Turtle Beach Corp (TBCH) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Parametric Sound reports second-quarter 2013 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the call over to Dave Mossberg, Investor Relations Representative. You may begin.

Thank you, Latoya. Good afternoon, everyone, and welcome to Parametric conference call to discuss second quarter of fiscal 2013 financial results.

Before we get started, we will be referring to today's press release announcing second-quarter results, which can be downloaded from the Investor Relations page of our website at ParametricSound.com.

Please be aware that some of the comments made during this call may include forward-looking statements that involve risks and uncertainties regarding our operations and future results that could cause Parametric Sound's results to differ materially from management's current expectation. We encourage you to review the Safe Harbor statements contained in today's press release and on our filings with the Securities and Exchange Commission, including, without limitation, on Form 10-K and Form 10-Q, which identify specific risk factors that may cause actual results or events to differ materially from those described in the forward-looking statements.

The speakers on today's call are Mr. Ken Potashner, our Executive Chairman, and Mr. Jim Barnes, our Chief Financial Officer. I will now turn the call over to Mr. Potashner for some introductory remarks.

Thank you, David. Welcome, everybody, to the Parametric Sound second-quarter earnings call. We have a lot of positive developments to go through today, and I'd like to start by having Jim Barnes, our CFO, go over the financial results.

Thanks, Ken. My remarks will focus on results for the second fiscal quarter of 2013, the quarter ended March 31, 2013. I will also comment on certain cash flow and balance sheet items.

We continued to make important progress on product rollout during the second quarter. We are scaling our internal assembly resources. We are building supply chains with key suppliers for our growing commercial HSS business. We are contracting more activities to our suppliers with the goal of turnkey production of our HSS 3000 products in the future.

As of the end of the quarter, we had 16 full-time persons on staff. We have increased the use of contract assembly personnel as required to produce product. Overall, our staffing levels have more than doubled year-over-year.

We are also committing substantial time, energy and resources to fortify our IP portfolio. We are working on new filings to build on the 26 issued and dozen patents that are currently pending.

Second-quarter revenue totaled $155,000. This was up from $60,000 recorded during the same period last year and up from $109,000 sequentially, which was the December 2012 quarter. We had a backlog of $30,000. We generally ship product within a week of receipt of order from our customers.

Both sequentially and overall, we expect sales to accelerate in 2013. We expect revenue from our commercial business to continue to ramp in coming quarters. We are building production for a significant and growing product pipeline.

Our gross profit was $76,000 for the second quarter. This was positive in comparison to $32,000 for the same quarter last year, and up from the $55,000 reported during the sequential December 2012 quarter. We continue to target commercial gross margins of 40% to 50%. Margins depend both on selling prices and production efficiencies as our volume grows. Selling prices are also affected by volume sale discounts to customers or distributors, as well as our product and accessory mix.

Total operating costs were $2 million, including $790,000 of non-cash option expenses during the quarter, caused primarily by our increased stock price. This compares to operating costs of $993,000 during the same period last year. Second-quarter operating costs net of option expense increased sequentially by about $180,000 versus that posted during the December quarter. The sequential increase in operating expenses primarily related to second-quarter annual meeting costs of $40,000 and $100,000 of licensee, collaboration and prototype costs. We also expended about $50,000 on our health initiative that is producing very positive progress.

Our cash used in operating activities during the March quarter was about $1.1 million, reflecting the increased R&D and annual meeting cost. We expect cash costs to continue at recent levels, but they may vary quarter to quarter, depending on investments made in IP, R&D and the timing of items not recurring each quarter. This includes such items as the annual meeting costs and costs that we may incur related to strategic opportunities. In future quarters, we expect cash expenditure levels to be offset in part by increasing cash contribution from commercial revenues.

Our net loss for the second quarter of 2013 was $1.96 million, or $0.30 per share, and included the $790,000 of non-cash stock option expenses. During the second quarter, we received proceeds of $434,000 from the exercise of warrants and options, and after quarter-end, another $439,000 from exercise of warrants.

As to our cash position, at March 31, we had a cash balance of $3.8 million and working capital of $4.5 million, plus the $439,000 received in April that I just mentioned. We believe we have sufficient funds for operations for the next 12 months given the current operating plans. We expect to increase contribution from commercial product sales.

We are unable to predict the impact of licensing or possible strategic transactions on our operations. To allow the Company the greatest flexibility with respect to strategic and other future opportunities, and as is customary for companies like us, we intend to soon file a shelf registration statement with the FCC, registering various securities that may be offered from time to time in the next three years.

That concludes my financial discussion. I will now turn the call back over to Ken.

Thank you, Jim. I'd like to give everybody an update to the process we announced by which we were assessing strategic alternatives, as well as give you an operational update. We have good news to report on both fronts.

As previously announced, the Company had been approached by multiple industry leaders to discuss strategic alternatives. These alternatives ranged from broad-based licensing discussions to mergers and full acquisition scenarios. We retained the investment banking firm Houlihan Lokey to help us assess these choices. We have now received a term sheet that we are pleased with from a leading prospect, and we have also entered now into a due diligence phase. We believe it is very a strong strategic fit and we are very pleased with the ongoing discussions. We've continued to receive interest as well from other parties and we will maintain those dialogues as we proceed.

We've also received licensing proposals that we will assess in the context of the strategic discussions. The strategic discussions and the licensing proposals are interrelated.

In addition to licensing interest from traditional consumer product applications, there are now sincere licensing discussions underway to explore glass integration for display applications and silicon integration for our electronics and our algorithms. I will keep you abreast of our progress here as these evolve.

From an operational view, we had a very good quarter. We continue to perform well on our commercial pilots. We've been awarded approval to begin a significant rollout with Build-A-Bear, who is one of our early pilots. We've also been given the green light to expand other key pilots, including McDonald's. We've also launched numerous new pilot projects during this quarter.

We've put out a separate release earlier today on the Build-A-Bear opportunity, and we've previously submitted an 8-K filing on expanding McDonald's to include their Disneyland store, which we believe is the highest-volume store west of the Mississippi. That installation begins this month.

Global demand for our directed audio solutions is expected to provide increased revenue growth throughout the balance of 2013 and through 2014. In the most recent quarter, we further bolstered our intellectual property portfolio with a key Nucor patent application that will enable a new emitter technology design. This design will further expand the application set for our 3D directional audio systems. It allows for performance enhancement and cost savings. The technology also enables us to pursue different form factors and shapes that will give us a broad set of new applications. Prototypes of this technology are now functional within the laboratory.

During the quarter, the Company has also entered into a memo of understanding with Shanghai Industrial Investment Group and AVIC's trade representative to pursue licensing agreements, manufacturing agreements, product development partnerships and to establish joint ventures to pursue opportunities in the greater China market. These discussions have progressed and we expect further positive developments.

On the manufacturing front, and additional to the Shanghai Industrial Investment Group relationship, we also now advanced discussions with [Esalon] to explore utilizing their factories to support our volume requirements. The Company is continuing to ramp sales and distribution partners, as well, and we are expanding our presence for our commercial products.

We continue to show dramatic results with our testing of the HHI product capability. We can repeatedly demonstrate that we can deliver higher DB and clarity to those with specific hearing challenges. We are now aggressively pursuing a 510(k) FDA filing and we will begin testing to that required protocol imminently. Initial testing we've done to that protocol has had very profoundly positive results.

We'll expect to provide a very substantial increase in the information flow relative to these testing and the implications of our technology in the health sector in that we think they are going to be very substantial in terms of benefit for Parametric overall.

So in summary, we are executing our operational plan and we are also exploring significant strategic choices that we have available to us, and we are doing both in the context of assuring our future success. So with that, we will open it at this point to any questions or comments that anyone might have.

(Operator Instructions) Alex Blanton, Clear Harbor Asset.

Thank you. I'd like to ask about a comment that you made on April 9 in your update, when you said you were deferring decisions to execute licenses as you assess the strategic opportunities. And then you kind of repeated that in your release today when you said you've got these licensing -- you've received licensing proposals, but you first are assessing strategic opportunities.

Why is that? It seems like the licensing is not going forward.

(multiple speakers) that the folks that have strategic interest in us would prefer that the IP not be broadly accessible by other parties that may be competing with them in some form or fashion. So that is the gist of it.

The progression from the timeframe you mentioned to today was, at that point, we had stated interest in having discussions, which transpired since then. And now, as those discussions have occurred, they've progressed, they have culminated in us receiving a term sheet that we are excited by, and we are now into a due diligence phase. So substantial progress, but clearly, the implications of licenses being issued to folks that might be contrary to the interest of the strategic discussions we have, those fit together totally.

So what you are saying is that the people you are discussing strategic alternatives with don't want to do licensing, or they would rather wait and do it themselves. Is that it? They don't want to license a product that you are doing.

Your assumption should be that the discussion we are in would be interested in taking the IP and applying it to their product line (multiple speakers), and expanding their product line and not having broad-based access to the IP.

Okay. The new patent application, could you be a little more specific on what the advance there is?

The advance is in multiple tranches, as I mentioned, so we get performance enhancements relative to a broad array of things -- in terms of clarity, in terms of power management and, most importantly, in terms of cost. The essence of it is new technology that supports a lower-cost film choice for us, and it also enables us to create different form factors and shapes, including curvature, that will open up new possibilities to deploy the technology.

Okay, great. One other thing.

Let's -- we want to make sure -- let's give other people a chance as well.

Okay, I'll get back in the queue. Thank you.

(Operator Instructions) [Mark Stafford], Stafford Capital.

You're going to put a shelf out there. How many shares are going to be in that shelf?

It's not a specific number of shares; it is just a large dollar amount, because there is no specific plan or specific security. So it is just a common, plain-vanilla shelf that just gives us flexibility over the next three years to take advantage of any opportunities out there. So there is no specific number of shares or any specific plans.

If it became effective, then you would start to see those plans come into place, if there was something that it was going to be used for, of which there is no immediate plans to do that.

Okay. And just as a follow-up, you believe your cash burn is going to be neutralized by revenue coming in for this next quarter?

The wild card in this is the HHI aspect of this. So we are currently positioned with adequate cash to execute the plans we've talked to date. If we decide to go ahead and accelerate HHI, that could bring into discussion financing alternatives.

And also, again, there's the complexity as well that obviously should we hit the button on the strategic choice, that we would -- that would be done with full access to all capital funds to execute all of our plans.

Okay, thank you.

[Joshua Westbrad], private investor.

Ken and team, congrats on the quarter. Thanks again for providing some insight. Even with the previous callers, I think that the Street continues to misunderstand the story here. And maybe -- there is a few questions I have, So Ken, if you could be patient.

The shelf registration, I think you guys mentioned three years. With the current cash you have on hand -- and I believe you mentioned that will get you through 2013 -- the idea of doing an equity offering for core Parametric, not HHI is not on the table?

I'm sorry, so you were asking is it on the table to do -- is it on the table to do a shelf for Parametric. Is that what you're asking?

Yes, without HHI. Let's assume -- would core Parametric need money?

Yes, so what is very traditional, Josh --

By the way, I like the idea of the shelf, just so you know.

So there is not a near-term plan to go ahead and do anything more than give us long-term flexibility. So you should expect that we will file a big-number shelf for a long -- Jim mentioned for a three-year planning horizon that gives us downstream flexibility to raise capital.

Got you (multiple speakers).

Now, the flipside of your question, I think, is do we have adequate funds to run the Company without pursuing a secondary. The answer there is yes.

Perfect. Now maybe for the tougher question. So a term sheet, you say you are pleased with it. And I understand there are a couple of verticals to this business, being digital signage, licensing and the healthcare sub. Have you talked to or could you give a little bit more information as to whether the term sheet would be for the entire business or a few of those businesses?

Yes, what I -- I don't want to go too far in that the strategic may have -- I don't want to preannounce the strategic's intentions. What I will say is that the strategic fits in the consumer sector. But they may very well -- and I'm sure they very well do -- see the relevance of the commercial and the health aspects of this. So I think all the technology we are working on is highly relevant, but I will say that the strategic discussion is in the consumer sector.

Got you. And just lastly, so based off your conversation to your advisors -- and I know Houlihan is a great firm and they've done great things in the past -- but an idea of you doing a deal not at a premium probably wouldn't be on the table -- to market value.

Yes, so we are not going to be in a position to comment on deal terms on the call.

But this isn't a fire sale, is what I'm trying to say.

This is not a fire sale.

Okay, I just wanted to put that out there. All right, guys. Congratulations. Keep up the great work.

Thank you.

(Operator Instructions) Alex Blanton, Clear Harbor Asset Management.

Thank you. Just a follow-up. Somebody alluded to this earlier, but not directly, and that is, when would you anticipate breakeven if you don't take the strategic alternative but you go ahead a run the Company as you're expecting to right now?

Yes, so we've previously announced that just the strength of the digital signage, or as we call it now the commercial market, alone, based on the pipeline that we've established, based on the number of pilots, based on that whole progress, so we announced that the magic number for us is 2000 units per month. And that number gets us there in the 2014 planning cycle.

So we've previously said that we are cash breakeven for 2014, and we have every -- we are most definitely on track to achieve that.

That's very encouraging. Now, you alluded to the fact, though, that the health alternative might shift that. Did I get that wrong?

No, what we said is that based on our spending plans that we've put in place to date, and actually the initial budgeting that we did for the Company, we didn't have health in there at all. And we are seeing further and further evidence that what we have is a very big deal. So to the point that we may not want to just feed it the scraps that we've been feeding it and rely purely on external relationships, which we've been successfully doing.

So we have an option to go ahead and accelerate the focus there. But obviously, we would only do that if there was a very good return financially for our shareholders in pursuing that. So that is the trade-off that we are looking at.

But today, we are making great progress with minimum spending in that space, and so far, we've had very good luck in aligning partners to put a lot of this on their backs. So for instance, we have doctors who have opened up their instrumentation and their time and are doing testing in exchange for publishing rights and things of that nature. So so far, we've been able to do it with a bootstrap-based strategy and we will push that as far as we can. But should we look at this and say this is a very big deal, we reserve the right to hit the gas on it, and then we will go ahead and assess the financing implications.

Sounds very good. Now, one final question. You said you were contracting with suppliers. Are those suppliers part of the Shanghai Industrial Investment Group that you did your MOU with? Are you going to them for outsourcing manufacturing? Is that (multiple speakers)?

So there is two discussions today. So there's a discussion today which is our current material suppliers for our current product that we're manufacturing in our low-volume facility here in Poway. So Jim's discussion have been along that expansion, of just supporting our initial pilot demand.

The Shanghai Industrial Investment Group discussion is a much larger-scale, high-volume capability. So those are the way to think of those two.

I'm going to dovetail back -- excuse me for doing this -- but to Josh, because the little would we do -- is this a fire sale scenario? So we are sitting here with extremely positive results on our commercial business, pilots moving forward aggressively, the movement with our initial pilot to volume. I can go on and on, a very substantial pipeline. We've got overwhelmingly positive health-related results in. I've got licenses on my desk for consumer applications with -- so I don't know how you could possibly connect those dots and get to the word fire sale. But anyway, couldn't go without going back to that point. But let's go to the next question.

Michael Fox, Park City Capital.

Good afternoon, guys, and congratulations on all the exciting things that are happening area. This is somewhat of a hypothetical, so I don't know if you be able to answer or not, but if you did go down the strategic road and you were to sell the Company, do you know if you would stay on with the Company or you would be looking for a new opportunity?

There is 15 levels of speculation you would need to put into that answer, so we -- the answer -- let's just not answer it because it wouldn't be a good answer.

Okay. Do you know any direction you can give us on timing?

The process we are in is -- sorry, again, to be a little redundant -- we received -- we had a series of dialogues; we received a term sheet. We negotiated a term sheet. We've moved into a due diligence phase. So think of the diligence phase in weeks, not months. And then again, for fiduciary responsibilities with our Board that we have to be receptive to inbound other inquiries, so we will service those inquiries.

Great. Thanks a lot.

(Operator Instructions) [Lloyd Quartin], Unique Investments.

Hi, guys. Congratulations. You mentioned briefly about the glass and silicon. Could you give us a little bit of information on that, please?

What we've said previously -- and I think people have some degree of fluency with the product road map -- so today, on the consumer side, the IP has been prototyped and demonstrated in the context of accessories. So here's something that looks like speakers that goes next to your PC or your iPad, things of that nature. Here is something that can be integrated into a sound bar, both stand-alone and blended with conventional speakers.

But we also said that there is a progression that instead of this film being in accessory type products, it could lend itself nicely downstream to be integrated directly into the display. So your TV screen is not only your video, but it's also your audio. Your iPad display or screen is not only your video, but your audio. Your cell phone display could be your audio as well.

So the statement that I made before is there has now been enough interest on that type of application that we are now in discussions with industry leaders along those lines, and they are committing technical resource to assessing and looking for partnerships to further explore that. So that is the display discussion.

Similar discussion on the silicon side of things. So without naming names, because I'm not able to do that with NDAs in place, there could be -- or there is great interest in terms of, gee, if this is a technology platform that could be deployed for delivering sound, what part of that technology platform can be integrated at the silicon level. So we are talking to folks in that space for what that integration could look like and what the uniqueness of it is.

Thank you. The Build-A-Bear stores, can you fill us in on how big a rollout that will be?

Yes, so Lloyd, we put out a press release today. So you should go refer to that. But the press release basically -- so think of Build-A-Bear as several hundred stores in their chain, but they need to go ahead and quantify that.

But what we announced today is that is that they've announced 20 to 25 newly-designed stores that are going to open using our technology. So our progression there was one demonstration that then went very well. They said, okay, build -- from this demonstration, build us a store. We built them a store, they loved it. They said, great, build us six stores as an expanded pilot. We built six stores, they loved it. And today's threshold is them saying we're going to commence our rollout and we would like to do 20 to 25 newly-designed stores and you are in it; so we are designed into those stores.

Additionally, in their description, they've announced that they are going to be retrofitting -- or refreshing, I think, was their word -- I think they had mentioned 40 to 50 locations as embedded in their description of Build-A-Bear in the press release. And so we have not mentioned anything specifically of our role in those refresh, but quite frankly, we are looking at a substantial partnership and future mutual success with Build-A-Bear.

I had one more question, but before that, I just want to (multiple speakers).

I'm holding Build-A-Bear up not as an endpoint, but as an example of here is how Parametric is positioned to progress from demo to pilot to expanded pilot to rollout.

That's great.

(multiple speakers) pipeline, there is a pretty reasonable number of pilots underway, and we've been very choiceful that -- I mean, we're only committing resources to pilots that we think can scale substantially.

Also, let me be very clear as well, on using Build-A-Bear as an example. Each Build-A-Bear store has on the order of 25 to 30 systems; each system is two emitters. So don't equate 20 to 25 stores with 25 emitters. Equate with on the order of 30 pairs or 60 emitters per store. And (multiple speakers) begin compiling or compounding the pilots into rollouts, we can get to relatively healthy numbers fairly quickly. And this is, again, what's in support of the earlier statements in terms of volume progression and revenue progression.

In reference to McDonald's, are there any other plans past the Disney Store at this point?

The discussions are we are working closely with what is called the McDonald's Channel. So we've got a very healthy discussion going there, where they have gone ahead and approved us as viable as a premium audio choice for their stores. We're going to take this one step at a time. Going from the initial installation to being granted what is a premier store for them is a big deal for us. We have had initial dialogues in terms of how we would support larger rollouts and things of that nature. And there is a ton of work to be done for us to be viable to support somebody at the scale of McDonald's.

But we are going to go ahead and put all the plans in place to make sure we can be viable. But there is a large number of steps required. But we've made initial -- and there is positive initial steps. And this deployment will be a key one for us.

That's great. I just wanted to say congratulations to you and your team, because everything you've talked about in the last few months you seem to be coming to fruition and you have a lot of happy shareholders.

Thank you.

Joshua Westbrad, Private Investor.

Thank God, Kenny, you still take my call. First of all, I wanted to actually explain what I meant. First of all, I never meant the word fire sale. The only reason I said that is because I think the street continues to get this story wrong and continues to think that this technology isn't what I believe it can be and is going to be. So with that said, I never meant the word fire sale in the sense of that is what you would do. So let's just get that off the table.

With that said, two other quick things, Ken.

(inaudible) your apology, Josh.

That's all right. So another thing, actually. You said a couple weeks for timing for the strategic. Is that how long the process typically takes?

I didn't say a couple weeks. I said weeks, not months.

Got you, weeks, not months. Okay, I just wanted to put that out there. And the last thing, I think I read that there is not only one, but possibly multiple in the strategic discussion. I know you have a term sheet for one, but you are in discussions or have been in discussions with multiple. Is that correct?

That's correct.

Okay, good. Wanted to put that there. Again, great job. Sorry about the fire sale word. Keep it up.

Thank you.

Thank you. This concludes today's Q&A session. (Operator Instructions).

All right.

I would like to turn the call back over for closing remarks.

All right. Again, thank you, everybody, for participating in the call today. Obviously, we will keep everybody updated as we progress on the strategic agenda, as well as on our operational agenda. So thank you again for your time.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.