May 3, 2013
Executives
David Mossberg – IR Kenneth Potashner – Executive Chairman Jim Barnes – CFO, Treasurer and Secretary
Analysts
Michael Fox – Park City Capital Alex Blanton – Clear Harbor Assets Mark Stafford – Stafford Capital
Operator
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 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.
David Mossberg
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 identifies specific risk factors that may cause actual results or events to differ materially from those described in the forward-looking statements. Speaking on today’s call are Mr.
Ken Potashner, our Executive Chairman and Mr. Jim Barnes, our Chief Financial Officer.
I’ll now turn the call over to Mr. Potashner for some introductory remarks.
Kenneth Potashner
Thank you, David. Welcome everybody to the Parametric Sound’s second quarter earnings call.
We have a lot of positive developments to go through today and I would like to start by having Jim Barnes, our CFO, go over the financial results.
James Barnes
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 products. 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 December 2012 quarter. We had a backlog of $30,000.
We generally ship products 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 cost of $993,000 during the same period last year. Second quarter operating cost net of option expense increased sequentially by about $180,000 versus that – during the December quarter.
The sequential increase in operating expenses primarily related to second quarter annual meeting cost of $40,000 and $100,000 of licensee collaboration and prototype costs. We also expended about $50,000 on our health initiatives 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 costs. We expect cash cost 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 cost 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 from operations for the next 12 months given the current operating plans.
We expect increased contribution from commercial product sales. We are unable to predict the impact of licensing our possible strategic transactions on our operations.
To allow the company the greatest flexibility with respect to strategic and other future opportunities and as its customary for companies like us, we intend to soon file our shelf registration statement with the SEC registering various securities that maybe 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.
Kenneth Potashner
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 has been approached by multiple industry leaders to discuss strategic alternatives.
These alternatives ranged from broad base 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 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 have 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 integrations for electronics and our algorithms.
I will keep 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 have 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 Disney Land store which we believe that 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 new core 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 enhancements 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 a memo of understanding with Shanghai Industrial Investment Group and ABIC’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 fronts, in additional to the Shanghai Industrial Investment Group relationship we have also now advanced discussions with F-Lawn 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 the 510(K) FDA filing and we will begin testing to that required protocol eminently.
Initial testing we’ve done to that protocol has had very profoundly positive results. We’ll expect it provide a very substantial increase in the information flow relative to these testing and the implications of our technology in the health sector and that we think they are going to be very substantial in terms of benefit for Parametric overall.
So, in summary, we were 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’ll open it at that point to questions or comments that anyone might have.
Operator
Thank you. (Operator Instructions) The first question is from Alex Blanton of Clear Harbor Assets.
Your line is open.
Alex Blanton – Clear Harbor Assets
Thank you. I’d like to ask about a comment that you made on April 9 in your update, and you said you’re deferring decisions to execute licenses as you assess these strategic opportunities then you kind of repeated that in your release today when you said you got these licensing – you received the licensing proposals, but you first are assessing strategic opportunities.
Why is that? It seems like, licensing is not going forward.
Kenneth Potashner
We want to make sure that the folks that have strategic interest in us would prefer that the IP not be broadly accessible by other parties that maybe competing with them in some form or fashion. So, that is the just of it.
The progression from the timeframe you mentioned to today was at that point we had stated interest and having discussions what’s transpired since then and now as those discussions occurred. They’ve progressed, they’ve 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 with those put together totally.
Alex Blanton – Clear Harbor Assets
So what you are saying is that the people you are discussing strategic alternates with don’t want to do licensing or they broadly be wait and do it themselves, is that it? They don’t want to license the product as you are doing?
Kenneth Potashner
Your assumption should be that the discussion we are in would be interested in taking the IP and applying it to their product line and expanding their product line and not having broad based access to the IP.
Alex Blanton – Clear Harbor Assets
Okay. The new patent application, could you be a little more specific on what the advance there is?
Kenneth Potashner
Yeah, well, the advance is at multiple fronts 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.
Alex Blanton – Clear Harbor Assets
Okay, great. Thank you.
One another thing…
Kenneth Potashner
Let’s some, we want to make sure that, let’s give other people a chance as well.
Alex Blanton – Clear Harbor Assets
Okay, I’ll get back in the queue. Thank you.
Kenneth Potashner
Thank you.
Operator
Thank you. (Operator Instructions) The next question is from Mark Stafford with Stafford Capital.
Your line is now open.
Mark Stafford –Stafford Capital
Hi, guys. You are going to put a shelf out there, how many shares are going to be in that shelf?
James Barnes
It’s not a specific number of shares; it’s just a large dollar amount because there is no specific plan or specific security. So it’s 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 which there is no immediate plans to do that.
Mark Stafford –Stafford Capital
Okay, and just here is a follow-up. Do you believe your cash burn is going to be neutralized by revenue coming in for this next quarter?
Kenneth Potashner
Well, the wild card in this is the HHI aspect of this. So we are currently positioned with that liquid cash to execute the plans we’ve talked today and if we decide to go ahead and accelerate HHI that could bring into discussion financing alternatives.
And also, again the complexity as well that that obviously should we hit the button on the strategic choice that would be done with full access to all capital funds to execute all of our plans.
Mark Stafford –Stafford Capital
Okay, thank you.
Operator
Thank you. The next question is from Joshua (inaudible) a private investor.
Your line is open.
Unidentified Analyst
Hey, guys sorry about that. I actually was on mute.
Ken, congrats on the quarter. Thanks again for providing some insight even with the previous calls I think that the street continues to misunderstand the story here and maybe there is a few questions I have, so can – if you could be patient.
The self-registration, I think you guys mentioned three years, with the current cash you have on hand then I believe you mentioned that will get you through 2013, the idea of doing an equity offering for core Parametric 0HHI is not on the table?
Kenneth Potashner
I am sorry, you were asking is it on the table to do is it on the table to do a shelf or Parametric is that what you are asking?
Unidentified Analyst
Yeah, without HHI, it would core – asset in money.
Kenneth Potashner
Yeah, so what we are – what’s very traditional Josh is…
Unidentified Analyst
But I like the idea of the shelf.
Kenneth Potashner
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’ll file a big number of shelf or a long – you mention for a three year planning horizon that gives us downstream flexibility to raise capital.
I think – your question I think is, do we have adequate funds to run the company without pursuing a secondary? The answer there is, yes.
Unidentified Analyst
Perfect. And now maybe to the tougher question, so a term sheet, you say you are pleased with it and I understand that a couple verticals to this business be engage your digital signage, licensing and the healthcare sub, have you talked to it, 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?
Kenneth Potashner
Yeah, what I – I don’t want to go too far in that the strategic may have – I don’t want to preannounce the strategic intentions. Okay, what I will say is that the strategic fits in the consumer sector.
But they may very well and I am sure they very well do to the relevance of the commercial and the health aspects of this. So, I think all the technology is working on is highly relevant, but I will say that strategic discussion is in the consumer sector.
Unidentified Analyst
Gotcha and just lastly, so based up on your conversations you advised and I know who had the great firm and have baked on great things in the past, but the idea of you doing the deal not at a premium probably would it be on the table for market value?
Kenneth Potashner
Yeah, so we are not going to be in a position to comment on deal terms on the call.
Unidentified Analyst
But this is in a fire cell is what I am trying to say.
Kenneth Potashner
This is not a fire cell.
Unidentified Analyst
Okay and so let’s put that out there. All right guys, congratulations, keep up the great work.
Operator
Thank you. (Operator Instructions) We have another question from Alex Blanton of Clear Harbor Asset Management.
Your line is open.
Alex Blanton – Clear Harbor Assets
Thank you. Just a follow-up.
Somebody alluded to this earlier but not directly and that is, when would anticipate breakeven is, if you don’t take the strategic alternative, but you go ahead and run the company as you are expecting to right now?
Kenneth Potashner
Yeah, so we have previously announced that just the strength of the digital signage or as we call 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 previously said that we are cash breakeven for 2014 and we have every – we are most definitely on track to achieve that.
Alex Blanton – Clear Harbor Assets
That’s very encouraging now. You alluded the fact that the health alternative might shift that, did I get that wrong or?
James Barnes
No, what we said is that, 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 had 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 wee may not want to just feed at the scraps that we’ve been feeding at 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’s the trade-off that we are looking at. But today, we are making great progress with minimum spending in that space and so far very good luck in aligning partners to put a lot of this on their back.
So for instance, we have doctors who have opened up their instrumentation and their time and are doing testing and exchange for publishing rights and things of that nature. So far we’ve been able to do it with a boot strap based strategy and we’ll 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 gap on it and then we will go ahead and assess the financing implications.
Alex Blanton – Clear Harbor Assets
It sounds very good. And one final question, you said you were contracting with suppliers, are those suppliers the part of the Shanghai Industrial Investment Group?
Did your MoU is, are you going to them for outsourcing a manufacturing? Is that…
Kenneth Potashner
There is two discussions today, so there is a discussion today which is our current material suppliers for our current product that we are manufacturing in our low volume facility here in Tawei. So, Jim’s discussions have been along that expansion of just reporting 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.
James Barnes
And I am going to dovetail that, excuse me for doing this Mr. Josh, because it’s a little, this is a fire cell scenario.
So worsening here with extremely positive results on our commercial business pilots moving forward aggressively, the movement with our initial pilots of volume that can go on and on a very substantial pipeline. We’ve got overwhelmingly positive health related results and I’ve got licenses on my desk for consumer applications.
So I don’t know how you could possibly connect those dots and get to the word fire cell. So, but anyway, couldn’t go without going back to that point, but let’s go to the next question.
Operator
The next question is from Michael Fox with Park City Capital. Your line is open.
Michael Fox – Park City Capital
Congratulations on all the exciting things that are happening. This is somewhat of a hypothetical – to the answer or not but if you did go down the strategic route and you were to sell the company, do you know if you would stand with the company or would be looking for a new opportunity?
Kenneth Potashner
Yeah, that there is 15 levels of speculation you would need to put into that answer. So, the answer – let’s just not answer because it won’t be a good answer.
Michael Fox – Park City Capital
Okay. Do you know any direction you can give us on timing?
Kenneth Potashner
On the process we are in – sorry, again to be a little redundant, we receive – we have series of dialogues, we received the term sheet, we negotiated term sheet. We 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 enquiries.
So we will service those enquiries.
Michael Fox – Park City Capital
Great, thanks a lot.
Operator
(Operator Instructions) The next question is from (inaudible) of Unique Investment .Your line is open.
Unidentified Analyst
Hi, guys. Congratulations.
You mentioned briefly about the glass and silicon, could you give us a little bit of information on that please?
Kenneth Potashner
Yeah, so what we said previously, and I think people have some degree of fluency with the product roadmap. So today, on the consumer side the IP has been prototype and demonstrated in the context of accessories.
So here is 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 standalone and blended with conventional speakers.
But we also said that there is a progression that instead of this film being an 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 is 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’s the display discussion.
Similar discussion on the silicon side of things, so without naming names because I am not able to do that with NDAs in place or there is great interest in terms of GF 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.
Unidentified Analyst
Thank you. The Build-A-Bear stores, could you tell us how big a rollout that will be?
Kenneth Potashner
Yeah, so we put out a press release today and you should refer to that, but the press release basically if you think the Build-A-Bear has several hundred stores in their chain, but they need to go ahead and quantify that. But what we announced today is that they have 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, from this demonstration build this 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 are going to commence our rollout and we’d 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 have announced that they are going to be retrofitting or refurnishing I think what their word – I think they mentioned 40 to 50 locations is 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.
Unidentified Analyst
And one more question.
Kenneth Potashner
I am holding Build-A-Bear up not as an end-point, but as an example of here is how Parametric is positioned to progress from demo to pilot to expanded pilot to rollout. I just want to - about the pipeline.
I mean, there is a pretty reasonable number of pilots underway and we’ve been very choiceful that we are only taking resources to pilot that we think can scale substantially. Also let me very clear as well using Build-A-Bear as an example, so each Build-A-Bear store ahs on the order 25 to 30 systems, each system has two emitters.
So don’t equate 20 to 25 stores with 25 emitters equated with – on the order 30 pairs or 60 emitters per store. And when we begin compiling or compounding the pilots and for rollouts, we can get to relatively healthy numbers fairly quickly and this is again with some support of the earlier statements in terms of volume progression and revenue progression.
Unidentified Analyst
In reference to McDonald’s, is there any other plan to pass the Disney store at this point?
Kenneth Potashner
Yeah, so the discussion we are working closely with what’s 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 those stores.
We are 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 of 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 made positive initial steps and this deployment will be a key one for us.
Unidentified Analyst
That’s great. I just want 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 we have a lot of happy shareholders.
Thank you.
Operator
The next question is from (inaudible) a private investor. Your line is open.
Unidentified Analyst
Thank god, Kenny for taking my call. But, first of all I wanted to actually say what I meant, first of all, I never meant the word fire cell.
The only reason I said that is I think the street continues to get this story wrong and it continues to think that this technology is that I believe it can be and is going to be. So with that said, I’d never meant the word fire cell on the sense of that’s what you do.
So, that’s just – get that off the table. With that said, two other quick things, Ken.
Kenneth Potashner
We made the apology Josh.
Unidentified Analyst
So, no, I don’t say – you said a couple weeks for timing for this strategic is that how long the process typically takes?
Kenneth Potashner
I said, I didn’t say couple of weeks, I said weeks not months.
Unidentified Analyst
Gotcha, 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 were in discussions and what have been in discussions about multiple, is that correct?
Kenneth Potashner
That’s correct.
Unidentified Analyst
Okay, good. Want to put out there.
Again, great job. Sorry about the – fire cell word.
Keep it up.
Kenneth Potashner
Thank you.
Operator
Thank you. This concludes today’s Q&A session.
(Operator Instructions)
Kenneth Potashner
Okay, all right. So…
Operator
I would like to turn the call back over for closing remarks.
Kenneth Potashner
Okay, all right. And thank you everybody for participating in the call today.
Obviously we will keep, everybody updated as we progress on the strategic agenda as well on our operational agenda. So thank you again for your time.
Operator
Ladies and gentlemen, this concludes today’s program. You may now disconnect.
Good day.