Silverstar Holdings, Ltd. F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

Silverstar Holdings, Ltd. (SSTR)

F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

November 13, 2008 4:30 pm ET

Executives

Clive Kabatznik – President & CEO

Analysts

Michael Kerrigan – Boenning & Scattergood

Joe First [ph] – First Associates

Rodney Axel [ph]

Presentation

Operator

Good afternoon. My name is Beth, and thank you for joining us today for the Silverstar Holdings First Quarter Fiscal 2009 Conference Call. Presenting today on behalf of Silverstar is Clive Kabatznik, Silverstar's President and Chief Executive Officer. Following his comments, we will open up the call for your questions.

I would like to remind everyone that this call will be available for replay through December 12, 2008, starting this evening at 7.30 p.m. Eastern time.

I would now like to turn the call over to the President and CEO of Silverstar, Mr. Clive Kabatznik. Sir, please proceed.

Clive Kabatznik

Beth, thank you very much, and good afternoon, everyone. Thank you for joining us today to discuss Silverstar's first quarter fiscal 2009 results. As you may have seen at the market close, we issued a press release announcing the results for the quarter, which ended September 30, 2008. This quarter represented the highest revenue in EBITDA first quarter in our Company's history at $8.8 million and $1.77 million respectively. This starts our fiscal 2009 year on a very strong note.

Our results are driven especially by the strong performance of our subsidiary Empire Interactive both in Europe and North America. The sales volume of Empire's new releases met or exceeded our expectations in both geographical territories. Animal Paradise DS continued to sell exceptionally well in Europe and was launched in North America during the quarter.

Additionally, Ford Racing Off Road Wii sold well in the United Kingdom, where it achieved strong chart rankings as a Top 10 Wii product. It was more than happened during the quarter, but before going much further operationally, I would like to provide you some more details about our financial results for Q1.

As I mentioned, revenues for the quarter totaled $8.8 million. This represented an increase of 126% from $3.9 million, which we reported in the same quarter a year ago and this established a new first quarter record for us in terms of revenue.

Adjusted EBITDA, which is a non-GAAP measure totaled $1.77 million or $0.09 per share, which is also a record for the first quarter. This represented a very strong improvement of $3 million from a loss of $1.2 million or $0.09 per share in the same quarter a year ago.

Net loss in the first quarter 2009, totaled $659,000 or $0.03 per share as compared to a net loss of $4.4 million or $0.35 per share a year ago. This is also obviously a strong improvement.

Our cost of sales was $4 million in the first quarter or 45% of total revenues. This compares to $1.6 million or 41% of revenue in the same quarter last year. This $2.4 million increase was virtually all the results of the increased sales of Empire and the higher percentage of cost of sales is primarily due to the increase proportion of Nintendo DS sales, which carry lower gross margins than as the console or PC products.

The cost of goods sold consist primarily of the actual tangible cost of the product, along with any labor overhead cost. Our SG&A expense for the quarter totaled $3.1 million or 35% of net sales as compared to $3 million or 76% of net sales in our first quarter last year. It's important to note that we've been able to more than double our sales while keeping our operating cost virtually unchanged.

This points to the leverage ability of our operating plan as sales increased we should see commence with and greater increases in EBITDA. Empire showed an increase of $216,000 which was primarily due to an increase of selling costs, due to increase sales, overall selling expenses increased to $132,000 to $520,000 this quarter versus $378,000 in the comparable quarter a year ago.

Empire's SG&A consist primarily of administrative, marketing, and sales staff, primarily in the UK, our smaller subsidiary, Strategy First, SG&A decreased by $86,000, primarily as a result of decreased staff and lower sales.

Amortization of software development cost and intangible assets in Q1 increased by $520,000 versus the comparable period of the previous year, amortization of intangible assets decreased by $1.6 million in the quarter. Depreciation expense was $54,000 for the quarter as compared to $43,000 in last year's quarter.

Now turning to our balance sheet, quarter-end cash and short-term investments totaled $1 million or about $0.05 per share as compared to $2.2 million at the end of the previous quarter and $7.4 million at the end of the first quarter of fiscal 2008. Our working capital deficit decreased by $948,000 from a deficit of $5.5 million at June 30, 2008 to a deficit of $4.7 million at September 30, 2008.

This decrease is primarily due to the result of significant reductions to our net current liabilities due to improved operating performance at Empire Interactive as well as the accretion exchange rate of the U.K. pound to the U.S. dollar.

As we noted in the first quarter's 10-K filing, and as indicated in 8-K filing submitted earlier today, we have entered into a relationship with Full Circle Funding, LP. As part of this relationship, early this week, Full Circle provided us with short-term secured loan of up to $2.1 million.

Additionally, we are still in discussions to finalize the loan contemplated by the term sheet we had secured with them on September 9 for senior secured loan of up to $8 million for Empire Interactive.

Full Circle's commitment in the conclusion of the larger loan will provide us with the access to capital and will enable us to continue to build upon the excellent start we've enjoyed to fiscal 2009.

Now back to operations. I would like to note that a key difference in this year’s first quarter is that we released 9 significant PC and console SKUs, 1 PC and 8 console SKUs as compared to only 1 in the same period a year ago.

Our releases in the first quarter 2009 comprise several well received titles including Pipe Mania for Nintendo DS, PSP, PS2 and PC, Unsolved Crimes on Nintendo DS; Animal Paradise for Nintendo DS North America; Jackass, the Game for Nintendo DS in Europe; Ford Racing Off Road for Nintendo Wii in Europe; and FlatOut Ultimate Carnage for the PC.

Also during the first quarter, we entered into a strategic distribution agreement with Atari, Inc. for North American sales. Talking with a legendary major brand like Atari, has ensured a strong presence of our game titles in all major North American retailers.

Our business plan as you know calls for aggressive growth in the United States, and with its new dynamic management team, Atari has proven to be the ideal partner to help us achieve our goals. This partnership with Atari help drive sales to more than 2 million of North American in the first quarter as compared to a minimal amount in the comparable quarter in 2007.

At the end of September, we shipped Animal Paradise for Nintendo DS to North American retailers of Atari. This title was well received as we entered the upcoming holiday season, and it follows on and made success of this title in Europe as well. We also shipped Pipe Mania on Nintendo DS, PSP, PS2 and PC and Unsolved Crimes for Nintendo DS with Atari during the quarter.

As we announced earlier this month, Hello Kitty DS shipped to North America this week also via Atari. And all indications of this title will be well received in the current quarter and beyond.

Also during the first quarter, we made a number of operational improvements that have streamlined our organization, and has set the stage for growth in fiscal 2009. We successfully completed the sale of our Razorworks studio to Rebellion, who are an excellent suitor for Razorworks. Rebellion is one of the foremost independent European developers and the talented Razorworks team will compliment the organization well.

We noted a modest amount of this transaction; however the real benefit is that, we have dramatically reduced operating cost of Empire, which should result in savings of approximately $3 million during this current fiscal year.

With this transaction complete, we've been able to focus more on our key strengths like building our product pipeline and our strong North American and North and European sales operations.

Looking forward, the launch of Hello Kitty DS will likely be the high point of our current second fiscal quarter. Certainly, current orders are pointing to one of the most successful product launches in our company's history.

Our recent signing of an exclusive relationship with PlayFirst, the developer of the smash hit Diner Dash series covering several popular and award winning titles, demonstrates our ability and our drive to continue to expand our product pipeline and portfolio.

PlayFirst had other options. So the selection of us reflects our unmatched strength in publishing and international distribution make us an ideal partner for any game developer, and we plan to continue to leverage these strengths going forward.

Given our accomplishment in the first quarter, along with the current support of Full Circle Funding to help finance our short-term growth, we remain extremely positive about our prospects in Q2 and throughout fiscal 2009 and beyond. So stay tuned as we are expecting out new titles and some exciting spinners of some of the most popular titles in the coming weeks.

With that I would like to open the call to address any questions you may have. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions). Our first question will come from Mike Kerrigan with Boenning & Scattergood. Go ahead please.

Michael Kerrigan - Boenning & Scattergood

Clive, how are you doing?

Clive Kabatznik

Fine, Mike. How are you?

Michael Kerrigan - Boenning & Scattergood

Good. I missed the details of that funding, and what are you putting up for the fund? If you give me the amount and then sort of what's the collateral?

Clive Kabatznik

As filed in the 8-K earlier this afternoon, we have received short-term funding of up to $2.1 million from Full Circle. The collateral are receivables and future receivables at the Empire Interactive, Europe and the Empire Interactive Inc. level. The funding is a short-term one, which should be self-liquidating and expires in early April 2009.

Michael Kerrigan - Boenning & Scattergood

Okay. Thank you.

Operator

Thank you. Our next question comes from Joe First [ph] of First Associates. Go ahead please.

Joe First - First Associates

Follow up on Mike's question. Can you also talk about a larger line of credit that you are working on; can you just go over that again?

Clive Kabatznik

Yes, we signed a term sheet with Full Circle in September for a line of up to $8 million which will be secured by all the assets of the Empire Europe and Empire Interactive Inc. We are still in discussions, negotiations over that line of credit, more than that I can't say, but obviously we are hopeful that, that line -- that full line will be secured and closed in the near future.

Joe First - First Associates

Okay. And in the past, if I trouble putting back-to-back quarters together, that are decent, do you think your second quarter can be close to as good or better than the first quarter has been?

Clive Kabatznik

The second quarter is looking. We said, our first half of the year would be particularly strong, it's looking very strong. As I mentioned, not only we are having some good continued sales of our older products, but the launch of Hello Kitty I think ended up going in to pokiest detail is looking very positive. So despite the fact that there are economic headwinds, we have not really seen much pushback from retailers. There seems to be strong demand for value priced family oriented game products, and despite the fact that the dollar has dramatically increased against the euro and the pound, we still see this as being a positive quarter.

Joe First - First Associates

Thank you.

Operator

(Operator instructions). Our next question comes from Rodney Axel [ph]. He is a private investor. Go ahead please.

Rodney Axel

Sir, I just received a notice of your annual meeting, which I never had the chance to read it yet, but it certainly deals with reverse stock split. And I realize the reason you're feeling that you have to do bring about such a split, but what advantages do you see down the road in having such a reverse split?

Clive Kabatznik

Yes, Rodney, thanks for asking that question. Let me first clarify what we're asking for is the authority to do a stock, but we are not saying that we definitely are going to do a stock split. The primary reason for asking for this authority is, because we -- as some of you may know, we are not in compliance with NASDAQ rule, whereby the bid price of our stock is above a dollar. So in order to regain compliance, if our stock doesn’t rise to the level of a dollar by a certain period of time, we would have to do a reverse split to meet compliance that we're now. It's -- again open to debate whether it makes sense to remain on NASDAQ if there is going to be dramatic stock split. We certainly aware of the disadvantages of a stock split. And I think certainly NASDAQ has given us a grace period whereby they are not enforcing $1 minimum bid rule. Our grace period has been extended from late December now to the middle of March 2009. So we do have more time to get in compliance. It is not inconceivable that NASDAQ based on the current market turmoil will elect to go back to the SEC and seek to get an extension on this grace period.

So what I would say to you is, again what we're asking for is to give the board the flexibility to make that decision. If they decide that indeed it is in our best interest to do a reverse stock split into remain on NASDAQ. Fortunately, we don't have to make that decision now and I will assure you since members of the board, including myself, our significant shareholders have not sold the share stock in this company from day one. That the decision to, if we do decide to initiate a reverse stock split, but if it is approved by shareholders will not be taken lightly and again we will certainly weigh the benefits, and again the sole benefit of this is remaining in compliance with NASDAQ listing requirements versus some of the more obvious and well-known disadvantages of having a stock split.

Rodney Axel

I am surely pleased to hear that, because like you, I've seen a stockholder for a long time and gave price with 1.5 to and even more than that and if there was a reverse split, we have to go a long way to recover that.

Clive Kabatznik

Yes. As I say, we are aware of that, as I say, what we're asking for is flexibility to be able to make the decision, but in no way, shape or form has that decision been made yet.

Rodney Axel

Okay. I wish you well (inaudible).

Clive Kabatznik

Thank you.

Rodney Axel

Thank you.

Operator

Thank you. (Operator instructions). Our next question is a follow-up from Joe First [ph] with First Associates.

Joe First - First Associates

Thank you. I also want to commend you on the progress you've made in this quarter. And a question, I think you said you released with a nine new titles in the first quarter and if that's correct, can you give some estimate on how many you might be able to release in the second quarter?

Clive Kabatznik

It was basically non-SKUs. The titles and I would say to that the major release, the major new release for the fourth quarter is Hello Kitty. There are a couple of titles that we released in the U.S., and they are going to be released in Europe for the first time, but the only major release for the fourth quarter is Hello Kitty. However, this is, as I said before a major release and both the shipping in the U.S. and the pre-orders for Europe are pointing to this being one of the most successful releases we've ever had.

Joe First - First Associates

And the products you released last quarter--

Clive Kabatznik

Are still selling well, and we're hopeful for some reorders, yes.

Joe First - First Associates

Good. And do you have any long-term, how do you intend to fix your balance sheet problems in the long run?

Clive Kabatznik

Well, again, we obviously have some liquidity issues as you can see by the balance sheet and we're hopeful that this Full Circle relationship will be consummated to the fullest extent possible, which should help us out. I think we have pointed out both in the 10-K and in the 10-Q that we will point out the 10-Q that will be released tomorrow that there are certain non-core assets that we will try and sell that we actually are talking to certain investors and investment bankers about identifying to. So we haven’t put them up for sale yet, but we're considering selling certain non-core assets. And then we have an investment in a technology company which is making Magnolia Broadband, which has made some significant progress over the last couple of months, which we also believe could result in a further monetization of an asset over, I would say, the next six months to nine months. And the bottom-line, beyond all of this of course is that we have to operate profitably and continue to build our business from an operational standpoint. So it's a first operational, second full circle, third, potential sales of assets, and fourth, potential monetization exit from Magnolia Broadband.

Joe First - First Associates

Can you -- go into the Magnolia I have forgotten about that if you had investment in that. Can you refer -- ?

Clive Kabatznik

I had almost forgotten as well, but the bottom-line is that Magnolia has for number of years and again as discussed been developing and perfecting and patenting a unique Transmit Diversity, Transmit technology for cell phones. And it has finally seemed to have achieved commercial acceptance among some of the major cell phone operators internationally. And that obviously should spur the chances of commercialization of technology and certainly we hope to spread the evaluations of technology. We are a minor investor in Magnolia, only have about a 2.2% stake. However, some of our co-investors are people like Intel Capital, DKR, Gotham and these are major VC players. And they clearly are also looking to have an exit after a number of years.

So I think that all the shareholders of Magnolia are hopeful that certainly 2009 will be the year of getting that company to promote land. And finally, it does seem that from a technological standpoint the market is coming around to adopting their standard, and just that Magnolia's patent portfolio in this regard we think is very strong and very defensible, and therefore we hope that the valuation of the company will be significant enough to make a difference to our balance sheet as well.

Joe First - First Associates

Thank you and good luck to you.

Clive Kabatznik

Thanks.

Operator

Thank you. At this time there are no further questions in queue. This concludes our question-and-answer session. I would now like to turn the call back to Mr. Kabatznik. Mr. Kabatznik, please proceed.

Clive Kabatznik

Operator; thank you very, very much. And again, thanks for joining us everybody. And I look forward to speaking to you again in the near future, hopefully with continued good results. Thanks, operator.

Operator

Thank you. Before we conclude today's call, I would like to take a moment to read the Company’s Safe Harbor statement. The company's remarks made during this call and answers to your questions may have included forward-looking statements that are subject to the Safe Harbor provisions of the Private Litigation Reform Act of 1995. These forward looking statements include among others things, statements regarding future events and the future financial performance of Silverstar Holdings that involve risks and uncertainties. Listeners are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results.

Listeners are referred to the documents filed by Silverstar Holdings with the SEC, specifically, the most recent reports on Form 10-K and 10-Q. Each of them may be amended from time-to-time, which identify important risk factors that could cause actual results to differ from those contained in the forward-looking statements. These forward-looking statements represent the Company's judgment as of the date of this conference call.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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