Business Context and Reporting Period
This Form 10-K covers the fiscal year ended September 30, 2010, for Parametric Sound Corporation (trading symbol: PAMT). The Company was incorporated on June 2, 2010, as a wholly-owned subsidiary of LRAD Corporation to facilitate the spin-off of its HyperSonic Sound (HSS) business. The spin-off was completed on September 27, 2010, distributing 15,306,064 shares of common stock to LRAD stockholders. Parametric Sound is a sound technology company focused on directed parametric sound solutions for digital signage and point-of-purchase markets. The Company is currently in the development phase of a new product line and has not yet commenced sales of these new products.
Key Financial Metrics
| Metric | Fiscal Year 2010 | Fiscal Year 2009 |
|---|---|---|
| Total Revenues | $607,037 | $607,106 |
| Gross Profit | $101,461 | ($31,657) |
| Net Loss | ($923,197) | ($986,426) |
| Operating Cash Flow | $257,607 | $157,043 |
| Cash and Equivalents (End of Period) | $439,385 | $0 |
| Total Debt (Subordinated Notes) | $700,000 | $0 |
| Working Capital | ($151,335) | $369,559 |
Note: Historical financial data reflects the HSS business as a component of LRAD Corporation prior to the September 27, 2010 spin-off. The Company received no cash or accounts receivable from LRAD at separation; liquidity was established via a $700,000 debt financing.
Material Changes vs. Prior Period
- Corporate Structure: Transitioned from a product line within LRAD Corporation to an independent, publicly traded entity on September 27, 2010.
- Revenue Source: 2010 revenues ($607,037) were derived entirely from the legacy H450 product line sold by LRAD. The Company has no current plans to sell the H450 and expects future revenue solely from a new product line currently in development.
- Impairment Charges: Significant non-cash impairment expenses were recorded in 2010 totaling $346,905 ($263,020 for patents and $21,087 for inventory) as the Company shifted strategy to new products, rendering certain legacy assets obsolete.
- Debt Financing: The Company issued $700,000 in 8% subordinated notes due September 28, 2011, to fund operations and reimburse related-party costs. This represents a material increase in liabilities compared to the prior year.
- Going Concern: Independent auditors have expressed substantial doubt about the Company's ability to continue as a going concern due to recurring losses and the need for additional financing.
Guidance, Outlook, and Risks
Outlook and Strategy: Management intends to introduce a new generation of parametric sound products (HSS-S2150 and HSS-M1150) featuring improved electronics and reduced costs. The Company targets digital signage, point-of-purchase, and 3D video markets. However, the Company has no orders for the new product line and cannot predict market acceptance or timing of revenue generation.
Liquidity Needs: The Company estimates it requires a minimum of $100,000 in additional capital to maintain operations for the next twelve months. Failure to secure financing or achieve product sales could force a curtailment of operations.
Key Risks and Contingencies:
- Going Concern: Substantial doubt exists regarding the ability to continue operations without additional financing.
- Related Party Transactions: The Company relies on an exclusive technology license from Syzygy Licensing LLC (owned by the CEO and CFO), requiring 5% royalties on future revenues. Conflicts of interest exist between management and Syzygy.
- Internal Controls: The Company identified material weaknesses in internal controls over financial reporting, including a lack of an audit committee and insufficient segregation of duties.
- Customer Concentration: Historically, one customer (Cardinal Health, Inc.) accounted for 34% of 2010 revenues, though future sales for this project will be fulfilled by LRAD Corporation.
- Supplier Dependency: The Company depends on a single supplier for piezo-film used in its emitters.
Investor Verification Checklist
- Capital Adequacy: Verify the Company's ability to raise the estimated $100,000+ required for 12-month operations and refinance the $700,000 debt due in September 2011.
- Product Development Status: Confirm the timeline for the commercial release of the new HSS-S2150 and HSS-M1150 products and any secured purchase orders.
- Related Party Terms: Review the specific terms of the license agreement with Syzygy Licensing LLC and the potential impact of the 5% royalty on future margins.
- Internal Control Remediation: Assess the progress in establishing an independent audit committee and segregating financial duties to address material weaknesses.
- Historical Data Relevance: Recognize that historical financial results (revenues and costs) are not indicative of future performance as the Company transitions to a new product line with a different cost structure.