Business context and reporting period
This is Parametric Sound Corporation’s unaudited Form 10-Q for the quarter and nine months ended June 30, 2013, filed August 8, 2013—not a standalone Turtle Beach filing. Parametric develops directional-audio products and technology, including its HyperSound (HSS) platform. Its revenue was primarily from product sales; it reported no licensing revenue to date.
After quarter-end, on August 5, 2013, Parametric agreed to acquire VTB Holdings, Inc. (Turtle Beach) in a merger. The transaction remained subject to closing conditions.
Financial performance and position
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $211,840 in 2013; $34,392 in 2012 | $475,898 in 2013; $158,867 in 2012 |
| Gross profit / margin | $101,457 / 48%; $15,863 / 46% | $232,236 / 49%; $88,271 / 55% |
| Operating expenses | $1,992,162; $1,730,270 | $5,332,378; $3,293,076 |
| Net loss | $1,891,750; $1,707,488 | $5,099,405; $3,199,802 |
| Net loss per share | $0.28; $0.27 | $0.78; $0.66 |
Cash used in operating activities for the nine months was $3.12 million, versus $1.86 million in 2012. Investing activities used $189,673; financing provided $1.07 million, principally from warrant and option exercises. Cash declined by $2.24 million to $3.28 million from September 30, 2012.
At June 30, cash was $3.28 million, working capital approximately $3.3 million, and total assets $5.69 million. Total liabilities were $867,385, including $141,197 of capital lease obligations; stockholders’ equity was $4.82 million. The filing provides no conventional margin or earnings measure beyond gross margin and operating and net losses.
Material changes versus prior comparable periods
- Revenue increased 516% in the quarter and 200% over nine months, from a low base, due to new customers and higher shipments to existing customers.
- Nine-month gross margin decreased to 49% from 55%; management noted that use of previously reserved inventory benefited both periods’ margins. It cautioned that historical margins may not predict future results.
- Nine-month operating expenses rose to $5.33 million from $3.29 million, reflecting higher selling, general and administrative and research and development costs. The quarter included $295,000 of strategic transaction costs; no comparable costs were reported in the prior-year quarter.
- Nine-month net loss increased to $5.10 million from $3.20 million. Cash used in operations also increased, and accounts receivable grew by $150,927 during the period.
Outlook, risks, contingencies and unusual items
- Management expected product sales to increase for the remainder of fiscal 2013 and in 2014, and anticipated possible future licensing revenue, but gave no quantified forecast and said sales levels and licensing timing were uncertain.
- Management said existing cash and planned product revenues were likely, but might not, fund operations for the next 12 months. It intended to seek additional financing; the merger required at least $5 million in qualifying proceeds. The filing estimated a need for at least $2 million of additional financing if the merger terminated under certain conditions, and $5 million otherwise. Availability and terms were uncertain.
- The merger would give former Turtle Beach holders and converted option holders approximately 80% of the combined company on a fully diluted basis, subject to adjustment. Turtle Beach preferred stock with a stated value of $12 million, plus accrued unpaid dividends, would remain outstanding. The merger required stockholder and NASDAQ approvals and financing, among other conditions, and could be terminated if not completed by February 28, 2014.
- Certain termination scenarios could require Parametric to pay a $1 million fee and/or grant Turtle Beach specified intellectual-property rights. Transaction costs were expected to continue. The merger also poses execution, dilution, management-distraction, and potential failure-to-close risks.
- Other business risks include recurring losses and negative operating cash flow, dependence on one supplier for HSS film, customer concentration (two customers generated 70% of nine-month revenue), uncertain product adoption and medical-device regulatory clearance, and approximately $3.0 million of cash deposits above FDIC insurance limits.
- Gross margins benefited from previously reserved inventory; the company reduced its inventory obsolescence reserve by $49,093 during the nine months. Share-based compensation was $1.56 million for the nine months, including approximately $2.0 million of estimated unvested option compensation cost.
- Management reported disclosure controls were effective at the reasonable-assurance level and no material changes in internal control over financial reporting. The filing reported no legal proceedings.
Most important facts to verify
- Whether the Turtle Beach merger closed, its final exchange ratio and ownership dilution, and the treatment of Turtle Beach’s $12 million preferred stock.
- Whether the required financing was obtained, its amount and terms, and whether further capital was needed to fund operations.
- Subsequent revenue growth, customer concentration, product margins, and any actual licensing revenue.
- Progress toward medical-device regulatory clearance and the commercial prospects of HyperSound health products.
- Actual merger-related costs and any termination fee or intellectual-property obligations if the transaction did not close.