Parametric Sound Corporation — Form 10-Q Summary
Entity and period: The filing is for Parametric Sound Corporation, not Turtle Beach Corp. It covers the quarter and nine months ended June 30, 2011, with comparative results for the periods ended June 30, 2010. The company was recently spun off from LRAD Corporation; 2010 comparative results reflect the HSS business as part of LRAD and are not fully comparable to the standalone company.
Financial performance and position
| Metric | Three months ended June 30, 2011 | Nine months ended June 30, 2011 | Prior-year comparable |
|---|---|---|---|
| Revenue | $1,844 | $1,844 | $174,881 and $520,078, respectively |
| Gross profit | $1,844 | $1,844 | $24,974 and $78,675, respectively |
| Operating expenses | $328,882 | $884,995 | $97,981 and $305,555, respectively |
| Operating loss | $327,038 | $883,151 | $73,007 and $226,880, respectively |
| Net loss | $484,768 | $1,186,021 | $73,007 and $226,880, respectively |
| Loss per share, basic and diluted | $0.03 | $0.07 | $0.00 and $0.01, respectively |
- 2011 revenue was from sales of excess components; the company reported no product sales in either 2011 period. HSS-3000 commercial shipments began in July 2011.
- Gross profit equaled reported revenue because cost of revenue was zero in 2011; this is not representative of product margins. The filing cautions that prior-year sales and margins are not indicative of results for the new product line.
- At June 30, 2011, cash was $482,077, total current assets $642,068, current liabilities $273,876, and working capital $368,192. Total assets were $950,108 and stockholders’ equity $676,232.
- Cash used in operating activities was $744,341 for the nine months; investing activities used $169,413, while financing activities provided $956,446. Cash increased by $42,692 from September 30, 2010.
- Cash operating costs were estimated at approximately $50,000 per month. The company had approximately $278,500 committed for future inventory deliveries, generally subject to modification or rescheduling.
- Subordinated notes had $30,000 of principal outstanding at June 30, 2011 (carrying amount, net of discount: $26,688); the notes were due September 28, 2011. The company reported no other available financing sources beyond cash on hand.
Material changes and financing
- Revenue fell sharply year over year because the prior-year HSS H450 sales were made by LRAD and the standalone company does not plan to sell that model. The company began accepting select-customer orders in the third quarter and reported a $43,000 backlog at June 30.
- Operating expenses rose, particularly research and development, as Parametric Sound built standalone capabilities and developed HSS-III products. Nine-month R&D expense was $432,177 versus $49,906 in the prior-year period; nine-month SG&A was $424,202 versus $215,348.
- Net interest and other expense was $157,730 for the quarter and $302,870 for the nine months, mainly reflecting interest and noncash amortization of debt discount and financing costs.
- In February 2011, the company raised $1.0 million gross through a common-stock and warrant financing. In June, 1.4 million warrants were exercised to reduce note principal by $420,000, and $250,000 of additional note principal plus $37,674 accrued interest was converted into 410,963 shares. These transactions left $30,000 principal outstanding.
Outlook, risks, and unusual matters
- Management said HSS-3000 shipments commenced in July 2011 and cited opportunities in digital signage, point-of-purchase, in-store networks, computers, and related applications. The company said market acceptance, future sales, and margins could not be predicted.
- Management expected planned sales, together with existing and previously reserved inventory, to support planned operations for the next 12 months. Without product sales, it estimated a minimum of approximately $150,000 in additional capital would be needed for that period. The filing warns that additional financing may not be available and that failure to raise funds could require curtailing operations.
- The filing identifies substantial uncertainty over the company’s ability to grow revenue, reach profitability, and continue as a going concern. It reported a nine-month net loss of $1.19 million and stated it had no financing source available other than cash on hand.
- A material weakness in internal control was disclosed: the CFO’s responsibilities included transaction initiation, asset custody, recording and reconciliation, and financial reporting without sufficient segregation of duties. Management concluded disclosure controls were not effective at the reasonable-assurance level; remediation was planned but not assured.
- The company owes Syzygy, an entity controlled by its CEO and CFO, royalties of generally 5% of revenue from products using licensed technology, with potential reduction to 3% in a territory if no relevant patent issues within four years. Related parties also participated in the note and equity financings.
- No pending material legal proceedings were reported. The company had no material capital-expenditure commitments, but expected continuing patent costs. The CEO personally guaranteed the assembly and warehouse lease.
Most important facts for investors to verify
- Confirm the issuer identity: this filing is for Parametric Sound Corporation, despite the request metadata naming Turtle Beach Corp.
- Track HSS-3000 orders, backlog conversion, shipment volumes, realized selling prices, and gross margins after July 2011 launch.
- Assess cash burn, the timing of the $30,000 note repayment, inventory commitments, and any need or ability to secure additional financing.
- Review whether management remediated the disclosed segregation-of-duties material weakness and whether subsequent filings report effective controls.
- Verify the effect of related-party financing and the Syzygy technology license, including royalties and patent-related obligations.