Business Context and Reporting Period
Company: Parametric Sound Corporation (formerly the HyperSonic Sound product line of LRAD Corporation).
Reporting Period: Quarterly report (Form 10-Q) for the period ended March 31, 2011.
Business Overview: The Company was spun off from LRAD Corporation on September 27, 2010. It focuses on developing a new line of directed parametric sound products for digital signage and point-of-purchase markets. The Company has no plans to sell the legacy H450 product models previously sold by LRAD Corporation. As of the reporting date, the new product line is under development, and no sales have commenced.
Key Financial Metrics
| Metric | Six Months Ended Mar 31, 2011 | Six Months Ended Mar 31, 2010 |
|---|---|---|
| Total Revenues | $0 | $345,197 |
| Gross Profit | $0 | $53,701 |
| Net Loss | $(701,253) | $(153,873) |
| Loss Per Share (Basic/Diluted) | $(0.04) | $(0.01) |
| Cash and Cash Equivalents (End of Period) | $921,335 | $0 |
| Total Assets | $1,146,989 | $644,187 |
| Total Liabilities | $748,999 | $611,705 |
| Subordinated Notes Payable (Net) | $553,263 | $436,728 |
| Stockholders' Equity | $397,990 | $32,482 |
Cash Flow Summary (Six Months Ended Mar 31, 2011):
- Net cash used in operating activities: $(450,936)
- Net cash used in investing activities: $(23,560)
- Net cash provided by financing activities: $956,446 (primarily from equity issuance)
Material Changes vs. Prior Period
- Revenue Cessation: Revenues dropped to zero from $345,197 in the prior year period. The Company ceased sales of legacy products and has not yet launched its new product line.
- Increased Operating Expenses: Total operating expenses rose to $556,113 from $207,574. This increase is driven by significant Research and Development (R&D) spending ($250,162 vs. $33,144) and higher Selling, General, and Administrative (SG&A) costs ($277,335 vs. $152,134) associated with operating as a standalone public company.
- Financing Activity: The Company raised $1,000,000 in net proceeds from the sale of common stock and warrants in February 2011, compared to no equity financing in the prior period. This significantly improved liquidity, increasing cash balances from $439,385 to $921,335.
- Debt Costs: The Company incurred significant non-cash interest expense ($117,933) related to the amortization of debt discounts and deferred financing costs associated with subordinated notes issued in September 2010.
Outlook, Risks, and Management Commentary
- Going Concern: Management explicitly states that the continuation of the Company as a going concern is dependent on its ability to develop revenues and obtain additional financing. There is no assurance that the Company will be successful in generating funds to sustain operations for twelve months or beyond.
- Product Development: The Company is preparing a new product line (HSS-III) but has no assurance regarding the timing or amount of future revenues. Historical revenues are not indicative of future results.
- Liquidity Needs: Cash operating costs approximate $50,000 per month. The Company has $700,000 in subordinated notes due September 28, 2011. Management believes it has sufficient capital for the next 12 months only if it can refinance or settle this debt; otherwise, it may require approximately $450,000 in additional capital.
- Internal Controls: The Company identified material weaknesses in internal controls over financial reporting, specifically a lack of independent audit committee oversight and insufficient segregation of duties (the CFO initiates transactions, has custody of assets, and prepares financial reports).
- Related Party Transactions: Significant portions of debt and equity financing were provided by related parties, including entities owned by executive officers. The Company also has a technology license agreement with a related party requiring 5% royalties on future revenues.
Investor Verification Checklist
- Debt Maturity: Verify the status of the $700,000 subordinated notes due September 28, 2011, and the Company's plan to refinance or repay them.
- Product Timeline: Confirm the expected launch date for the new HSS-III product line and any pre-orders or customer commitments.
- Cash Burn Rate: Monitor monthly cash burn against the current cash balance of ~$921,000 to assess runway without additional financing.
- Internal Control Remediation: Review future filings for progress on establishing an independent audit committee and segregating financial duties.
- Related Party Dependence: Assess the extent of reliance on related parties for future capital and the terms of the technology license agreement with Syzygy.