Business context and reporting period
Parametric Sound Corporation’s Form 10-K covers the fiscal year ended September 30, 2013—not a standalone fourth quarter. The company developed HyperSound, a directional-audio technology, and sold HSS-3000 systems mainly for commercial signage and kiosk uses. It was also pursuing consumer and hearing-health applications. The proposed Turtle Beach merger had not closed as of the filing date, November 26, 2013.
Financial results and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $562,902 | $233,649 |
| Gross profit / margin | $270,573 / 48% | $113,507 / 49% |
| Operating expenses | $7,938,981 | $4,587,752 |
| Net loss | $7,670,424 | $4,462,182 |
| Cash used in operations | $4,967,225 | $2,752,165 |
Product sales were $545,905, up from $222,016; other revenue was $16,997. No licensing revenue was recognized. Two customers represented 43% and 24% of FY2013 revenue. R&D expense was $2.06 million, versus $1.34 million. The net loss included $2.11 million of noncash share-based compensation and $1.28 million of merger/strategic-transaction expenses.
At September 30, 2013, cash was $1.60 million, working capital was $1.51 million, and total assets were $4.27 million. Current assets were $2.59 million and current liabilities $1.08 million. Total liabilities were $1.18 million, including $132,097 of capital-lease obligations; the filing reports no material conventional debt. In November 2013, the company raised $5.1 million gross, approximately $5.08 million net, through a registered stock sale. FY2013 investing cash use was $295,597; financing provided $1.33 million.
Material changes versus the prior year
Total revenue increased about 141%, while gross margin declined one percentage point. Net loss widened by $3.21 million, reflecting higher SG&A and R&D and new merger-related costs. Operating cash use increased by $2.22 million, and year-end cash fell $3.93 million to $1.60 million. Accounts receivable and inventory increased; accounts payable also rose materially. The November equity issuance occurred after year-end and is not included in September 30 cash.
Outlook, merger, risks and unusual items
Management expected higher FY2014 product sales from expanded distribution and direct selling, and anticipated future licensing revenue, but provided no quantified forecast and said sales, licensing timing and FDA clearance were uncertain. New emitter products were targeted for FY2014. A November 2013 FDA 510(k) submission sought clearance for an over-the-counter hearing-impaired product; approval was not assured.
The proposed merger would leave former Turtle Beach holders with approximately 80% of the combined company on a fully diluted basis, subject to adjustment. Turtle Beach’s $12 million stated-value preferred stock, plus accrued unpaid dividends, and certain phantom stock units would remain outstanding. Closing depended on stockholder and Nasdaq approvals and other conditions; the company believed the November financing met the minimum $5 million financing condition. Management cited expected liquidity for the next year, but warned that failure to close could require renewed strategic review, additional financing or cost reductions. Merger termination under specified circumstances could trigger a $1 million fee and/or an IP license; merger-related costs were expected to be substantial.
Merger-related shareholder lawsuits sought to block the transaction; outcomes and potential losses were not estimable, and no litigation accrual was recorded at September 30. Other key risks include a single-source piezo-film supplier, customer concentration, recurring losses and negative operating cash flow, unproven licensing plans, technology and product-liability risks, and potential limits on tax attributes after a change in ownership. The independent auditor issued an unqualified opinion and reported effective internal control over financial reporting as of September 30, 2013.
Important facts for investors to verify
- Whether the merger closed, its final ownership split and the treatment of Turtle Beach’s preferred stock and other obligations.
- How the November 2013 financing proceeds were used and the combined company’s liquidity, debt and cash burn.
- Whether revenue growth continued, customer concentration decreased, and gross margins improved.
- Whether FDA clearance was obtained and whether any licensing agreements produced revenue.
- Developments and financial exposure from merger litigation, termination provisions and integration costs.
- Whether supplier dependence, tax-attribute limitations and any post-merger credit-facility obligations materially affect operations.