Parametric Sound (PAMT) hopes to revolutionize the speakers in your car, home theater, hearing aide, and more by licensing to speaker companies its breakthrough new technology which the company calls Hyper Sonic Sound (HSS). The term HSS was coined and invented by Parametric Sound President Elwood "Woody" Norris. PAMT shares are up over 100% since a secondary offering in March 2012. This increase is not warranted.
Summary - Key Points
1. Parametric Sound's technology is not new. The founder has been promoting the technology for 15+ years. The pitch is almost verbatim what it was since at least 1996 (as far back as online annual filings go).
2. Management relies on a demonstration with a hidden subwoofer to make investors believe the technology can produce a full range of sound. The science behind the technology indicates low range notes will not be achievable without risk of potentially harmful side effects.
3. The technology is not an attractive, transformative opportunity for target markets, specifically gaming because the speakers cannot produce bass. Adding a traditional subwoofer would eliminate any benefit achievable with this technology as anyone who has lived with a gamer knows, most of what is irritating is the bass from the explosions reverberating through the wall.
4. Parametric Sound does not have "strong IP" as management indicates with competitors, potential licensees, and a patent troll all possessing related patents which will greatly reduce the company's negotiating power.
5. The company is not well capitalized for a development stage venture. The payment received for the only licensing deal inked to date is refundable as early as January. The average patent defense cost would burn about half their 6/30/12 cash balance.
6. There are not strong barriers to entry. A directional parametric speaker can be produced with off-the-shelf components or hobby kits by anyone.
Parametric Sound was spun out of LRAD Corp (LRAD) (previously American Technology Corporation) in June 2010 after LRAD management failed to find a market for HSS and could not sell the division at an attractive price according to an LRAD spokesman. Parametric continued along as a penny stock for about a year and half until it was discovered by Executive Chairman Kenneth Potashner. After he took control of the day to day doings, the company completed a 1 for 5 reverse split, did a small secondary offering, and up-listed on the Nasdaq at $4.50 per share. After a press release on a new contract and a flashy presentation, the stock more than doubled with a market cap of about double its prior parent LRAD. Parametric Sound is a stock benefiting from the latest round of promotional claims from its founder.
Mr. Norris has tried promoting this technology for at least the past 15 years without success for his companies or investors. (2001 & 2003 company literature) In 1997, he presented HSS to the Acoustical Society of America. In 1996, LRAD's predecessor announces it is collaborating with Carver Corporation for a home audio system. Based on public filings, it doesn't appear an agreement ever materialized. Regarding HSS, the 1996 10K stated: "the Company's strategy is to license broadly, it may provide limited exclusivity in certain market segments or sub-segments or may enter into exclusive arrangements with others to enter particular market segments," which sounds very familiar to the plan today at Parametric. (1996 10K (see p3); Carver Corporation Announcement (also in 10K)
The Intellectual Property
Parametric management believes it has "Strong IP," according to the corporate presentation. While the company does have several patents, so too do potential licensees, competitors, and even an intellectual property licensing firm (commonly known as a patent troll). For instance, Xerox (XRX) has a patent on a "Hypersonic Transducer" for delivering audio to a specific person or target. Philips Electronics has a patent titled "Driving of Parametric Loudspeakers". The founder of Holosonics, a competitor in display speakers has at least 6 patents related to parametric speakers including one titled "Parametric audio system."
Further proving the low barrier to entry, a California man recently ran a successful campaign on kickstarter to crowd source funding for his small parametric speaker, the Soundlazer. Fully functional, he has begun shipping the product to its backers as of 9/15/12. That anyone in a garage built his own speaker using similar technology with off-the-rack parts calls into question how stiff a barrier there really is to entry in this market.
Keeping the story straight
In promoting HSS, Norris likes to talk about his prior successes in investing; however, he doesn't seem to be able to remember how successful he has or hasn't been. On his personal website, in a USA today article from earlier in the decade, Norris claims to have sold technology related to the Jabra Jawbone for $1.5MM; however, several years later, in a 2009 TED Talks presentation (skip to 12:34) he ups the figure to $7.5MM. He inflates the figure by 5 times which should make investors question other figures he puts out.
Three of the possible use cases presented by Parametric Sound management are a rock concert, home theater, and movie theater; however, in the same USA today article referenced above, rock concerts, home theater, and movies are specifically listed as places where the technology is less useful. The article also listed a few groups testing HSS including Sony. Sony was mentioned in LRAD predecessor's FY03 10K. The filing says Sony had a non-exclusive supply agreement for HSS in Europe with a plan to develop the distribution channel is 2004. Sony was again mentioned in a 2/12/04 earnings release for 1Q04 as a customer for HSS. Sony's involvement with HSS doesn't appear again in future filings. Sony has passed before; why would a major OEM would go for this dated technology with limited uses this time around?
The Product & Technology
HSS relies on ultrasonic sound to create a directional speaker. This speaker can be pointed like a flash light. If you step out of the 'beam', the volume declines greatly. The primary initial market for the technology, according to management's current investor pitch, is gaming speakers. The pitch is: if a pair of these speakers was pointed at a gamer, he or she could turn up the volume and no one else in the house would have to hear the explosions going off in his or her game.
At a recent demo of Parametric Sound's technology, investors were invited to see the technology first hand. Management does 2 demos. One demo involves Mr. Norris pointing a one channel speaker at you where he plays a water fall which is akin to white noise. This demo is the one you'll find in brochures and on YouTube dating back several years.
The second demo is one in which you sit in front of a two speaker system. This arrangement is supposed to demonstrate a consumer application. My observations were several. The quality of the sound is very poor with an almost painful, tinny ring to it if you are not seated directly in the center of the speakers. Again, Mr. Norris will start with his favorite demo where he plays a waterfall which amounts to white noise. Management offered to play some hip-hop since the bass notes of that music more closely mirrors what will be needed for success in gaming. The bass which resonated from the speakers as he played some hip-hop sounded pretty good.
Unfortunately, undisclosed to investors, there was a standard, run-of-the-mill sub-woofer hiding under the table which was covered with a table cloth. This parlor trick is clearly designed to deceive investors into believing Parametric can create a full sound range; however, low frequencies are not possible due to practical limitations in the science behind Parametric's technology. These limitations were demonstrated in University of Central Florida informal experiments using both Parametric's speakers and that of a competitor, concluding:
both units are limited in their ability to reproduce low frequency sounds (in fact most anything below 400 Hz) and also sound best when used at quiet volumes - typically too quiet for many practical applications.
In addition to the lack of bass, the audio 'beam' scatters or reflects around the room which made the music audible when standing at several different angles and distances to the other peoples' demo of the two speaker setup.
Another paper published in 2005 by the University of Adelaide in Australia discussed parametric speakers use in noise control and used LRAD's predecessor ie. Parametric Sound's technology for testing. On page 2, the authors note that due to the 12 dB per octave roll-off, "much higher primary pressure amplitudes are needed to produce secondary wave amplitudes comparable to what could be produced at higher secondary frequencies." What does this mean? A drop of 1octave (think middle C on a piano to the C key 8 keys to the left) requires a more than doubling of the volume of ultrasonic carrier wave. The paper closing remarks note the high levels of ultrasound put out by the speaker "may potentially have an adverse health effect," and "these high levels are of particular concern as they are intrinsic in the governing physical sound generation mechanism and therefore cannot be reduced significantly through improved parametric array design." The speaker (one of PAMT's and LRAD's predecessor) used in testing peaked at 130 dB. In the U.S. OSHA specifies the limit of safe ultrasound at 145 dB; other countries including Canada, Japan, and Sweden have guidelines of 110-115 as a safe limit for the frequency range employed by Parametric Sound's ultrasonic carrier wave.
Parametric's likely retort would be that it intends for a gaming audio company to package its technology with a subwoofer; however, anyone who lives with a gamer knows that the one sound you can hear across the house is the bass. Such a product pairing would render useless the whole point of a directional speaker.
Deals so far
Parametric Sound's only licensing deal so far is with an after-market car-audio products company, Epsilon Electronics. This contract is risk-free for Epsilon with several ways for them to get their money back. If after 6 months Epsilon hasn't been able to find a use for the technology, Epsilon can get a refund. If Epsilon finds a use for the technology, all of its licensing fees are paid back out of Parametric's royalty until Epsilon's net cost on the contract is zero. There is no reason not to sign this deal if you are Epsilon as you get a free, exclusive look at a technology for your engineers to play with. Channel checks revealed current similar technologies including Parametric's cannot achieve a volume or low end of the frequency range for an application in car audio or home theater applications.
The most recently announced deal is a "strategic relationship" with Fujitsu Frontech North America, a subsidiary of the Japanese firm Fujitsu, which will make Fujitsu Frontech a reseller of Parametric's display & signage speaker, a product area management repeatedly has designated as non-core to Parametric's licensing business model going forward. This agreement allows Fujitsu Frontech the option at its customer's election to include a Parametric Speaker. Again, there is no reason for Fujitsu Frontech not to enter into this agreement since it costs them nothing to offer this product nor does there appear to be any minimum orders.
Epsilon may exercise its option for a 6 month extension for further evaluation of the technology in January (at no additional cost). If they fail to come up with a product, Epsilon will ask for a refund no later than June of next year. This refund will further decrease Parametric's cash.
The investment bank that did the secondary has a warrant for 188k shares priced at $5.63 which unlocks the last week of September. Management's shares' lockup expires at the same time. With a gain of 100%, some of those shares may be sold.
With only $6MM in cash and $750k per quarter burn rate at present staffing levels, PAMT likely cannot afford more than one intellectual property lawsuit which average $2-3MM according to industry statistics. Management has said it will aggressively defend its patents and would likely hope to agree to licensing agreements; however, such a defense may be difficult with a patent troll lurking as those groups typically are only after cash and have no interest in licensing anything from you. If any such lawsuits occur, I would expect a secondary shortly thereafter.