This article was originally published as a Friday File for the Irregulars on August 2. The content below has not been updated or revised, but we can add that they have not yet made any of the substantial inroads in licensing that we’re looking for … and investor enthusiasm for the stock died down substantially in the month following the teaser, particularly when a widely-publicized short case made the rounds on SeekingAlpha and elsewhere (Basenese also countered that short argument, just FYI, so you can decide for yourself which side of the argument works better).
The company teased is now near a $25 million market cap, and I’d say they’re still entirely dependent on developing a licensing agreement with a consumer products company that brings in prospects of some actual royalty revenue. The digital signage stuff doesn’t seem to be moving the needle at all in terms of revenue, hopes for the company to become big are built on some kind of sound technology for the home and mass market. I still find it an appealing story, but it’s certainly a story — they have enough cash to keep up with what they’re doing for at least a couple more quarters, but they need to get beyond demos for rooms of analysts and actually have a consumer product developed to move much further, I’d speculate. They’ve talked up a “2012-2013” timeline for getting a significant licensing deal in consumer products, so they’re giving themselves some more time … but with their cash balance and high short interest, I’d say they probably have six months now to get some substantial good news out there.
And yes, though I was tempted by the story at $10 because of the size of the market, the fall to $5 reminds us of how hard it is for a new technology to break into the market. So that’s your update …. if you want to see my thoughts on the original teaser from four months ago, which is much like the current one being circulated, you can see that below.
Friday File 8/2/12
We’re getting the Friday File out to you a wee bit early this week, since yours truly will be off the Gumshoe Grid for the next several days celebrating the anniversary of my birth. This one looked like an interesting one to dig into for you before I disappear for a few days — a new teaser that just started running for a pricey service and a “breakthrough” technological advance — what could go wrong?
The ad comes in from Louis Basenese for his MicroCap Tech Trader, and they use the good old, “We’ll send you a big fat check in the mail” pitch to get your attention. Of course, the $2,650 check they want to send you to buy shares of this teased stock is really just their discount from the “full price” subscription of $3,500. In effect, what you’re getting, as you smarties already figured out, is an $850 newsletter subscription. Which is slightly less than they tried to get for the letter when they launched it a year or so ago, so I don’t know if they’ve ever gotten anyone to pay their “list price” of $3,500 or not.
I also don’t know their track record — Basenese has been around for a while and has teased many tech and “growth” stocks for various letters … the last teaser pick of his we deciphered for this newish letter was the successful but not alarmingly so Uni-Pixel (UNXL) last summer, which is churning along at trying to develop commercial scale products but hasn’t yet “changed the face of touchscreens” and probably shouldn’t be a public company.
(There are a lot of those out there — companies that go public to essentially raise R&D money, with no conceivable notion of profitability — and sometimes they work out fine and the long-term technology development done by a public company works out, as in the case of some biotech stocks, but it always seems silly to pitch a company’s idea that will revolutionize the world if the company itself is small enough that any of the potential customers for their technology could, if they believed strongly at all in the potential, buy them out without blinking an eye. UNXL, for what it’s worth, is now a $6 stock that’s losing about a dollar a share every year, up about a buck from when Louis pitched it a year ago but far below where it was in 2007 when it was losing $9 a share as a $20 stock.)
But anyway, here we’ve got a stock that Basenese says has already shown big returns but is just getting started — and he says he learned about their technology in person, it’s all about directing sound precisely at listeners with something he calls a “sound laser” … here’s how he teases us:
“I rushed back from the airport like a bat out of you know where…Are you getting our free Daily Update
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“Because what I had just experienced was so incredible… so mind-blowingly powerful… and life-alteringly lucrative…
“That I had to share it with you as quickly as possible.
“What the automobile did to the horse and buggy…
“The transistor did to the vacuum tube…
“What the calculator did to the adding machine….
“And the PC did to the mainframe computer…
“Is about to happen again.
“To a technology the world has taken for granted for the past 135 years.
“I’ve never come across anything with so much pure profit potential…
“This technology has the very real potential to make investors incredibly rich.
“In fact, I’m so confident in this research that Wall Street Daily’s accounting department is prepared to authorize a certified check in your name in the amount of $2,650.”
Those are some big claims, other than the gimmicky “certified check for $2,650” bit … so what is he talking about?
“Consider the following…
“368 million PCs will be sold this year…
“300 million smartphones sold…
“121 million tablet computers…
“214 million flat panel TVs…
“There are over 254.4 million cars on the road in the United States alone.
“And there are now three million interactive kiosks, like ATMs, in existence…
“They all have one thing in common.
“They rely on ancient technology to transmit sound.
“Since Thomas Edison first cranked the handle of his tin foil phonograph machine and played, “Mary had a little lamb…”
“The way we hear the world has essentially stayed the same.
“That’s about to change.
Well, we’re trying to get a 1966 Oldsmobile fixed up and road-ready and I can tell you that the basic technology of speakers may be the same, but a 50 year old AM radio sure sounds different than what’s in our modern cars. Admittedly, mice may have chewed a few of those speaker cables, but still …
What Basenese is selling is the “sound laser” idea of targeted sound — here’s how he describes his test of the technology in Boston (I live a lot closer than he does, apparently I wasn’t invited to this exclusive test, dangit):
“I sat down in an ordinary conference room swivel chair in front of a pair of normal looking black speakers, each about the size of a paperback book.
“The inventor looked at me and asked if I was ready.
“‘Yes’, I said, expecting to hear a typical high-quality sound demo, like in a high-end stereo store.
“When he hit the ‘play’ button on his iPad, I instantly turned around to see if a frog was sitting behind me.
“He was playing a rainforest track.
“And it felt like I’d been dropped into the middle of the Amazon….
“It was the most unbelievable sound experience I’ve ever had….
“Then came the really amazing part.
“The inventor turned the speakers away from me.
“The sound stopped. I didn’t hear a thing.
“Once the speakers were turned back to me, it was as if someone had flipped the “on” switch inside my head again….”
And actually, I bet it was early June when Basenese got “his” test of this technology … because that’s when a roomful of investment guys got a taste of it at a conference in Boston, and they had the opportunity to get demonstrations following the presentation. You can hear their conference presentation here if you like, though obviously the “test” part doesn’t really convey in the recording. They also have a good overview investor presentation here with pretty up-to-date numbers, probably the same one they presented at that conference.
And the stock? It’s actually related to a stock we’ve written about before, this is Parametric Sound (PAMT), which has traded over-the-counter for a couple years but just “uplisted” to the Nasdaq a few months ago. Parametric was spun off from LRAD Corp. (LRAD), which is focused on a long range “sound cannon” technology that Christian DeHaemer touted as a “pirate fighter” several years ago — the inventor of this “sound laser” technology took the consumer, directed sound piece with him into his spun-off Parametric Sound and left the long-range-hailer military-potential stuff with LRAD, the two companies are now completely separate.
The company talks up the “immersive” sound quality of the technology, which they call HyperSound and which basically piggybacks sound waves on top of targeted ultrasonic waves for improving sound for home theaters and gaming and noisy environments (casinos, etc.), but it sounds like it works so well and so simply because the sound is actually “created” when it hits the targeted surface … like your body … so it doesn’t have the distortion created by all the air between you and the speaker. Which also means it has applications for the hearing impaired, so they’re also trying to develop technology for that “hearing aid” market. What they sound most excited about is offering “3D sound” to go along with modern HD or 3D TVs that offer terrible built-in sound — and apparently the technology can be included either in aftermarket low-profile speaker bars or inside the actual thin flatscreen TV sets themselves, it doesn’t take up space or depth the way conventional speakers do (because of their need to move volumes of air). There’s also potential for very precise aiming of the sound waves if needed or wanted, so that it can only be heard in a specific location — this is really for high-quality personal sound, not big, bombastic room-filling sound for crowds.
The technology was spun off from LRAD in September 2010 to Parametric Sound (LRAD is still focused on “sound cannons” that can do loud, clear long-range targeted messaging or hailing, like between ships or from police to a hostile crowd) — and perhaps more important, it was spun off “with” Woody Norris, who invented the technology in his lab in California. That spinoff was not a particularly big story (the technology has been around for a very long time and has disappointed investors before) until they got some substantial institutional backing more recently, and an experienced industry executive.
Those new investors got aboard this company with the intent of developing it into a licensing play — they want to get the big consumer electronics companies to develop products using Woody’s technology, with some design assistance from Woody Norris and the Parametric engineers but no manufacturing responsibility for PAMT.
The first deal they signed, which was with what sounds like a high-end aftermarket car audio/video company (there’s a business where I don’t even know the brand names anymore), is representative of what they hope to get — they want to choose a leading company to buy limited-time exclusivity and develop products on a rapid timetable. In this case they get a million bucks up front from Epsilon Electronics in exchange for that exclusivity in their niche (aftermarket car audio and video) for two years, and then a big 15% royalty stream on any products, which it sounds like they’re happy with. Parametric does do some low-volume manufacturing, particularly for digital signage and interactive kiosks, but they won’t be doing “real” manufacturing or investing in that capacity, they want the experts to use their technology.
The company also says they’re “funded up” after they raised that $9 million when they moved up to Nasdaq, and they won’t be going back to do more capital raising (ie, selling more stock) … which is a “famous last words” thing to say but certainly could be true if they’re successful at getting more good licensing deals signed. They have about eight million bucks now, and they are planning to spend about $2 million on lawyers and patent work to tune up their IP portfolio before they make what they believe will be larger licensing deals for TVs, video game systems, and slot machines over the next year or so, again picking one industry leader to forge the path in each sector on a limited-time exclusivity deal, but they envision this technology being something that every company will have to either license or respond to with their own new designs as they transform the industry. The ambition is certainly big, thought the company is small and the employee list numbers maybe a half dozen now.
Yes, they only have a few employees and the basic technology is already “done” (it’s been around in less-developed form for more than a decade — the USA Today article teased by Basenese was from 2003, and you’re probably aware that USA Today is not where you typically see “bleeding edge” technology advancements), so other than the executive salaries and some big checks to their law firm their expenses will be pretty minimal — they have allocated less than a million dollars of that fundraising (which actually netted them $8 million, after fees) to hiring new employees.
Parametric Sound expects to have a “Dolby-like” business model, with ~90% gross margins and scaling up to a dozen or a few dozen employees, so it ought to be create rapid earnings growth if they are able to build revenue streams. And they say their technology is a tenth or a fiftieth the cost of high-end Bose or Dolby technologies, so it gives very high level performance at mass market prices.
Dolby we’ve covered several times as well, though not as much in recent years, and it is a nice-looking model — they do indeed have gross margins up near 90% and trade at about 4X sales, though their actual net profit margin of about 30% is not particularly better than, say, Apple (AAPL), so I’m not sure where the heavy costs come into it for them as a primarily licensing-focused company (I think Dolby does more marketing than PAMT seems to envision, though I don’t think Dolby actually builds anything). It could easily be that costs end up being far higher than Parametric expects in the end, whether for marketing or legal or support or continued R&D enhancement reasons, though it’s far too early for that to be the overriding concern about such a tiny “idea” stock with, so far, just the first real customer signed on to try the technology and effectively test the business model.
It seems very likely that this will be a big year for Parametric one way or the other — they’re calling this the “get awareness” phase before they have their patent portfolio in shape enough to really share their intellectual property with some assurances (the deal with the car stereo company is relatively simple and small, it sounds like Parametric is essentially just giving them the widget to put in their product, not actually sharing their code like they’d probably have to do with, say, Sony or Panasonic), and they’re putting a “2012-2013” timeframe on their plans to get licensing deals done in some major markets. That could bring in substantial one-time payments to refresh their balance sheet as it runs down, though it sounds like the product development timeline means that meaningful royalty revenues, which should be the larger and more sustainable revenue stream in the end, are probably three or four years away as they envision it. At the current run rate, it looks like they ought to be able to keep going for another two years or so even if they fail to make any new licensing deals or generate any royalty revenue, though that’s obviously not what they’re hoping for — my guess is that the timeframe is optimistic, since it almost always is for tiny companies, but I have no basis for that guess.
They said in their conference presentation that after the fundraising, management owns about 25% of the stock and institutional investors 15%, so this is really very much a teensy, individual-investor-owned stock and it can move like crazy — the market cap right now is just under $70 million, it’s near its all-time highs, and the one-time payout of a million bucks for making the car stereo licensing deal just recently is five times the sales they’ve recorded in the previous twelve months, so they are in transition and so far it’s a good transition. Just really early, and I think probably very unpredictable.
Once they have a patent portfolio that they’re comfortable with, and their plan is basically to build the company up as a patent fortress first, then the stock could easily have huge moves if they sign big deals with name-brand companies — or, should they have a patent problem with the core of their technology (it seems unlikely to me, given the inventor’s longstanding history with this technology, but patents are funny things), the stock could certainly crater. The only asset this company has is their rights to Woody’s patents and their own corporate patents and their technical know-how to develop products with them, and they’re really just starting to sell those licensing deals to potential customers so we don’t really know what they’re worth yet. I’m very encouraged by the Epsilon Electronics deal, but that’s still brand new.
They sound quite sophisticated in their plan and approach, with an eye on the patent strength/safety first and then on the speed to development and the royalties second, and I’m encouraged by the fact that they have every intention of not spending a lot of money on other stuff but on really developing things collaboratively with the manufacturers who license the technology. But I’m not, of course, an expert on the technology itself or on the patents — they say they think they have it locked up and they won’t share the technology until they’re confident, and they say the hardware and software would be extremely difficult to reverse-engineer, so they’re thinking about the right things.
Call me crazy, but I’d be tempted to nibble on this one if I weren’t writing about it today. I haven’t read through their filings yet to see what kind of hold they have over Elwood Norris and his patents, which is obviously key since he’s the guy who has been pushing this technology and this idea for a decade or more, according to the last filings I saw he owns a bit more than 1% of the stock personally so that’s positive (though it would be better if he had bought more), and the stock has certainly been moving in the right direction as their pieces have fallen into place this year (uplisting to Nasdaq, new Executive Chairman with industry expertise, first licensing deal, etc.). It’s clearly a speculation that the dominos will keep falling over the next 12-18 months, leading to substantial name-brand products that generate royalties within probably two or three years or a bit longer, but I like the story enough and the finances are stable enough that it seems like a worthwhile speculation to consider if there aren’t any other real skeletons hiding in this young company.
Of course, there is absolutely nothing on which to reasonably base a valuation — we have no way of guessing what the revenues might be in a couple years, or what they might get in licensing fees if they win a huge customer, and their numbers over the last twelve months are essentially meaningless, too, so I could tell you with a straight face that it “should” be worth $5, or $3, or $50 … but I’d really just be making it up, so all I can really say is that investors valued this company at $10.55 when the market closed on Thursday night.
The market is huge, the technology is cool and extremely different and potentially not expensive for end users, and the company seems to be doing all the right things … but they don’t have any of that market won yet and the basic technology, despite its coolness and seemingly obvious appeal, has also spent many years essentially on the back burner, so the upside seems extraordinarily high if things go well and the downside seems to be right about 100% if they go poorly — if PAMT falls back to the revenue/cash flow they were experiencing in 2011 and earlier and there isn’t enough interest to get big licensing deals signed over the next two years, the company may not be worth anything at all.
I certainly won’t trade in the shares over the next three days, per my trading rules, but I’m feeling interested in this one — if I decide to nibble later on I’ll let you know.