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LRAD Corporation (LRAD) recently announced its intention to spinoff most of its HSS Technology (HyperSonic Sound) related business into a new company called the Parametric Sound Corporation. The transaction is expected to be completed within the next three to four months. Post-spinoff, LRAD will continue making its Long Range Acoustic Device (for which the company is now named), which are mainly used for security purposes on ships, ports and crowd control.
The new company, Parametric Sound, will focus on “delivering directed parametric sound solutions to customers primarily in the digital signage, point-of-purchase, in-store network and related markets that benefit from sound that can be focused and controlled to specific locations. The company intends to finance, develop and introduce a new generation of HSS products.” Elwood G. Norris, currently on the board of directors at LRAD and HSS technology pioneer, will helm the new company and become its Chairman and CEO.
The company listed several reasons for the spinoff within its press release including: increased focus on individual product lines, separation of the risks (HSS business removed from LRAD) and an increase in the transparency of the two businesses so investors can “better evaluate the merits and prospects of each company. This is expected to enhance the likelihood that each company will receive appropriate market recognition of its performance and potential.” Looking at previous 10K filings, reporting was often consolidated making it difficult to determine each individual components contributions.
According to current President and CEO Tom Brown, “we have been unsuccessful in developing a market for HSS, we have no current plans to invest further resources in it. Our focus is building LRAD Corporation through increasing market opportunities for our proven LRAD product line.” Additionally, LRAD will not contribute any cash or working capital other than certain inventory to the new business and the cost of the spinoff is expected to be reimbursed by the new company. LRAD has agreed to commit some initial working capital though, but the amounts and terms have yet to be determined. According to Robert Putnam, an LRAD spokesman, “the company tried to sell the division but couldn’t get the right price”. Reading between the lines (or in some cases, the actual lines themselves), it appears that the LRAD management team does not have much confidence in the future of the HSS business.
Putting it all together we have a case where the parent company has given up investing in a business and have so far been unsuccessful in salvaging it (insiders think its trash), no other companies seemed willing to buy it (other insiders do not have confidence either), the parent even seems reluctant to invest in the spinoff (charging the new company, no real dollar commitments)…so why should we as investors get involved?
Pre-spinoff, LRAD has yet to turn a profit (although losses have been on the decline) and has a market cap of only approximately $35m (as of this writing). As a result, the new HSS business will be a fraction of that size, making it too small for many investors. Although completion of the transaction is still months away and most of the documentation has yet to be released, I am sensing this is a pass. If there is an investment here, it might be with the parent who has a somewhat proven product, but upon first glance it is also fraught with risks and would require a strong understanding of its business and growth opportunities. A closer look at the forthcoming documentation might help.
Disclosure: Author holds no position in any stock mentioned.
As a brief update: On June 2nd, 2010 the spinoff was put to a shareholder vote and was approved. Additionally, as expected Mr. Norris has resigned from LRAD’s Board of Directors in anticipation of taking over the new company. See the 8K here: http://edgar.sec.gov/Archives/edgar/data/924383/000118143110031983/rrd278472.htm