10-Q 1 lrad20180630_10q.htm FORM 10-Q lrad20180630_10q.htm
 


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark one)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to                           .

 

Commission File Number: 000-24248

 


 

 

LRAD CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Delaware

87-0361799

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

   

16990 Goldentop Rd. Ste. A, San Diego,

California

92127

(Address of principal executive offices)

(Zip Code)

 

(858) 676-1112

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☐  Yes     ☒  No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

       

Non-accelerated filer

☐  

Smaller reporting company

 

Emerging growth company ☐

   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes  ☒    No

 

The number of shares of Common Stock, $0.00001 par value, outstanding on August 10, 2018 was 32,936,721.

 



 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.     Financial Statements

 

 

LRAD Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

June 30,

         
   

2018

   

September 30.

 
   

(Unaudited)

   

2017

 
                 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 12,030,076     $ 12,764,421  

Short-term marketable securities

    3,662,471       4,359,542  

Restricted cash

    346,027       39,466  

Accounts receivable, net

    6,583,346       5,681,882  

Inventories, net

    5,404,618       5,257,234  

Prepaid expenses and other

    862,812       983,322  

Total current assets

    28,889,350       29,085,867  
                 

Long-term marketable securities

    1,269,688       711,124  

Long-term restricted cash

    98,455       -  

Deferred tax assets, net

    5,537,410       8,331,000  

Property and equipment, net

    497,483       509,603  

Goodwill

    2,455,611       -  

Intangible assets, net

    1,653,508       55,689  

Other assets

    241,429       164,517  

Total assets

  $ 40,642,934     $ 38,857,800  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Accounts payable

  $ 1,754,593     $ 1,112,366  

Accrued liabilities

    3,529,940       2,561,395  

Notes payable, current portion

    532,822       -  

Total current liabilities

    5,817,355       3,673,761  
                 

Notes payable, less current portion

    207,530       -  

Total liabilities

    6,024,885       3,673,761  
                 

Stockholders' equity

               

Preferred stock, $0.00001 par value; 5,000,000 shares authorized; none issues and outstanding

    -       -  

Common stock, $0.00001 par value; 50,000,000 shares authorized; 32,651,763 and 32,158,436 shares issued and outstanding, respectively

    325       322  

Additional paid-in capital

    88,917,349       87,956,839  

Accumulated deficit

    (54,074,417 )     (52,771,853 )

Accumulated other comprehensive loss

    (225,208 )     (1,269 )

Total stockholders' equity

    34,618,049       35,184,039  

Total liabilities and stockholders' equity

  $ 40,642,934     $ 38,857,800  

 

See accompanying notes

 

1

 

 

 

LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

   

Three months ended

   

Nine months ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Revenues:

                               

Product sales

  $ 6,583,865     $ 3,852,676     $ 21,045,148     $ 12,026,248  

Contract and other

    930,203       276,878       1,965,934       787,032  

Total revenues

    7,514,068       4,129,554       23,011,082       12,813,280  

Cost of revenues

    3,815,203       2,420,126       11,318,697       6,945,496  
                                 

Gross Profit

    3,698,865       1,709,428       11,692,385       5,867,784  
                                 

Operating expenses

                               

Selling, general and administrative

    2,904,135       2,039,755       7,610,424       5,899,235  

Research and development

    972,857       666,244       2,664,829       1,858,894  

Total operating expenses

    3,876,992       2,705,999       10,275,253       7,758,129  
                                 

Income (loss) from operations

    (178,127 )     (996,571 )     1,417,132       (1,890,345 )
                                 

Other income

    24,159       32,682       73,894       94,884  
                                 

Income (loss) from operations before income taxes

    (153,968 )     (963,889 )     1,491,026       (1,795,461 )

Income tax expense (benefit)

    (73,749 )     (435,726 )     2,793,590       (752,969 )

Net loss

  $ (80,219 )   $ (528,163 )   $ (1,302,564 )   $ (1,042,492 )
                                 

Net loss per common share - basic and diluted

  $ (0.00 )   $ (0.02 )   $ (0.04 )   $ (0.03 )

Weighted average common shares outstanding:

                               

Basic and diluted

    32,306,207       31,861,916       32,314,038       31,820,632  

 

See accompanying notes

 

2

 

 

 

LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

   

Three months ended

   

Nine months ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Net loss

  $ (80,219 )   $ (528,163 )   $ (1,302,564 )   $ (1,042,492 )

Other comprehensive loss, net of tax

                               

Unrealized gain (loss) on marketable securities, net of tax

    5,805       107       (11,064 )     (1,871 )

Unrealized foreign currency loss, net of tax

    (217,231 )     -       (212,875 )     -  

Comprehensive loss

  $ (291,645 )   $ (528,056 )   $ (1,526,503 )   $ (1,044,363 )

 

See accompanying notes

 

3

 

 

 

LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Nine months ended

 
   

June 30,

 
   

2018

   

2017

 

Operating Activities:

               

Net loss

  $ (1,302,564 )   $ (1,042,492 )
                 

Adjustments to reconcile net loss to net cash provided by operating activities

 

Depreciation and amortization

    337,200       93,859  

Warranty provision

    12,361       -  

Inventory obsolescence

    91,976       (186,772 )

Share-based compensation

    433,063       943,923  

Deferred income taxes

    2,793,590       (754,569 )

Changes in operating assets and liabilities:

               

Accounts receivable, net

    (496,642 )     1,024,797  

Inventories, net

    (239,360 )     (760,351 )

Prepaid expenses and other

    153,576       (22,923 )

Other assets

    (60,615 )     180,063  

Accounts payable

    376,864       1,223,342  

Accrued liabilities

    54,610       291,725  

Net cash provided by operating activities

    2,154,059       990,602  
                 

Investing Activities:

               

Purchases of marketable securities

    (3,208,197 )     (2,304,263 )

Proceeds from maturities of marketable securities

    3,335,639       2,402,861  

Capital expenditures

    (166,845 )     (171,735 )

Purchase of Genasys, net of cash and restricted cash acquired

    (2,246,545 )     -  

Patent costs paid

    -       (7,789 )

Net cash used in investing activities

    (2,285,948 )     (80,926 )
                 

Financing Activities:

               

Proceeds from exercise of stock options

    1,027,719       -  

Repurchase of common stock

    (500,272 )     -  

Proceeds from the issuance of promissory notes

    63,144       -  

Payments on promissory notes

    (786,437 )     -  

Net cash used in financing activities

    (195,846 )     -  

Effect of foreign exchange rate on cash

    (1,594 )     -  

Net (decrease) increase in cash, cash equivalents, and restricted cash

    (329,329 )     909,676  

Cash, cash equivalents and restricted cash, beginning of period

    12,803,887       13,466,711  

Cash, cash equivalents and restricted cash, end of period

  $ 12,474,558     $ 14,376,387  
                 
                 

Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated

 

balance sheets:

               

Cash and cash equivalents

  $ 12,030,076     $ 14,336,921  

Restricted cash, current portion

    346,027       -  

Long-term restricted cash

    98,455       39,466  

Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows

  $ 12,474,558     $ 14,376,387  

 

See accompanying notes

 

4

 

 

LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Continued) 

 

 

   

Nine months ended

 
   

June 30,

 

Supplemental disclosures of cash flow information:

 

2018

   

2017

 

Interest paid

  $ 12,235     $ -  
                 

Noncash investing and financing activities:

               

Change in unrealized loss on marketable securities

  $ (11,064 )   $ (1,978 )
                 

Business combinations accounted for as a purchase:

               

Fair value of assets acquired

  $ 5,520,504     $ -  

Cash paid

    (3,011,439 )     -  

Liabilities assumed

  $ 2,509,065     $ -  

 

See accompanying notes

 

5

 

 

LRAD Corporation

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

1. OPERATIONS

 

LRAD® Corporation, a Delaware corporation (the “Company”), is engaged in the design, development and commercialization of directed and multidirectional sound technologies, voice broadcast products, and location-based mass messaging solutions for emergency warning and workforce management. The principal markets for the Company’s proprietary sound reproduction technologies, voice broadcast products and mass messaging solutions are in North and South America, Europe, Middle East and Asia.

 

On January 18, 2018, the Company acquired all of the issued and outstanding shares of capital stock of Genasys Holdings, S.L. and its subsidiaries (“Genasys”), pursuant to a Stock Purchase Agreement, dated January 18, 2018. Genasys is a leading software provider of advanced location-based mass messaging solutions for emergency warning systems and workforce management. See Note 4 for additional information about this transaction.

 

 

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

General

 

The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the footnotes. The condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended September 30, 2017 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on December 13, 2017. The accompanying condensed consolidated balance sheet at September 30, 2017 has been derived from the audited consolidated balance sheet at September 30, 2017 contained in the above referenced Form 10-K. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

 

Principles of Consolidation

 

The Company has four wholly owned subsidiaries, Genasys Holding, S.L. and Genasys II Spain, S.A.U. and two currently inactive subsidiaries, Genasys America de CV and LRAD International Corporation. The condensed consolidated financial statements include the accounts of these subsidiaries after elimination of intercompany transactions and accounts.

 

Reclassifications

 

Where necessary, the prior year’s information has been reclassified to conform to the current year presentation.

 

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2018-7, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-7”), which amends and expands Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The standard requires entities to measure nonemployee share-based payment transactions by estimating the fair value of the equity instrument it is obligated to issue, measure the equity-classified nonemployee share-based payment awards at the grant date, and consider the probability of satisfying performance conditions when accounting for nonemployee share based payment awards with such conditions. ASU 2018-7 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that fiscal year. Accordingly, this guidance will be effective for the Company in the fiscal year beginning October 1, 2019. The Company is currently evaluating the impact of this guidance on the consolidated financial statements and related disclosures.

 

6

 

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, which amends Topic 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The provisions of this guidance are to be applied using a retrospective transition method to each period presented. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company adopted ASU 2016-18 effective January 1, 2018. For the nine months ended June 30, 2018, the increase in restricted cash resulted primarily from restricted cash balances included in the assets acquired in the acquisition of Genasys, as described in Note 4. The adoption did not have a material impact on the Company's consolidated financial position, results of operations and cash flows, other than the impact discussed above.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This guidance changes how companies account for certain aspects of share-based payments to employees. Among other things, under the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in-capital (“APIC”), but will instead record such items as income tax expense or benefit in the income statement, and APIC pools will be eliminated. Companies will apply this guidance prospectively. Another component of the new guidance allows companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards, whereby forfeitures can be estimated, as required today, or recognized when they occur. If elected, the change to recognize forfeitures when they occur needs to be adopted using a modified retrospective approach. The guidance was effective for the Company in the first quarter of fiscal 2018. The adoption of this standard resulted in the recognition of $1.1 million of gross deferred tax assets related to the historical excess tax benefits from stock-based compensation that was not previously included in deferred tax assets and a corresponding increase in the Company’s valuation allowance.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which issued new guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new guidance must be adopted using the modified retrospective approach and will be effective for the Company in the fiscal year beginning October 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of this guidance, if any, on its consolidated financial statements and related disclosures.

 

In May 2014, the FASB issued Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (created by “ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASC 606 will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles when it becomes effective. In July 2015, the FASB deferred the effective date of the standard by an additional year; however, it provided companies the option to adopt one year earlier, commensurate with the original effective date. Accordingly, the standard will be effective for the Company in the fiscal year beginning October 1, 2018. The Company is currently evaluating the impact of this guidance, if any, on its consolidated financial statements and related disclosures.

 

 

4. ACQUISITIONS

 

On January 18, 2018, the Company completed its acquisition of Genasys, pursuant to a Stock Purchase Agreement. Genasys, headquartered in Madrid, Spain, is a leading software provider of advanced, location-based mass messaging solutions for emergency warning systems and workforce management. Genasys has 17 employees based primarily in Spain.

 

The Company believes the combination of Genasys’ mass messaging solutions and software development capabilities will enable the Company to enhance existing product offerings through integrated mass messaging solutions as well as provide growth opportunities in new markets. Genasys’ operating results were included in the Company’s consolidated financial statements beginning January 18, 2018 and include $916,000 in net sales and a net operating loss of $90,000 through June 30, 2018.

 

The acquisition consideration consisted of the following:

 

Cash paid

  $ 2,826,189  

Acquisition escrow liability

    185,250  

Total consideration

  $ 3,011,439  

 

During the three months ended June 30, 2018, the acquisition escrow liability was paid to the former shareholders of Genasys. The Company incurred $356,547 in acquisition expenses related to this transaction, through June 30, 2018. Acquisition expenses include fees paid to auditors, attorneys, consultants and other professional services. These expenses were recorded in selling, general, and administrative expenses in the consolidated statement of operations as follows: $119,202 in the third quarter of fiscal 2018, $151,313 in the second quarter of fiscal 2018, $45,016 in the first quarter of fiscal 2018 and $41,016 in the fourth quarter of fiscal 2017.

 

7

 

 

Purchase Price Allocation and Other Items

 

The determination of the purchase price allocation to specific assets acquired and liabilities assumed is preliminary as of June 30, 2018. The purchase price allocation is subject to change based upon the final determination of fair value estimates of certain assets acquired and liabilities assumed. Based on the fair value estimates, the purchase price for Genasys has been allocated to individual assets acquired and liabilities assumed as follows:

 

Assets Acquired

       

Cash and restricted cash acquired

  $ 579,644  

Accounts receivable

    426,940  

Fixed assets

    5,712  

Intangible assets

    1,850,000  

Goodwill

    2,603,688  

Other assets

    54,520  

Total assets acquired

    5,520,504  
         

Liabilities assumed

       

Accounts payable

    275,653  

Accrued expenses and other liabilities

    315,817  

Severance obligation

    397,558  

Debt

    1,520,037  

Total liabilities assumed

    2,509,065  

Net assets acquired

  $ 3,011,439  

 

The estimated fair value of identifiable intangible assets acquired, and their estimated useful lives were as follows:

 

 

   

Fair Value

   

Useful Lives

(in years)

 

Technology

  $ 690,000       7  

Customer relationships

    660,000       7  

Trade name portfolio

    240,000       5  

Non-compete agreements

    260,000       3  
    $ 1,850,000          

 

Identifiable intangible assets are amortized over their useful lives based upon a number of assumptions including the estimated period of economic benefit and utilization. The weighted average amortization period for identifiable intangible assets acquired is 6 years.

 

The goodwill for Genasys is attributable to combining the mass messaging solutions and software development capabilities with existing LRAD products for enhanced offerings and the skill level of the acquired workforce. The Company will continue to analyze the transaction and refine its calculations, as appropriate during the measurement period, which could affect the value of goodwill. Goodwill from the Genasys acquisition will not be deductible for tax purposes.

 

Pro Forma Information

 

The following table provides the unaudited pro forma results of operations for the three and nine months ended June 30, 2018 and 2017, respectively, as if Genasys had been acquired as of the beginning of fiscal year 2017. Pro forma results do not include any anticipated synergies from the combination of the companies, and accordingly, are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the dates indicated or that may result in the future.

 

   

Three months ended

   

Nine months ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Net revenues

  $ 7,610,260       4,646,765     $ 23,833,153       14,326,125  

Net loss

    (48,821 )     (473,480 )     (1,136,331 )     (1,257,072 )

Basic and diluted loss per share

  $ (0.00 )   $ (0.01 )   $ (0.04 )   $ (0.04 )

 

8

 

 

The following is a reconciliation of actual net revenue and net income to pro forma net revenue and net income:

 

   

Three months ended June 30,

 
   

2018

   

2017

 
   

Net revenues

   

Net income (loss)

   

Net revenues

   

Net income (loss)

 

LRAD actual results

  $ 7,012,430     $ 36,450     $ 4,129,554     $ (528,163 )

Genasys actual results

    597,830       (116,669 )     517,211       103,947  

Pro forma adjustments

    -       31,398       -       (49,264 )

Pro forma results

  $ 7,610,260     $ (48,821 )   $ 4,646,765     $ (473,480 )

 

   

Nine months ended June 30,

 
   

2018

   

2017

 
   

Net revenues

   

Net income (loss)

   

Net revenues

   

Net income (loss)

 

LRAD actual results

  $ 22,094,790     $ (1,194,052 )   $ 12,813,280     $ (1,042,492 )

Genasys actual results

    1,738,363       10,215       1,512,845       (68,793 )

Pro forma adjustments

    -       47,506       -       (145,787 )

Pro forma results

  $ 23,833,153     $ (1,136,331 )   $ 14,326,125     $ (1,257,072 )

 

 

The following table identifies the pro forma adjustments:

 

   

Three months ended

   

Nine months ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Acquisition costs

  $ 119,202       -     $ 315,531     $ -  

Depreciation and amortization costs

    (79,458 )     (79,458 )     (238,374 )     (238,374 )

Tax effect of adjustments

    (8,346 )     30,194       (29,651 )     92,587  

Pro forma adjustments

  $ 31,398     $ (49,264 )   $ 47,506     $ (145,787 )

 

 

 

 5. GOODWILL AND INTANGIBLE ASSETS

 

During the nine months ended June 30, 2018, the Company recorded intangible assets of $1,850,000 and goodwill of $2,603,688 in connection with the acquisition of Genasys, as described in Note 4.    

 

Identifiable intangible assets are amortized over their useful lives based upon a number of assumptions including the estimated period of economic benefit and utilization. The Company will assess the impairment of identifiable amortized intangible assets when events and circumstances indicate the carrying value of the assets might not be recoverable.

 

The goodwill attributable to the acquisition of Genasys is due to combining the mass messaging solutions and software development capabilities with existing LRAD products for enhanced offerings and the skill level of the acquired workforce. The Company will continue to analyze the transaction and refine its calculations, as appropriate during the measurement period, which could affect the value of goodwill. Subsequent to the measurement period, the Company will periodically review goodwill for impairment in accordance with ASC 350 “Intangibles – Goodwill and Other – Testing Indefinite-Lived Assets for Impairment”.

 

9

 

 

The Company’s intangible assets consist of the following:

 

   

June 30, 2018

   

September 30, 2017

 
   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Net Carrying

Amount

   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Net Carrying

Amount

 

Technology

  $ 650,767     $ (42,610 )   $ 608,157     $ -     $ -     $ -  

Customer relationships

    622,474       (40,757 )     581,717       -       -       -  

Trade name portfolio

    226,354       (20,749 )     205,605       -       -       -  

Non-compete agreements

    245,216       (37,464 )     207,752       -       -       -  

Patents

    108,247       (57,970 )     50,277       108,247       (52,558 )     55,689  
    $ 1,853,058     $ (199,550 )   $ 1,653,508     $ 108,247     $ (52,558 )   $ 55,689  

 

 

The amortization expense for the three months ended June 30, 2018 and 2017 was $81,262 and $1,922, respectively. The amortization expense for the nine months ended June 30, 2018 and 2017 was $153,026 and $5,602, respectively.

 

Estimated Future Amortization Expense for the Years Ended September 30, 2018 (July 1, 2018 through September 30, 2018)

  $ 79,030  

2019

    316,117  

2020

    316,117  

2021

    258,219  

2022

    234,378  

Thereafter

    449,647  

Total futue estimated amortization expense

  $ 1,653,508  

 

 

 

6. FAIR VALUE MEASUREMENTS

 

The Company’s financial instruments consist principally of cash equivalents, short and long-term marketable securities, accounts receivable and accounts payable. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

 

 

Level 1:

Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

 

 

Level 2:

Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.

 

 

Level 3:

Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

 

The fair value of the Company’s cash equivalents and marketable securities was determined based on Level 1 and Level 2 inputs. The Company did not have any marketable securities in the Level 3 category as of June 30, 2018 or September 30, 2017. The Company believes that the recorded values of its other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

 

10

 

 

Instruments Measured at Fair Value

 

The following tables present the Company’s cash equivalents and marketable securities’ costs, gross unrealized gains and losses, and fair value by major security type recorded as cash equivalents or short-term or long-term marketable securities as of June 30, 2018 and September 30, 2017.

 

   

June 30, 2018

 
           

Unrealized

   

Fair

   

Cash

   

Short-term

   

Long-term

 
   

Cost Basis

   

Losses

   

Value

   

Equivalents

   

Securities

   

Securities

 

Level 1:

                                               

Money Market Funds

  $ 241,013     $ -     $ 241,013     $ 241,013       -       -  
                                                 

Level 2:

                                               

Certificates of deposit

    688,000       -       688,000       -       189,000       499,000  

Municipal securities

    150,160       (65 )     150,095       -       150,095       -  

Corporate bonds

    4,106,332       (12,268 )     4,094,064       -       3,323,376       770,688  

Subtotal

    4,944,492       (12,333 )     4,932,159       -       3,662,471       1,269,688  
                                                 

Total

  $ 5,185,505     $ (12,333 )   $ 5,173,172     $ 241,013     $ 3,662,471     $ 1,269,688  

 

   

September 30, 2017

 
           

Unrealized

   

Fair

   

Cash

   

Short-term

   

Long-term

 
   

Cost Basis

   

Losses

   

Value

   

Equivalents

   

Securities

   

Securities

 
                                                 

Level 1:

                                               

Money Market Funds

  $ 55,257     $ -     $ 55,257     $ 55,257     $ -     $ -  
                                                 

Level 2:

                                               

Certificates of deposit

    2,436,647       -       2,436,647       -       1,937,647       499,000  

Municipal securities

    25,315       (12 )     25,303       -       25,303       -  

Corporate bonds

    2,609,973       (1,257 )     2,608,716       -       2,396,592       212,124  

Subtotal

    5,071,935       (1,269 )     5,070,666       -       4,359,542       711,124  
                                                 

Total

  $ 5,127,192     $ (1,269 )   $ 5,125,923     $ 55,257     $ 4,359,542     $ 711,124  

 

 

 

7. INVENTORIES

 

Inventories consisted of the following:

 

   

June 30,

2018

   

September 30,

2017

 

Raw materials

  $ 5,119,720     $ 3,784,935  

Finished goods

    456,899       1,742,960  

Work in progress

    338,506       147,871  

Inventories, gross

    5,915,125       5,675,766  

Reserve for obsolescence

    (510,507 )     (418,532 )

Inventories, net

  $ 5,404,618     $ 5,257,234  

 

11

 

 

 

8. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   

June 30,

2018

   

September 30,

2017

 

Office furniture and equipment

  $ 1,103,861     $ 1,093,502  

Machinery and equipment

    1,167,712       994,157  

Leasehold improvements

    76,138       76,138  

Property and equipment, gross

    2,347,711       2,163,797  

Accumulated depreciation

    (1,850,228 )     (1,654,194 )

Property and equipment, net

  $ 497,483     $ 509,603  

 

   

Nine months ended

 
   

June 30,

 
   

2018

   

2017

 

Depreciation expense

  $ 184,174     $ 88,257  

 

 

 

  9. ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following:

 

   

June 30,

   

September 30,

 
   

2018

   

2017

 

Payroll and related

  $ 1,788,948     $ 1,870,579  

Deferred revenue

    1,175,948       268,580  

Accrued contract costs

    184,508       197,034  

Severance

    231,676       -  

Warranty reserve

    148,860       179,101  

Deferred rent

    -       46,101  
Total   $ 3,529,940     $ 2,561,395  

 

 

 Payroll and related

Payroll and related consists primarily of accrued vacation, bonus, sales commissions, and benefits.

 

Deferred Revenue

Deferred revenue consists primarily of prepayments from customers in advance of product shipment.

 

Warranty Reserve

Changes in the warranty reserve and extended warranty were as follows:

 

   

Three months ended

   

Nine months ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Beginning balance

  $ 169,204     $ 449,141     $ 179,101     $ 356,984  

Warranty provision

    -       (2,761 )     12,361       108,608  

Warranty settlements

    (20,344 )     (46,201 )     (42,602 )     (65,413 )

Ending balance

  $ 148,860     $ 400,179     $ 148,860     $ 400,179  

 

Accrued contract costs

 

The Company has contracted with a third-party service provider to administer the required services under the terms of a repair and maintenance agreement with a foreign military. This payment is made in arrears for each contract year ended March 26.

 

 

10. INCOME TAXES

 

The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017.  The Act reduces the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018.  Subsequently, the SEC issued Staff Accounting Bulletin (“SAB”) 118, which allows for the recording of provisional amounts related to U.S. tax reform and subsequent adjustments related to U.S. tax reform during a measurement period not to exceed one year from the enactment date.  Accordingly, the Company remeasured its deferred tax assets on a provisional basis based on the rates at which they are expected to be realized in the future, which is generally 21%, resulting in a decrease to the Company’s net deferred tax assets of $2,474,000 during the quarter ended December 31, 2017. The Company will continue to analyze certain aspects of the Act and refine its calculations as appropriate during the measurement period, which could affect the measurement of these balances. 

 

12

 

 

For the nine months ended June 30, 2018, the Company recorded income tax expense of $290,590 reflecting an effective tax rate of 20.05% and an additional discrete tax expense of $2,503,000 due to the remeasurement of its deferred tax assets as a result of tax reform. For the nine months ended June 30, 2017, the Company recorded an income tax benefit of $752,969 reflecting an effective tax rate of 41.9%.  For the nine months ended June 30, 2018, when compared to the same period in 2017, the decrease in the effective tax rate was primarily attributable to the decrease in Federal statutory tax rate due to tax reform. The Company continues to maintain a partial valuation allowance against its deferred tax assets as the Company believes that the negative evidence that it will be able to recover these net deferred tax assets outweighs the positive evidence.

 

ASC 740, Accounting for Uncertainty in Income Taxes, requires the Company to recognize in its consolidated financial statements uncertainties in tax positions taken that may not be sustained upon examination by the taxing authorities. If interest or penalties are assessed, the Company would recognize these charges as income tax expense. The Company has not recorded any income tax expense or benefit for uncertain tax positions.

 

 

11. DEBT

 

In connection with the acquisition of Genasys, as described in Note 4, the Company acquired certain debts of Genasys. The carrying value of the acquired debt approximates fair value. The components of the acquired debt consisted of the following as of June 30, 2018:

 

   

Principal

 
         

Loans with governmental agencies, current portion

  $ 532,822  

Loans with governmental agencies, long-term

    207,530  

Total debt

  $ 740,352  

 

Loans with governmental agencies represents debt granted by ministries within Spain and the European Union for the purpose of stimulating economic development and promoting research and development. Loans with governmental agencies as of June 30, 2018 are as follows:

 

Agency

Due Date

 

Interest Rate

   

Principal

   

Ministry of Industry, Tourism, and Commerce

December 31, 2018

    0.53%     $ 69,828  

a

Ministry of Industry, Tourism, and Commerce

December 31, 2019

    0.51%       102,036  

b

Ministry of Industry, Tourism, and Commerce

January 31, 2020

    3.95%       89,463  

c

Ministry of Science and Innovation

February 2, 2022

    0.00%       70,086    

Ministry of Science and Innovation

February 2, 2024

    0.00%       280,243  

d

Center for Development of Industrial Technology

March 31, 2021

    0.00%       78,843    

European Union Agency for Network and Information Security

October 28, 2018

 

Euribor +2.25%

      49,853    
              $ 740,352    

 

 

 

a.

This loan is secured by $24,688 of cash pledged as collateral by Genasys. This amount is included in restricted cash at June 30, 2018. The cash will be released upon repayment of the loan.

 

b.

This loan is secured by $38,165 of cash pledged as collateral by Genasys, which represents 25% of the original principal received. This amount is included in restricted cash at June 30, 2018. The cash will be released upon repayment of the loan.

 

c.

This loan is secured by $60,290 of cash pledged as collateral by Genasys, which represents 35% of the original principal received. This amount is included in restricted cash at June 30, 2018. The cash will be released upon repayment of the loan.

 

d.

This loan is secured by $280,243 of cash pledged as collateral by Genasys, which is the current balance of the loan. This amount represents 66.6% of the original principal received. This amount is included in restricted cash at June 30, 2018. The Company expects the Ministry of Science and Innovation to declare the terms of the loan satisfied within fiscal year 2018 and that the outstanding balance of the loan will be paid in full during fiscal year 2018. Accordingly, this has been included in the current portion of notes payable as of June 30, 2018.

 

13

 

 

The following is a schedule of future annual payments as of June 30, 2018:

 

July 2018-June 2019

  $ 532,822  

July 2019-June 2020

    134,887  

July 2020-June 2021

    55,121  

July 2021-June 2022

    17,522  

Thereafter

    -  

Total

  $ 740,352  

 

 

The Company has pledged $444,482 of cash as collateral against debt. This restricted cash amount is included in restricted cash and long-term restricted cash as of June 30, 2018.

 

The Company recorded $4,390 and $14,205 in interest expense for the three months and nine months ended June 30, 2018, respectively in the condensed consolidated statements of operations in connection with the above referenced debt.

 

 

12. COMMITMENTS AND CONTINGENCIES

 

Litigation

 

The Company may at times be involved in litigation in the ordinary course of business. The Company will, from time to time, when appropriate in management’s estimation, record adequate reserves in the Company’s consolidated financial statements for pending litigation. Currently, there are no pending material legal proceedings to which the Company is a party or to which any of its property is subject.

 

Bonus Plan

 

The Company has incentive bonus plans for fiscal year 2018 designed to motivate its key employees to achieve the Company’s financial objectives. All of the Company’s key employees are entitled to participate in the incentive plans. Target Bonus Amounts (“Target”) vary based on a percentage of the employee’s base salary which range from 25% to 75% of base salary and a bonus payment may be made at three levels, including at 87% of Target, at 100% of Target and at 135% of Target, depending upon the achievement by the Company of specified performance goals. Performance targets include certain fiscal 2018 metrics, including product bookings, net revenues, operating income and operating cash flow. Included in such calculation is the cost of the incentive plan. During the three months ended June 30, 2018 and 2017, the Company accrued $475,000 and $366,820 respectively, for bonuses and related payroll tax expense in connection with the bonus plans. During the nine months ended June 30, 2018 and 2017, the Company accrued $1,213,543 and $745,900 respectively, for bonuses and related payroll tax expenses in connection with the bonus plans.

 

Acquisition Escrow Liability

 

In connection with the acquisition of Genasys the Company recorded an escrow liability of €150,000 which was equivalent to $185,250 at the date of acquisition, as described in Note 4.  This liability was based on a working capital target and payable to the former shareholders of Genasys. The Company paid €150,000 which was equivalent to $179,265 during the three months ended June 30, 2018 to satisfy this liability.

 

 

13. SHARE-BASED COMPENSATION

 

Equity Incentive Plans

 

At June 30, 2018, the Company had two equity incentive plans. The 2005 Equity Incentive Plan (“2005 Equity Plan”) was terminated with respect to new grants in March 2015, but remains in effect for grants issued prior to that time. The Amended and Restated 2015 Equity Incentive Plan (“2015 Equity Plan”) was approved by the Company’s Board of Directors on December 6, 2016 and by the Company’s stockholders on March 14, 2017. The 2015 Equity Plan authorizes for issuance as stock options, restricted stock, stock appreciation rights, restricted stock units and performance awards, an aggregate of 5,000,000 new shares of common stock to employees, directors, advisors or consultants. At June 30, 2018, there were options outstanding covering 1,724,701 and 2,275,565 shares of common stock under the 2005 Equity Plan and 2015 Equity Plan, respectively.

 

14

 

 

Stock Option Activity

 

The following table summarizes information about stock option activity during the nine months ended June 30, 2018:

 

   

Number of

Shares

   

Weighted

Average

Exercise Price

 

Outstanding October 1, 2017

    4,663,502     $ 2.16  

Granted

    3,500     $ 2.21  

Forfeited/expired

    (87,083 )   $ 2.79  

Exercised

    (579,653 )   $ 1.77  

Outstanding June 30, 2018

    4,000,266     $ 2.20  

Exercisable June 30, 2018

    2,894,363     $ 2.30  

 

Options outstanding are exercisable at prices ranging from $0.93 to $3.17 and expire over the period from 2018 to 2024 with an average life of 3.1 years. The aggregate intrinsic value of options outstanding and exercisable at June 30, 2018 was $1,741,162 and $1,342,667, respectively.

 

During the nine months ended June 30, 2017, the Company incurred non-cash share-based compensation expense of $307,324 resulting from the modification of stock options in accordance with a Separation Agreement and General Release related to the June 30, 2016 departure of the Company’s prior chief executive officer (“CEO”). As per the agreement, all unvested options became fully vested on December 31, 2016 and shall remain exercisable for a period of 24 months following the December 31, 2016 separation date as defined in the agreement. The expense is measured as the excess of the fair value of the modified awards over the fair value of the original awards immediately before its terms are modified as per ASC 718-20-35.

 

Performance-Based Stock Options

 

On August 1, 2016, the Company awarded a performance-based stock option (PVO) to purchase 750,000 shares of the Company’s common stock to a key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2019 and 2020 (375,000 shares for each year) including minimum free cash flow margin and net revenue targets at four different target levels for each of the years. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets.

 

The Company has made the assumption that the lowest performance target level for each of the years will be met, and therefore 187,500 shares of the PVO are assumed to vest. The weighted average grant date fair value for the PVO was $0.81 per share, which was estimated on the date of grant using the Black-Scholes option pricing model. Non-cash share-based compensation expense related to this award is recognized on a straight-line basis over the requisite service periods. The share-based compensation expense related to the shares of the PVO for the three months ended June 30, 2018 and 2017 was $10,562 and $10,562, respectively. The share-based compensation expense related to the shares of the PVO for the nine months ended June 30, 2018 and 2017 was $31,685 and $31,685, respectively The Company will continue to review these targets each quarter and will adjust the expected outcome as needed, recognizing compensation expense cumulatively in such period for the difference in expense.

 

Restricted Stock Units

 

During the quarter ended December 31, 2016, the Board of Directors approved the grant of 25,000 restricted stock units (“RSUs”) to each of the Company’s non-employee directors, subject to stockholder approval of the Amended and Restated 2015 Equity Incentive Plan at the 2017 Annual Meeting of Stockholders. These RSUs were granted as replacements for 20,000 stock options that would have been granted on the date of the 2016 Annual Meeting of Stockholders and vested on the first anniversary of the 2016 Annual Meeting of Stockholders, which was May 17, 2017. As a result of the stockholders’ approval of the Amended and Restated 2015 Equity Incentive Plan at the 2017 Annual Meeting of Stockholders on March 14, 2017, the RSUs previously granted were made effective at a market value of $197,500 and were expensed on a straight-line basis through the vest date.

 

On March 14, 2017, the Board of Directors approved an additional grant of 25,000 RSUs to each of the Company’s non-employee directors that will vest on the first anniversary of the grant date. These were also issued at a market value of $197,500, which was expensed on a straight line basis through the March 14, 2018 vest date.

 

On March 20, 2018, the Board of Directors approved an additional grant of 25,000 RSUs to each of the Company’s non-employee directors that will vest on the first anniversary of the grant date. These were issued at a market value of $278,750, which have been and will be expensed on a straight line basis through the March 20, 2019 vest date. Also, during the nine months ended June 30, 2018, 93,330 RSUs were granted to employees that will vest equally over three years on each of the first three anniversary dates of the grant. These were issued at a market value of $210,176, which will be expensed on a straight line basis over the three year life of the grants.

 

15

 

 

Share-Based Compensation

 

The Company recorded share-based compensation expense and classified it in the condensed consolidated statements of operations as follows:

 

   

Three months ended

   

Nine months ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Cost of revenues

  $ 5,111     $ 6,192     $ 16,367     $ 17,943  

Selling, general and administrative

    123,311       272,118       352,766       856,215  

Research and development

    20,391       23,462       63,930       69,765  
    $ 148,813     $ 301,772     $ 433,063     $ 943,923  

 

The employee stock options granted in the nine months ended June 30, 2018 and 2017 had a weighted-average estimated fair value of $0.89 per share and $0.71 per share, respectively, using the Black-Scholes option pricing model with the following weighted-average assumptions (annualized percentages):

 

   

Nine months ended

 
   

June 30,

 
   

2018

   

2017

 

Volatility

    45.4%       47.5% - 53.7%  

Risk free interest rate

    2.2%       1.7% - 2.0%  

Forfeiture rate

    10.0%         10.0%    

Dividend yield

    0.0%         0.0%    

Expected life in years

    4.6       3.8 - 4.6  

 

 

The Company did not declare a dividend for the nine-month periods ended June 30, 2018 and 2017. Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected life of the options. The risk-free interest rate is based on rates published by the Federal Reserve Board. The expected life is based on observed and expected time to post-vesting exercise. The expected forfeiture rate is based on past experience and employee retention data. Forfeitures are estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from those estimates or if the Company updates its estimated forfeiture rate. Such amounts will be recorded as a cumulative adjustment in the period in which the estimate is changed.

 

As of June 30, 2018, there was approximately $730,000 of total unrecognized compensation cost related to non-vested share-based employee compensation arrangements. The cost is expected to be recognized over a weighted-average period of 1.7 years.

 

 

14. STOCKHOLDERS’ EQUITY

 

Summary

 

The following table summarizes changes in the components of stockholders’ equity during the nine months ended June 30, 2018:

 

 

                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

Balance at September 30, 2017

    32,158,436     $ 322     $ 87,956,839     $ (52,771,853 )   $ (1,269 )   $ 35,184,039  

Share-based compensation expense

    -       -       433,063       -       -       433,063  

Issuance of common stock upon exercise of stock options, net

    579,653       -       1,027,719       -       -       1,027,719  

Issuance of common stock upon vesting of restricted stock units

    125,000       -       -       -       -       -  

Stock buyback

    (211,326 )     3       (500,272 )     -       -       (500,269 )

Other comprehensive loss

    -                               (223,939 )     (223,939 )

Net loss

    -       -       -       (1,302,564 )     -       (1,302,564 )

Balance at June 30, 2018

    32,651,763     $ 325     $ 88,917,349     $ (54,074,417 )   $ (225,208 )   $ 34,618,049  

 

16

 

 

Share Buyback Program

 

The Board of Directors approved a share buyback program in 2015 under which the Company was authorized to repurchase up to $4 million of its outstanding common shares. In December 2017, the Board of Directors extended the program through December 31, 2018. There were 211,326 shares repurchased during the nine months period ended June 30, 2018. There were zero shares repurchased during the nine-month period ended June 30, 2017. At June 30, 2018, all repurchased shares were retired. At June 30, 2018, $3.4 million was available for share repurchase under this program.

 

Dividends

 

There were no dividends declared in the nine months ended June 30, 2018 and 2017.

 

 

15. NET LOSS PER SHARE

 

The following table sets forth the computation of basic and diluted loss per share:

 

 

   

Three months ended

   

Nine months ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Numerator:

                               

Net loss

  $ (80,219 )   $ (528,163 )   $ (1,302,564 )   $ (1,042,492 )
                                 

Denominator:

                               

Weighted average common shares outstanding - basic and diluted

    32,306,207       31,861,916       32,314,038       31,820,632  
                                 

Basic loss per common share - basic and diluted

  $ (0.00 )   $ (0.02 )   $ (0.04 )   $ (0.03 )
                                 

Potentially dilutive securities outstanding at period end excluded from diluted computation as the inclusion would have been antidilutive:

                               

Options

    4,000,266       4,853,002       4,000,266       4,853,002  

Restricted stock units

    218,330       125,000       218,330       125,000  

Total

    4,218,596       4,978,002       4,218,596       4,978,002  

 

 

 

 

16. SEGMENT INFORMATION

 

The Company is engaged in the design, development and commercialization of directed and multidirectional sound technologies, voice broadcast products and location-based mass messaging solutions for emergency warning and workforce management. The Company operates in two business segments: Hardware (LRAD) and Software (Genasys) and its principle markets are North and South America, Europe, Middle East and Asia. As reviewed by the Company’s chief operating decision maker, the Company evaluates the performance of each segment based on sales and operating income. Cash and cash equivalents, marketable securities, accounts receivable, inventory, property and equipment, deferred tax assets, goodwill and intangible assets are primary assets identified by segment. The accounting policies for segment reporting are the same for the Company as a whole and transactions between the two operating segments are not material.

 

17

 

 

The following table presents the Company’s segment disclosures:

   

Three months ended

   

Nine months ended

 
   

June 30, 2018

   

June 30, 2018

 
                 

Revenue from external customers

               

LRAD

  $ 7,012,430     $ 22,094,790  

Genasys

    501,638       916,292  
    $ 7,514,068     $ 23,011,082  
                 

Intercompany revenues

               

LRAD

  $ -     $ -  

Genasys

    96,192       186,010  
    $ 96,192     $ 186,010  
                 

Segment operating income

               

LRAD

  $ (63,257 )   $ 1,507,264  

Genasys

    (114,870 )     (90,132 )
    $ (178,127 )   $ 1,417,132  
                 

Other expenses:

               

Depreciation and amortization expense

         

LRAD

  $ (62,665 )   $ (187,433 )

Genasys

    (80,804 )     (149,767 )
    $ (143,469 )   $ (337,200 )
                 

Interest expense

               

LRAD

  $ -     $ -  

Genasys

    (4,388 )     (14,205 )
    $ (4,388 )   $ (14,205 )
                 

Income tax expense (benefit)

               

LRAD

  $ (73,749 )   $ 2,793,590  

Genasys

    -       -  
    $ (73,749 )   $ 2,793,590  

 

 

   

June 30, 2018

   

September 30, 2017

 

Long-lived assets

               

LRAD

  $ 538,173     $ 565,292  

Genasys

    4,068,429       -  
    $ 4,606,602     $ 565,292  
                 

Total assets

               

LRAD

  $ 35,520,401     $ 38,857,800  

Genasys

    5,122,533       -  
    $ 40,642,934     $ 38,857,800  

 

 

17. MAJOR CUSTOMERS

 

For the three months ended June 30, 2018, revenues from three customers accounted for 15%, 11%, and 10% of total revenues, and for the nine months ended June 30, 2018 revenues from three customers accounted for 22%, 11% and 11% of total revenues, with no other single customer accounting for more than 10% of revenues. At June 30, 2018, accounts receivable from three customers accounted for 15%, 13%, and 12% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.

 

For the three months ended June 30, 2017, revenues from two customers accounted for 47% and 13% of total revenues, and for the nine months ended June 30, 2017 revenues from two customers accounted for 15% and 10% of total revenues, with no other single customer accounting for more than 10% of revenues. At June 30, 2017, accounts receivable from two customers accounted for 41% and 25% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.

 

18

 

 

The following table summarizes revenues by geographic region. Revenues are attributed to countries based on customer’s delivery location.

 

   

Three months ended

   

Nine months ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Americas

  $ 3,814,782     $ 1,367,044     $ 14,918,891     $ 5,088,553  

Asia Pacific

    3,089,770       150,474       6,367,532       1,204,267  

Europe, Middle East, and Africa

    609,516       2,612,036       1,724,659       6,520,460  

Total Revenues

  $ 7,514,068     $ 4,129,554     $ 23,011,082     $ 12,813,280  

 

19

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The discussion and analysis set forth below should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included under Item 1 of this Quarterly Report on Form 10-Q, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended September 30, 2017.

 

Forward Looking Statements

 

This report contains certain statements of a forward-looking nature relating to future events or future performance. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements but are not the only means of identifying forward-looking statements. Prospective investors are cautioned that such statements are only predictions and actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider various factors identified in this report and any matters set forth under Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K, which could cause actual results to differ materially from those indicated by such forward-looking statements.

 

Overview

Our Company is a leading innovator and manufacturer of acoustic communication systems that control sound from 30° - 360° over short and long distances. By broadcasting audible voice messages and tones with exceptional clarity and only where needed, we offer novel sound applications that conventional bullhorns, loudspeakers, and public address and emergency warning systems cannot achieve. We have developed two LRAD® product lines using our proprietary technologies:

• Acoustic Hailing Devices (“AHDs”), which project audible broadcasts with exceptional intelligibility in a 30° beam from close range out to 5,500 meters, and;

• ONE VOICE® Mass Notification Systems (“MN systems”), which project 60° - 360° audible broadcasts with industry-leading vocal intelligibility from close range to over 14 square kilometers from a single installation.

 

LRAD systems are a technological breakthrough in broadcasting audible, highly intelligible voice messages and tones over long distances and high ambient noise using minimal power. Our AHDs meet stringent military requirements and are packaged in several form factors, from portable, hand held units to permanently installed, remotely operated systems. Through broadcasting directional alert tones and live prerecorded messages, our AHDs are designed to enable users to safely hail and warn, inform and direct, prevent misunderstandings, determine intent, establish large safety zones, resolve uncertain situations, and potentially save lives. We continue to enhance our acoustic communication technologies and product lines to provide a complete range of systems and accessories. Our recently patented XL driver technology, which generates higher audio output in a smaller and lighter form factor, is being incorporated into our AHD and ONE VOICE products.

 

Building on the success of our AHDs, we launched our multidirectional product line. Unlike most siren-based mass notification systems on the market, our ONE VOICE systems broadcast both emergency warning sirens and highly intelligible voice messages with uniform 60° - 360° coverage over local and wide areas. We believe our ability to shape the broadcast coverage area, our industry-leading speech intelligibility, and our multiple system activation and control options, make us more competitive in the large and growing mass notification market. 

  

Our products are designed to meet a broad range of diverse applications, including emergency warning and mass notification, fixed and mobile military deployments, maritime, critical infrastructure, perimeter, commercial, border, and homeland security, law enforcement, emergency responder and fire rescue communications, asset protection, and wildlife preservation and control. By selling our industry-leading AHDs and advanced ONE VOICE MN systems into 72 countries, we have created a new worldwide market and a recognized global brand. We continue to develop new acoustic innovations and believe we have established a significant competitive advantage in our principal markets. 

 

Business developments in the fiscal quarter ended June 30, 2018:

 

  Announced over $1.5 million in AHD orders for law enforcement and public safety applications from the Asia Pacific region.
  Received $780,000 in follow-on LRAD 500X and SoundSaber® orders from the U.S. Navy.
  Added four business development personnel to the Company’s inside sales team.
  Repurchased 211,326 shares under the Company’s share buyback program.

 

On January 18, 2018, the Company completed its acquisition of Genasys for approximately $3.0 million (€2.4 million) paid or payable in cash and the assumption of approximately $1.5 million (€1.2 million) of debt. Genasys, headquartered in Madrid, Spain, is a leading software provider of advanced, location-based mass messaging solutions for emergency warning systems and workforce management. Genasys had sales of approximately $2.1 million (€1.9 million) for its year ended December 31, 2017 and has approximately 17 employees based primarily in Spain.

 

20

 

 

The Company believes the combination of Genasys’ mass messaging solutions and software development capabilities will enable the Company to enhance existing product offerings through integrated mass messaging solutions as well as provide growth opportunities in new markets. The results of Genasys’ operations were included in the Company’s consolidated financial statements beginning January 18, 2018.

 

Revenues in the Company’s third fiscal quarter ended June 30, 2018, were $7.5 million, an increase from $4.1 million in the third fiscal quarter of 2017. The increase in revenues was driven by a significant increase in AHD and MN systems revenue and the addition of Genasys in 2018. AHD revenues increased $1,216,426, or 31%, MN systems revenue increased $1,672,384 or 745% compared to the third fiscal quarter of 2017 and Genasys contributed $501,638 in revenue. Based on the timing of budget cycles, as well as financial issues and military conflict in certain areas of the world, delays in awarding contracts often occur, resulting in uneven quarterly revenues. Gross profit increased compared to the same quarter in the prior year as a result of higher sales and higher fixed overhead absorption. Operating expenses increased 43.3% from $2.7 million to $3.9 million in the quarter ended June 30, 2018, primarily due to the addition of Genasys’ operating expenses, acquisition related expenses, increased employee compensation and related expenses (including additional engineering and sales personnel), computer related expenses and commission expense. The third quarter of fiscal 2018 results, reflect a $73,749 income tax benefit which is a non-cash benefit that increased the balance of the deferred tax asset. We reported net loss of $80,219 for the quarter, or less than $0.01 per share, compared to net loss of $528,163, or $0.02 per share for the same quarter in the prior year.

 

Overall Business Outlook

 

Our product line-up continues to gain worldwide awareness and recognition through media exposure, trade show participations, product demonstrations and word of mouth as a result of positive responses and increased acceptance of our products. We believe we have a solid global brand, technology and product foundation with our AHD and MN systems product lines, which we have expanded over the years to service new markets and customers for greater business growth.  We believe that we have strong market opportunities for our directional and multidirectional product offerings within the mass notification, defense, law enforcement, fire rescue, public safety, maritime, homeland security, critical infrastructure security, asset protection, and wildlife control and preservation business sectors. We intend to continue expanding our international mass notification business, particularly in the Middle East, Europe and Asia where we believe there are greater market opportunities for our multidirectional products. Our selling network has expanded through the addition of sales consultants as well as continuing to improve and increase our relationships with key integrators and sales representatives within the United States and in a number of worldwide locations. However, we may continue to face challenges due to continuing economic and geopolitical conditions in some international regions. We anticipate that the current U.S. government administration will support U.S. military spending, which we believe could benefit us, although there is uncertainty as to priorities and timing. We continue to pursue large business opportunities, but it is difficult to anticipate how long it will take to close these opportunities, or if they will ever ultimately come to fruition. It is also difficult to determine whether our multidirectional product will be accepted as a viable solution in the mass notification market, which includes a number of large, well-known competitors.

 

Critical Accounting Policies

 

We have identified a number of accounting policies as critical to our business operations and the understanding of our results of operations. These are described in our consolidated financial statements located in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, 2017. The impact and any associated risks related to these policies on our business operations is discussed below and throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results.

 

The methods, estimates and judgments we use in applying our accounting policies, in conformity with generally accepted accounting principles in the U.S., have a significant impact on the results we report in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The estimates affect the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

 

21

 

 

Comparison of Results of Operations for the Three Months Ended June 30, 2018 and 2017

 

   

Three months ended

               
   

June 30, 2018

   

June 30, 2017

               
           

% of

           

% of

               
           

Total

           

Total

   

Fav(Unfav)

 
   

Amount

   

Revenue

   

Amount

   

Revenue

   

Amount

   

%

 

Revenues:

                                         

Product sales

  $ 6,583,865     87.6%     $ 3,852,676     93.3%     $ 2,731,189     70.9%  

Contract and other

    930,203     12.4%       276,878     6.7%       653,325     236.0%  

Total revenues

    7,514,068     100.0%       4,129,554     100.0%       3,384,514     82.0%  
                                           

Cost of revenues

    3,815,203     50.8%       2,420,126     58.6%       (1,395,077 )   (57.6%)  

Gross Profit

    3,698,865     49.2%       1,709,428     41.4%       1,989,437     116.4%  
                                           

Operating expenses

                                         

Selling, general and administrative

    2,904,135     38.6%       2,039,755     49.4%       (864,380 )   (42.4%)  

Research and development

    972,857     12.9%       666,244     16.1%       (306,613 )   (46.0%)  

Total operating expenses

    3,876,992     51.6%       2,705,999     65.5%       (1,170,993 )   (43.3%)  
                                           

Loss from operations

    (178,127 )   (2.4%)       (996,571 )   (24.1%)       818,444     82.1%  
                                           

Other income

    24,159     0.3%       32,682     0.8%       (8,523 )   (26.1%)  
                                           

Loss from operations before income taxes

    (153,968 )   (2.0%)       (963,889 )   (23.3%)       809,921     84.0%  

Income tax benefit

    (73,749 )   (1.0%)       (435,726 )   (10.6%)       (361,977 )   (83.1%)  

Net loss

  $ (80,219 )   (1.1%)     $ (528,163 )   (12.8%)     $ 447,944     84.8%  

 

 

   

Three months ended

               
   

June 30, 2018

   

June 30, 2017

               
           

% of

           

% of

               
           

Total

           

Total

   

Fav(Unfav)

 
   

Amount

   

Revenue

   

Amount

   

Revenue

   

Amount

   

%

 

Net revenue (a):

                                         

LRAD

  $ 7,012,430     93.3%     $ 4,129,554     100.0%     $ 2,882,876     69.8%  

Genasys

    501,638     6.7%       -     0.0%       501,638     100.0%  

Total net revenue

  $ 7,514,068     100.0%     $ 4,129,554     100.0%     $ 3,384,514     82.0%  
                                           

Operating loss:

                                         

LRAD

  $ (63,257 )   (0.8%)     $ (996,571 )   (24.1%)     $ 933,314     93.7%  

Genasys

    (114,870 )   (1.5%)       -     0.0%       (114,870 )   (100.0%)  

Total operating loss

  $ (178,127 )   (2.4%)     $ (996,571 )   (24.1%)     $ 818,444     82.1%  

 

(a)

Net revenue excludes intercompany revenue of $96,192 and zero for the three months ended June 30, 2018 and 2017, respectively.

 

Revenues

 

The tables above set forth for the periods indicated certain items of our condensed consolidated statements of operations expressed in dollars and as a percentage of net revenues. The financial information and the discussion below should be read in conjunction with the condensed consolidated financial statements and notes contained in this report.

 

Revenues increased 82% in the current quarter compared to the prior year due to the larger backlog at March 31, 2018 compared to March 31, 2017 and the addition of $501,638 of Genasys sales in the 2018 fiscal quarter. Sales improved in the current quarter for the AHD product line (up $1,216,426, or 31%) and for the MN systems product line (up $1,672,384, or 745%) compared to the prior year quarter. The receipt of orders will often be uneven due to the timing of approvals or budgets. At June 30, 2018, we had aggregate deferred revenue of $1,175,948 for prepayments from customers in advance of product shipment and software support agreements.

 

Gross Profit

 

The increase in gross profit in the current quarter compared to the prior year was primarily due to the higher level of sales, partially offset by an increase in manufacturing overhead expenses to support the increased sales.

 

22

 

 

Our products have varying gross margins, so product mix may affect gross profits. In addition, our margins vary based on the sales channels through which our products are sold in a given period. We continue to implement product updates and changes, including raw material and component changes that may impact product costs. With such product updates and changes we have limited warranty cost experience and estimated future warranty costs can impact our gross margins. We do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased $864,380 over the prior year quarter. This reflects the addition of $469,457 from Genasys (including $113,852 for one-time audit fees and $79,458 for amortization of intangible assets), $202,976 for salaries/benefits/consultants, $39,411 for information technology related expenses and $111,442 increase in commission expense. This was partially offset by a $148,807 decrease in non-cash share-based compensation expense, primarily due to non-recurring expense for separation costs related to the departure of the Company’s prior CEO in the prior year quarter.

 

We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three-months ended June 30, 2018 and 2017 of $123,311 and $272,118, respectively.

 

We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize potential opportunities. Commission expenses will fluctuate based on the nature of our sales.

 

Research and Development Expenses

 

Research and development expenses increased $306,613 compared to the prior year primarily due to $172,594 for salaries and benefits due to increased engineering staff compared to the prior year quarter, and $97,736 for increased product development and product testing.

 

Included in research and development expenses for the three months ended June 30, 2018 and 2017 was $20,391 and $23,462 of non-cash share-based compensation costs, respectively.

 

Research and development costs vary period to period due to the timing of projects, and the timing and extent of the use of outside consulting, design and development firms. We continually improve our product offerings and we expect to continue to expand our product line with new products, customizations and enhancements. Based on current plans, we may expend additional resources on research and development in the current year compared to the prior year.

 

Net Loss

 

The $447,944 decrease in net loss in the fiscal year 2018 third quarter was primarily due to the higher gross profits realized from increased sales in the 2018 quarter. Non-cash income tax benefit of $73,749 and $435,726 was recognized in the three months ended June 30, 2018 and 2017, respectively.

 

23

 

 

Comparison of Results of Operations for the Nine Months Ended June 30, 2018 and 2017

 

   

Nine months ended

               
   

June 30, 2018

   

June 30, 2017

               
           

% of

           

% of

               
           

Total

           

Total

   

Fav(Unfav)

 
   

Amount

   

Revenue

   

Amount

   

Revenue

   

Amount

   

%

 

Revenues:

                                         

Product sales

  $ 21,045,148     91.5%     $ 12,026,248     93.9%     $ 9,018,900     75.0%  

Contract and other

    1,965,934     8.5%       787,032     6.1%       1,178,902     149.8%  

Total revenues

    23,011,082     100.0%       12,813,280     100.0%       10,197,802     79.6%  
                                           

Cost of revenues

    11,318,697     49.2%       6,945,496     54.2%       (4,373,201 )   (63.0%)  

Gross Profit

    11,692,385     50.8%       5,867,784     45.8%       5,824,601     99.3%  
                                           

Operating expenses

                                         

Selling, general and administrative

    7,610,424     33.1%       5,899,235     46.0%       (1,711,189 )   (29.0%)  

Research and development

    2,664,829     11.6%       1,858,894     14.5%       (805,935 )   (43.4%)  

Total operating expenses

    10,275,253     44.7%       7,758,129     60.5%       (2,517,124 )   (32.4%)  
                                           

Income (loss) from operations

    1,417,132     6.2%       (1,890,345 )   (14.8%)       3,307,477     175.0%  
                                           

Other income

    73,894     0.3%       94,884     0.7%       (20,990 )   (22.1%)  
                                           

Income (loss) from operations before income taxes

    1,491,026     6.5%       (1,795,461 )   (14.0%)       3,286,487     183.0%  

Income tax expense (benefit)

    2,793,590     12.1%       (752,969 )   (5.9%)       (3,546,559 )   (471.0%)  

Net loss

  $ (1,302,564 )   (5.7%)     $ (1,042,492 )   (8.1%)     $ (260,072 )   (24.9%)  

 

 

   

Nine months ended

               
   

June 30, 2018

   

June 30, 2017

               
           

% of

           

% of

               
           

Total

           

Total

   

Fav(Unfav)

 
   

Amount

   

Revenue

   

Amount

   

Revenue

   

Amount

   

%

 

Net revenue (a):

                                         

LRAD

  $ 22,094,790     96.0%     $ 12,813,280     100.0%     $ 9,281,510     72.4%  

Genasys

    916,292     4.0%       -     0.0%       916,292     100.0%  

Total net revenue

  $ 23,011,082     100.0%     $ 12,813,280     100.0%     $ 10,197,802     79.6%