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, 2019
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)
16262 West Bernardo Drive, San Diego,
California
92127
(Address of principal executive offices)
(Zip Code)
(858) 676-1112
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which securities are registered
Common stock, $0.00001 par value per share
LRAD
NASDAQ Capital Market
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 and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” or “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 9, 2019 was 32,593,869.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LRAD Corporation
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
2019
September 30,
(Unaudited)
2018
ASSETS
Current assets:
Cash and cash equivalents
Short-term marketable securities
Restricted cash
Accounts receivable, net
Inventories, net
Prepaid expenses and other
Total current assets
Long-term marketable securities
Long-term restricted cash
Deferred tax assets, net
Property and equipment, net
Goodwill
Intangible assets, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, current portion
Total current liabilities
Notes payable, less current portion
Other liabilities, noncurrent
Total liabilities
Stockholders' equity:
Preferred stock, $0.00001 par value; 5,000,000 shares authorized; none issued and outstanding
Common stock, $0.00001 par value; 50,000,000 shares authorized; 32,579,118 and 33,176,146 shares issued and outstanding, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
Nine months ended
Revenues:
Product sales
Contract and other
Total revenues
Cost of revenues
Gross Profit
Operating expenses
Selling, general and administrative
Research and development
Total operating expenses
Income (loss) from operations
Other income and expense, net
Income (loss) from operations before income taxes
Income tax expense (benefit)
Net income (loss)
Net income (loss) per common share
Basic
Diluted
Weighted average common shares outstanding:
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss)
Unrealized gain (loss) on marketable securities
Unrealized foreign currency gain (loss)
Comprehensive income (loss)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization
Warranty provision
Inventory obsolescence
Share-based compensation
Deferred income taxes
Changes in operating assets and liabilities:
Payroll and related
Warranty settlements
Accrued and other liabilities
Net cash provided by operating activities
Investing Activities:
Purchases of marketable securities
Proceeds from maturities of marketable securities
Capital expenditures
Purchase of Genasys, net of cash and restricted cash acquired
Net cash provided by (used in) investing activities
Financing Activities:
Proceeds from exercise of stock options
Repurchase of common stock
Proceeds from the issuance of unsecured promissory notes
Payments on promissory notes
Net cash used in financing activities
Effect of foreign exchange rate on cash
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
Restricted cash, current portion
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows
Nine Months Ended June 30,
Interest paid
Noncash investing and financing activities:
Change in unrealized gain (loss) on marketable securities
Business combinations accounted for as a purchase:
Fair value of assets acquired
Cash paid or payable
Liabilities assumed
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 public safety 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.
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, 2018 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on December 21, 2018. The accompanying condensed consolidated balance sheet at September 30, 2018 has been derived from the audited consolidated balance sheet at September 30, 2018 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 three wholly owned subsidiaries, 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
New pronouncements pending adoption
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance by requiring recognition of credit losses when it is probable that a loss has been incurred. The new standard requires the establishment of an allowance for estimated credit losses on financial assets including trade and other receivables at each reporting date. The new standard will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. The new standard will be effective for the Company in the first quarter of fiscal year beginning October 1, 2020, and early adoption is permitted. The Company is currently reviewing this standard to assess the impact on its condensed consolidated financial statements and related disclosures.
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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 expects that the adoption of this ASU will not have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, 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 expects that the adoption of this ASU will not have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 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. Although the Company has not completed its assessment of the full impact on its consolidated financial statements of the adoption of Topic 842, the Company currently believes that the most significant changes will be related to the recognition of a right-to-use asset and a corresponding lease liability on its consolidated balance sheet for the new facility lease described in Note 13, Commitments and Contingencies.
New pronouncements adopted
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 No. 2016-18 was effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company adopted ASU No. 2016-18 effective January 1, 2018. For the year ended September 30, 2018 and the nine months ended June 30, 2019, restricted cash balances are due to a security deposit for the Company’s new office lease, as described in Note 13, Commitments and Contingencies, and restricted cash held as collateral for notes payable, as described in Note 11, Debt. 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 May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“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. ASU 2014-09 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 was effective for the Company in the fiscal year beginning October 1, 2018. Subsequently, the FASB issued additional guidance (ASUs 2015-14; 2016-08; 2016-10; 2016-12; 2016-13; 2016-20). The adoption of this guidance by the Company, effective October 1, 2018, did not have a material impact on the Company’s consolidated financial statements (see Note 4, Revenue Recognition, for further detail).
4. REVENUE RECOGNITION
On October 1, 2018, the Company adopted the new accounting standard FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) for all contracts using the modified retrospective method. Based on the Company’s analysis of contracts with customers in prior periods, there was no cumulative effect adjustment to the opening balance of the Company’s accumulated deficit as a result of the adoption of this new standard.
The Company derives its revenue from the sale of products to customers, contracts, license fees, other services and freight. The Company sells its products through its direct sales force and through authorized resellers and system integrators. The Company recognizes revenue for goods including software when all the significant risks and rewards have been transferred to the customer, no continuing managerial involvement usually associated with ownership of the goods is retained, no effective control over the goods sold is retained, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transactions will flow to the Company and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Software license revenue, maintenance and/or software development service fees may be bundled in one arrangement or may be sold separately.
Product Revenue
Product revenue is recognized as a distinct single performance obligation when products are tendered to a carrier for delivery, which represents the point in time that our customer obtains control of the products. A smaller portion of product revenue is recognized when the customer receives delivery of the products. A portion of products are sold through resellers and system integrators based on firm commitments from an end user, and as a result, resellers and system integrators carry little or no inventory. Our customers do not have a right to return product unless the product is found defective and therefore our estimate for returns has historically been insignificant.
Perpetual licensed software
The sale and/or license of software products is deemed to have occurred when a customer either has taken possession of or has the ability to take immediate possession of the software and the software key. Perpetual software licenses can include one-year maintenance and support services. In addition, the Company sells maintenance services on a stand-alone basis and is therefore capable of determining their fair value. On this basis, the amount of the embedded maintenance is separated from the fee for the perpetual license and is recognized on a straight-line basis over the period to which the maintenance relates.
Time-based licensed software
The time-based license agreements include the use of a software license for a fixed term, generally one-year, and maintenance and support services during the same period. The Company does not sell time-based licenses without maintenance and support services and therefore revenues for the entire arrangements are recognized on a straight-line basis over the term.
Warranty, maintenance and services
We offer extended warranty, maintenance and other services. Extended warranty and maintenance contracts are offered with terms ranging from one to several years, which provide repair and maintenance services after expiration of the original one-year warranty term. Revenues from separately priced extended warranty and maintenance contracts are recognized on a straight-line basis, over the contract period, and classified as contract and other revenues. Revenue from other services such as training or installation is recognized when the service is completed.
Multiple element arrangements
The Company has entered into a number of multiple element arrangements, such as the sale of a product or perpetual licenses that may include maintenance and support (included in price of perpetual licenses) and time-based licenses (that include embedded maintenance and support, both of which may be sold with software development services, training, and other product sales). In some cases, the Company delivers software development services bundled with the sale of the software. In multiple element arrangements, the Company uses either the stand-alone selling price or vendor specific objective evidence to determine the fair value of each element within the arrangement, including software and software-related services such as maintenance and support. In general, elements in such arrangements are also sold on a stand-alone basis and stand-alone selling prices are available.
Revenue is allocated to each deliverable based on the fair value of each individual element and is recognized when the revenue recognition criteria described above are met, except for time-based licenses which are not unbundled. When software development services are performed and are considered essential to the functionality of the software, the Company recognizes revenue from the software development services on a stage of completion basis, and the revenue from the software when the related development services have been completed.
We disaggregate revenue by reporting segment (Hardware (LRAD) and Software (Genasys)) and geographically to depict the nature of revenue in a manner consistent with our business operations and to be consistent with other communications and public filings. See Note 17, Segment Information and Note 18, Major Customers for additional details of revenues by reporting segment and disaggregation of revenue.
Contract Assets and Liabilities
We enter into contracts to sell products and provide services, and we recognize contract assets and liabilities that arise from these transactions. We recognize revenue and corresponding accounts receivable according to ASC 606 and, at times, recognize revenue in advance of the time when contracts give us the right to invoice a customer. We may also receive consideration, per terms of a contract, from customers prior to transferring goods to the customer. We record customer deposits as a contract liability. Additionally, we may receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed. In such instances, we record a deferred revenue liability. We recognize these contract liabilities as revenue after all revenue recognition criteria are met. The table below shows the balance of contract assets and liabilities as of June 30, 2019 and September 30, 2018, including the change between the periods. The current portion of contract liabilities and the non-current portion are included in “Accrued liabilities” and “Other liabilities, noncurrent”, respectively, on the accompanying Condensed Consolidated Balance Sheets. See Note 10, Accrued Liabilities for additional details.
The Company’s contract assets are as follows:
Prepaid maintenance
agreement
Balance at September 30, 2018
New prepaid maintenance agreements
Recognition of expense as a result of performing services
Balance at June 30, 2019
The Company’s contract liabilities are as follows:
Customer
deposits
Deferred
revenue
Total contract
liabilities
New performance obligations
Recognition of revenue as a result of satisfying performance obligations
Effect of exchange rate on deferred revenue
Less: non-current portion
Current portion at June 30, 2019
Remaining Performance Obligations
Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations under an original contract with a term greater than one year which are fully or partially unsatisfied at the end of the period.
As of June 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $2,009,225. We expect to recognize revenue on approximately $1,408,469 or 70% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter.
Practical Expedients
In cases where we are responsible for shipping after the customer has obtained control of the goods, we have elected to treat these activities as fulfillment activities rather than as a separate performance obligation. Additionally, we have elected to capitalize the cost to obtain a contract only if the period of amortization would be longer than one year. We only give consideration to whether a customer agreement has a financing component if the period of time between transfer of goods and services and customer payment is greater than one year. We also utilize the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value we are providing to the customer.
5. 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:
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, 2019 or September 30, 2018. 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.
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, 2019 and September 30, 2018.
June 30, 2019
Cost Basis
Unrealized
Gain
Fair
Value
Cash
Equivalents
Short-term
Securities
Long-term
Level 1:
Money Market Funds
Level 2:
Certificates of deposit
Municipal securities
Corporate bonds
Subtotal
Total
September 30, 2018
Losses
6. INVENTORIES
Inventories consisted of the following:
Raw materials
Finished goods
Work in process
Inventories, gross
Reserve for obsolescence
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Office furniture and equipment
Machinery and equipment
Leasehold improvements
Construction in progress
Property and equipment, gross
Accumulated depreciation
Three months ended June 30,
Nine months ended June 30,
Depreciation expense
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill is attributable to the acquisition of Genasys and 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 workforce. The Company periodically reviews goodwill for impairment in accordance with relevant accounting standards. There were no additions or impairments to goodwill during the nine months ended June 30, 2019. At June 30, 2019 and September 30, 2018, goodwill was $2,396,320 and $2,445,990, respectively.
During the year ended September 30, 2018, the Company determined that certain patents were impaired. These patents supported products that are no longer sold by the Company. The Company recorded a non-cash loss on the impairment of these patents of $11,133 for the year ended September 30, 2018. There was no impairment loss for the nine months ended June 30, 2019.
Intangible assets and goodwill related to Genasys are translated from Euros to U.S. dollars at the balance sheet date. The net impact of foreign currency exchange differences arising during the nine months ended June 30, 2019, related to goodwill and intangible assets was a reduction of $81,018. The Company’s intangible assets consisted of the following:
Technology
Customer relationships
Trade name portfolio
Non-compete agreements
Patents
Accumulated amortization
Amortization expense
Estimated Amortization expense for the twelve months ended June 30,
2020
2021
2022
2023
2024
Thereafter
Total estimated amortization expense
9. PREPAID EXPENSES AND OTHER
Prepaid expenses and other current assets consisted of the following:
June 30
Deposits for inventory
Leashold improvement receivable
Prepaid insurance
Prepaid maintenance agreement
Dues and subscriptions
Other
Deposits for inventory consisted of cash payments to vendors for inventory to be delivered in the future.
Leasehold improvement receivable
Leasehold improvement receivable represents amounts owed to the Company by its landlord for costs incurred to renovate and prepare the Company’s new facility for use. The lease provided an allowance for tenant improvements of $1,588,214. (See Note 13, Commitments and Contingencies, for additional information about this lease). As of June 30, 2019, $180,103 has not been received by the Company.
Prepaid Insurance
Prepaid insurance consisted of premiums paid for health, commercial and corporate insurance. These premiums are amortized on a straight-line basis over the term of the agreements.
At March 31, 2011, prepaid expenses included $1,500,000 paid to a third party service provider in connection with the Company’s obligations under a sales contract to a foreign military service to provide repair and maintenance services over an eight- year period for products sold thereunder. The total prepaid expense was amortized on a straight-line basis at an annual rate of $187,500 over the eight-year contract period to correspond with the revenues for these services and was recognized as a component of cost of sales. The amortization of the prepaid maintenance agreement was completed during the period ended March 31, 2019. As of September 30, 2018, $93,750 of the total prepayment was classified as a current asset.
10. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
Deferred revenue
Customer deposits
Accrued contract costs
Severance
Warranty reserve
Deferred rent
Other liabilities-noncurrent consisted of the following:
Deferred extended warranty revenue
Payroll and related consists primarily of accrued vacation, bonus, sales commissions, and benefits.
Deferred Revenue
Deferred revenue consists primarily of extended warranty obligations and prepayments for software support agreements.
Accrued contract costs consist of accrued expenses for contracting a third party service provider to fulfill repair and maintenance obligations required under a contract with a foreign military for units sold in the year ended September 30, 2011. Payments to the service provider will be made annually upon completion of each year of service. A new contract was signed with the customer in May 2019 to continue repair and maintenance services through May 2024. These services are being recorded in cost of revenues to correspond with the revenues for these services.
Severance liability at September 30, 2018, consisted of accrued payments to former employees of Genasys. All payments related to this liability were paid during the period ended March 31, 2019.
Warranty Reserve
Changes in the warranty reserve and extended warranty were as follows:
Beginning balance
Ending balance
Deferred Rent
Deferred rent liability as of June 30, 2019 and September 30, 2018 consists of the difference between the average rental amount charged to expense and amounts payable under the lease for the Company’s office space. Deferred rent also includes cash and leasehold incentives from the landlord in the aggregate amount of $2,013,169 at June 30, 2019 to compensate for costs incurred by the Company to make the office space ready for operation. Leasehold incentives received from a landlord are deferred and recognized on a straight-line basis as a reduction to rent expense over the lease term.
Deferred extended warranty revenue consists of warranties purchased in excess of the Company’s standard warranty. Extended warranties typically range from one to two years.
11. DEBT
In connection with the acquisition of Genasys the Company assumed certain debts of Genasys. The balances of the acquired debt consist of loans with governmental agencies as of June 30, 2019. Loans with governmental agencies represent interest free debt granted by ministries within Spain for the purpose of stimulating economic development and promoting research and development. Loans with governmental agencies as of June 30, 2019 are as follows:
Agency
Due Date
Principal
Ministry of Economy and Competitiveness
February 2, 2022
February 2, 2024
(a)
This loan is secured by $273,472 of cash pledged as collateral by Genasys, which is the current balance of the loan. This amount is included in restricted cash at June 30, 2019. The Company expects the Ministry of Economy and Competitiveness to declare the terms of the loan satisfied within the next twelve months and the outstanding balance of the loan will be paid in full during fiscal 2019. Accordingly, this has been included in the current portion of notes payable as of June 30, 2019.
The following is a schedule of future annual payments as of June 30, 2019:
The current portion of debt is $290,571 and the noncurrent portion of debt is $34,196.
12. INCOME TAXES
For the nine months ended June 30, 2019, the Company recorded income tax expense of $675,457 reflecting an effective tax rate of 20.03%. For the nine months ended June 30, 2018, the Company recorded an income tax expense of $319,590 and an additional discrete tax expense of $2,474,000 due to the remeasurement of its deferred tax assets as a result of 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.
13. COMMITMENTS AND CONTINGENCIES
Facility Lease
On January 3, 2018, the Company entered into a lease for a facility of 54,766 square feet to replace the expired lease of the prior San Diego facility as the Company’s executive offices, research and development, assembly and operational facilities. The lease commenced July 1, 2018 and will expire August 30, 2028. The aggregate monthly payments, with abatements, average $36,146 per month for the first fourteen months, and are $74,460, $76,694, $78,994, $81,364, $83,805, $86,319, $88,909, $91,576 and $94,324 per month for the second through tenth years of the lease, plus certain other costs and charges as specified in the lease agreement, including the Company’s proportionate share of the building operating expenses and real estate taxes. The lease provided an allowance for tenant improvements of $1,588,214, which was classified as deferred rent on the Company’s consolidated balance sheet and will be amortized as an offset to rent expense with a corresponding charge to depreciation expense on a straight-line basis over the term of the lease.
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 a bonus plan for employees, in accordance with their terms of employment, whereby they can earn a percentage of their salary, at three different levels, based on meeting targeted objectives for orders received, revenue, operating income and operating cash flow. In the nine months ended June 30, 2019, the Company exceeded the minimum targeted level of orders received and revenues and has recorded $902,274 of expense. Bonus related expense is included in “Accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2019 and September 30, 2018. In the nine months ended June 30, 2018, the company exceeded the minimum targeted level of orders received and revenues and recorded $1,223,543 of expense.
14. SHARE-BASED COMPENSATION
Equity Incentive Plans
At June 30, 2019, 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 amendment to the Equity Plan was approved in 2015 and authorizes for issuance 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, 2019, there were options and restricted stock units outstanding covering 691,383 and 2,174,708 shares of common stock under the 2005 Equity Plan and 2015 Equity Plan, respectively, and 1,873,059 shares of common stock available for grant for a total of 4,739,150 currently available under the two equity plans.
Stock Option Information
A summary of the activity in options to purchase the capital stock of the Company as of June 30, 2019 is presented below:
Number of
Shares
Weighted
Average
Exercise Price
Outstanding September 30, 2018
Granted
Forfeited/expired
Exercised
Outstanding June 30, 2019
Exerciseable June 30, 2019
Options outstanding are exercisable at prices ranging from $1.31 to $3.17 and expire over the period from 2020 to 2024 with an average life of 3.22 years. The aggregate intrinsic value of options outstanding and exercisable at June 30, 2019 was $3,495,052 and $2,364,061, respectively. The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last day of trading for the quarter, which was $3.29 per share, and the exercise price multiplied by the number of applicable options. The total intrinsic value of stock options exercised during the nine months ended June 30, 2019 was $97,609 and proceeds from these exercises were $54,621.
The following table summarized information about stock options outstanding and exercisable at June 30, 2019:
Weighted Average
Range of
Number
Remaining
Exercise
Exercise Prices
Outstanding
Contractual Life
Price
Exercisable
$1.31
$1.71
$1.99
$2.02
$3.17
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 determined that as of June 30, 2019, it is probable that some of the performance conditions will be achieved and recorded $101,447 in share-based compensation expense related to these options for the three months ended June 30, 2019. 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
On March 14, 2017, the Board of Directors approved a 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 and will vest on the first anniversary of the grant date. These were issued at a market value of $278,750, which were expensed on a straight-line basis through the March 20, 2019 vest date.
During the quarter ended March 31, 2019, 93,330 RSUs were granted to employees that will vest over three years on the anniversary date 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.
On February 7, 2019, the Board of Directors approved non-employee director compensation to include an annual grant of 30,000 RSU’s 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 $412,500, which have been and will be expensed on a straight-line basis through the March 12, 2020 vest date.
Compensation expense for RSUs was $124,991 for the three months ended June 30, 2019 and $344,473 for the nine months ended June 30, 2019. Compensation expense for RSUs was $78,252 for the three months ended June 30, 2018 and $197,325 for the nine months ended June 30, 2018.
A summary of the restricted stock units of the Company as of June 30, 2019 is presented below:
Released
Forfeited/cancelled
Share-Based Compensation
The Company’s employee stock options have various restrictions that reduce option value, including vesting provisions and restrictions on transfer and hedging, among others, and are often exercised prior to their contractual maturity.
There were no stock options granted during the nine months ended June 30, 2019. The weighted average estimated fair value of employee stock options granted during the nine months ended June 30, 2018 was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions (annualized percentages):
June 30, 2018
Volatility
Risk free interest rate
Forfeiture rate
Dividend yield
Expected life in years
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 contractual term of the options was seven years. 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. Such revision adjustments to expense will be recorded as a cumulative adjustment in the period in which the estimate is changed. The Company did not declare a dividend for the nine-month periods ended June 30, 2019 or in fiscal year 2018.
As of June 30, 2019, there was approximately $575,955 of unrecognized compensation costs related to outstanding non-performance-based employee stock options and restricted stock units. This amount is expected to be recognized over a weighted average period of 1.05 years. To the extent the forfeiture rate is different from what the Company anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.
The Company recorded share-based compensation expense and classified it in the condensed consolidated statements of operations as follows:
15. STOCKHOLDERS’ EQUITY
Summary
The following table summarizes changes in the components of stockholders’ equity during the nine months ended June 30, 2019 and the nine months ended June 30, 2018:
Accumulated
Additional
Common Stock
Paid-in
Comprehensive
Stockholders'
Amount
Capital
Deficit
Loss
Equity
Share-based compensation expense
Issuance of common stock upon exercise of stock options, net
Stock buyback
Other comprehensive loss
Net income
Balance at December 31, 2018
Issuance of common stock upon vesting of restricted stock units
Balance at March 31, 2019
Balance at September 30, 2017
Balance at December 31, 2017
Balance at March 31, 2018
Balance at June 30, 2018
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.
In December 2018, the Board of Directors approved a new share buyback program beginning January 1, 2019 and expiring on December 31, 2020, under which the Company is authorized to repurchase up to $5 million of its outstanding common shares exclusive of any fees, commissions or other expenses related to such repurchases. At June 30, 2019, $4.5 million was available for share repurchase under this program. The previous program expired on December 31, 2018.
There were 788,425 shares repurchased for $2,171,022 during the nine months ended June 30, 2019. There were 211,236 shares repurchased for $500,274 during the nine-month period ended June 30, 2018. At June 30, 2019, all repurchased shares were retired into treasury.
Dividends
There were no dividends declared in the nine months ended June 30, 2019 and 2018.
16. NET INCOME (LOSS) PER SHARE
Basic earnings per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period increased to include the number of dilutive potential common shares outstanding during the period. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method, which assumes that the proceeds from the exercise of the outstanding options are used to repurchase common stock at market value. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities. If the Company has losses for the period, the inclusion of potential common stock instruments outstanding would be anti-dilutive. In addition, under the treasury stock method, the inclusion of stock options with an exercise price greater than the per-share market value would be antidilutive. Potential common shares that would be antidilutive are excluded from the calculation of diluted income per share
The following table sets forth the computation of basic and diluted net income (loss) per share:
Basic income (loss) per share
Diluted income (loss) per share
Weighted average shares outstanding - basic
Assumed exercise of dilutive options
Weighted average shares outstanding - diluted
Potentially diluted securities outstanding at period end excluded from diluted computation as the inclusion would have been antidilutive:
Options
RSU
17. 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.
The following table presents the Company’s segment disclosures:
Revenue from external customers
Genasys
Intercompany revenues
Segment operating income (loss)
Other expenses:
Depreciation and amortization expense
Interest expense
Long-lived assets
18. MAJOR CUSTOMERS
For the three months ended June 30, 2019, revenues from one customer accounted for 30% of total revenues and for the nine months ended June 30, 2019, revenues from two customers accounted for 43% and 11% of total revenues, with no other single customer accounting for more than 10% of revenues. At June 30, 2019, accounts receivable from three customers accounted for 30%, 14% and 11% 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, 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.
The following table summarizes revenues by geographic region. Revenues are attributed to countries based on customer’s delivery location.
Americas
Asia Pacific
Europe, Middle East and Africa
Total Revenues
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, 2018.
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
LRAD® Corporation is a leading innovator and manufacturer of acoustic communication systems that project audible voice messages, tones, and warning sirens over short and long distances. By broadcasting audible voice messages with exceptional clarity and only where needed, we offer unique sound applications that conventional bullhorns, loudspeakers, and public address and emergency warning systems cannot achieve. With the January 2018 acquisition of Genasys Holding S.L., we combined our advanced mass notification voice broadcast systems with Genasys’ location-based mass messaging solutions. Using our proprietary technologies, we have developed two product lines:
• Acoustic Hailing Devices (“AHDs”), which project audible broadcasts with exceptional intelligibility in a 30° beam from close range out to 5,500 meters, and;
• Public Safety Mass Notification, which include systems that project 60° - 360° audible voice broadcasts with industry leading vocal clarity from close range to over 14 square kilometers from a single installation and geospecific mass messaging mobile alert solutions that are compatible with major emergency warning protocols.
We have created a new worldwide market and a recognized global brand by selling our industry-leading AHDs and advanced public safety mass notification systems into 72 countries. We continue to develop new acoustic innovations and believe we have established a significant competitive advantage in our principal markets.
LRAD systems are a technological breakthrough in broadcasting audible, highly intelligible voice messages and tones over long distances and above high ambient noise using minimal power. Our AHDs meet stringent military specifications 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, notify 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 patented XL driver technology, which generates higher audio output in a smaller and lighter form factor, is being incorporated into many of our AHD and public safety mass notification products.
Our multidirectional product line was built on the success of our AHD’s. Unlike most siren-based public mass notification systems on the market, our public safety mass notification 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 multi-modal 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 for 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.
Business developments in the fiscal quarter ended June 30, 2019:
●
Entered into a $4.75 million maintenance agreement for AHD’s deployed by the Indian Navy
Announced $1.7 million in defense and homeland security orders
Received $0.85 million in international public safety notification and wildlife preservation orders
Announced follow-on $0.5 million Canadian Army order
Presented a Federal Emergency Management Agency (FEMA) webinar for emergency managers and demonstrated LRAD’s public safety mass notification system compatibility with FEMA’s Integrated Public Alert and Warning System (IPAWS)
Announced Mill Valley, CA is installing LRAD public safety notification system hardware packaged with Genasys software
Revenues in the third fiscal quarter ended June 30, 2019, were $8.9 million, an increase of $1.4 million from $7.5 million in the third fiscal quarter of 2018. The increase in revenues was primarily driven by an increase in public safety mass notification revenues. Public safety mass notification revenue increased $1,587,711, or 66%, compared to the third fiscal quarter of 2018, offset by a $238,053, or 5%, decrease in AHD revenues. Based on the timing of government budget cycles, financial issues and leadership change 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 primarily as a result of higher sales. Operating expenses were essentially unchanged comparted to the similar prior year period. The third quarter fiscal 2019 results reflect $118,310 of income tax expense which is a non-cash charge that reduced the balance of the deferred tax asset. We reported net income of $638,041 for the quarter, or $0.02 per share, compared to a net loss of $80,219, or $0.00 per share, for the same quarter in the prior year.
Overall Business Outlook
Our products and solutions continue 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. We believe we have a solid global brand, technology and product foundation with our AHD and public safety mass notification 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 protection 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 U.S. and in a number of worldwide locations. However, we may continue to face challenges during the remainder of fiscal 2019 and into fiscal 2020 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 products and software will be accepted as viable solutions in the public safety 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, 2018. 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.
Comparison of Results of Operations for the Three Months Ended June 30, 2019 and 2018
The following table sets 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.
Three Months Ended
% of
Fav(Unfav)
Revenue
%
Net sales
Total net sales
Revenues
Revenues increased in the current quarter compared to the corresponding quarter in the prior year due to a larger backlog at March 31, 2019 compared to March 31, 2018. Revenues improved in the current quarter for the public safety mass notification systems product line ($1,587,711, or 66%) compared to the prior year quarter offset by a slight decrease ($238,053, or 5%) in AHD product line revenues. The receipt of orders will often be uneven due to the timing of approvals or budgets. At June 30, 2019, we had aggregate deferred revenue of $1,091,270 for extended warranty obligations and software support agreements.
The increase in gross profit in the current quarter compared to the prior year was primarily due to the higher level of sales, offset by an increase in manufacturing overhead expenses to support the increased sales.
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 decreased $191,289 over the prior year quarter. This reflects a decrease to compensation related expenses and smaller decreases in trade show, travel and computer related expenses.
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three months ended June 30, 2019 and 2018 of $242,660 and $123,311, respectively. The increase in the current quarter period is largely due to $101,447 for catch up performance option expense as we now believe that it is probable that certain goals under an employment agreement will be achieved.
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 $229,829 in the current quarter compared to the prior year largely due to $199,301 for increased product development and product testing expenses.
Included in research and development expenses for the three months ended June 30, 2019 and 2018 was $11,279 and $20,391 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 in 2019 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 Income
The $718,260 increase in net income in the fiscal year 2019 third quarter was primarily due to the higher gross profit realized from increased sales in the 2019 quarter. Non-cash income tax expense of $118,310 was recognized in the three months ended June 30, 2019 compared to a non-cash income tax benefit of $73,749 in the three months ended June 30, 2018.
Comparison of Results of Operations for the Nine Months Ended June 30, 2019 and 2018
Nine Months Ended
Income from operations
Income from operations before income taxes
Income tax expense
Revenues increased 27% for the nine-month period ended June 30, 2019 compared to the same prior year period due to the larger backlog at September 30, 2018 compared to September 30, 2017 and the addition of $520,857 of Genasys sales in the first quarter of fiscal 2019 (no Genasys sales were included in the first quarter of fiscal 2018 as it was acquired on January 18, 2018). AHD revenues were $22,633,707 an increase of $5,566,987, or 33%, compared to the same prior year period, and public safety mass notification systems revenues were $6,599,269, an increase of $654,905, or 11%, compared to the same prior year period. The receipt of orders will often be uneven due to the timing of approvals or budgets. At June 30, 2019, we had aggregate deferred revenues of $1,091,270 for extended warranty obligations and software support agreements.
The increase in gross profit in the nine months ended June 30, 2019 was primarily due to increased sales volume partially offset by an increase in manufacturing overhead expenses to support increased sales.
Selling, general and administrative expenses increased $328,808 in the nine months ended June 30, 2019 compared to the prior year period. The increase in selling, general and administrative expenses is primarily due to Genasys selling and general administrative expenses totaling $462,770 in the first quarter of fiscal 2019 compared to zero in 2018. In addition, compensation expense was $191,512 higher than the prior year. This was partially offset by $151,679 in lower information technology related expenses, $115,359 in lower travel expenses and $65,156 in lower commission expense. As a percentage of sales, selling, general and administrative expense decreased to 27% for the nine months ended June 30, 2019 compared to 33% in the prior year period.
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the nine months ended June 30, 2019 and 2018 of $508,762 and $352,766, respectively. The increase in the current fiscal year to date period is largely due to $101,447 for catch up performance option expense as we now believe that it is probable that certain goals under an employment agreement will be achieved.
Research and development expenses increased $865,976 in the nine months ended June 30, 2019 compared to the prior year, primarily due to increased product development activities ($632,892) and compensation and related expenses ($145,655).
Included in research and development expenses for the nine months ended June 30, 2019 and 2018 was $42,499 and $63,930 of non-cash share-based compensation costs, respectively.
Net Income (Loss)
The $2,862,831 net income for the first nine months of fiscal year 2019 was an improvement of $4,165,395 over the net loss in the prior year period. The improved results were primarily due to the $2,474,000 tax expense in fiscal year 2018 from the remeasurement of its deferred tax assets as a result of tax reform, plus higher sales in fiscal year 2019.
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 2019 was $11,290,068, compared to $11,063,091 at September 30, 2018. We had short-term marketable securities of $2,978,354 at June 30, 2019, compared to $3,592,175 at September 30, 2018, and long-term marketable securities of $1,499,795 and $1,200,541 at June 30, 2019 and September 30, 2018 respectively. Other than cash and cash equivalents, short and long-term marketable securities, other working capital and expected future cash flows from operating activities in subsequent periods, we have no unused sources of liquidity at this time.
Principal factors that could affect our liquidity include:
•
ability to meet sales projections;
government spending levels;
introduction of competing technologies;
product mix and effect on margins;
ability to reduce current inventory levels;
product acceptance in new markets;
value of shares repurchased; and
value of dividends declared.
Principal factors that could affect our ability to obtain cash from external sources include:
volatility in the capital markets; and
market price and trading volume of our common stock.
Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the twelve-month period subsequent to the issuance of the interim financial information. However, we operate in a rapidly evolving and unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that we may not be required to raise additional funds through the sale of equity or debt securities or from credit facilities. Additional capital, if needed, may not be available on satisfactory terms, or at all.
Cash Flows
Our cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows, are summarized in the table below:
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Operating Activities
Net income of $2,862,831 for the nine months ended June 30, 2019 was increased by $2,045,884 of non-cash items that included a reduction to deferred income taxes, share-based compensation, depreciation and amortization, warranty provision, and inventory obsolescence. Cash provided by operating activities in the current year reflected a decrease in prepaid expenses and other of $2,330,897, an increase in accrued and other liabilities of $1,766,516, a decrease in inventory of $200,306 and a decrease in other assets of $116,973. Cash used in operating activities included an increase in accounts receivable of $4,029,608, a decrease in accounts payable of $2,267,016 and a decrease in payroll and related liabilities of $583,162.
Net loss of $1,302,564 for the nine months ended June 30, 2018 was decreased by $3,668,190 of non-cash items that included a reduction to deferred income taxes primarily resulting from enactment of the tax reform act, share-based compensation, depreciation and amortization, warranty provision, and inventory obsolescence. Cash provided by operating activities in the prior year reflected an increase in accounts payable of $376,864 due to the timing of payments, decreases in prepaid expenses and other of $153,576 and an increase in accrued and other liabilities of $178,843. Cash used in operating activities included an increase in inventory of $239,360, an increase in accounts receivable of $496,642, an increase in other assets of $60,615, a decrease in payroll and related liabilities of $81,631 and warranty settlements of $42,602.
We had accounts receivable of $6,814,225 at June 30, 2019, compared to $2,785,997 at September 30, 2018. The level of trade accounts receivable at June 30, 2019 represented approximately 70 days of revenues compared to 78 days of revenues at September 30, 2018 due to the timing of shipments and related collections in this quarter compared to the fourth fiscal quarter of 2018. Terms with individual customers vary greatly. We typically require thirty-day terms from our customers if credit is approved. Our receivables can vary dramatically due to overall sales volume, quarterly variations in sales, timing of shipments to and receipts from large customers, payment terms, and the timing of contract payments.
At June 30, 2019 and September 30, 2018, our working capital was $23,886,117 and $21,090,472 respectively. The increase in working capital was primarily due to the net income generated from operations in the first nine months of fiscal year 2019.
Investing Activities
Our net cash provided by investing activities was $29,759 for the nine months ended June 30, 2019, compared to cash used in investing activities of $2,285,948 for the nine months ended June 30, 2018. The 2018 amount included $2,246,545 for the acquisition of Genasys. Cash used in investing activities for the purchase of property and equipment was $303,912 and $166,845 for the nine months ended June 30, 2019 and 2018, respectively. In the nine months ended June 30, 2019, we decreased our holding of short and long-term marketable securities by $314,567, compared to a decrease of $127,442 in the nine months ended June 30, 2018. We anticipate some additional expenditures for tooling and equipment during the balance of fiscal year 2019.
Financing Activities
In the nine months ended June 30, 2019, we used $2,133,445 for financing activities, compared to $195,846 for the nine months ended June 30, 2018. During the first nine months of 2019 we used $2,171,022 to repurchase shares of common stock and paid $17,044 on promissory notes, offset by $54,621 in proceeds from the exercise of stock options. The first nine months of 2018 included net payments of $786,437 to pay down debt assumed in the Genasys acquisition. Proceeds from the exercise of stock options were $1,027,719 for the nine months ended June 30, 2018. Total debt at June 30, 2019 was $324,767.
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 no shares repurchased during the nine months ended June 30, 2018.
In December 2018, the Board of Directors approved a new share buyback program beginning January 1, 2019, under which the Company is authorized to repurchase up to $5 million of its outstanding common shares. During the quarter ended June 30, 2019, no shares were repurchased. At June 30, 2019, all repurchased shares were retired into treasury. At June 30, 2019, $4.5 million was available for share repurchase under this program.
Recent Accounting Pronouncements
New pronouncements issued for future implementation are discussed in Note 3, Recent Accounting Pronouncements, to our condensed consolidated financial statements.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
Foreign Currency Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal. The transactions of our Spanish subsidiary are denominated primarily in Euros, which is a natural hedge against foreign currency fluctuations. All other sales to customers and all arrangements with third-party manufacturers, with one exception, provide for pricing and payment in U.S. dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the U.S. dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the U.S. dollar relative to other currencies could result in our suppliers raising their prices to continue doing business with us. Fluctuations in currency exchange rates could affect our business in the future.
Item 4.
Controls and Procedures.
We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of our disclosure controls and procedures as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2019.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our fiscal quarter ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings.
We may at times be involved in litigation in the ordinary course of business. We will also, from time to time, when appropriate in management’s estimation, record adequate reserves in our 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.
Item 1A.
Risk Factors.
As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.
Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None.
Mine Safety Disclosures.
Not Applicable.
Item 5.
Other Information.
Item 6.
Exhibits.
31.1
Certification of Richard S. Danforth, Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
Certification of Dennis D. Klahn, Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Richard S. Danforth, Principal Executive Officer and Dennis D. Klahn, Principal Financial Officer.*
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
*
Filed concurrently herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 12, 2019
By:
/s/ DENNIS D. KLAHN
Dennis D. Klahn, Chief Financial Officer
(Principal Financial Officer)
31