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EX-32.1 - EXHIBIT 32.1 - Genasys Inc.ex_114798.htm
EX-31.2 - EXHIBIT 31.2 - Genasys Inc.ex_114797.htm
EX-31.1 - EXHIBIT 31.1 - Genasys Inc.ex_114796.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 March 31, 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

       

Non-accelerated filer

☐  (Do not check if a smaller reporting company)

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 May 11, 2018 was 32,394,288 .



 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

LRAD Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

   

March 31,

         
   

2018

   

September 30,

 
   

(Unaudited)

   

2017

 
                 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 12,732,882     $ 12,764,421  

Short-term marketable securities

    4,063,109       4,359,542  

Restricted cash

    363,745       39,466  

Accounts receivable, net

    5,718,396       5,681,882  

Inventories, net

    5,443,342       5,257,234  

Prepaid expenses and other

    845,831       983,322  

Total current assets

    29,167,305       29,085,867  
                 

Long-term marketable securities

    991,178       711,124  

Deferred tax assets, net

    5,463,661       8,331,000  

Long-term restricted cash

    104,146       -  

Property and equipment, net

    483,467       509,603  

Goodwill

    2,603,687       -  

Intangible assets, net

    1,833,847       55,689  

Other assets

    242,196       164,517  

Total assets

  $ 40,889,487     $ 38,857,800  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Accounts payable

  $ 1,890,427     $ 1,112,366  

Accrued liabilities

    3,414,362       2,561,395  

Notes payable, current portion

    896,317       -  

Total current liabilities

    6,201,106       3,673,761  

Notes payable, less current portion

    269,231       -  

Total liabilities

    6,470,337       3,673,761  

Commitments and contingencies (Note 12)

               
                 

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; 32,394,288 and 32,158,436 shares issued and outstanding, respectively

    322       322  

Additional paid-in capital

    88,426,807       87,956,839  

Accumulated deficit

    (53,994,197 )     (52,771,853 )

Accumulated other comprehensive loss

    (13,782 )     (1,269 )

Total stockholders' equity

    34,419,150       35,184,039  

Total liabilities and stockholders' equity

  $ 40,889,487     $ 38,857,800  

 

See accompanying notes

 

1

 

 

 

LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

   

Three months ended

   

Six months ended

 
   

March 31,

   

March 31,

 
   

2018

   

2017

   

2018

   

2017

 

Revenues:

                               

Product sales

  $ 7,125,258     $ 5,471,613     $ 14,461,283     $ 8,173,572  

Contract and other

    743,190       270,778       1,035,732       510,154  

Total revenues

    7,868,448       5,742,391       15,497,015       8,683,726  

Cost of revenues

    3,832,468       2,808,546       7,503,494       4,525,370  
                                 

Gross profit

    4,035,980       2,933,845       7,993,521       4,158,356  
                                 

Operating expenses:

                               

Selling, general and administrative

    2,517,891       1,893,045       4,706,289       3,859,480  

Research and development

    913,935       605,239       1,691,972       1,192,650  

Total operating expenses

    3,431,826       2,498,284       6,398,261       5,052,130  
                                 

Income (loss) from operations

    604,154       435,561       1,595,260       (893,774 )
                                 

Other income

    15,205       32,074       49,735       62,202  
                                 

Income (loss) before income taxes

    619,359       467,635       1,644,995       (831,572 )

Income tax expense (benefit)

    158,451       169,285       2,867,339       (317,243 )

Net income (loss)

  $ 460,908     $ 298,350     $ (1,222,344 )   $ (514,329 )
                                 

Net income (loss) per common share - basic and diluted

  $ 0.01     $ 0.01     $ (0.04 )   $ (0.02 )

Weighted average common shares outstanding: - basic and diluted

                               

Basic

    32,275,647       31,800,103       32,212,286       31,800,103  

Diluted

    33,299,206       31,863,902       32,212,286       31,800,103  

 

See accompanying notes

 

2

 

 

 

LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

   

Three months ended

   

Six months ended

 
   

March 31,

   

March 31,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Net income (loss)

  $ 460,908     $ 298,350     $ (1,222,344 )   $ (514,329 )

Other comprehensive income (loss), net of tax:

                               

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

    (8,837 )     4,332       (16,868 )     (1,978 )

Unrealized foreign currency gain, net of tax

    4,355       -       4,355       -  

Comprehensive income (loss)

  $ 456,426     $ 302,682     $ (1,234,857 )   $ (516,307 )

 

See accompanying notes

 

3

 

 

 

LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

   

Six months ended

 
   

March 31,

 
   

2018

   

2017

 

Operating Activities:

               

Net (loss)

  $ (1,222,344 )   $ (514,329 )
                 

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

               

Depreciation and amortization

    193,809       62,834  

Warranty provision

    12,361       111,369  

Inventory obsolescence

    85,435       (181,486 )

Share-based compensation

    284,250       642,151  

Deferred income taxes

    2,867,339       (317,243 )

Changes in operating assets and liabilities:

               

Accounts receivable, net

    389,434       168,183  

Inventories, net

    (271,543 )     (174,720 )

Prepaid expenses and other

    174,589       (101,304 )

Other assets

    (60,614 )     133,188  

Accounts payable

    502,933       707,549  

Accrued and other liabilities

    (56,313 )     521,375  

Net cash provided by operating activities

    2,899,336       1,057,567  
                 

Investing Activities:

               

Purchases of marketable securities

    (2,402,346 )     (1,773,530 )

Proceeds from maturities of marketable securities

    2,401,856       1,874,823  

Capital expenditures

    (90,135 )     (57,473 )

Patent costs paid

    -       (4,286 )

Purchase of Genasys, net of cash and restricted cash acquired

    (2,246,545 )     -  

Net cash (used in) provided by investing activities

    (2,337,170 )     39,534  
                 

Financing Activities:

               

Proceeds from exercise of stock options

    185,718       -  

Proceeds from issuance of unsecured promissory notes

    63,144       -  

Payments on unsecured promissory notes

    (414,477 )     -  

Net cash used in financing activities

    (165,615 )     -  
Effect of foreign exchange rate on cash     335       -  

Net increase in cash, cash equivalents and restricted cash

    396,886       1,097,101  

Cash, cash equivalents and restricted cash, beginning of period

    12,803,887       13,466,711  

Cash, cash equivalents and restricted cash, end of period

  $ 13,200,773     $ 14,563,812  
                 
                 
                 
Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets:                
                 

Cash and cash equivalents

  $ 12,732,882     $ 14,524,346  

Restricted cash, current portion

    363,745       39,466  

Long-term restricted cash

    104,146       -  

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

  $ 13,200,773     $ 14,563,812  

 

See accompanying notes

 

4

 

 

LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Continued) 

 

   

Six months ended

 
   

March 31,

 
   

2018

   

2017

 

Supplemental disclosures of cash flow information:

               

Interest paid

  $ 9,186     $ -  
                 

Noncash investing and financing activities:

               

Change in unrealized loss on marketable securities

  $ (16,868 )   $ (1,978 )
                 

Business combinations accounted for as a purchase:

               

Fair value of assets acquired

  $ 5,520,504     $ -  

Cash paid or payable

    (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 November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash ("ASU 2016-18"), 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 six months ended March 31, 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.

 

6

 

 

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 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 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 16 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 $415,000 in net sales and net operating income of $25,000, through March 31, 2018.

 

The preliminary acquisition consideration consisted of the following:

 

Cash paid

  $ 2,826,189  

Acquisition escrow liability

    185,250  

Total consideration

  $ 3,011,439  

 

As of March 31, 2018, the acquisition consideration is subject to change upon finalization of net working capital and other adjustments. Net working capital adjustments will be settled during the three months ended June 30, 2018. The cash portion of the purchase price was funded from cash on hand. The Company incurred $237,345 in acquisition expenses related to this transaction, through March 31, 2018. These expenses were recorded in selling, general, and administrative expenses in the consolidated statement of operations as follows: $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 March 31, 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 are 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.

 

8

 

 

Pro Forma Information

 

The following table provides the unaudited pro forma results of operations for the three and six months ended March 31, 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

   

Six months ended

 
   

March 31,

   

March 31,

 
   

2018

   

2017

   

2018

   

2017

 

Net revenues

  $ 8,042,879     $ 6,034,248     $ 16,222,894     $ 9,474,427  

Net income

    529,094       276,048       (1,081,478 )     (788,438 )

Basic and diluted earnings per share

  $ 0.02     $ 0.01     $ (0.03 )   $ (0.02 )

 

 

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

 

   

Three months ended March 31,

 
   

2018

   

2017

 
   

Net revenues

   

Net income

   

Net revenues

   

Net income

 

LRAD actual results

  $ 7,453,794     $ 384,516     $ 5,742,391     $ 298,350  

Genasys actual results

    589,085       89,727       291,857       79,067  

Pro Forma adjustments

    -       54,851       -       (101,369 )

Pro forma results

  $ 8,042,879     $ 529,094     $ 6,034,248     $ 276,048  

 

   

Six months ended March 31,

 
   

2018

   

2017

 
   

Net revenues

   

Net income

   

Net revenues

   

Net income

 

LRAD actual results

  $ 15,082,361     $ (1,298,736 )   $ 8,683,726     $ (514,329 )

Genasys actual results

    1,140,533       126,844       790,701       (172,740 )

Pro Forma adjustments

    -       90,414       -       (101,369 )

Pro forma results

  $ 16,222,894     $ (1,081,478 )   $ 9,474,427     $ (788,438 )

 

 

The following table identifies the pro forma adjustments:

 

   

Three months ended

   

Six months ended

 
   

March 31,

   

March 31,

 
   

2018

   

2017

   

2018

   

2017

 

Acquisition costs

  $ 151,313     $ -     $ 196,329     $ -  

Depreciation and amortization costs

    (81,881 )     (163,762 )     (81,881 )     (163,762 )

Tax effect of adjustments

    (14,581 )     62,393       (24,034 )     62,393  

Pro forma adjustmenst

  $ 54,851     $ (101,369 )   $ 90,414     $ (101,369 )

 

 

 

 5. GOODWILL AND INTANGIBLE ASSETS

 

During the three months ended March 31, 2018, the Company recorded intangible assets of $1,850,000 and goodwill of $2,603,687 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.

 

9

 

 

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 Topic 350 “Intangibles – Goodwill and Other – Testing Indefinite-Lived Assets for Impairment”.

 

The Company’s intangible assets consist of the following:

 

 

   

March 31, 2018

   

September 31, 2017

 
   

Gross Carrying Amount

   

Accumulated Amortization

   

Net Carrying Amount

   

Gross Carrying Amount

   

Accumulated Amortization

   

Net Carrying Amount

 

Technology

  $ 690,000     $ (20,536 )   $ 669,464     $ -     $ -     $ -  

Customer relationships

    660,000       (19,642 )     640,358       -       -       -  

Trade name portfolio

    240,000       (10,000 )     230,000       -       -       -  

Non-compete agreements

    260,000       (18,056 )     241,944       -       -       -  

Patents

    108,247       (56,166 )     52,081       108,247       (52,558 )     55,689  
    $ 1,958,247     $ (124,400 )   $ 1,833,847     $ 108,247     $ (52,558 )   $ 55,689  

 

 

The amortization expense for the three months ended March 31, 2018 and 2017 was $70,038 and $1,859, respectively. The amortization expense for the six months ended March 31, 2018 and 2017 was $71,842 and $3,681, respectively.

 

 

Estimated Future Amortization Expense Years Ended September 30,

       

2018 (April 1, 2018 through September 30, 2018)

  $ 166,689  

2019

    333,771  

2020

    333,448  

2021

    271,771  

2022

    246,363  

Thereafter

    481,805  

Total estimated amortization expense

  $ 1,833,847  

 

 

 

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 March 31, 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 March 31, 2018 and September 30, 2017.

 

   

March 31, 2018

 
           

Unrealized

   

Fair

   

Cash

   

Short-term

   

Long-term

 
   

Cost Basis

   

Losses

   

Value

   

Equivalents

   

Securities

   

Securities

 
                                                 

Level 1:

                                               

Money Market Funds

  $ 98,539     $ -     $ 98,539     $ 98,539     $ -     $ -  
                                                 

Level 2:

                                               

Certificates of deposit

  $ 936,952     $ -     $ 936,952     $ -     $ 437,952     $ 499,000  

Municipal securities

    85,626       (168 )     85,459       -       85,459       -  

Corporate bonds

    4,049,846       (17,970 )     4,031,876       -       3,539,698       492,178  

Subtotal

    5,072,424       (18,138 )     5,054,287       -       4,063,109       991,178  
                                                 

Total

  $ 5,170,963     $ (18,138 )   $ 5,152,826     $ 98,539     $ 4,063,109     $ 991,178  

 

 

   

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:

 

   

March 31,

   

September 30,

 
   

2018

   

2017

 

Raw materials

  $ 5,135,966     $ 3,784,935  

Finished goods

    417,587       1,742,960  

Work in process

    393,756       147,871  

Inventories, gross

    5,947,309       5,675,766  

Reserve for obsolescence

    (503,967 )     (418,532 )

Inventories, net

  $ 5,443,342     $ 5,257,234  

 

11

 

 

 

8. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   

March 31,

   

September 30,

 
   

2018

   

2017

 

Office furniture and equipment

  $ 1,296,249     $ 1,093,502  

Machinery and equipment

    1,067,802       994,157  

Leasehold improvements

    76,138       76,138  

Property and equipment, gross

    2,440,189       2,163,797  

Accumulated depreciation

    (1,956,722 )     (1,654,194 )

Property and equipment, net

  $ 483,467     $ 509,603  

 

   

Six months ended

 
   

March 31,

 
   

2018

   

2017

 

Depreciation expense

  $ 121,967     $ 59,153  

 

 

 

9. ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following:

 

   

March 31,

   

September 30,

 
   

2018

   

2017

 
                 

Payroll and related

  $ 1,214,039     $ 1,870,579  

Deferred revenue

    1,028,497       268,580  

Accrued contract costs

    474,068       197,034  

Severance

    327,937       -  

Acquisition escrow liability

    185,250       -  

Warranty reserve

    169,204       179,101  

Deferred rent

    15,367       46,101  

Total

  $ 3,414,362     $ 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.

 

12

 

 

Warranty Reserve

 

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

 

   

Three months ended

   

Six months ended

 
   

March 31,

   

March 31,

 
   

2018

   

2017

   

2018

   

2017

 

Beginning balance

  $ 188,308     $ 353,938     $ 179,101     $ 356,984  

Warranty provision

    -       101,673       12,361       111,369  

Warranty settlements

    (19,104 )     (6,470 )     (22,258 )     (19,212 )

Ending balance

  $ 169,204     $ 449,141     $ 169,204     $ 449,141  

 

 

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. 

 

For the six months ended March 31, 2018, the Company recorded income tax expense of $393,339 reflecting an effective tax rate of 25.1% 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. For the six months ended March 31, 2017, the Company recorded an income tax benefit of $317,243 reflecting an effective tax rate of 38.1%.  For the six months ended March 31, 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.

 

Accounting Standards Codification (“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

 

 

 

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 March 31, 2018:

 

Loans with Governmental Agencies (1)

  $ 847,215  

Revolving Credit Facilities (2)

    198,850  

Term Loans (3)

    119,483  

Total debt

    1,165,548  

Less current portion

    (896,317 )

Total long-term debt

  $ 269,231  

 

 

(1)

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 March 31, 2018 are as follows:

 

Agency

Due Date

 

Interest Rate

   

Principal

   

Ministry of Industry, Tourism, and Commerce

December 31, 2018

  0.53%     $ 73,865  

a

Ministry of Industry, Tourism, and Commerce

December 31, 2019

  0.51%       107,933  

b

Ministry of Industry, Tourism, and Commerce

January 31, 2020

  3.95%       94,634   c

Ministry of Science and Innovation

February 2, 2022

  0.00%       74,136    

Ministry of Science and Innovation

February 2, 2024

  0.00%       296,440  

d

Center for Development of Industrial Technology

March 31, 2021

  0.00%       94,306    

European Union Agency for Network and Information Security

October 28, 2018

  2.95%       105,902    
            $ 847,215    

 

 

a.

This loan is secured by $26,113 of cash pledged as collateral by Genasys. This amount is included in restricted cash at March 31, 2018. The cash will be released upon repayment of the loan.

 

b.

This loan is secured by $40,373 of cash pledged as collateral by Genasys, which represents 25% of the original principal received. This amount is included in restricted cash at March 31, 2018. The cash will be released upon repayment of the loan.

 

c.

This loan is secured by $63,774 of cash pledged as collateral by Genasys, which represents 35% of the original principal received. This amount is included in restricted cash at March 31, 2018. The cash will be released upon repayment of the loan.

 

d.

This loan is secured by $296,440 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 March 31, 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 March 31, 2018.

 

 

(2)

Revolving credit facilities were used by Genasys to meet short-term operating needs. Revolving credit facilities as of March 31, 2018 are as follows:

 

 

Description

 

Interest Rate

   

Principal

 

Revolving Credit Facility A

  3.50%     $ 58,092  

Revolving Credit Facility B

  3.95%       60,811  

Revolving Credit Facility C

  3.00%       60,199  

Other Revolving Credit Facilities

  4.20%       19,748  
          $ 198,850  

 

 

Borrowing under Revolving Credit Facilities A, B, and C are up to a maximum of €50,000 (approximately $61,600). These revolving credit facilities mature during the three months ended June 30, 2018. The Other Revolving Credit Facilities were used by Genasys to fund local tax payments and mature during the three months ended June 30, 2018.

 

14

 

 

 

(3)

Term Loans as of March 31, 2018 are as follows:

 

Description

 

Due Date

 

Interest Rate

   

Principal

 

Term Loan A

 

October 20, 2018

  4.80%     $ 12,681  

Term Loan B

 

May 27, 2019

 

Variable

      18,549  

Term Loan C

 

June 20, 2019

  4.29%       39,951  

Term Loan D

 

July 12, 2020

 

Variable

      48,302  
              $ 119,483  

 

Term Loan A is an unsecured 4.80% fixed rate loan due in October 2018 issued to fund the working capital needs of Genasys. There is a prepayment penalty of 3% of the outstanding balance. Principal and interest payments are payable on the 20th of each month.

Term Loan B is an unsecured variable rate loan due in May 2019 issued to fund the working capital needs of Genasys. The interest rate is Euribor +3.5%. There are no prepayment penalties. Principal and interest payments are payable on the 27th of each month.

Term Loan C is an unsecured fixed rate loan due in June 2019 issued to fund the working capital needs of Genasys. There is no prepayment penalty. Principal and interest payments are due on the 20th of each month.

Term Loan D is an unsecured variable rate loan due in July 2020 issued to fund the working capital needs of Genasys. There is a prepayment penalty of 0.5% of the outstanding balance. The interest rate is fixed at 2.44% until July 2018 at which point the interest rate becomes Euribor +2.44%. Principal and interest payments are due on the 12th of each month.

 

The following is a schedule of future annual payments as of March 31, 2018:

 

April 2018-March 2019

  $ 896,317  

April 2019-March 2020

    173,035  

April 2020-March 2021

    48,796  

April 2021-March 2022

    47,400  

April 2022-March 2023

    -  

Thereafter

    -  

Total

  $ 1,165,548  

 

The Company has pledged $428,425 of cash as collateral against debt. This restricted cash amount is included in restricted cash and long-term restricted cash as of March 31, 2018.

 

The Company recorded $9,815 in interest expense for the three months and six months ended March 31, 2018 in the condensed consolidated statements of income 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 50% of Target, at 100% of Target and at 200% 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 six months ended March 31, 2018 and 2017, the Company accrued $738,543 and $379,080, 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 $185,250, as described in Note 4.  This liability is based on a working capital target and may be payable to the former shareholders of Genasys.  The Company has not completed its final evaluation of this measurement as of March 31, 2018.  The Company expects this analysis to be completed by June 30, 2018.    

 

 

13. SHARE-BASED COMPENSATION

 

Equity Incentive Plans

 

At March 31, 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 March 31, 2018, there were options outstanding covering 2,193,502 and 2,279,315 shares of common stock under the 2005 Equity Plan and 2015 Equity Plan, respectively.

 

15

 

 

Stock Option Activity

 

The following table summarizes information about stock option activity during the six months ended March 31, 2018:

 

   

Number

   

Weighted Average

 
   

of Shares

   

Exercise Price

 

Outstanding October 1, 2017

    4,663,502     $ 2.16  

Granted

    3,500     $ 2.21  

Forfeited/expired

    (83,333 )   $ 2.84  

Exercised

    (110,852 )   $ 1.68  

Outstanding March 31, 2018

    4,472,817     $ 2.15  

Exercisable March 31, 2018

    3,298,533     $ 2.23  

 

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 3.0 years. The aggregate intrinsic value of options outstanding and exercisable at March 31, 2018 was $1,242,236 and $990,806, respectively.

 

During the six months ended March 31, 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 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 May 17, 2017 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 will be 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 will be expensed on a straight line basis through the March 20, 2019 vest date. Also during the quarter, 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.

 

16

 

 

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

   

Six months ended

 
   

March 31,

   

March 31,

 
   

2018

   

2017

   

2018

   

2017

 

Cost of revenues

  $ 5,047     $ 5,874     $ 11,256     $ 11,751  

Selling, general and administrative

    120,133       148,600       229,455       584,097  

Research and development

    20,609       22,928       43,539       46,303  

Total

  $ 145,789     $ 177,402     $ 284,250     $ 642,151  

 

The employee stock options granted in the six months ended March 31, 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):

 

   

Six months ended

 
   

March 31,

 
   

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 six-month periods ended March 31, 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 March 31, 2018, there was approximately $900,000 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 1.9 years.

 

 

14. STOCKHOLDERS’ EQUITY

 

Summary

 

The following table summarizes changes in the components of stockholders’ equity during the six months ended March 31, 2018:

 

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

Balances, September 30, 2017

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

Share-based compensation expense

    -       -       284,250       -       -       284,250  

Issuance of common stock upon exercise of stock options, net

    110,852       -       185,718                       185,718  

Issuance of common stock upon vesting of restricted stock units

    125,000       -       -       -       -       -  

Other comprehensive loss

    -       -       -       -       (12,513 )     (12,513 )

Net loss

    -       -       -       (1,222,344 )             (1,222,344 )

Balances, March 31, 2018

    32,394,288     $ 322     $ 88,426,807     $ (53,994,197 )   $ (13,782 )   $ 34,419,150  

 

17

 

 

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. There were no shares repurchased during the six-month periods ended March 31, 2018 and 2017 respectively. At March 31, 2018, all repurchased shares were retired. In December 2017, the Board of Directors extended the program through December 31, 2018. At March 31, 2018, $3.9 million is available for share repurchase under this program.

 

Dividends

 

There were no dividends declared in the six months ended March 31, 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

   

Six months ended

 
   

March 31,

   

March 31,

 
   

2018

   

2017

   

2018

   

2017

 

Numerator:

                               

Net income (loss)

  $ 460,908     $ 298,350     $ (1,222,344 )   $ (514,329 )
                                 

Denominator:

                               

Weighted average common shares outstanding - basic and diluted

    32,275,647       31,800,103       32,212,286       31,800,103  

Assumed exercise of dilutive options and warrants

    1,023,559       63,799       -       -  

Weighted average dilutive shares outstanding

    33,299,206       31,863,902       32,212,286       31,800,103  
                                 

Basic income (loss) per common share - basic and diluted

  $ 0.01     $ 0.01     $ (0.04 )   $ (0.02 )

Diluted income (loss) per common share

  $ 0.01     $ 0.01     $ (0.04 )   $ (0.02 )
                                 

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

                               

Options

    1,766,250       3,061,836       2,706,567       2,989,836  

Restricted stock units

    218,330       250,000       218,330       250,000  

Total

    1,984,580       3,311,836       2,924,897       3,239,836  

 

 

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 and Software 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.

 

18

 

 

The following table presents the Company’s segment disclosures:

 

   

Three Months Ended

   

Six Months Ended

 
   

March 31, 2018

   

March 31, 2018

 

Revenues from external customers

               

LRAD

  $ 7,453,794     $ 15,082,361  

Genasys

    414,654       414,654  
    $ 7,868,448     $ 15,497,015  
                 

Intercompany revenues

               

LRAD

  $ -     $ -  

Genasys

    89,818       89,818  
    $ 89,818     $ 89,818  
                 

Segment Operating Income

               

LRAD

  $ 579,498     $ 1,570,604  

Genasys

    24,656       24,656  
    $ 604,154     $ 1,595,260  
                 

Other expenses:

               

Depreciation and amortization expense

               

LRAD

  $ (64,660 )   $ (124,765 )

Genasys

    (69,044 )     (69,044 )
    $ (133,704 )   $ (193,809 )
                 

Interest expense

               

LRAD

  $ -     $ -  

Genasys

    (9,815 )     (9,815 )
    $ (9,815 )   $ (9,815 )
                 

Income tax expense

               

LRAD

  $ (158,451 )   $ (2,867,339 )

Genasys

    -       -  
    $ (158,451 )   $ (2,867,339 )

 

    March 31, 2018     September 30, 2017  

Long-lived assets:

               

LRAD

  $ 527,872     $ 565,292  

Genasys

    4,393,129       -  

Total

  $ 4,921,001     $ 565,292  
                 

Total Assets

               

LRAD

  $ 35,471,343     $ 38,857,800  

Genasys

    5,418,144       -  

Total

  $ 40,889,487     $ 38,857,800  

 

19

 

 

 

17. MAJOR CUSTOMERS

 

For the three months ended March 31, 2018, revenues from three customers accounted for 40%, 15% and 14% of total revenues, and for the six months ended March 31, 2018 revenues from two customers accounted for 33% and 16% of total revenues, with no other single customer accounting for more than 10% of revenues. At March 31, 2018, accounts receivable from one customer accounted for 56% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.

 

For the three months ended March 31, 2017, revenues from two customers accounted for 23% and 11% of total revenues, and for the six months ended March 31, 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 March 31, 2017, accounts receivable from three customers accounted for 41%, 24% and 14% 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.

 

   

Three months ended March 31,

   

Six months ended March 31,

 
   

2018

   

2017

   

2018

   

2017

 

Americas

  $ 5,051,072     $ 2,099,151     $ 11,104,110     $ 3,721,509  

Asia Pacific

    2,255,856       2,923,825       3,277,762       3,908,425  

Europe, Middle East and Africa

    561,520       719,415       1,115,143       1,053,792  

Total Revenues

  $ 7,868,448     $ 5,742,391     $ 15,497,015     $ 8,683,726  

 

20

 

 

 

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 the use of powerful voice commands, prerecorded messages in multiple languages, and warning tones, our AHDs are designed to create large safety zones while determining the intent and influencing the behavior of security threats. We continue to enhance our acoustic communication technologies and product lines to provide a complete range of systems and accessories, including 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 over 70 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 March 31, 2018:

 

 

Received $895,000 in follow-on AHD orders for public safety in the Asia Pacific region.

 

Announced over $1.0 million in AHD orders for defense, public safety, and off-shore security from Southeast Asia.

 

Acquired Genasys Holding S.L., a location-based mass messaging and mobile alert solutions provider for emergency warning and workforce management.

 

Received a $1.0 million AHD order from an international defense department.

 

Announced $1.0 million in orders for AHDs, accessories, and spare parts from the U.S. Military and U.S. State Department.

 

21

 

 

On January 18, 2018, the Company completed its acquisition of Genasys Holdings, S.L. and its subsidiaries (“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 16 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. The results of Genasys’ operations were included in the Company’s consolidated financial statements beginning January 18, 2018.

 

Revenues in the second fiscal quarter ended March 31, 2018, were $7.9 million, an increase from $5.7 million in the second fiscal quarter of 2017. The increase in revenues was driven by a significant increase in AHD revenue and the addition of Genasys in 2018, offset by a decrease in mass notification revenues. AHD revenues increased $3,515,640, or 97%, and Genasys contributed $414,654 in revenue, however, mass notification revenue decreased $1,804,237, or 85%, compared to the second fiscal quarter of 2017. 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 37.4% from $2.5 million to $3.4 million in the quarter ended March 31, 2018, primarily due to the addition of Genasys operating expenses, acquisition related expenses, increased payroll related expenses for additional engineering and sales personnel, higher incentive expense accrual based on the Company’s expectation for meeting current year financial goals, travel and related expenses, and computer related expenses. The second quarter of fiscal 2018 results, reflect a $158,000 income tax expense which is a non-cash charge that reduces the balance of the deferred tax asset. We reported net income of $460,908 for the quarter, or $0.01 per share, compared to net income of $298,350, or $0.01 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 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 United States and in a number of worldwide locations. However, we may continue to face challenges in fiscal 2018 due to continuing economic and geopolitical conditions in some international regions. We anticipate that the new 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.

 

22

 

 

Comparison of Results of Operations for the Three Months Ended March 31, 2018 and 2017

 

Revenues

 

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

                 
   

March 31, 2018

   

March 31, 2017

                 
           

% of Total

           

% of Total

   

Fav(Unfav)

 
   

Amount

   

Revenue

   

Amount

   

Revenue

   

Amount

   

%

 

Revenues:

                                               

Product sales

  $ 7,125,258       90.6 %   $ 5,471,613       95.3 %   $ 1,653,645       30.2 %

Contract and other

    743,190       9.4 %     270,778       4.7 %     472,412       174.5 %

Total revenues

    7,868,448       100.0 %     5,742,391       100.0 %     2,126,057       37.0 %
                                                 

Cost of revenues

    3,832,468       48.7 %     2,808,546       48.9 %     (1,023,922 )     (36.5 %)

Gross profit

    4,035,980       51.3 %     2,933,845       51.1 %     1,102,135       37.6 %
                                                 

Operating Expenses:

                                               

Selling, general and administrative

    2,517,891       32.0 %     1,893,045       33.0 %     (624,846 )     (33.0 %)

Research and development

    913,935       11.6 %     605,239       10.5 %     (308,696 )     (51.0 %)

Total operating expenses

    3,431,826       43.6 %     2,498,284       43.5 %     (933,542 )     (37.4 %)
                                                 

Income from operations

    604,154       7.7 %     435,561       7.6 %     168,593       38.7 %
                                                 

Other Income

    15,205       0.2 %     32,074       0.6 %     (16,869 )     (52.6 %)
                                                 

Income before income taxes

    619,359       7.9 %     467,635       8.2 %     151,724       32.4 %

Income tax expense

    158,451       2.0 %     169,285       2.9 %     10,834       6.4 %

Net income

  $ 460,908       5.9 %   $ 298,350       5.2 %   $ 162,558       54.5 %

 

Revenues increased in the current quarter compared to the prior year due to the larger backlog at December 31, 2017 compared to December 31, 2016 and the addition of $414,654 of Genasys sales in the 2018 fiscal quarter. Sales improved in the current quarter for the AHD product line (up $3,515,640 or 97%) but were lower for the MN systems product line (down $1,804,237, or 85%) compared to the prior year quarter. The receipt of orders will often be uneven due to the timing of approvals or budgets. At March 31, 2018, we had aggregate deferred revenue of $1,028,497 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.

 

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 $624,846 over the prior year quarter. This reflects increases of $285,200 from Genasys operations, $169,199 for salaries/benefits/consultants, $130,137 higher professional services (largely acquisition related), $124,835 for information technology related expenses and $102,362 in travel and related expenses. This was offset by a $221,829 decrease in commission expense.

 

We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three-months ended March 31, 2018 and 2017 of $120,133 and $148,600, respectively.

 

23

 

 

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 $308,696 compared to the prior year primarily due to $159,479 for salaries and benefits due to increased engineering staff compared to the prior year quarter and $142,898 for increased product development and product testing.

 

Included in research and development expenses for the three months ended March 31, 2018 and 2017 was $20,609 and $22,928 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 2018 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 $162,558 increase in net income in the fiscal year 2018 second quarter was primarily due to the higher gross profits realized from increased sales in the 2018 quarter and a lower effective tax rate in 2018. Non-cash income tax expense of $158,451 and $169,285 was recognized in the three months ended March 31, 2018 and 2017, respectively.

 

Comparison of Results of Operations for the Six Months Ended March 31, 2018 and 2017

 

Revenues

 

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.

 

   

Six months ended

                 
   

March 31, 2018

   

March 31, 2017

                 
           

% of Total

           

% of Total

   

Fav(Unfav)

 
   

Amount

   

Revenues

   

Amount

   

Revenues

   

Amount

   

%

 

Revenues:

                                               

Product sales

  $ 14,461,283       93.3 %   $ 8,173,572       94.1 %   $ 6,287,711       76.9 %

Contract and other

    1,035,732       6.7 %     510,154       5.9 %     525,578       103.0 %

Total revenues

    15,497,015       100.0 %     8,683,726       100.0 %     6,813,289       78.5 %
                                                 

Cost of revenues

    7,503,494       48.4 %     4,525,370       52.1 %     (2,978,124 )     (65.8 %)

Gross profit

    7,993,521       51.6 %     4,158,356       47.9 %     3,835,165       92.2 %