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,December 31, 2013
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 | ☒ |
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 July 30, 2013January 29, 2014 was 32,499,199.33,133,380.
PART I. FINANCIAL INFORMATION
Item 1. |
|
LRAD Corporation
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2013 (Unaudited) | September 30, 2012 | December 31, 2013 (Unaudited) | September 30, 2013 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 15,057,571 | $ | 13,859,505 | ||||||||||||
Accounts receivable, less allowance of $3,972 and $4,372for doubtful accounts | 1,166,598 | 5,517,894 | ||||||||||||||
Cash | $ | 18,086,313 | $ | 15,805,195 | ||||||||||||
Accounts receivable, less allowance of $0 and $3,772for doubtful accounts | 1,901,232 | 4,958,532 | ||||||||||||||
Inventories, net | 5,245,315 | 3,112,489 | 5,344,853 | 4,587,750 | ||||||||||||
Prepaid expenses and other | 466,497 | 441,823 | 512,721 | 1,003,875 | ||||||||||||
Total current assets | 21,935,981 | 22,931,711 | 25,845,119 | 26,355,352 | ||||||||||||
Property and equipment, net | 258,197 | 212,863 | 328,535 | 237,377 | ||||||||||||
Intangible assets, net | 138,583 | 158,457 | 50,162 | 51,650 | ||||||||||||
Prepaid expenses and other - noncurrent | 961,391 | 1,102,016 | 867,641 | 914,516 | ||||||||||||
Total assets | $ | 23,294,152 | $ | 24,405,047 | $ | 27,091,457 | $ | 27,558,895 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 909,048 | $ | 995,719 | $ | 568,968 | $ | 1,596,409 | ||||||||
Accrued liabilities | 524,851 | 623,742 | 1,239,459 | 1,054,968 | ||||||||||||
Total current liabilities | 1,433,899 | 1,619,461 | 1,808,427 | 2,651,377 | ||||||||||||
Other liabilities - noncurrent | 419,362 | 363,817 | 146,777 | 146,109 | ||||||||||||
Total liabilities | 1,853,261 | 1,983,278 | 1,955,204 | 2,797,486 | ||||||||||||
Commitments and contingencies (Note 8) | ||||||||||||||||
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;32,499,199 and 32,374,499 shares issued and outstanding, respectively | 325 | 324 | ||||||||||||||
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;33,205,373 and 32,900,705 shares issued and outstanding, respectively | 332 | 329 | ||||||||||||||
Treasury stock, at cost, 19,796 shares | (37,420 | ) | - | |||||||||||||
Additional paid-in capital | 87,045,296 | 86,358,011 | 87,715,532 | 87,434,834 | ||||||||||||
Accumulated deficit | (65,604,730 | ) | (63,936,566 | ) | (62,542,191 | ) | (62,673,754 | ) | ||||||||
Total stockholders' equity | 21,440,891 | 22,421,769 | 25,136,253 | 24,761,409 | ||||||||||||
Total liabilities and stockholders' equity | $ | 23,294,152 | $ | 24,405,047 | $ | 27,091,457 | $ | 27,558,895 |
See accompanying notes
LRAD Corporation
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30, Nine months ended June 30, 2013 2012 2013 2012 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 (Loss) income from operations Other income (Loss) income from operations before income taxes Income tax (benefit) expense Net (loss) income Net (loss) income per common share - basic and diluted Weighted average common shares outstanding: Basic Diluted $ 1,905,518 $ 2,936,179 $ 7,555,330 $ 8,821,963 252,126 224,732 772,231 351,024 2,157,644 3,160,911 8,327,561 9,172,987 1,242,190 1,586,018 4,564,215 4,532,497 915,454 1,574,893 3,763,346 4,640,490 1,607,237 1,120,358 4,149,971 3,370,211 423,434 414,457 1,302,102 1,225,165 2,030,671 1,534,815 5,452,073 4,595,376 (1,115,217 ) 40,078 (1,688,727 ) 45,114 6,807 6,780 22,163 26,502 (1,108,410 ) 46,858 (1,666,564 ) 71,616 - (153,518 ) 1,600 (150,818 ) $ (1,108,410 ) 200,376 $ (1,668,164 ) 222,434 $ (0.03 ) $ 0.01 $ (0.05 ) $ 0.01 32,428,095 32,374,499 32,407,475 32,374,499 32,428,095 33,492,944 32,407,475 33,168,978
Three months ended December 31, 2013 2012 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 Income (loss) from operations before income taxes Income tax expense Net income (loss) Net income per common share Basic Diluted Weighted average common shares outstanding: Basic Diluted $ 3,556,062 $ 2,762,345 266,568 217,762 3,822,630 2,980,107 1,878,079 1,494,284 1,944,551 1,485,823 1,424,544 1,172,475 393,541 421,921 1,818,085 1,594,396 126,466 (108,573 ) 5,197 8,197 131,663 (100,376 ) 100 - $ 131,563 (100,376 ) $ 0.00 $ 0.00 $ 0.00 $ 0.00 33,028,646 32,399,199 33,473,582 32,399,199
See accompanying notes
LRAD Corporation
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended June 30, 2013 2012 Operating Activities: Net (loss) income Adjustments to reconcile net (loss) income to net cashprovided by operating activities: Depreciation and amortization Provision for doubtful accounts Warranty provision Inventory obsolescence Share-based compensation Loss on sale or impairment of patents Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other Prepaid expenses and other - noncurrent Accounts payable Warranty settlements Accrued and other liabilities Net cash provided by operating activities Investing Activities: Purchase of equipment Patent costs paid Net cash used in investing activities Financing Activities: Proceeds from exercise of stock options Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental Disclosure of Cash Flow Information Cash (refunded) paid for taxes Three months ended December 31, 2013 2012 Operating Activities: Net income (loss) Adjustments to reconcile net income (loss) to net cashprovided by operating activities: Depreciation and amortization Provision for doubtful accounts Warranty provision Inventory obsolescence Share-based compensation Loss on sale or impairment of patents Changes in operating assets and liabilities: Accounts receivable Inventories Prepaid expenses and other Prepaid expenses and other - noncurrent Accounts payable Warranty settlements Accrued and other liabilities Net cash provided by operating activities Investing Activities: Capital expenditures Patent costs paid Net cash used in investing activities Financing Activities: Repurchase of common stock Proceeds from exercise of stock options Net cash provided by financing activities Net increase in cash Cash, beginning of period Cash, end of period Supplemental Disclosure of Cash Flow Information Cash paid (refunded) for taxes $ (1,668,164 ) $ 222,434 106,485 66,945 (400 ) - (834 ) (31,885 ) (219,419 ) 112,189 582,058 476,779 5,138 18,205 4,351,696 2,994,406 (1,913,407 ) (487,687 ) (24,674 ) (72,830 ) 140,625 69,859 (86,671 ) (447,196 ) (11,585 ) (19,199 ) (30,927 ) (2,255,563 ) 1,229,921 646,457 (134,349 ) (154,139 ) (2,734 ) (2,365 ) (137,083 ) (156,504 ) 105,228 - 105,228 - 1,198,066 489,953 13,859,505 13,870,762 $ 15,057,571 $ 14,360,715 $ (38,724 ) $ 60,015 $ 131,563 $ (100,376 ) 35,203 30,716 (3,772 ) (200 ) 14,361 (9,445 ) (4,414 ) (29,701 ) 149,814 205,978 - 5,138 3,061,072 3,249,384 (752,689 ) (1,050,152 ) 491,154 84,902 46,875 46,875 (1,027,441 ) (204,313 ) (11,362 ) (4,275 ) 182,160 113,452 2,312,524 2,337,983 (124,793 ) (76,655 ) (80 ) (983 ) (124,873 ) (77,638 ) (99,597 ) - 193,064 19,228 93,467 19,228 2,281,118 2,279,573 15,805,195 13,859,505 $ 18,086,313 $ 16,139,078 $ 100 $ (40,324 )
See accompanying notes
LRAD Corporation
Notes to Interim Condensed Consolidated Financial Statements (unaudited)(Unaudited)
1. OPERATIONS
LRAD® Corporation, a Delaware corporation (the “Company”), is engaged in the design, development and commercialization of directed sound technologies and products. The principal markets for the Company’s proprietary sound reproduction technologies and products are in North and South America, Europe, the Middle East and Asia.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
General
The accompanyingCompany’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United Statesrules and regulations of America for interim financial information, the instructions to Form 10-QSecurities and applicable sections of Regulation S-X.Exchange Commission (“SEC”). Certain information and notefootnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to thosesuch rules and regulations, although, inregulations. In our opinion, the opinion of management, the interim financialaccompanying statements reflect all adjustments necessary to present fairly the financial position, results of operations, and disclosures included therein arecash flows for those periods indicated, and contain adequate in orderdisclosure to make the financial statementsinformation presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the footnotes. The condensed consolidated balance sheet as of September 30, 2012 was derived from the Company’s most recent audited financial statements. Operating results for the three and nine month periods are not necessarily indicative of the results that may be expected for the year. The interim condensed 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, 20122013 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”)SEC on December 4, 2012.November 21, 2013. 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 a currently inactive wholly owned subsidiary, American Technology Holdings, Inc.,LRAD International Corporation, which the Company formed to conduct international marketing, sales and distribution activities. The condensed consolidated financial statements include the accounts of this subsidiary after elimination of intercompany transactions and accounts.
Fair Value Measurements
At June 30, 2013, there was no difference between the carrying value and fair market value of the Company’s cash equivalents.
Reclassifications
Where necessary, the prior year’s information has been reclassified to conform to the current year presentation.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2013, the Financial Accounting Standards Board (“FASB”) issued guidance requiring a liability related to an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. The presentation of unrecognized tax benefits as a reduction of a deferred tax asset is consistent with an entity’s analysis of the realizability of its deferred tax assets and, as a result, is not expected to change an entity’s assessment of realizability. For public companies, this guidance is effective on a prospective basis for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The Company does not expect the adoption of this guidance will have a material impact on our financial statements
4. INVENTORIES
Inventories consisted of the following:
June 30, 2013 September 30, 2012 Raw materials Finished goods Work in process Reserve for obsolescence December 31, 2013 September 30, 2013 Raw materials Finished goods Work in process Reserve for obsolescence $ 4,213,671 $ 2,693,753 953,670 818,082 319,760 61,859 5,487,101 3,573,694 (241,786 ) (461,205 ) $ 5,245,315 $ 3,112,489 $ 4,303,861 $ 3,941,203 1,160,901 605,240 193,196 358,826 5,657,958 4,905,269 (313,105 ) (317,519 ) $ 5,344,853 $ 4,587,750
4.5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31, September 30, Office furniture and equipment Machinery and equipment Leasehold improvements Accumulated depreciation
2013
2013 $ 775,301 $ 769,799 727,094 607,803 55,298 55,298 1,557,693 1,432,900 (1,229,158 ) (1,195,523 ) $ 328,535 $ 237,377
June 30, 2013 September 30, 2012 Machinery and equipment Office furniture and equipment Leasehold improvements Accumulated depreciation $ 601,187 $ 525,020 771,889 716,625 55,298 55,298 1,428,374 1,296,943 (1,170,177 ) (1,084,080 ) $ 258,197 $ 212,863
Nine months ended June 30, | ||||||||
2013 | 2012 | |||||||
Depreciation expense | $ | 89,015 | $ | 44,563 |
Three months ended | ||||||||
2013 | 2012 | |||||||
Depreciation expense | $ | 33,635 | $ | 24,916 |
5. INTANGIBLE ASSETS
Patents consisted of the following:
June 30, 2013 September 30, 2012 Cost Accumulated amortization $ 350,582 $ 358,925 (211,999 ) (200,468 ) $ 138,583 $ 158,457
Nine months ended June 30, | ||||||||
2013 | 2012 | |||||||
Amortization expense | $ | 17,470 | $ | 22,382 | ||||
Loss on sale or impairment of patents | - | 18,205 |
Each quarter, the Company reviews the ongoing value of its capitalized patent costs and reduces the value if any of its patents are no longer consistent with its business strategy, as noted in the above table.
6. ACCRUED LIABILITIES AND OTHER LIABILITIES—NONCURRENT
Accrued liabilities consisted of the following:
June 30, September 30, Accrued expenses Payroll and related Warranty reserve Customer deposits Deferred revenue Total Other liabilities - noncurrent consisted of the following: Deferred revenue - noncurrent Deferred rent Extended warranty Total 2013 2012 $ 117,788 $ 197,032 239,471 272,212 162,268 154,069 5,324 10 - 419 $ 524,851 $ 623,742 $ 270,559 $ 270,140 119,177 43,433 29,626 50,244 $ 419,362 $ 363,817
December 31, | September 30, | |||||||
2013 | 2013 | |||||||
Payroll and related | $ | 577,185 | $ | 650,125 | ||||
Accrued contract costs | 295,551 | 197,034 | ||||||
Warranty reserve | 195,057 | 189,277 | ||||||
Deferred revenue and other | 171,666 | 18,532 | ||||||
Total | $ | 1,239,459 | $ | 1,054,968 | ||||
Other liabilities - noncurrent consisted of the following: | ||||||||
Deferred rent | $ | 126,076 | $ | 122,627 | ||||
Extended warranty | 20,701 | 23,482 | ||||||
Total | $ | 146,777 | $ | 146,109 |
Deferred Revenue
Deferred revenue at June 30, 2013 and September 30, 2012 included $270,559, collected from a license agreement in advance of recognized revenue.
Warranty Reserve
Changes in the warranty reserve during the three and nine months ended June 30,December 31, 2013 and 2012 were as follows:
Three month ended Nine months ended June 30, June 30, Beginning balance Warranty provision Warranty settlements Ending balance Short-term warranty reserve Long-term warranty reserve Three months ended December 31, 2013 2012 Beginning balance Warranty provision Warranty settlements Ending balance 2013 2012 2013 2012 $ 205,005 $ 217,240 $ 204,313 $ 272,261 (7,302 ) 8,122 (834 ) (31,885 ) (5,809 ) (4,185 ) (11,585 ) (19,199 ) $ 191,894 $ 221,177 $ 191,894 $ 221,177 $ 162,268 169,907 $ 162,268 $ 169,907 29,626 51,270 29,626 51,270 $ 191,894 $ 221,177 $ 191,894 $ 221,177 $ 212,759 $ 204,313 14,361 (9,445 ) (11,362 ) (4,275 ) $ 215,758 $ 190,593
December 2013 | September 2013 | |||||||
Short-term warranty reserve | $ | 195,057 | $ | 189,277 | ||||
Long-term warranty reserve | 20,701 | 23,482 | ||||||
$ | 215,758 | $ | 212,759 |
7. INCOME TAXES
At June 30,December 31, 2013, the Company had federal net operating losses (“NOLs”) and related state NOLs. In accordance with Financial Accounting Standards BoardFASB Accounting Standards Codification (“ASC”) Topic 740, “Accounting for Income Taxes” (“ASC 740”), the Company recorded a full valuation allowance as it is more likely than not that some or all of the deferred tax assets will not be realized in the future.
The Company did not record a tax provision during the ninethree months ended June 30,December 31, 2013 as the Company expects its annual effective tax rate to be zero. In addition to the Company’s federal NOLs, it also made an election under Section 172(b)(1)(H) of the Internal Revenue Code of 1986 (“Section 172”), as amended per the American Recovery and Reinvestment Tax Act of 2009, to carry back its fiscal year ended September 30, 2008 applicable NOL for a period of 3 years, and carry forward the loss for up to 20 years, which offsets the Alternative Minimum Tax in the current tax year. In addition, the state of California has reinstated the NOL carryover deduction for taxable years beginning on or after January 1, 2012, which are expected to offset any state taxes during the 20132014 fiscal year.
ASC 740 requires the Company to recognize in its 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.
8. COMMITMENTS AND CONTINGENCIES
Bank and Other Cash Equivalent Deposits in Excess of FDIC Insurance Limits
The Company maintains cash and cash equivalent accounts with Federal Deposit Insurance Corporation (“FDIC”) insured financial institutions. Under provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank Act”),institutions, which provided unlimited FDIC insurance was provided for all funds in non-interest bearing transaction accounts through December 31, 2012. Beginning on January 1, 2013, the FDIC coverscoverage includes all deposit accounts up to $250,000 per depositor for each insured bank. In addition, the Company’s security account is protected by coverage offered by the Securities Investor Protection Corporation (“SIPC”) up to $500,000, which is inclusive of up to $250,000 of protection for claims for cash. The Company’s exposure for amounts in excess of FDICthese insured limits at June 30,December 31, 2013 was approximately $14,800,000.$17,800,000. The Company has not experienced any losses in such accounts.
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 financial statements for pending litigation. On July 24, 2012,Currently, there are no pending material legal proceedings to which the Company was served with a complaint filed in the Delaware Court of Chancery by Iroquois Master Fund Ltd. (“Iroquois”), a shareholder of the Company, against the Company’s board of directors (the “Board”), its Chief Executive Officer and Chief Financial Officer (the “Delaware Litigation”). The action is a purported derivative actionparty or to which alleges breachany of fiduciary duty and other claims against the individual defendants based on the issuance of stock options to them, which the plaintiff alleges were granted in violation of the terms of the Company’s 2005 Equity Incentive Plan. The Company was also named in the action as a nominal defendant against which no recoveryits property is sought. The plaintiff seeks rescission or repricing of the stock options at issue and other damages, purportedly on behalf of the Company. The defendants filed a motion to dismiss the complaint. Rather than oppose the motion, the plaintiff filed an amended complaint on November 19, 2012. Defendants filed a motion to dismiss the amended derivative complaint on December 17, 2012. The Company and the individual defendants seek dismissal of the complaint on the grounds that the plaintiff has failed to comply with Delaware law in filing the complaint. The individual defendants seek dismissal on the additional grounds that the Complaint fails to state a legal claim against them. A hearing on the defendants’ motion to dismiss the amended derivative complaint was held March 4, 2013.
The Company received a notice and a Schedule 13D was filed by Iroquois with the SEC on January 17, 2013 announcing Iroquois’ intention to nominate a slate of five directors to stand for election at the Company’s 2013 Annual Meeting of Stockholders (the “annual meeting”). The Company’s Nominating and Corporate Governance Committee reviewed and considered the nominations as well as qualified individuals who were submitted by other stockholders to serve on the Board. On May 21, 2013, the Company entered into an agreement (the “Settlement Agreement”) with Iroquois to settle the potential proxy contest pertaining to the election of directors to the Board at the annual meeting. The Company agreed, among other things, to nominate three new nominees to the Board and to pay to Iroquois its legal and advisory fees in connection with its nomination of director candidates, in the amount of $301,496, which was paid in the quarter ended June 30, 2013. Also as part of the settlement, the Company and Iroquois agreed to execute a Stipulation of Settlement seeking to settle the Delaware Litigation brought by Iroquois in July 2012. As part of the settlement, Thomas R. Brown, President and Chief Executive Officer of the Company, has agreed to increase the exercise price of the option granted to Mr. Brown in May 2012 to $3.00 per share. A hearing is scheduled for September 10, 2013 to request approval of the Stipulation of Settlement by the Delaware Court. If the Delaware Court approves the Stipulation, Iroquois’ Counsel shall apply to the Delaware Court for an award of attorneys’ fees and expenses of no more than $340,000.
At this time, the Company estimates that it is reasonably possible that it could incur a loss, after reimbursement of insurance, of $19,271 for Iroquois’ attorneys’ fees and has accrued this expenses in the quarter ended June 30, 2013. This amount is an estimate which is subject to change based on the final insurance reimbursement and the ruling by the Delaware Court.subject.
Bonus Plan
The Company has an incentive bonus plan for fiscal year 20132014 designed to motivate its employees to achieve the Company’s financial objectives. All of the Company’s employees are entitled to participate in the incentive plan. Target Bonus Amounts (“Target”) vary based on a percentage of the employee’s base salary which range from 10% to 50% 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 earnings per share goals. Included in such calculation is the cost of the incentive plan. For purposes of the earnings per share calculation, the number of shares outstanding will also be held constant as of October 1, 2012.2013. During the ninethree months ended June 30,December 31, 2013 and 2012, the Company did not record any bonus expense in connection with the respective 20132014 or 20122013 plans.
9. SHARE-BASED COMPENSATION
Stock Option Plans
At June 30,December 31, 2013, the Company had one equity incentive plan, the 2005 Equity Incentive Plan (“2005 Equity Plan”). The 2005 Equity Plan, as amended, authorizes for issuance as stock options, stock appreciation rights, or stock awards an aggregate of 3,250,000 new shares of common stock to employees, directors or consultants. The total plan reserve includes these new shares and shares reserved under prior plans, allowing for the issuance of up to 4,999,564 shares. At June 30,December 31, 2013, there were options outstanding covering 2,870,6392,712,000 shares of common stock under the 2005 Equity Plan and an additional 1,437,977837,634 shares of common stock available for grant.
Stock Option Activity
The following table summarizes information about stock option activity during the ninethree months ended June 30,December 31, 2013:
Number Weighted Average of Shares Exercise Price Outstanding October 1, 2012 Granted Forfeited/expired Exercised Outstanding June 30, 2013 Exercisable June 30, 2013 Number of Shares Weighted Average Exercise Price Outstanding October 1, 2013 Granted Forfeited/expired Exercised Outstanding December 31, 2013 Exercisable December 31, 2013 3,463,339 $ 1.31 4,000 $ 0.94 (472,000 ) $ 1.72 (124,700 ) $ 0.84 2,870,639 $ 1.26 2,387,960 $ 1.23 2,394,476 $ 1.89 682,500 $ 1.73 (7,500 ) $ 1.93 (357,476 ) $ .54 2,712,000 $ 2.02 1,957,140 $ 2.08
Options outstanding are exercisable at prices ranging from $0.46$0.93 to $3.13 and expire over the period from 20132014 to 2023 with an average life of 5.06.2 years. The aggregate intrinsic value of options outstanding and exercisable at June 30,December 31, 2013 was $444,108$643,465 and $443,256,$497,002, respectively.
Share-Based Compensation
The Company recorded share-based compensation expense and classified it in the condensed consolidated statements of operations as follows:
Three months ended Nine months ended June 30, June 30, Cost of revenue Selling, general and administrative Research and development Total Three months ended December 31, 2013 2012 Cost of revenue Selling, general and administrative Research and development Total 2013 2012 2013 2012 $ 1,180 $ 6,070 $ 6,385 $ 19,195 178,777 174,873 539,652 411,075 11,798 18,366 36,021 46,509 $ 191,755 $ 199,309 $ 582,058 $ 476,779 �� $ 2,058 $ 3,899 131,176 189,831 16,580 12,248 $ 149,814 $ 205,978
The employee stock options granted in the ninethree months ended June 30,December 31, 2013 and 2012 had a weighted-average estimated fair value of $0.64$0.85 per share and $0.88$0.70 per share, respectively, using the Black-Scholes option pricing model with the following weighted-average assumptions (annualized percentages):
Nine months ended June 30, 2013 2012 Volatility Risk-free interest rate Forfeiture rate Dividend yield Expected life in years Three months ended December 31, 2013 2012 Volatility Risk-free interest rate Forfeiture rate Dividend yield Expected life in years 77.0% - 81.0% 81.0% - 82.0% 0.93% - 1.08% 0.76% - 1.10% 10.0% 10.0% 0.0% 0.0% 6.4 5.4 - 6.4 65.0% - 76.0% 81.0 % 0.6% - 2.0% 0.9 % 10.0% 10.0 % 0.0% 0.0 % 3.2 - 6.5 6.4
The Company has never paid cash dividends and has no present intention to pay cash dividends. 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.
Since the Company has an NOL carryforward as of June 30,December 31, 2013, no excess tax benefit for the tax deductions related to share-based awards was recognized for the ninethree months ended June 30,December 31, 2013 and 2012. As of June 30,December 31, 2013, there was approximately $500,000$800,000 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 1.11.7 years.
10. STOCKHOLDERS’ EQUITY
Summary
The following table summarizes changes in the components of stockholders’ equity during the ninethree months ended June 30,December 31, 2013:
Additional Total Common Stock Paid-in Accumulated Stockholders' Shares Amount Capital Deficit Equity Balances, September 30, 2012 Issuance of common stock upon exercise of stock options Share-based compensation expense Net loss Balances, June 30, 2013 Common Stock Treasury Additional Paid-in Accumulated Total Stockholders' Shares Amount Stock Capital Deficit Equity Balances, September 30, 2013 Issuance of common stock upon exercise of stock options, net Share-based compensation expense Repurchase of common stock Treasury shares Net income Balances, December 31, 2013 32,374,499 $ 324 $ 86,358,011 $ (63,936,566 ) $ 22,421,769 124,700 1 105,227 - 105,228 - - 582,058 - 582,058 - - - (1,668,164 ) (1,668,164 ) 32,499,199 $ 325 $ 87,045,296 $ (65,604,730 ) $ 21,440,891 32,900,705 $ 329 $ 87,434,834 $ (62,673,754 ) $ 24,761,409 357,476 4 193,060 193,064 149,814 149,814 (33,012 ) (1 ) (62,176 ) (62,177 ) (19,796 ) $ (37,420 ) (37,420 ) 131,563 131,563 33,205,373 $ 332 $ (37,420 ) $ 87,715,532 $ (62,542,191 ) $ 25,136,253
Stock Purchase Warrants
At June 30,December 31, 2013, the Company had 1,627,945 shares purchasable under outstanding warrants at an exercise price of $2.67 which are exercisable through February 4, 2016.
Share Buyback Program
11. (LOSS) INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Nine Months Ended June 30, June 30, 2013 2012 2013 2012 Basic (Loss) income available to common stockholders Weighted average common shares outstanding Basic (loss) income per common share Diluted (Loss) income available to common stockholders Weighted average common shares outstanding Assumed exercise of dilutive options and warrants Weighted average dilutive shares outstanding Diluted (loss) income per common share Potentially dilutive securities outstanding at period end excluded from the diluted computation as the inclusion would have been antidilutive: Options Warrants Total $ (1,108,410 ) $ 200,376 $ (1,668,164 ) $ 222,434 32,499,199 32,374,499 32,499,199 32,374,499 $ (0.03 ) $ 0.01 $ (0.05 ) $ 0.01 $ (1,108,410 ) $ 200,376 $ (1,668,164 ) $ 222,434 32,499,199 32,374,499 32,499,199 32,374,499 0 1,118,445 0 794,479 32,499,199 33,492,944 32,499,199 33,168,978 $ (0.03 ) $ 0.01 $ (0.05 ) $ 0.01 2,870,639 901,700 2,870,639 891,700 1,627,945 1,627,945 1,627,945 1,627,945 4,498,584 2,529,645 4,498,584 2,519,645
12. MAJOR CUSTOMERS
For the three months ended June 30, 2013, revenues from one customer accounted for 20% of revenues, and for the nine months ended June 30, 2013, revenues from two customers accounted for 19% and 11% of revenues, respectively, with no other single customer accounting for more than 10% of revenues. At June 30, 2013, accounts receivable from six customers accounted for 18%, 17%, 12%, 11%, 11% and 11% of total accounts receivable, respectively, with no other single customer accounting for more than 10% of the accounts receivable balance.
For the three months ended June 30, 2012, revenues from one customer accounted for 39% of revenues, and for the nine months ended June 30, 2012, revenues from three customers accounted for 18%, 11% and 10% of revenues, with no other single customer accounting for more than 10% of revenues. At June 30, 2012, accounts receivable from four customers accounted for 19%, 14%, 13% and 11% of total accounts receivable, respectively, with no other single customer accounting for more than 10% of the accounts receivable balance.
13. SUBSEQUENT EVENTS
In July 2013, the Company’s Board of Directors approved a share buyback program under which the Company may repurchase up to $3 million of its outstanding common shares from time to time onshares. In November 2013, the open market and in privately negotiated transactions, depending on market conditions, share price and other factors. This buyback program will be effective throughBoard of Directors authorized the repurchase of an additional $1 million of the Company’s outstanding common shares. The repurchase authorization expires December 31, 2013.2014. During the quarter ended December 31, 2013, the Company purchased 52,808 shares at an average price paid per share of $1.89 for a total cost of $99,597. At December 31, 2013, 33,012 of these shares were retired, and 19,796 were reported as treasury shares.
11. INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended December 31, 2013 2012 Basic Income (loss) available to common stockholders Weighted average common shares outstanding Basic income (loss) per common share Diluted Income (loss) available to common stockholders Weighted average common shares outstanding Assumed exercise of dilutive options and warrants Weighted average dilutive shares outstanding Diluted income (loss) per common share Potentially dilutive securities outstanding at period end excluded fromthe diluted computation as the inclusion would have been antidilutive: Options Warrants Total $ 131,563 $ (100,376 ) 33,028,646 32,399,199 $ 0.00 $ 0.00 $ 131,563 $ (100,376 ) 33,028,646 32,399,199 444,936 - 33,473,582 32,399,199 $ 0.00 $ 0.00 1,751,500 2,617,857 1,627,945 1,627,945 3,379,445 4,245,802
12. MAJOR CUSTOMERS
For the three months ended December 31, 2013, revenues from one customer accounted for 11% of total revenues, with no other single customer accounting for more than 10% of revenues. At December 31, 2013, accounts receivable from four customers accounted for 31%, 19%, 11% and 10% of total accounts receivable, respectively, with no other single customer accounting for more than 10% of the accounts receivable balance.
For the three months ended December 31, 2012, revenues from two customers accounted for 28% and 13% of total revenues, respectively, with no other single customer accounting for more than 10% of revenues. At December 31, 2012, accounts receivable from three customers accounted for 26%, 25% and 14% of total accounts receivable, respectively, with no other single customer accounting for more than 10% of the accounts receivable balance.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 interim 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, 2012.2013.
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
Overview
LRAD CorporationOur Company develops and delivers highly intelligible, directed acoustic products that beam, focus and control sound over short and long distances. By placing sound only where needed, we not only enhance many typical speaker applications, but we offer novel sound applications that conventional speakers cannot achieve. We offer a variety of directional sound products, which meet a broad range of requirements from communicating with and deterring threats over distances up to 300 meters with our hand-held LRAD 100X to distances in excess of 3,500 meters with our LRAD 2000X. Since 1996, we have been at the forefront developing new acoustic innovations to project, focus, shape and control sound and we believe we have established a significant competitive advantage in our principal markets. In 2007, we completely redesigned our LRAD products, introducing the LRAD-X product line, with improved quality and functionality. Through increased focus and investment in worldwide sales and marketing activities, our Long Range Acoustic Device® or LRAD® pioneered a new worldwide market, selling into over 65 countries, for directional long-range acoustic hailing devices (“AHDs”).
In the quarter ended June 30, 2013, revenues were $2,157,644 compared to $3,160,911Revenues in the quarter ended June 30, 2012. In spite of continued budget uncertainty, U.S. Defense spending improved in the quarter as weDecember 31, 2013, were awarded a $12.2 million multi-year contract from the U.S. Navy. Shipments under the new U.S. Navy contract commence$3,822,630, compared to $2,980,107 in the quarter ended September 30, 2013 with additional shipments anticipatedDecember 31, 2012. The increase in future quarters. Delaysrevenues was primarily due to strong sales for oil platforms and vessels as well as in the receipt of other expected orderspublic safety and security sectors. In addition, a $1.3 million order for a national police force in our pipeline resultedSoutheast Asia was scheduled to ship in the first fiscal quarter, but was delayed due to a decreasesupply issue and will now ship in quarterly revenues as comparedthe second fiscal quarter. The international market continues to be a large opportunity for us, particularly in the quarter ended June 30, 2012. We believe these expected orders are forthcoming, but the timing of requirements, approval processespublic safety and funding make them difficult to forecast.security sectors. We continue to pursue internationalfunding opportunities for our products with the U.S. Army as well as new markets as a resultthe 2014 U.S. Department of Defense (“DOD”) appropriations bill is being finalized and the 2015 DOD appropriations bill is being developed. In addition, we have increased selling efforts in the mass notification market where our recently releasedregular and smaller-sized LRAD 360X and LRAD 2000X products.omnidirectional products provide an effective solution. Gross margin which was negatively impacted by the reduced quarterly revenue, was 42%51% of net revenues in the quarter ended December 31, 2013, compared to 50% of net revenues forin the quarter ended June 30, 2012.prior year first quarter. Operating expenses increased by $223,689 or 14%, primarily due to an increase in our business development team to allow us to support our expanded selling efforts, particularly in the mass notification market. On a quarter over quarter basis, our revenues are expected to remain uneven.
Our LRAD-X product line uses directionality and focused acoustic output to clearly transmit critical information, instructions and warnings in excess ofmore than 3,500 meters. The LRAD-X product line features clearimproved voice intelligibility and is availablemeets the military’s stringent environmental requirements in a number of packages and form factors that meet the military’s stringent environmental requirements. Throughfactors.Through the use of powerful voice commands, prerecorded messages in multiple languages, and deterrent tones, the LRAD creates large safety zones can be created while determining the intent and influencing the behavior of potential security threats. Ouran intruder. We continue to expand our LRAD-X product line providesto provide a complete range of systems from single useroperator portable to permanently installed, remotely operated. Our LRAD products have been competitively selected over other commercially available systems by U.S. and several foreign militaries. Our current LRAD-X product line includes the following:
LRAD 2000X—launched in fiscal 2012 to meet the requirements of larger security applications—is our largest and loudest AHD and broadcasts highly intelligible voice communication that can be clearly heard and understood over distances in excess of 3,500 meters. This unit is designed to be highly effective in perimeter and border security applications.
LRAD 1000X—selected by the U.S. Navy as its AHD for Block 0 of the Shipboard Protection System—can be manually operated to provide long distance hailing and warning with highly intelligible communication. This unit is available in both fully-integrated and remotely-operated electronics.
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LRAD 500X—selected by the U.S. Navy and U.S. Army as their AHD for small vessels and vehicles—is lightweight and can be easily transported to provide security personnel long-range communications and a highly effective hailing and warning capability where needed.
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LRAD 300X—a lightweight mid-range AHD developed for small vessels and manned and unmanned vehicles and aircraft—is available with both fully integrated and remotely-operated electronics.
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LRAD 100X—a self-contained, battery powered, portable system designed for use in a variety of mass notification, law enforcement and commercial security applications—is ideally suited for short-range perimeter security and communications.
LRAD-RX—selected by the U.S. Navy after a competitive bid as its AHD for Block 2 of the Shipboard Protection System— is our solution for remotely controlled security. The LRAD-RX enables system operators to detect and communicate with an intruder over long distances. It features an LRAD 1000X emitter head, integrated camera, high-intensity searchlight and our proprietary, robust, and Internet protocol-addressable full pan and tilt drive system for precise aiming and tracking. The LRAD-RX can also be integrated with radar to provide automated intruder alerts. Because of its automated capabilities, the LRAD-RX is intended to reduce manpower requirements and false alarms while providing an intelligent, cost-effective security solution.
In 2012, to meet the needs of the growing worldwide mass notification market, and taking advantage of our LRAD technology, we designed and developed the LRAD 360. Most mass notification systems are primarily sirens. In addition to a loud deterrent tone, the LRAD 360 provides the same highly intelligible voice clarity as the rest of the LRAD product line. However, it is designed to transmit communications and warnings over a 360-degree area, unlike the more directional LRAD products. We are in the process of developing a product line to meet this market and have launched the following products to date:
LRAD 360X—launched in fiscal 2012 —is designed with 360-degree directionality to provide features needed for mass notification and emergency warning capabilities. The LRAD 360X is targeted for market applications including tsunami, hurricane and tornado warnings and communications, campus and military base alerts, border and perimeter security, wildlife safety and control and asset protection.
LRAD 360Xm—launched in 2013—a smaller version of the LRAD 360X product for use in smaller applications.
Overall Business Outlook
We are experiencing positive response and increased acceptance of our products. We believe we have a solid technology and product foundation with our LRAD-X product line, and we have expanded our product line seeking to service new markets and customers for greater business growth. We believe that we have strong market opportunities within the worldwide government and military sector, as well as increased commercial applications as a result of continued global threats to governments, commerce and law enforcement, and in wildlife preservation and control applications. We intend to continue to expand our selling efforts internationally, especially in the Middle East and South America where we believe there is greater opportunity for the sale of our products. We also plan to continue to expand our presence in the mass notification market with our LRAD 360X product line. Our selling network has expanded through the addition of business development employees as well as continuing to include a number ofimprove 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 through the balance ofin fiscal 20132014 due to extremecontinuing international economic and geopolitical conditions in certain countries. A weak recovery of financial markets and continued lack of confidence in major economies could impact the operation of our business.regions. We anticipate continued uncertainty with U.S. Military spending due to ongoing defense budget delays inand spending reductions as the passage of the FY14 Federal Budget and details of the Overseas Contingency Operations (OCO) budget.U.S. government tries to reduce our national debt. We continue to pursue large business opportunities, but it is difficult to forecastanticipate how long it will take to close these opportunities, or if they will ever ultimately result in product sales.come to fruition.
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, 2012.2013. 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,December 31, 2013 and 2012
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 December 31, 2013 December 31, 2012 % of Net % of Net Increase/(Decrease) Amount Revenue Amount Revenue Amount % Revenues: Product sales Contract and other Cost of revenues Gross profit Operating Expenses: Selling, general and administrative Research and development Income (loss) from operations Other Income Income (loss) from operations before income taxes Income tax expense na Net income (loss) $ 3,556,062 93.0% $ 2,762,345 92.7% $ 793,717 28.7% 266,568 7.0% 217,762 7.3% 48,806 22.4% 3,822,630 100.0% 2,980,107 100.0% 842,523 28.3% 1,878,079 49.1% 1,494,284 50.1% 383,795 25.7% 1,944,551 50.9% 1,485,823 49.9% 458,728 30.9% 1,424,544 37.3% 1,172,475 39.3% 252,069 21.5% 393,541 10.3% 421,921 14.2% (28,380 ) (6.7% ) 1,818,085 47.6% 1,594,396 53.5% 223,689 14.0% 126,466 3.3% (108,573 ) (3.6% ) 235,039 216.5% 5,197 0.1% 8,197 0.2% (3,000 ) (36.6% ) 131,663 3.4% (100,376 ) (3.4% ) 232,039 231.2% 100 0.0% - 0.0% 100 $ 131,563 3.4% $ (100,376 ) (3.4% ) $ 231,939 231.1%
Three months ended June 30, 2013 June 30, 2012 % of Net % of Net Increase/(Decrease) Amount Revenue Amount Revenue Amount % Revenues: Product sales Contract and other Cost of revenues Gross profit Operating Expenses: Selling, general and administrative Research and development (Loss) income from operations Other Income (Loss) income from operations before income taxes Income tax benefit Net (loss) income $ 1,905,518 88.3% $ 2,936,179 92.9% $ (1,030,661 ) (35.1% ) 252,126 11.7% 224,732 7.1% 27,394 12.2% 2,157,644 100.0% 3,160,911 100.0% (1,003,267 ) (31.7% ) 1,242,190 57.6% 1,586,018 50.2% (343,828 ) (21.7% ) 915,454 42.4% 1,574,893 49.8% (659,439 ) (41.9% ) 1,607,237 74.5% 1,120,358 35.4% 486,879 43.5% 423,434 19.6% 414,457 13.1% 8,977 2.2% 2,030,671 94.1% 1,534,815 48.5% 495,856 32.3% (1,115,217 ) (51.7% ) 40,078 1.3% (1,155,295 ) (2882.6% ) 6,807 0.3% 6,780 0.2% 27 0.4% (1,108,410 ) (51.4% ) 46,858 1.5% (1,155,268 ) (2465.5% ) - 0.0% (153,518 ) (4.9% ) 153,518 100.0% $ (1,108,410 ) (51.4% ) $ 200,376 6.4% $ (1,308,786 ) (653.2% )
The decreaseincrease in revenues was primarily due to delaysstrong sales for oil platforms and vessels as well as public safety orders. In addition, a $1.3 million order for a national police force in Southeast Asia was scheduled to ship in the receiptfirst fiscal quarter, but was delayed due to a supply issue and delivery of orderswill now ship in the quarter ended June 30, 2013 compared to the prior year.second fiscal quarter. Uncertainty on U.S. defense spending continued through the current quarter as a result of sequestration and the delayed passage of the FY13 continuing resolution.quarter. Due to the budgetary cycles of our customer base and the lack of established markets for our proprietary products, we expect continued uneven quarterly revenues in future periods.
At June 30,December 31, 2013, we had aggregate deferred revenue of $270,559 collected$171,666 for prepayments from a license agreementcustomers in advance of recognized revenue. This revenue component is subject to significant variability based on the timing, amount and recognition of new arrangements or payment terms.product shipment.
Gross Profit
The decreaseincrease in gross profit in the quarter was primarily due to decreased revenue and some unfavorable product mix, partially offset by favorable manufacturing overhead spending.increased revenue.
Our products have varying gross margins, so product sales mix will materially 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 reflected a $394,632an increase in legalof $219,983 for consulting fees and other professional fees related to the current lawsuit, which the parties are seeking to settle with the Delaware Court, and responding to the threatened proxy contest, which was settled in the quarter ended June 30, 2013. Additional increases included $91,221 for salaries as a result of hiring additional business development personnel, $51,832 for commission expense to third party representatives, $32,543 for trade shows, $31,806 for increased travel and $38,894$3,336 for costs related to the proxy and annual meeting which was held in an earlier quarter of the prior year,other reductions. These expenses were partially offset by $30,363 savingsa decrease of $58,655 for moving expensesnon-cash share-based compensation expense due to moving the Company’s office in the prior yearfully vested stock options and $7,505 of other reductions.$28,776 for legal fees.
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three months ended June 30,December 31, 2013 and 2012 of $178,777$131,176 and $174,873,$189,831, respectively.
We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize potential opportunities. Commission expenses will fluctuate based on the nature of our sales. In addition, we expect some additional legal expenses to continue in the third fiscal quarter due to the recent lawsuit and proxy matters. This may result in increased selling, general and administrative expenses in the future.
Research and Development Expenses
Research and development expenses reflected a small spending increase,decreased compared to the prior year primarily due to increased rent allocation in the new building.favorable travel expenses.
Included in research and development expenses for the three months ended June 30,December 31, 2013 and 2012 was $11,798$16,580 and $18,366$12,248 of non-cash share-based compensation costs, respectively.
Research and development costs vary period to period due to the timing of projects, the availability of funds for research and development and the timing and extent of the use of outside consulting, design and development firms. We continually improve our product offerings and we have further expanded the product line-up in 20132014 and 20122013 with new products, customizations and enhancements. Based on current plans, we expect research and development costs to continue in the current fiscal year on a basis comparable to the prior year.
Net Income
Loss from Operations
The increase in the loss from operationsnet income was primarily attributabledue to the decreaseincrease in revenues and gross margin, and an increase in legal and professional fees.
Net Loss
The increase in net loss was primarily due to the decrease in revenues and gross margin and an increase in legal and professional fees. We did not recognize any income tax expense in the current year, compared to a benefit of $153,518 in the quarter ended June 30, 2012.
Comparison of Results of Operations for the Nine Months Ended June 30, 2013 and 2012
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.
Nine months ended June 30, 2013 June 30, 2012 % of Net % of Net Increase/(Decrease) Amount Revenue Amount Revenue Amount % 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 (Loss) income from operations Other Income (Loss) income from continuing operations before income taxes Income tax expense (benefit) Net (loss) income $ 7,555,330 90.7% $ 8,821,963 96.2% $ (1,266,633 ) (14.4% ) 772,231 9.3% 351,024 3.8% 421,207 120.0% 8,327,561 100.0% 9,172,987 100.0% (845,426 ) (9.2% ) 4,564,215 54.8% 4,532,497 49.4% 31,718 0.7% 3,763,346 45.2% 4,640,490 50.6% (877,144 ) (18.9% ) 4,149,971 49.8% 3,370,211 36.7% 779,760 23.1% 1,302,102 15.7% 1,225,165 13.4% 76,937 6.3% 5,452,073 65.5% 4,595,376 50.1% 856,697 18.6% (1,688,727 ) (20.3% ) 45,114 0.5% (1,733,841 ) (3843.2% ) 22,163 0.3% 26,502 0.3% (4,339 ) (16.4% ) (1,666,564 ) (20.0% ) 71,616 0.8% (1,738,180 ) (2427.1% ) 1,600 0.0% (150,818 ) (1.6% ) 152,418 101.1% $ (1,668,164 ) (20.0% ) $ 222,434 2.4% $ (1,890,598 ) (850.0% )
Revenues decreased by 9.2% compared to the same period in the prior year, primarily due to uncertainty on defense spending through much of the year as a result of sequestration and the delayed passage of the FY13 continuing resolution. Contract and other revenue for the nine months ended June 30, 2013 includes $591,094 for an annual maintenance agreement for units sold to a foreign military in fiscal 2011, compared to $197,031 for only one quarter in the prior year. Due to the budgetary cycles of our customer base and the lack of established markets for our proprietary products, we expect continued uneven quarterly revenues in future periods.
At June 30, 2013, we had aggregate deferred revenue of $270,559 collected from a license agreement in advance of recognized revenue. This revenue component is subject to significant variability based on the timing, amount and recognition of new arrangements or payment terms.
Gross Profit
The decrease in gross profit year to date was primarily due to lower revenues, unfavorable product mix and an increase in contracted annual maintenance costs when compared to the costs for the first year warranty period in the prior year, related to a large foreign military sale in March 2011.
Our products have varying gross margins, so product sales mix will materially 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 reflected a $994,946 increase in legal and other professional fees related to the current lawsuit, which the parties are seeking to settle with the Delaware Court, and responding to the threatened proxy contest, which was settled in the quarter ended June 30, 2013, $128,577 increase in non-cash share-based compensation and $93,688 increase in salaries and consulting expenses, partially offset by a $103,654 decrease in commissionincreased expense for business development personnel and consultants to our contracted sales representatives, $57,940 decrease in travel expense and $53,858 of other spending reductions.increase selling efforts.
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the nine months ended June 30, 2013 and 2012 of $539,652 and $411,075, respectively.
We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize potential opportunities. Commission expenses will fluctuate based on the nature of our sales. In addition, we expect legal expenses related to the lawsuit and proxy matters to continue into the third fiscal quarter. This may result in increased selling, general and administrative expenses in the future.
Research and Development Expenses
Research and development expenses reflected a $43,496 increase in rent due to increased square footage in our new office facility and a $40,302 increase in product development costs, offset by $6,861 of spending reductions.
Included in research and development expenses for the nine months ended June 30, 2013 and 2012 was $36,021 and $46,509 of non-cash share-based compensation costs, respectively.
In the nine months ended June 30, 2013 and 2012, we reviewed the ongoing value of our capitalized intangible assets. As a result of this review, we reduced the value of these patents by $0 and $18,205 for the nine months ended June 30, 2013 and 2012, respectively.
Research and development costs vary period to period due to the timing of projects, the availability of funds for research and development and the timing and extent of the use of outside consulting, design and development firms. We continually improve our product offerings and we further expanded the product line-up in 2013 and 2012 with new products, customizations and enhancements. Based on current plans, we expect research and development costs to continue in the current fiscal year on a basis comparable to the prior year.
(Loss) Income from Operations
The decrease in income from operations was primarily attributable to the decrease in revenues and gross profit and an increase in legal and professional fees.
Net (Loss) Income
The decrease in net income was primarily the result of the decrease in revenues and gross profit, and an increase in legal and professional fees.
Liquidity and Capital Resources
Cash and cash equivalents at June 30,December 31, 2013 was $15,057,571,$18,086,313, compared to $13,859,505$15,805,195 at September 30, 2012.2013. The change in cash and cash equivalents was primarily the result of a reduction in accounts receivable from strong year-end shipments in September 30, 2012,2013, partially offset by a decrease in accounts payable as we paid for the inventory purchases required for fourth quarter shipments and an increase in inventory based on forecasted requirements. Other than cash and cash equivalents and expected future cash flows from operating activities in subsequent periods, we have no other unused sources of liquidity at this time. The Company has approved a share buyback program that could result in the use of up to $3 million to repurchase outstanding common shares through December 31, 2013.
At June 30, 2013 and September 30, 2012, our working capital was $20,502,082 and $21,312,250, respectively.
Principal factors that could affect our liquidity include:
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ability to meet sales projections;
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government spending levels;
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introduction of competing technologies;
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product mix and effect on margins;
ability to reduce current inventory levels;
product acceptance in new markets; and
value of shares repurchased
Principal factors that could affect our ability to obtain cash from external sources include:
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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 next twelve months. 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 consolidated statements of cash flows, are summarized in the table below:
Three months ended December 31, 2013 2012 Cash provided by (used in): Operating activities Investing activities Financing activities 2,312,524 2,337,983 (124,873 ) (77,638 ) 93,467 19,228
Operating Activities
Our net cash provided byNet income of $131,563 for the three months ended December 31, 2013 was adjusted for $191,192 of non-cash items that include share-based compensation expense, depreciation and amortization and inventory obsolescence. Cash generated from operating activities was $1,229,921 for the nine months ended June 30, 2013, compared to $646,457 for the nine month ended June 30, 2012. Net cash provided by operating activities for the nine months ended June 30, 2013 resulted primarily fromreflected a reductiondecrease in accounts receivable of $4,351,696$3,061,072 due to collections from a high year-end balance, partially offset by a net loss offset bydecrease in prepaid expenses not requiringand other and prepaid expenses and other – noncurrent of $538,029, primarily for the usereceipt of cash of $1,195,136a reimbursement from our insurance company related to last year’s lawsuit, and increased inventory based on the current forecast of $1,913,407. Net cash provided by operating activities during the nine months ended June 30, 2012 resulted from $864,667 net income increased by expenses not requiring the use of cash and $2,994,406 from reduced accounts receivable from a higher year-end balance, partially offset by $2,255,563 for reducedan increase in accrued and other liabilities resulting from bonus paymentsof $182,160. Cash used in operating activities included accounts payable of $1,027,441 for 2011 which were paid inpayment of year-end inventory requirements, increased inventories of $752,689 based on our current sales forecast and $11,362 used for warranty settlements. Net loss of $100,376 for the ninethree months ended June 30,December 31, 2012 $487,688was adjusted for increased$202,486 of non-cash items that include share-based compensation expense, depreciation and amortization, inventory obsolescence and $447,196 for decreased accounts payable.
At June 30, 2013, we had netimpairment of patents. Cash generated from operating activities reflected a decrease in accounts receivable of $1,166,598,$3,249,384, a decrease in prepaid expenses and other and prepaid expenses and other – noncurrent of $131,777, and an increase in accrued and other liabilities of $113,452. Cash used in operating activities included a $1,050,152 increase in inventory, a $204,313 decrease in accounts payable, and $4,275 for warranty settlements.
We had accounts receivable of $1,901,232 at December 31, 2013, compared to $5,517,894 in accounts receivable$4,958,532 at September 30, 2012.2013. The level of trade accounts receivable at December 31, 2013 represented approximately 46 days of revenues for the quarter ended June 30, 2013 represented approximately 49compared to 52 days of revenue, compared to 90 days of revenuerevenues for the quarter endedat September 30, 2012.2013. Terms with individual customers vary greatly. We typically require thirty-day terms from our customers. Our receivables can vary significantlydramatically due to overall sales volumesvolume and due to quarterly variations in sales and timing of shipments to and receipts from large customers and the timing of contract payments.
At December 31, 2013 and September 30, 2013, our working capital was $24,036,692 and $23,703,975, respectively.
Investing Activities
We use cash in investing activities primarily for the purchase of tooling, computer equipment and software, and investment in new or existing patents. Cash used in investing activities for equipment and patents was $137,083$124,873 and $156,504$77,638 for the ninethree months ended June 30,December 31, 2013 and 2012, respectively. We anticipate some additional expenditure for equipment and patents during the balance of fiscal year 2013.2014.
Financing Activities
In the ninethree months ended June 30,December 31, 2013 and 2012, we received $105,228$193,064 and $19,228, respectively, from the exercise of stock options. We did not receive any proceeds from financing activitiesIn July 2013, the Board of Directors approved a share buyback program under which the Company may repurchase up to $3 million of its outstanding common shares. In November 2013, the Board of Directors authorized the repurchase of an additional $1 million of the Company’s outstanding common shares. The repurchase authorization expires December 31, 2014. During the quarter ended December 31, 2013, the Company purchased 52,808 of its outstanding shares at an average price paid per share of $1.89 for a total cost of $99,597, with none repurchased in the nine months ended June 30, 2012.prior year.
Recent Accounting Pronouncements
There were no adopted or pending recent accounting pronouncements that are expected to have a material impact on our condensed consolidated financial statements for the ninethree months ended June 30,December 31, 2013.
Item 3. |
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Interest Rate Risk
The Company’s interest income is sensitive to fluctuations in the general level of U.S. interest rates. Changes in U.S. interest rates affect the interest earned on the Company’s cash and cash equivalents.cash. The Company’s exposure to market risk for changes in interest rates is minimal as a result of maintaining cash in savings accounts and short term money market accounts. The Company currently does not have any debt that could be subject to interest fluctuation or market risk.
Foreign Currency Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, all 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,December 31, 2013.
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,December 31, 2013, 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 financial statements for pending litigation. On July 24, 2012,Currently, there are no pending material legal proceedings to which the Company was served with a complaint filed in the Delaware Court of Chancery by Iroquois Master Fund Ltd., a shareholder of the Company (“Iroquois”), against the Company’s board of directors (the “Board”), its Chief Executive Officer and Chief Financial Officer (the “Delaware Litigation”). The action is a purported derivative action,party or to which alleges breachany of fiduciary duty and other claims against the individual defendants based on the issuance of stock options to them, which the plaintiff alleges were granted in violation of the terms of the Company’s 2005 Equity Incentive Plan. The Company was also named in the action as a nominal defendant against which no recoveryits property is sought. The plaintiff seeks rescission or repricing of the stock options at issue and other damages, purportedly on behalf of the Company. The defendants filed a motion to dismiss the complaint. Rather than oppose the motion, the plaintiff filed an amended complaint on November 19, 2012. Defendants filed a motion to dismiss the amended derivative complaint on December 17, 2012. The Company and the individual defendants seek dismissal of the complaint on the grounds that the plaintiff has failed to comply with Delaware law in filing the complaint. The individual defendants seek dismissal on the additional grounds that the Complaint fails to state a legal claim against them. A hearing on the defendants’ motion to dismiss the amended derivative complaint was held March 4, 2013.subject.
The Company received a notice and a Schedule 13D was filed by Iroquois with the SEC on January 17, 2013 announcing Iroquois’ intention to nominate a slate of five directors to stand for election at the Company’s 2013 Annual Meeting of Stockholders (the “annual meeting”). The Company’s Nominating and Corporate Governance Committee reviewed and considered the nominations as well as qualified individuals who were submitted by other stockholders to serve on the Board. On May 21, 2013, the Company entered into an agreement (the “Settlement Agreement”) with Iroquois to settle the potential proxy contest pertaining to the election of directors to the Board at the annual meeting. The Company agreed, among other things, to nominate three new nominees to the Board and to pay to Iroquois its legal and advisory fees in connection with its nomination of director candidates, in the amount of $301,496, which was paid in the quarter ended June 30, 2013. Also as part of the settlement, the Company and Iroquois agreed to execute a Stipulation of Settlement seeking to settle the Delaware Litigation brought by Iroquois in July 2012. As part of the settlement, Thomas R. Brown, President and Chief Executive Officer of the Company, has agreed to increase the exercise price of the option granted to Mr. Brown in May 2012 to $3.00 per share. A hearing is scheduled for September 10, 2013 to request approval of the Stipulation of Settlement by the Delaware Court. If the Delaware Court approves the Stipulation, Iroquois’ Counsel shall apply to the Delaware Court for an award of attorneys’ fees and expenses of no more than $340,000.
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.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.In August 2013, the Board of Directors approved a share buyback program under which the Company may repurchase up to $3 million of its outstanding common shares. In November 2013, the Board of Directors authorized the repurchase of an additional $1 million of the Company’s outstanding common shares. The repurchase authorization expires December 31, 2014. Shares repurchased under the plan have been, or will be, retired. At December 31, 2013, we held 19,796 of treasury shares. The following table discloses the stock repurchases during the quarter ended December 31, 2013:
Period Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced programs Maximum dollar value of shares that may yet be purchased under the program October 1, 2013 - October 31, 2013 November 1, 2013 - November 30, 2013 December 1, 2013 - December 31, 2013 Total ---- ---- ---- $4,000,000 ---- ---- ---- $4,000,000 52,808 $1.89 52,808 $3,900,403 52,808 52,808
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Mine Safety Disclosures. |
Not Applicable.
Item 5. | Other Information. |
None.
Item 6. | Exhibits. |
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| Certification of Thomas R. Brown, 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 Katherine H. McDermott, 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 Thomas R. Brown, Principal Executive Officer and Katherine H. McDermott, Principal Financial Officer.* | |
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* | Filed concurrently herewith. |
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SIGNATURES
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.
LRAD CORPORATION | ||
Date: February 4, 2014 |
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| /s/ KATHERINE H. |
Katherine H. McDermott, Chief Financial Officer | ||
(Principal Financial Officer) |
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