UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended June 30,December 31, 2013

or

For the transition period from                        to                         .

Commission File Number: 000-24248

LRAD CORPORATION

(Exact name of registrant as specified in its charter)

(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.

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

LRAD Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

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		$	1,905,518			$	2,936,179			$	7,555,330			$	8,821,963
Contract and other			252,126				224,732				772,231				351,024
Total revenues			2,157,644				3,160,911				8,327,561				9,172,987
Cost of revenues			1,242,190				1,586,018				4,564,215				4,532,497
Gross profit			915,454				1,574,893				3,763,346				4,640,490
Operating expenses:
Selling, general and administrative			1,607,237				1,120,358				4,149,971				3,370,211
Research and development			423,434				414,457				1,302,102				1,225,165
Total operating expenses			2,030,671				1,534,815				5,452,073				4,595,376
(Loss) income from operations			(1,115,217	)			40,078				(1,688,727	)			45,114
Other income			6,807				6,780				22,163				26,502
(Loss) income from operations before income taxes			(1,108,410	)			46,858				(1,666,564	)			71,616
Income tax (benefit) expense			-				(153,518	)			1,600				(150,818	)
Net (loss) income		$	(1,108,410	)			200,376			$	(1,668,164	)			222,434
Net (loss) income per common share - basic and diluted		$	(0.03	)		$	0.01			$	(0.05	)		$	0.01
Weighted average common shares outstanding:
Basic			32,428,095				32,374,499				32,407,475				32,374,499
Diluted			32,428,095				33,492,944				32,407,475				33,168,978

		Three months ended December 31,
		2013				2012
Revenues:
Product sales		$	3,556,062			$	2,762,345
Contract and other			266,568				217,762
Total revenues			3,822,630				2,980,107
Cost of revenues			1,878,079				1,494,284
Gross profit			1,944,551				1,485,823
Operating expenses:
Selling, general and administrative			1,424,544				1,172,475
Research and development			393,541				421,921
Total operating expenses			1,818,085				1,594,396
Income (loss) from operations			126,466				(108,573	)
Other income			5,197				8,197
Income (loss) from operations before income taxes			131,663				(100,376	)
Income tax expense			100				-
Net income (loss)		$	131,563				(100,376	)
Net income per common share
Basic		$	0.00			$	0.00
Diluted		$	0.00			$	0.00
Weighted average common shares outstanding:
Basic			33,028,646				32,399,199
Diluted			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		$	(1,668,164	)		$	222,434
Adjustments to reconcile net (loss) income to net cashprovided by operating activities:
Depreciation and amortization			106,485				66,945
Provision for doubtful accounts			(400	)			-
Warranty provision			(834	)			(31,885	)
Inventory obsolescence			(219,419	)			112,189
Share-based compensation			582,058				476,779
Loss on sale or impairment of patents			5,138				18,205
Changes in operating assets and liabilities:
Accounts receivable			4,351,696				2,994,406
Inventories			(1,913,407	)			(487,687	)
Prepaid expenses and other			(24,674	)			(72,830	)
Prepaid expenses and other - noncurrent			140,625				69,859
Accounts payable			(86,671	)			(447,196	)
Warranty settlements			(11,585	)			(19,199	)
Accrued and other liabilities			(30,927	)			(2,255,563	)
Net cash provided by operating activities			1,229,921				646,457
Investing Activities:
Purchase of equipment			(134,349	)			(154,139	)
Patent costs paid			(2,734	)			(2,365	)
Net cash used in investing activities			(137,083	)			(156,504	)
Financing Activities:
Proceeds from exercise of stock options			105,228				-
Net cash provided by financing activities			105,228				-
Net increase in cash and cash equivalents			1,198,066				489,953
Cash and cash equivalents, beginning of period			13,859,505				13,870,762
Cash and cash equivalents, end of period		$	15,057,571			$	14,360,715
Supplemental Disclosure of Cash Flow Information
Cash (refunded) paid for taxes		$	(38,724	)		$	60,015

		Three months ended December 31,
		2013				2012
Operating Activities:
Net income (loss)		$	131,563			$	(100,376	)
Adjustments to reconcile net income (loss) to net cashprovided by operating activities:
Depreciation and amortization			35,203				30,716
Provision for doubtful accounts			(3,772	)			(200	)
Warranty provision			14,361				(9,445	)
Inventory obsolescence			(4,414	)			(29,701	)
Share-based compensation			149,814				205,978
Loss on sale or impairment of patents			-				5,138
Changes in operating assets and liabilities:
Accounts receivable			3,061,072				3,249,384
Inventories			(752,689	)			(1,050,152	)
Prepaid expenses and other			491,154				84,902
Prepaid expenses and other - noncurrent			46,875				46,875
Accounts payable			(1,027,441	)			(204,313	)
Warranty settlements			(11,362	)			(4,275	)
Accrued and other liabilities			182,160				113,452
Net cash provided by operating activities			2,312,524				2,337,983
Investing Activities:
Capital expenditures			(124,793	)			(76,655	)
Patent costs paid			(80	)			(983	)
Net cash used in investing activities			(124,873	)			(77,638	)
Financing Activities:
Repurchase of common stock			(99,597	)			-
Proceeds from exercise of stock options			193,064				19,228
Net cash provided by financing activities			93,467				19,228
Net increase in cash			2,281,118				2,279,573
Cash, beginning of period			15,805,195				13,859,505
Cash, end of period		$	18,086,313			$	16,139,078
Supplemental Disclosure of Cash Flow Information
Cash paid (refunded) for taxes		$	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		$	4,213,671			$	2,693,753
Finished goods			953,670				818,082
Work in process			319,760				61,859
			5,487,101				3,573,694
Reserve for obsolescence			(241,786	)			(461,205	)
		$	5,245,315			$	3,112,489

		December 31, 2013				September 30, 2013
Raw materials		$	4,303,861			$	3,941,203
Finished goods			1,160,901				605,240
Work in process			193,196				358,826
			5,657,958				4,905,269
Reserve for obsolescence			(313,105	)			(317,519	)
		$	5,344,853			$	4,587,750

  

 4.5. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

		December 31, 2013				September 30, 2013
Office furniture and equipment		$	775,301			$	769,799
Machinery and equipment			727,094				607,803
Leasehold improvements			55,298				55,298
			1,557,693				1,432,900
Accumulated depreciation			(1,229,158	)			(1,195,523	)
		$	328,535			$	237,377

 

		June 30, 2013				September 30, 2012
Machinery and equipment		$	601,187			$	525,020
Office furniture and equipment			771,889				716,625
Leasehold improvements			55,298				55,298
			1,428,374				1,296,943
Accumulated depreciation			(1,170,177	)			(1,084,080	)
		$	258,197			$	212,863

 5. INTANGIBLE ASSETS

Patents consisted of the following:

 

		June 30,  2013				September 30,  2012
Cost		$	350,582			$	358,925
Accumulated amortization			(211,999	)			(200,468	)
		$	138,583			$	158,457

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,
		2013				2012
Accrued expenses		$	117,788			$	197,032
Payroll and related			239,471				272,212
Warranty reserve			162,268				154,069
Customer deposits			5,324				10
Deferred revenue			-				419
Total		$	524,851			$	623,742
Other liabilities - noncurrent consisted of the following:
Deferred revenue - noncurrent		$	270,559			$	270,140
Deferred rent			119,177				43,433
Extended warranty			29,626				50,244
Total		$	419,362			$	363,817

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,
		2013				2012				2013				2012
Beginning balance		$	205,005			$	217,240			$	204,313			$	272,261
Warranty provision			(7,302	)			8,122				(834	)			(31,885	)
Warranty settlements			(5,809	)			(4,185	)			(11,585	)			(19,199	)
Ending balance		$	191,894			$	221,177			$	191,894			$	221,177
Short-term warranty reserve		$	162,268				169,907			$	162,268			$	169,907
Long-term warranty reserve			29,626				51,270				29,626				51,270
		$	191,894			$	221,177			$	191,894			$	221,177

		Three months ended December 31,
		2013				2012
Beginning balance		$	212,759			$	204,313
Warranty provision			14,361				(9,445	)
Warranty settlements			(11,362	)			(4,275	)
Ending balance		$	215,758			$	190,593

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			3,463,339			$	1.31
Granted			4,000			$	0.94
Forfeited/expired			(472,000	)		$	1.72
Exercised			(124,700	)		$	0.84
Outstanding June 30, 2013			2,870,639			$	1.26
Exercisable June 30, 2013			2,387,960			$	1.23

		Number of Shares				Weighted Average Exercise Price
Outstanding October 1, 2013			2,394,476			$	1.89
Granted			682,500			$	1.73
Forfeited/expired			(7,500	)		$	1.93
Exercised			(357,476	)		$	.54
Outstanding December 31, 2013			2,712,000			$	2.02
Exercisable December 31, 2013			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,
			2013				2012				2013				2012
Cost of revenue		$	1,180			$	6,070			$	6,385			$	19,195
Selling, general and administrative			178,777				174,873				539,652				411,075
Research and development			11,798				18,366				36,021				46,509
Total		$	191,755			$	199,309			$	582,058			$	476,779

		Three months ended December 31,						��
		2013				2012
Cost of revenue		$	2,058			$	3,899
Selling, general and administrative			131,176				189,831
Research and development			16,580				12,248
Total		$	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		77.0%	-	81.0%			81.0%	-	82.0%
Risk-free interest rate		0.93%	-	1.08%			0.76%	-	1.10%
Forfeiture rate			10.0%					10.0%
Dividend yield			0.0%					0.0%
Expected life in years			6.4				5.4	-	6.4

		Three months ended December 31,
		2013					2012
Volatility		65.0%	-	76.0%				81.0	%
Risk-free interest rate		0.6%	-	2.0%				0.9	%
Forfeiture rate			10.0%					10.0	%
Dividend yield			0.0%					0.0	%
Expected life in years		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			32,374,499			$	324			$	86,358,011			$	(63,936,566	)		$	22,421,769
Issuance of common stock upon exercise of stock options			124,700				1				105,227				-				105,228
Share-based compensation expense			-				-				582,058				-				582,058
Net loss			-				-				-				(1,668,164	)			(1,668,164	)
Balances, June 30, 2013			32,499,199			$	325			$	87,045,296			$	(65,604,730	)		$	21,440,891

		Common Stock								Treasury				Additional Paid-in				Accumulated				Total Stockholders'
		Shares				Amount				Stock				Capital				Deficit				Equity
Balances, September 30, 2013			32,900,705			$	329							$	87,434,834			$	(62,673,754	)		$	24,761,409
Issuance of common stock upon exercise of stock options, net			357,476				4								193,060								193,064
Share-based compensation expense															149,814								149,814
Repurchase of common stock			(33,012	)			(1	)							(62,176	)							(62,177	)
Treasury shares			(19,796	)						$	(37,420	)											(37,420	)
Net income																			131,563				131,563
Balances, December 31, 2013			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		$	(1,108,410	)		$	200,376			$	(1,668,164	)		$	222,434
Weighted average common shares outstanding			32,499,199				32,374,499				32,499,199				32,374,499
Basic (loss) income per common share		$	(0.03	)		$	0.01			$	(0.05	)		$	0.01
Diluted
(Loss) income available to common stockholders		$	(1,108,410	)		$	200,376			$	(1,668,164	)		$	222,434
Weighted average common shares outstanding			32,499,199				32,374,499				32,499,199				32,374,499
Assumed exercise of dilutive options and warrants			0				1,118,445				0				794,479
Weighted average dilutive shares outstanding			32,499,199				33,492,944				32,499,199				33,168,978
Diluted (loss) income per common share		$	(0.03	)		$	0.01			$	(0.05	)		$	0.01
Potentially dilutive securities outstanding at period end excluded from the diluted computation as the inclusion would have been antidilutive:
Options			2,870,639				901,700				2,870,639				891,700
Warrants			1,627,945				1,627,945				1,627,945				1,627,945
Total			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		$	131,563			$	(100,376	)
Weighted average common shares outstanding			33,028,646				32,399,199
Basic income (loss) per common share		$	0.00			$	0.00
Diluted
Income (loss) available to common stockholders		$	131,563			$	(100,376	)
Weighted average common shares outstanding			33,028,646				32,399,199
Assumed exercise of dilutive options and warrants			444,936				-
Weighted average dilutive shares outstanding			33,473,582				32,399,199
Diluted income (loss) per common share		$	0.00			$	0.00
Potentially dilutive securities outstanding at period end excluded fromthe diluted computation as the inclusion would have been antidilutive:
Options			1,751,500				2,617,857
Warrants			1,627,945				1,627,945
Total			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

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: