LRAD Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

See accompanying notes

 

 

LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

See accompanying notes

 

 

 

LRAD Corporation

Consolidated Statements of Comprehensive Loss

 

 

 

See accompanying notes

 

 

LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

See accompanying notes

 

 

 

LRAD Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Item 2.

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

 

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

 

Forward Looking Statements

 

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

 

Overview

 

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

 

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

 

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

 

LRAD systems are a technological breakthrough in broadcasting audible, highly intelligible voice messages and tones over long distances and high ambient noise using minimal power. Our AHD's meet stringent military requirements and are packaged in several form factors, from portable, hand held units to permanently installed, remotely operated systems. Through the use of powerful voice commands, prerecorded messages in multiple languages, and warning tones, our AHD's are designed to create large safety zones while determining the intent and influencing the behavior of security threats. We continue to expand our AHD product line to provide a complete range of systems and accessories, including our recently patented XL driver technology, which generates higher audio output in a smaller and lighter form factor. We have incorporated, and plan to continue incorporating, this proprietary technology into our AHD and ONE VOICE products.

 

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

  

Our products are designed to meet a broad range of diverse applications including emergency warning and mass notification, fixed and mobile military deployments, maritime, critical infrastructure, perimeter, commercial, border, and homeland security, law enforcement, emergency responder and fire rescue communications, asset protection, and wildlife preservation and control. By selling our industry-leading AHD's and advanced ONE VOICE mass notification systems into over 70 countries, we have created a new worldwide market and a recognized global brand. We continue to develop new acoustic innovations and believe we have established a significant competitive advantage in our principal markets. 

 

Business developments in the fiscal quarter ended December 31, 2017:

 

●

Received $870,000 in AHD orders for the U.S. Army and U.S. Marine Corps.

 

●

Announced $1.1 million follow-on AHD order from Southeast Asia for border and maritime security.

 

●

Received $1.5 million follow-on LRAD 360XT order from one of the largest oil & gas companies in Eurasia. The mobile mass notification systems are being equipped with our solar power option and integrated with a gas detection alarm system.

 

●

Announced $1.0 million LRAD 500X-RE systems and accessories order for domestic and international U.S. Air Force bases.

 

 

Revenues in the first fiscal quarter ended December 31, 2017, were $7.6 million, an increase from $2.9 million in the first fiscal quarter of 2017. The increase in revenues was driven by increases in both AHD and mass notification revenues. AHD revenues increased $2,559,000, or 128%, and mass notification revenues increased $2,074,748, or 297%, compared to the first fiscal quarter of 2017. Based on the timing of budget cycles, as well as financial issues and military conflict in certain areas of the world, delays in awarding contracts often occur, resulting in uneven quarterly revenues. Gross profit increased compared to the same quarter in the prior year as a result of higher sales and higher fixed overhead absorption. Operating expenses increased by 16.2% from $2.6 million to $3.0 million in the quarter ended December 31, 2017, primarily due to higher incentive expense accrual based on the Company’s expectation for meeting current year financial goals, computer related expenses and increased salaries and consulting for additional engineering and sales personnel. The first quarter of fiscal 2018 results, reflect a $2.7 million income tax expense including $2.5 million for a decrease to the deferred tax asset due to enactment of the “Tax Cuts and Jobs Act” (the “Act”) on December 22, 2017, which reduces the U.S. federal corporate tax rate to 21% effective January 1, 2018. Primarily as a result of this fiscal 2018 income tax expense, we reported a net loss of $1,683,253 for the quarter, or $0.05 per share, compared to a net loss of $812,680, or $0.03 per share for the same quarter in the prior year.

 

Overall Business Outlook

 

Our product line-up continues to gain worldwide awareness and recognition through media exposure, trade show participations, product demonstrations and word of mouth as a result of positive responses and increased acceptance of our products. We believe we have a solid global brand, technology and product foundation with our LRAD-X directed product line, which we have expanded over the years to service new markets and customers for greater business growth.  We have launched a line of omnidirectional products targeted to meet the needs of the large and growing mass notification market. We believe that we have strong market opportunities for our directional and omnidirectional product offerings within the global government and military sector, as well as increasing commercial applications as a result of continued threats to governments, commerce and law enforcement, and in wildlife preservation and control applications. We intend to continue expanding our international mass notification business, particularly in the Middle East, Europe and Asia where we believe there are greater market opportunities for our omnidirectional products. Our selling network has expanded through the addition of sales consultants as well as continuing to improve and increase our relationships with key integrators and sales representatives within the United States and in a number of worldwide locations. However, we may continue to face challenges in fiscal 2018 due to continuing economic and geopolitical conditions in some international regions. We anticipate that the new U.S. government administration will support U.S. military spending, which we believe could benefit us, although there is uncertainty as to priorities and timing. We continue to pursue large business opportunities, but it is difficult to anticipate how long it will take to close these opportunities, or if they will ever ultimately come to fruition. It is also difficult to determine whether our omnidirectional product will be accepted as a viable solution in the mass notification market, which includes a number of large, well-known competitors.

 

Critical Accounting Policies

 

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

 

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

 

 

Comparison of Results of Operations for the Three Months Ended December 31, 2017 and 2016

 

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, 2017								December 31, 2016
						% of Total								% of Total				Fav(Unfav)
		Amount				Revenues				Amount				Revenues				Amount				%
Revenues:
Product sales		$	7,336,025				96.2	%		$	2,701,959				91.9	%		$	4,634,066				171.5	%
Contract and other			292,542				3.8	%			239,375				8.1	%			53,167				22.2	%
Total revenues			7,628,567				100.0	%			2,941,334				100.0	%			4,687,233				159.4	%
Cost of revenues			3,671,027				48.1	%			1,716,824				58.4	%			(1,954,203	)			(113.8	%)
Gross profit			3,957,540				51.9	%			1,224,510				41.6	%			2,733,030				223.2	%
Operating expenses:
Selling, general and administrative			2,188,398				28.7	%			1,966,436				66.9	%			(221,962	)			(11.3	%)
Research and development			778,037				10.2	%			587,410				19.9	%			(190,627	)			(32.5	%)
Total operating expenses			2,966,435				38.9	%			2,553,846				86.8	%			(412,589	)			(16.2	%)
Income (loss) from operations			991,105				13.1	%			(1,329,336	)			(45.2	%)			2,320,441				(174.6	%)
Other income			34,530				0.5	%			30,128				1.0	%			4,402				14.6	%
Income (loss) from continuing operations before income taxes			1,025,635				13.4	%			(1,299,208	)			(44.2	%)			2,324,843				(178.9	%)
Income tax expense (benefit)			2,708,888				35.5	%			(486,528	)			(16.5	%)			(3,195,416	)			na
Net loss		$	(1,683,253	)			(22.1	%)		$	(812,680	)			(27.6	%)		$	(870,573	)			107.1	%

 

Revenues increased in the current quarter compared to the prior year due to the larger backlog at September 30, 2017 compared to September 30, 2016. Sales improved in the current quarter both AHD (up $2,559,319 or 128%) and MNS (up $2,074,748, or 297%) product lines compared to the prior year. The receipt of orders will often be uneven due to the timing of approvals or budgets. At December 31, 2017, we had aggregate deferred revenue of $437,945 for prepayments from customers in advance of product shipment.

 

Gross Profit

 

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

 

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

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased $221,962 over the prior year quarter. This reflects $209,322 higher information technology related expenses, $154,197 higher incentive compensation expense, $81,957 higher salaries, benefits and consulting expense, primarily for business development and $59,885 in increased travel. The increases were offset by a $326,175 decrease in non-cash compensation, primarily due to the prior year non-recurring expense related to a Separation Agreement and General Release related to the departure of the Company’s prior CEO. A new enterprise resource planning software system was implemented in the first quarter of fiscal year 2018 and this rate of expense is not expected to recur in future periods.

 

 

We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three months ended December 31, 2017 and 2016 of $109,322 and $435,497, respectively. The decrease is primarily due to non-recurring expense related to a Separation Agreement and General Release related to the departure of the Company’s prior CEO in the prior year quarter.

 

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

 

Research and Development Expenses

 

Research and development expenses increased compared to the prior year primarily due to $75,162 for increased product development, $58,609 for salaries and benefits due to increased engineering staff compared to the prior year quarter and $60,405 for bonus accrual.

 

Included in research and development expenses for the three months ended December 31, 2017 and 2016 was $22,930 and $23,375 of non-cash share-based compensation costs, respectively.

 

Research and development costs vary period to period due to the timing of projects, and the timing and extent of the use of outside consulting, design and development firms. We continually improve our product offerings and we expect to continue to expand our product line in 2018 with new products, customizations and enhancements. Based on current plans, we may expend additional resources on research and development in the current year compared to the prior year.

 

Net Loss

 

The increase in net loss compared to the prior year was due to income tax expense for the three months ended December 31, 2017 primarily due to a reduction in the deferred tax asset resulting from the change to the U.S. Corporate income tax rates effective for the calendar year ended December 31, 2018. The additional non-cash expense was partially offset by an increase in gross profit. We recognized an income tax benefit of $486,528 for the three months ended December 31, 2016.

 

Liquidity and Capital Resources

 

Cash and cash equivalents at December 31, 2017 was $15,117,544, compared to $12,803,887 at September 30, 2017 primarily as a result of cash generated from operations. Other than cash and expected future cash flows from operating activities in subsequent periods, we have no unused sources of liquidity at this time.

 

Principal factors that could affect our liquidity include:

 

●

ability to meet sales projections;

 

●

government spending levels;

 

●

introduction of competing technologies;

 

●

product mix and effect on margins;

 

●

ability to reduce current inventory levels;

 

●

product acceptance in new markets;

 

●

value of shares repurchased; and

 

●

value of dividends declared.

 

Principal factors that could affect our ability to obtain cash from external sources include:

 

●

volatility in the capital markets; and

 

●

market price and trading volume of our common stock.

 

Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the 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 condensed consolidated statements of cash flows, are summarized in the table below:

 

		Three Months Ended
		December 31,
		2017				2016
Cash provided by:
Operating activities		$	1,753,585			$	1,428,286
Investing activities			400,554				69,026
Financing activities			159,518				-

 

Operating Activities

 

Net loss of $1,683,253 for the three months ended December 31, 2017 was decreased by $2,960,116 of non-cash items that included a reduction to deferred income taxes primarily resulting from enactment of the “Act”, share-based compensation, depreciation and amortization, warranty provision, and inventory obsolescence. Cash provided by operating activities in the current year reflected an increase in accounts payable of $790,635 due to the timing of payments, decreases in prepaid expenses and other of $393,761, an increase in accrued and other liabilities of $311,483, a decrease in other assets of $46,874 and a decrease in accounts receivable of $3,662. Cash used in operating activities included a decrease in payroll and related of $1,023,538 primarily for payment of incentive compensation earned in fiscal 2017, an increase in inventory of $43,001 and warranty settlements of $3,154.

 

Net loss of $812,680 for the three months ended December 31, 2016 was decreased by $20,447 of non-cash items that included deferred income taxes, share-based compensation, depreciation and amortization, warranty provision, and inventory obsolescence. Cash provided by operating activities in the current year reflected a decrease in accounts receivable of $1,929,765 due to the collection of a high year-end balance, an increase in accounts payable of $500,042 due to the timing of payments, payroll and related of $180,766 primarily for accrued bonuses, and decreases in prepaid expenses and other of $80,378 and other assets of $46,871. Cash used in operating activities included an increase in inventory of $327,680, a decrease in accrued and other liabilities of $176,881 for decreased deferred revenue for customer prepayments and warranty settlements of $12,742.

 

We had accounts receivable of $5,678,220 at December 31, 2017, compared to $5,681,882 at September 30, 2017. The level of trade accounts receivable at December 31, 2017 represented approximately 68 days of revenues compared to 70 days of revenues at September 30, 2017 due to the timing of shipments and related collections in this quarter compared to the fourth fiscal quarter of 2017. Terms with individual customers vary greatly. We typically require thirty-day terms from our customers if credit is approved. Our receivables can vary dramatically due to overall sales volume, quarterly variations in sales, timing of shipments to and receipts from large customers, payment terms, and the timing of contract payments.

 

At December 31 and September 30, 2017, our working capital was $26,485,964 and $25,412,106 respectively. The increase in working capital was primarily due to cash generated from operations.

 

Investing Activities

 

In the three months ended December 31, 2017, we decreased our holding of short and long-term marketable securities by $454,721, compared to sales of $84,610 in the three months ended December 31, 2016.

 

We also 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 tooling and patents was $54,167 and $15,584 for the three months ended December 31, 2017 and 2016, respectively. We anticipate some additional expenditures for equipment during the balance of fiscal year 2018.

 

Financing Activities

 

In the three months ended December 31, 2017, cash provided from the exercise of stock options was $159,518. In the three months ended December 31, 2016, we had no cash from financing activities.

 

The Board of Directors approved a share buyback program in 2013 under which the Company was authorized to repurchase up to $4 million of its outstanding common shares. There were no shares repurchased during the quarters ended December 31, 2017 and 2016, respectively. At December 31, 2017, all repurchased shares were retired. In December 2017, the Board of Directors extended the program through December 31, 2018.

 

 

Recent Accounting Pronouncements

 

New pronouncements issued for future implementation are discussed in Note 3, Recent Accounting Pronouncements, to our condensed consolidated financial statements.

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

 

Foreign Currency Risk

 

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. 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 December 31, 2017.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during our fiscal quarter ended December 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

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

 

Item 1A.

Risk Factors.

 

As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3.     Defaults Upon Senior Securities.

 

None.

 

 

Item 4.

Mine Safety Disclosures.

 

Not Applicable.

 

Item 5.

Other Information.

 

None.

 

Item 6.

Exhibits.

31.1	Certification of Richard S. Danforth, Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of Dennis D. Klahn, Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Richard S. Danforth, Principal Executive Officer and Dennis D. Klahn, Principal Financial Officer.*
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

---

*	Filed concurrently herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	LRAD CORPORATION
Date: February 8, 2018	By:	/s/    DENNIS D. KLAHN
		Dennis D. Klahn, Chief Financial Officer
		(Principal Financial Officer)

 

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