Genasys Inc. - Quarter Report: 2018 December (Form 10-Q)

 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(Mark one)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2018

 

or

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to                           .

 

Commission File Number: 000-24248

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LRAD CORPORATION

(Exact name of registrant as specified in its charter)

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Delaware	87-0361799
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
16262 West Bernardo Drive, San Diego, California	92127
(Address of principal executive offices)	(Zip Code)

 

(858) 676-1112

(Registrant’s telephone number, including area code)

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☐   Yes     ☒   No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes  ☒    No

 

The number of shares of Common Stock, $0.00001 par value, outstanding on February 8, 2019 was 32,615,133 .

 

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		December 31,
		2018				September 30,
		(Unaudited)				2018
ASSETS
Current assets:
Cash and cash equivalents		$	4,416,106			$	11,063,091
Short-term marketable securities			3,783,863				3,592,175
Restricted cash			397,933				403,427
Accounts receivable, net			8,698,868				2,785,997
Inventories, net			8,708,732				6,734,183
Prepaid expenses and other			953,891				3,091,401
Total current assets			26,959,393				27,670,274
Long-term marketable securities			899,759				1,200,541
Long-term restricted cash			339,591				339,556
Deferred tax assets, net			5,673,997				5,957,000
Property and equipment, net			2,362,920				2,448,725
Goodwill			2,412,680				2,445,990
Intangible assets, net			1,459,572				1,557,346
Other assets			241,310				241,365
Total assets		$	40,349,222			$	41,860,797
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	3,013,104			$	3,083,344
Accrued liabilities			2,079,618				3,199,864
Notes payable, current portion			292,554				296,594
Total current liabilities			5,385,276				6,579,802
Notes payable, less current portion			51,644				52,358
Other liabilities, noncurrent			1,916,139				1,739,430
Total liabilities			7,353,059				8,371,590
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; 32,589,321 and 33,176,146 shares issued and outstanding, respectively			326				332
Additional paid-in capital			88,766,502				90,251,145
Accumulated deficit			(55,470,955	)			(56,516,895	)
Accumulated other comprehensive loss			(299,710	)			(245,375	)
Total stockholders' equity			32,996,163				33,489,207
Total liabilities and stockholders' equity		$	40,349,222			$	41,860,797

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		Three months ended
		December 31,
		2018				2017
Revenues:
Product sales		$	9,348,168			$	7,336,025
Contract and other			829,391				292,542
Total revenues			10,177,559				7,628,567
Cost of revenues			5,088,301				3,671,027
Gross Profit			5,089,258				3,957,540
Operating expenses
Selling, general and administrative			2,751,008				2,188,398
Research and development			1,048,375				778,037
Total operating expenses			3,799,383				2,966,435
Income from operations			1,289,875				991,105
Other income			39,068				34,530
Income before income taxes			1,328,943				1,025,635
Income tax expense			283,003				2,708,888
Net income (loss)		$	1,045,940			$	(1,683,253	)
Net income (loss) per common share - basic and diluted		$	0.03			$	(0.05	)
Weighted average common shares outstanding:
Basic			32,896,021				32,236,039
Diluted			33,570,866				32,236,039

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		Three months ended
		December 31,
		2018				2017
Net income (loss)		$	1,045,940			$	(1,683,253	)
Other comprehensive loss, net of tax
Unrealized (loss) on marketable securities			(613	)			(8,031	)
Unrealized foreign currency loss			(53,722	)			-
Comprehensive income (loss)		$	991,605			$	(1,691,284	)

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		Three months ended
		December 31,
		2018				2017
Operating Activities:
Net income (loss)		$	1,045,940			$	(1,683,253	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities
Depreciation and amortization			201,267				60,105
Warranty provision			20,618				12,361
Inventory obsolescence			54,854				40,301
Share-based compensation			133,845				138,461
Deferred income taxes			283,003				2,708,888
Changes in operating assets and liabilities:
Accounts receivable, net			(5,916,242	)			3,662
Inventories, net			(2,029,403	)			(43,001	)
Prepaid expenses and other			2,136,282				393,761
Other assets			-				46,874
Accounts payable			(66,849	)			790,635
Payroll and related			(1,047,037	)			(1,023,537	)
Warranty settlements			(4,789	)			(3,154	)
Accrued and other liabilities			94,627				311,482
Net cash (used in) provided by operating activities			(5,093,884	)			1,753,585
Investing Activities:
Purchases of marketable securities			(874,353	)			(1,673,295	)
Proceeds from maturities of marketable securities			982,834				2,128,016
Capital expenditures			(38,813	)			(54,167	)
Net cash provided by investing activities			69,668				400,554
Financing Activities:
Proceeds from exercise of stock options			2,528				159,518
Repurchase of common stock			(1,621,022	)			-
Net cash (used in) provided by financing activities			(1,618,494	)			159,518
Effect of foreign exchange rate on cash			(9,734	)			-
Net (decrease) increase in cash, cash equivalents, and restricted cash			(6,652,444	)			2,313,657
Cash, cash equivalents and restricted cash, beginning of period			11,806,074				12,803,887
Cash, cash equivalents and restricted cash, end of period		$	5,153,630			$	15,117,544
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets:
Cash and cash equivalents		$	4,416,106			$	15,117,544
Restricted cash, current portion			397,933				-
Long-term restricted cash			339,591				-
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows		$	5,153,630			$	15,117,544

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		Three months ended December 31,
		2018				2017
Noncash investing and financing activities:
Change in unrealized loss on marketable securities		$	(613	)		$	(8,031	)

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1. OPERATIONS

 

LRAD^® Corporation, a Delaware corporation (the “Company”), is engaged in the design, development and commercialization of directed and multidirectional sound technologies, voice broadcast products, and location-based mass messaging solutions for emergency warning and workforce management. The principal markets for the Company’s proprietary sound reproduction technologies, voice broadcast products and mass messaging solutions are in North and South America, Europe, Middle East and Asia.

 

 

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

General

 

The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the footnotes. The condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended September 30, 2018 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on December 21, 2018. The accompanying condensed consolidated balance sheet at December 31, 2018 has been derived from the audited consolidated balance sheet at September 30, 2018 contained in the above referenced Form 10-K. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

 

Principles of Consolidation

 

The Company has three wholly owned subsidiaries, Genasys II Spain, S.A.U. and two currently inactive subsidiaries, Genasys America de CV and LRAD International Corporation. The consolidated financial statements include the accounts of these subsidiaries after elimination of intercompany transactions and accounts.

 

Reclassifications

 

Where necessary, the prior year’s information has been reclassified to conform to the current year presentation.

 

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

New pronouncements pending adoption

 

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-7, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-7”), which amends and expands Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The standard requires entities to measure nonemployee share-based payment transactions by estimating the fair value of the equity instrument it is obligated to issue, measure the equity-classified nonemployee share-based payment awards at the grant date, and consider the probability of satisfying performance conditions when accounting for nonemployee share based payment awards with such conditions. ASU 2018-7 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that fiscal year. Accordingly, this guidance will be effective for the Company in the fiscal year beginning October 1, 2019. The Company is currently evaluating the impact, if any, adoption of this guidance will have on its consolidated financial statements and related disclosures.

 

In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within that fiscal year. The Company expects that the adoption of this ASU will not have a material impact on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which issued new guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new guidance must be adopted using the modified retrospective approach and will be effective for the Company in the fiscal year beginning October 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact, if any, adoption of this guidance will have on its consolidated financial statements and related disclosures.

 

 

New pronouncements adopted

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, which amends Topic 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The provisions of this guidance are to be applied using a retrospective transition method to each period presented. ASU No. 2016-18 was effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company adopted ASU No. 2016-18 effective January 1, 2018. For the year ended September 30, 2018 and the three months ended December 31, 2018, restricted cash balances are due to a security deposit for the Company’s new office lease, as described in Note 13, Commitments and Contingencies, and restricted cash held as collateral for notes payable, as described in Note 11, Debt. The adoption did not have a material impact on the Company's consolidated financial position, results of operations and cash flows, other than the impact discussed above.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This guidance changes how companies account for certain aspects of share-based payments to employees. Among other things, under the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in-capital (“APIC”), but will instead record such items as income tax expense or benefit in the income statement, and APIC pools will be eliminated. Companies will apply this guidance prospectively. Another component of the new guidance allows companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards, whereby forfeitures can be estimated, as required today, or recognized when they occur. If elected, the change to recognize forfeitures when they occur needs to be adopted using a modified retrospective approach. The guidance was effective for the Company in the first quarter of fiscal 2018. The adoption of this standard resulted in the recognition of $1.1 million of gross deferred tax assets related to the historical excess tax benefits from stock based compensation that was not previously included in deferred tax assets and a corresponding increase in the Company’s valuation allowance.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles when it becomes effective. In July 2015, the FASB deferred the effective date of the standard by an additional year; however, it provided companies the option to adopt one year earlier, commensurate with the original effective date. Accordingly, the standard will was effective for the Company in the fiscal year beginning October 1, 2018. Subsequently the FASB has issued additional guidance (ASUs 2015-14; 2016-08; 2016-10; 2016-12; 2016-13; 2016-20). The adoption of this guidance by the Company, effective October 1, 2018, did not have a material impact on the Company’s consolidated financial statements (see Note 4, Revenue Recognition, for further detail).

 

 

4.	REVENUE RECOGNITION

 

On October 1, 2018, the Company adopted the new accounting standard FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) for all contracts using the modified retrospective method. Based on the Company’s analysis of contracts with customers in prior periods, there was no cumulative effect adjustment to the opening balance of the Company’s accumulated deficit as a result of the adoption of this new standard.

 

The Company derives its revenue from the sale of products to customers, contracts, license fees, other services and freight. The Company sells its products through its direct sales force and through authorized resellers and system integrators. The Company recognizes revenue for goods including software when all the significant risks and rewards have been transferred to the customer, no continuing managerial involvement usually associated with ownership of the goods is retained, no effective control over the goods sold is retained, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transactions will flow to the Company and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Software license revenue, maintenance and/or software development service fees may be bundled in one arrangement or may be sold separately.

 

 

Product Revenue

 

The Company sells its products to customers, including resellers and system integrators, and revenue is recognized in the period that products are shipped (free on board (“FOB”) shipping point) or received by customers (FOB destination), when the fee is fixed or determinable, when collection of resulting receivables is reasonably assured, and when there are no remaining obligations. Most revenues from resellers and system integrators are based on firm commitments from an end user, and as a result, resellers and system integrators carry little or no inventory. Our customers do not have the right to return product unless the product is found to be defective.

 

Perpetual licensed software

 

The sale and/or license of software products is deemed to have occurred when a customer either has taken possession of or has the ability to take immediate possession of the software and the software key. Perpetual software licenses can include one year maintenance and support services. In addition, the Company sells maintenance services on a stand-alone basis and is therefore capable of determining their fair value. On this basis, the amount of the embedded maintenance is separated from the fee for the perpetual license and is recognized on a straight-line basis over the period to which the maintenance relates.

 

Time-based licensed software

 

The time-based license agreements include the use of a software license for a fixed term, generally one-year, and maintenance and support services during the same period. The Company does not sell time-based licenses without maintenance and support services and therefore revenues for the entire arrangements are recognized on a straight-line basis over the term.

 

Warranty, maintenance and services

 

We offer extended warranty, maintenance and other services. Extended warranty and maintenance contracts are offered with terms ranging from one to several years, which provide repair and maintenance services after expiration of the original one-year warranty term. Revenues from separately priced extended warranty and maintenance contracts are recognized on a straight-line basis, over the contract period, and classified as contract and other revenues. Revenue from other services such as training or installation is recognized when the service is completed.

 

Multiple element arrangements

 

The Company has entered into a number of multiple element arrangements, such as the sale of a product or perpetual licenses that may include maintenance and support (included in price of perpetual licenses) and time-based licenses (that include embedded maintenance and support, both of which may be sold with software development services, training, and other product sales). In some cases, the Company delivers software development services bundled with the sale of the software. In multiple element arrangements, the Company uses either the stand-alone selling price or vendor specific objective evidence to determine the fair value of each element within the arrangement, including software and software-related services such as maintenance and support. In general, elements in such arrangements are also sold on a stand-alone basis and stand-alone selling prices are available.

 

Revenue is allocated to each deliverable based on the fair value of each individual element and is recognized when the revenue recognition criteria described above are met, except for time-based licenses which are not unbundled. When software development services are performed and are considered essential to the functionality of the software, the Company recognizes revenue from the software development services on a stage of completion basis, and the revenue from the software when the related development services have been completed.

 

We disaggregate revenue by reporting segment (Hardware (LRAD) and Software (Genasys)) and geographically to depict the nature of revenue in a manner consistent with our business operations and to be consistent with other communications and public filings. See Note 17, Segment Information and Note 18, Major Customers for additional details of revenues by reporting segment and disaggregation of revenue.

 

Contract Assets and Liabilities

 

We enter into contracts to sell products and provide services, and we recognize contract assets and liabilities that arise from these transactions. We recognize revenue and corresponding accounts receivable according to ASC 606 and, at times, recognize revenue in advance of the time when contracts give us the right to invoice a customer. We may also receive consideration, per terms of a contract, from customers prior to transferring goods to the customer. We record customer deposits as a contract liability. Additionally, we may receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed. In such instances, we record a deferred revenue liability. We recognize these contract liabilities as revenue after all revenue recognition criteria are met. The table below shows the balance of contract assets and liabilities as of December 31, 2018 and September 30, 2018, including the change between the periods.

 

 

The Company’s contract assets are as follows:

 

 

The Company’s contract liabilities are as follows:

 

 

Remaining Performance Obligations

 

Remaining performance obligations related to ASC 606 represent the aggregate transaction price allocated to performance obligations under an original contract with a term greater than one year which are fully or partially unsatisfied at the end of the period.

 

As of December 31, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $609,238. We expect to recognize revenue on approximately $525,983 or 86% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter.

 

Practical Expedients 

 

In cases where we are responsible for shipping after the customer has obtained control of the goods, we have elected to treat these activities as fulfillment activities rather than as a separate performance obligation. Additionally, we have elected to capitalize the cost to obtain a contract only if the period of amortization would be longer than one year. We only give consideration to whether a customer agreement has a financing component if the period of time between transfer of goods and services and customer payment is greater than one year. We also utilize the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value we are providing to the customer.

 

 

5.	FAIR VALUE MEASUREMENTS

 

The Company’s financial instruments consist principally of cash equivalents, short and long-term marketable securities, accounts receivable and accounts payable. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

 

Level 1:     Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

 

Level 2:     Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.

 

Level 3:     Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

 

The fair value of the Company’s cash equivalents and marketable securities was determined based on Level 1 and Level 2 inputs. The Company did not have any marketable securities in the Level 3 category as of December 31, 2018 or September 30, 2018. The Company believes that the recorded values of its other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

 

 

Instruments Measured at Fair Value

 

The following tables present the Company’s cash equivalents and marketable securities’ costs, gross unrealized gains and losses, and fair value by major security type recorded as cash equivalents or short-term or long-term marketable securities as of December 31, 2018 and September 30, 2018.

 

 

 

 

 

6. INVENTORIES

 

Inventories consisted of the following:

 

 

 

 

7. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

 

 

 

8. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill is attributable to the acquisition of Genasys and is due to combining the mass messaging solutions and software development capabilities with existing LRAD products for enhanced offerings and the skill level of the workforce. The Company periodically reviews goodwill for impairment in accordance with relevant accounting standards. There were no additions or impairments to goodwill during the three months ended December 31, 2018.

 

During the year ended September 30, 2018, the Company determined that certain patents were impaired. These patents supported products that are no longer sold by the Company. The Company recorded a non-cash loss on the impairment of these patents of $11,133 for the year ended September 30, 2018. There was no impairment loss for the three months ended December 31, 2018.

 

Intangible assets and goodwill related to Genasys are translated from Euros to U.S. dollars at the balance sheet date. The net impact of foreign currency exchange differences arising during the period related to goodwill and intangible assets was a reduction of $54,009. The Company’s intangible assets consisted of the following:

 

 

 

 

Estimated amortization expense for the twelve months ended December 31,

 

 

 

9. PREPAID EXPENSES AND OTHER

 

Prepaid expenses and other current assets consisted of the following:

 

 

Deposits for inventory

 

Deposits for inventory consisted of cash payments to vendors for inventory to be delivered in the future.

 

Leasehold improvement receivable

 

Leasehold improvement receivable represents amounts owed to the Company by its landlord for costs incurred to renovate and prepare the Company’s new facility for use. The lease provided an allowance for tenant improvements of $1,588,214. (See Note 13, Commitments and Contingencies, for additional information about this lease). As of December 31, 2018, $180,103 has not been received by the Company.

 

Prepaid Insurance

 

Prepaid insurance consisted of premiums paid for health, commercial and corporate insurance. These premiums are amortized on a straight-line basis over the term of the agreements.

 

Prepaid maintenance agreement

 

At March 31, 2011, prepaid expenses included $1,500,000 paid to a third party service provider in connection with the Company’s obligations under a sales contract to a foreign military service to provide repair and maintenance services over an eight- year period for products sold thereunder. The total prepaid expense is being amortized on a straight-line basis at an annual rate of $187,500 over the eight-year contract period to correspond with the revenues for these services and is being recognized as a component of cost of sales. Accordingly, as of December 31, 2018, $46,875 of the total prepayment was classified as a current asset. As of September 30, 2018, $93,750 of the total prepayment was classified as a current asset.

 

 

 

10. ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following:

 

 

Other liabilities-noncurrent consisted of the following: 

 

 

Payroll and related

 

Payroll and related consists primarily of accrued vacation, bonus, sales commissions, and benefits.

 

Deferred Revenue

 

Deferred revenue consists primarily of extended warranty obligations and prepayments for software support agreements.

 

Accrued contract costs

 

Accrued contract costs consist of accrued expenses for contracting a third party service provider to fulfill repair and maintenance obligations required under a contract through March 28, 2019 with a foreign military for units sold in the year ended September 30, 2011. Payments to the service provider will be made annually upon completion of each year of service. These services are being recorded in cost of revenues to correspond with the revenues for these services.

 

Severance

 

Severance liability at December 31, 2018 and September 30, 2018, consisted of accrued payments to former employees of Genasys, payable during the year ending September 30, 2019.

 

Warranty Reserve

 

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

 

 

 

Deferred Rent

 

Deferred rent liability as of December 31, 2018 and September 30, 2018 consists of the difference between the average rental amount charged to expense and amounts payable under the lease for the Company’s office space. Deferred rent also includes cash and leasehold incentives from the landlord in the aggregate amount of $1,909,128 at December 31, 2018 to compensate for costs incurred by the Company to make the office space ready for operation. Leasehold incentives received from a landlord are deferred and recognized on a straight-line basis as a reduction to rent expense over the lease term.

 

 

11. DEBT

 

In connection with the acquisition of Genasys the Company acquired certain debts of Genasys. The carrying value of the acquired debt approximates fair value. The balances of the acquired debt consist of loans with governmental agencies as of December 31, 2018. Loans with governmental agencies represent interest free debt granted by ministries within Spain for the purpose of stimulating economic development and promoting research and development. Loans with governmental agencies as of December 31, 2018 are as follows:

 

 

(a)

This loan is secured by $275,339 of cash pledged as collateral by Genasys, which is the current balance of the loan. This amount is included in restricted cash at December 31, 2018. The Company expects the Ministry of Economy and Competitiveness to declare the terms of the loan satisfied within fiscal year 2019 and that the outstanding balance of the loan will be paid in full during fiscal year 2019. Accordingly, this has been included in the current portion of notes payable as of December 31, 2018.

 

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

 

 

The current portion of debt is $292,554 and the noncurrent portion of debt is $51,644.

 

 

12. INCOME TAXES

 

For the three months ended December 31, 2018, the Company recorded income tax expense of $283,003 reflecting an effective tax rate of 21.1%. For the three months ended December 31, 2017, the Company recorded an income tax expense of $234,888 reflecting an effective tax rate of 22.9% and an additional discrete tax expense of $2,474,000 due to the remeasurement of its deferred tax assets as a result of tax reform.  For the three months ended December 31, 2018, when compared to the same period in 2017, the decrease in the effective tax rate was primarily attributable to the decrease in Federal statutory tax rate due to tax reform. The Company continues to maintain a partial valuation allowance against its deferred tax assets as the Company believes that the negative evidence that it will be able to recover these net deferred tax assets outweighs the positive evidence.

 

ASC 740, Accounting for Uncertainty in Income Taxes, requires the Company to recognize in its consolidated financial statements uncertainties in tax positions taken that may not be sustained upon examination by the taxing authorities. If interest or penalties are assessed, the Company would recognize these charges as income tax expense. The Company has not recorded any income tax expense or benefit for uncertain tax positions.

 

 

13. COMMITMENTS AND CONTINGENCIES

 

Facility Lease

 

On January 3, 2018, the Company entered into a lease for 54,766 square feet to replace the expired lease of the prior San Diego facility as the Company’s executive offices, research and development, assembly and operational facilities. The lease commenced July 1, 2018 and will expire August 30, 2028. The aggregate monthly payments, with abatements, average $36,146 per month for the first fourteen months, and are $74,460, $76,694, $78,994, $81,364, $83,805, $86,319, $88,909, $91,576 and $94,324 per month for the second through tenth years of the lease, plus certain other costs and charges as specified in the lease agreement, including the Company’s proportionate share of the building operating expenses and real estate taxes. The lease provided an allowance for tenant improvements of $1,588,214, which was classified as deferred rent on the Company’s consolidated balance sheet and will be amortized as an offset to rent expense with a corresponding charge to depreciation expense on a straight-line basis over the term of the lease.

 

 

Litigation

 

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

 

Bonus Plan

 

The Company has a bonus plan for employees, in accordance with their terms of employment, whereby they can earn a percentage of their salary, at three different levels, based on meeting targeted objectives for orders received, revenue, operating income and operating cash flow. In the three months ended December 31, 2018, the Company exceeded the minimum targeted level of orders received and revenues and has recorded $392,930 of expense. In the three months ended December 31, 2017, the company exceeded the minimum targeted level of orders received and revenues and recorded $405,267 of expense.

 

 

14. SHARE-BASED COMPENSATION

 

Stock Option Plans

 

At December 31, 2018, the Company had two equity incentive plans. The 2005 Equity Incentive Plan (“2005 Equity Plan”) was terminated with respect to new grants in March 2015, but remains in effect for grants issued prior to that time. The Amended and Restated 2015 Equity Incentive Plan (“2015 Equity Plan”) was approved by the Company’s Board of Directors on December 6, 2016 and by the Company’s stockholders on March 14, 2017. The amendment to the Equity Plan was approved in 2015 and authorizes for issuance stock options, restricted stock, stock appreciation rights, restricted stock units and performance awards, an aggregate of 5,000,000 new shares of common stock to employees, directors, advisors or consultants. At December 31, 2018, there were options and restricted stock units outstanding covering 717,283 and 2,140,971 shares of common stock under the 2005 Equity Plan and 2015 Equity Plan, respectively and 2,122,359 shares of common stock available for grant for a total of 4,980,613 currently available under the two equity plans.

 

Share-Based Compensation

 

The Company’s employee stock options have various restrictions that reduce option value, including vesting provisions and restrictions on transfer and hedging, among others, and are often exercised prior to their contractual maturity.

 

There were no stock options granted during the three months ended December 31, 2018. The weighted average estimated fair value of employee stock options granted during the three months ended December 31, 2017 was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions (annualized percentages):

 

 

Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected life of the options. The risk-free interest rate is based on rates published by the Federal Reserve Board. The contractual term of the options was seven years. The expected life is based on observed and expected time to post-vesting exercise. The expected forfeiture rate is based on past experience and employee retention data. Forfeitures are estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from those estimates. Such revision adjustments to expense will be recorded as a cumulative adjustment in the period in which the estimate is changed. The Company did not pay a dividend in fiscal 2018 or in fiscal 2017.

 

As of December 31, 2018, there was approximately $397,670 of total unrecognized compensation costs related to outstanding employee stock options. This amount is expected to be recognized over a weighted average period of 1.4 years. To the extent the forfeiture rate is different from what the Company anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.

 

 

Performance-Based Stock Options

 

On August 1, 2016, the Company awarded a performance-based stock option (PVO) to purchase 750,000 shares of the Company’s common stock to a key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2019 and 2020 (375,000 shares for each year) including a minimum Free Cash Flow margin and Net Revenue targets at four different target levels for each of the years. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets.

 

The Company determined that as of December 31, 2018, it is probable that some but not all of the performance conditions will be achieved. The Company will continue to review these targets each quarter and will adjust the expected outcome as needed, recognizing compensation expense cumulatively in such period for the difference in expense.

 

Restricted Stock Units

 

On March 14, 2017, the Board of Directors approved a grant of 25,000 RSUs to each of the Company’s non-employee directors that will vest on the first anniversary of the grant date. These were issued at a market value of $197,500, which was expensed on a straight line basis through the March 14, 2018 vest date.

 

On March 20, 2018, the Board of Directors approved an additional grant of 25,000 RSUs to each of the Company’s non-employee directors that will vest on the first anniversary of the grant date. These were issued at a market value of $278,750, which have been and will be expensed on a straight line basis through the March 20, 2019 vest date. Also, during fiscal 2018, 93,330 RSUs were granted to employees that will vest equally over three years on each of the first three anniversary dates of the grant. These were issued at a market value of $210,176, which will be expensed on a straight line basis over the three-year life of the grants.

 

A summary of the restricted stock units of the Company as of December 31, 2018 is presented below:

 

 

Stock Option Summary Information

 

A summary of the activity in options to purchase the capital stock of the Company as of December 31, 2018 is presented below:

 

 

Options outstanding are exercisable at prices ranging from $0.93 to $3.17 and expire over the period from 2020 to 2024 with an average life of 3.9 years. The aggregate intrinsic value of options outstanding and exercisable at December 31, 2018 was $1,313,333 and $1,089,894, respectively. The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last day of trading for the quarter, which was $2.52 per share, and the exercise price multiplied by the number of applicable options. The total intrinsic value of stock options exercised during the three months ended December 31, 2018 was $1,504 and proceeds from these exercises were $2,528.

 

 

The following table summarized information about stock options outstanding at December 31, 2018:

 

 

Share-Based Compensation

 

The Company recorded share-based compensation expense and classified it in the condensed consolidated statements of operations as follows:

 

 

 

 

15. STOCKHOLDERS’ EQUITY

 

Summary

 

The following table summarizes changes in the components of stockholders’ equity during the three months ended December 31, 2017 and the three months ended December 31, 2018:

 

 

 

Share Buyback Program

 

The Board of Directors approved a share buyback program in 2015 under which the Company was authorized to repurchase up to $4 million of its outstanding common shares. In December 2017, the Board of Directors extended the program through December 31, 2018. During the three months ended December 31, 2018, 588,425 shares were repurchased for $1,621,022. During the three months ended December 31, 2017 no shares were repurchased. At December 31, 2018, all repurchased shares were retired into treasury.

 

In December 2018, the Board of Directors approved a new share buyback program beginning January 1, 2019 and expiring on December 31, 2020, under which the Company was authorized to repurchase up to $5 million of its outstanding common shares. The previous program expired on December 31, 2018.

 

Dividends

 

There were no dividends declared in the three months ended December 31, 2018 and 2017.

 

 

 

16. NET INCOME (LOSS) PER SHARE

 

The following table sets forth the computation of basic and diluted loss per share:

 

 

 

17. SEGMENT INFORMATION

 

The Company is engaged in the design, development and commercialization of directed and multidirectional sound technologies, voice broadcast products and location-based mass messaging solutions for emergency warning and workforce management. The Company operates in two business segments: Hardware (LRAD) and Software (Genasys) and its principle markets are North and South America, Europe, Middle East and Asia. As reviewed by the Company’s chief operating decision maker, the Company evaluates the performance of each segment based on sales and operating income. Cash and cash equivalents, marketable securities, accounts receivable, inventory, property and equipment, deferred tax assets, goodwill and intangible assets are primary assets identified by segment. The accounting policies for segment reporting are the same for the Company as a whole and transactions between the two operating segments are not material.

 

 

The following table presents the Company’s segment disclosures:

 

 

 

 

18. MAJOR CUSTOMERS

 

For the three months ended December 31, 2018, revenues from one customer accounted for 60% of total revenues with no other single customer accounting for more than 10% of revenues. At December 31, 2018, accounts receivable from one customer accounted for 64% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.

 

For the three months ended December 31, 2017, revenues from two customers accounted for 31% and 26% of total revenues, respectively, with no other single customer accounting for more than 10% of revenues. At December 31, 2017, accounts receivable from one customer accounted for 42% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.

 

The following table summarizes revenues by geographic region. Revenues are attributed to countries based on customer’s delivery location.

 

 

 

 

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