XNAS:LRAD LRAD Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

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

For the quarterly period ended March 31, 2012

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

 

 

 

LOGO

LRAD CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   87-0361799

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

15378 Avenue of Science, Ste 100, San Diego,

California

  92128
(Address of principal executive offices)   (Zip Code)

(858) 676-1112

(Registrant’s telephone number, including area code)

 

 

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

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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

The number of shares of Common Stock, $0.00001 par value, outstanding on April 26, 2012 was 32,374,499.

 

 

 


LRAD CORPORATION

INDEX

 

          Page  
PART I. FINANCIAL INFORMATION      1   

Item 1.

   Financial Statements:      1   
   Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and September 30, 2011      1   
   Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2012 and 2011 (unaudited)      2   
   Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2012 and 2011 (unaudited)      3   
   Notes to Interim Condensed Consolidated Financial Statements (unaudited)      4   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      10   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      16   

Item 4.

   Controls and Procedures      17   
PART II. OTHER INFORMATION      17   

Item 1.

   Legal Proceedings      17   

Item 1A.

   Risk Factors      17   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      17   

Item 3.

   Defaults Upon Senior Securities      17   

Item 4.

   Mine Safety Disclosures      17   

Item 5.

   Other Information      17   

Item 6.

   Exhibits      17   
SIGNATURES      19   


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

LRAD Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     March 31,        
     2012
(Unaudited)
    September 30,
2011
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 13,884,772      $ 13,870,762   

Restricted cash

     606,250        606,250   

Accounts receivable

     2,133,263        5,098,148   

Inventories, net

     3,192,703        2,735,520   

Prepaid expenses and other

     591,071        663,601   

Assets of discontinued operations

     —          6,250   
  

 

 

   

 

 

 

Total current assets

     20,408,059        22,980,531   

Restricted cash

     39,406        —     

Property and equipment, net

     67,811        75,468   

Intangible assets, net

     200,592        225,969   

Prepaid expenses and other - noncurrent

     1,156,360        1,218,750   
  

 

 

   

 

 

 

Total assets

   $ 21,872,228      $ 24,500,718   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 437,498      $ 1,040,202   

Accrued liabilities

     536,217        2,899,211   

Liabilities of discontinued operations

     —          9,263   
  

 

 

   

 

 

 

Total current liabilities

     973,715        3,948,676   

Other liabilities - noncurrent

     323,687        276,744   
  

 

 

   

 

 

 

Total liabilities

     1,297,402        4,225,420   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

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; 32,374,499 shares issued and outstanding each period

     324        324   

Additional paid-in capital

     85,951,030        85,673,560   

Accumulated deficit

     (65,376,528     (65,398,586
  

 

 

   

 

 

 

Total stockholders’ equity

     20,574,826        20,275,298   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 21,872,228      $ 24,500,718   
  

 

 

   

 

 

 

See accompanying notes

 

1


LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    

Three months ended

March 31,

    

Six months ended

March 31,

 
     2012     2011      2012      2011  

Revenues:

          

Product sales

   $ 2,340,731      $ 15,297,871       $ 5,885,784       $ 17,435,860   

Contract and other

     59,710        205,204         126,292         272,603   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total revenues

     2,400,441        15,503,075         6,012,076         17,708,463   

Cost of revenues

     1,083,438        4,635,260         2,946,479         5,848,273   
  

 

 

   

 

 

    

 

 

    

 

 

 

Gross profit

     1,317,003        10,867,815         3,065,597         11,860,190   
  

 

 

   

 

 

    

 

 

    

 

 

 

Operating expenses:

          

Selling, general and administrative

     1,193,294        4,390,379         2,249,853         5,444,105   

Research and development

     429,390        665,690         810,708         1,044,910   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expenses

     1,622,684        5,056,069         3,060,561         6,489,015   
  

 

 

   

 

 

    

 

 

    

 

 

 

(Loss) Income from operations

     (305,681     5,811,746         5,036         5,371,175   

Interest income

     6,778        4,506         19,722         8,190   
  

 

 

   

 

 

    

 

 

    

 

 

 

(Loss) income from continuing operations before income taxes

     (298,903     5,816,252         24,758         5,379,365   

Income tax (benefit) expense

     (7,015     112,095         2,700         112,095   
  

 

 

   

 

 

    

 

 

    

 

 

 

(Loss) income from continuing operations

     (291,888     5,704,157         22,058         5,267,270   

Income from discontinued operations, net of tax

     —          105         —           81,625   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net (loss) income

   $ (291,888   $ 5,704,262       $ 22,058       $ 5,348,895   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net (loss) income per common share - continuing operations:

          

Basic

   $ (0.01   $ 0.18       $ 0.00       $ 0.17   

Diluted

   $ (0.01   $ 0.17       $ 0.00       $ 0.17   

Net income per common share - discontinued operations:

          

Basic

   $ 0.00      $ 0.00       $ 0.00       $ 0.00   

Diluted

   $ 0.00      $ 0.00       $ 0.00       $ 0.00   

Net (loss) income per common share:

          

Basic

   $ (0.01   $ 0.18       $ 0.00       $ 0.17   

Diluted

   $ (0.01   $ 0.17       $ 0.00       $ 0.17   

Weighted average common shares outstanding:

          

Basic

     32,374,499        31,687,779         32,374,499         31,154,649   
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted

     32,374,499        32,606,414         33,006,994         32,068,244   
  

 

 

   

 

 

    

 

 

    

 

 

 

See accompanying notes

 

2


LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    

For the six months ended

March 31,

 
     2012     2011  

Operating Activities:

    

Net income

   $ 22,058      $ 5,348,895   

Less: Net income from discontinued operations (Note 16)

     —          81,625   
  

 

 

   

 

 

 

Income from continuing operations

     22,058        5,267,270   

Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:

    

Depreciation and amortization

     45,011        83,992   

Provision for doubtful accounts

     —          (24,000

Warranty provision

     (40,007     106,258   

Inventory obsolescence

     (98,686     18,861   

Share-based compensation

     277,470        210,670   

Loss on impairment of patents

     11,197        20,433   

Changes in operating assets and liabilities:

    

Restricted cash

     (39,406     (3,031,250

Accounts receivable

     2,964,885        1,797,555   

Inventories

     (358,497     (513,522

Prepaid expenses and other

     72,530        (593,651

Prepaid expenses - noncurrent

     62,390        (1,312,500

Accounts payable

     (602,704     (106,583

Warranty settlements

     (15,014     (21,327

Accrued liabilities

     (2,261,030     (439,871
  

 

 

   

 

 

 

Net provided by operating activities of continuing operations

     40,197        1,462,335   

Net cash (used in) provided by operating activities of discontinued operations (Note 16)

     (3,013     79,037   
  

 

 

   

 

 

 

Net cash provided by operating activities

     37,184        1,541,372   

Investing Activities:

    

Purchase of equipment

     (22,342     (21,859

Patent costs paid

     (832     (761
  

 

 

   

 

 

 

Net cash used in investing activities

     (23,174     (22,620

Financing Activities:

    

Proceeds from exercise of common stock warrants

     —          4,346,613   

Proceeds from exercise of stock options

     —          109,910   
  

 

 

   

 

 

 

Net cash provided by financing activities

     —          4,456,523   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     14,010        5,975,275   

Cash and cash equivalents, beginning of period

     13,870,762        5,421,167   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 13,884,772      $ 11,396,442   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information

    

Cash paid for taxes

   $ 60,015      $ 209,550   
  

 

 

   

 

 

 

See accompanying notes

 

3


LRAD Corporation

Notes to Interim Condensed Consolidated Financial Statements (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 America, Europe, Middle East and Asia.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

General

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and applicable sections of Regulation S-X. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although, in the opinion of management, the interim financial statements reflect all adjustments necessary and that disclosures included therein are adequate in order to make the financial statements not misleading. The condensed consolidated balance sheet as of September 30, 2011 was derived from the Company’s most recent audited financial statements. Operating results for the three and six 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, 2011 included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (“SEC”) on December 5, 2011.

Principles of Consolidation

The Company has a currently inactive wholly owned subsidiary, American Technology Holdings, Inc., 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.

Discontinued Operations

The financial statements presented herein reflect the spin-off of the Company’s Hypersonic Sound (“HSS”) business as a stand-alone company on September 27, 2010. The results of operations include some continued activity by the Company to fulfill remaining sales and warranty obligations following the spin-off, are designated as discontinued operations in the accompanying financial statements. Amounts reflected as discontinued operations in the accompanying Condensed Consolidated Statements of Operations include direct and allocated costs attributable to the former HSS business, but do not include allocations of general corporate overhead costs.

Reclassifications

Where necessary, the prior year’s information has been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.

3. FAIR VALUE MEASUREMENTS

At March 31, 2012, there was no difference between the carrying value and fair market value of the Company’s cash equivalents. For certain financial instruments, including accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their relatively short maturities.

4. RESTRICTED CASH

Restricted cash was reported as follows:

 

     March 31,
2012
     September 30,
2012
 

Current asset

   $ 606,250       $ 606,250   

Noncurrent asset

     39,406         —     
  

 

 

    

 

 

 
   $ 645,656       $ 606,250   
  

 

 

    

 

 

 

 

4


The Company’s assets included restricted cash, which was pledged to support bank guarantees for product warranty of product delivered on a sales contract in the quarter ended March 31, 2011. The current portion covered the first year of product warranty, and the noncurrent portion was recently issued and will be renewed annually for seven years to cover each year of the extended warranty and maintenance agreement. The current portion will become unrestricted and transferred to cash and cash equivalents in the current fiscal year upon completion of the first year warranty term, and the noncurrent will remain for the duration of the seven year term. These assets are carried at cost, which approximates market value.

5. INVENTORIES

Inventories consisted of the following:

 

     March 31,
2012
    September 30,
2011
 

Finished goods

   $ 813,168      $ 505,749   

Work in process

     217,218        168,622   

Raw materials

     2,580,185        2,368,245   
  

 

 

   

 

 

 
     3,610,571        3,042,616   

Reserve for obsolescence

     (417,868     (307,096
  

 

 

   

 

 

 
   $ 3,192,703      $ 2,735,520   
  

 

 

   

 

 

 

6. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

 

     March 31,
2012
    September 30,
2011
 

Machinery and equipment

   $ 530,753      $ 521,719   

Office furniture and equipment

     767,476        775,662   

Leasehold improvements

     268,107        262,258   
  

 

 

   

 

 

 
     1,566,336        1,559,639   

Accumulated depreciation

     (1,498,525     (1,484,171
  

 

 

   

 

 

 
   $ 67,811      $ 75,468   
  

 

 

   

 

 

 
     Six months ended  
     March 31,
2012
    March 31,
2011
 

Depreciation expense

   $ 29,999      $ 67,974   
  

 

 

   

 

 

 

7. INTANGIBLE ASSETS

Intangible assets consisted of the following:

 

     March 31,
2012
    September 30,
2011
 

Cost

   $ 441,347      $ 458,912   

Accumulated amortization

     (240,755     (232,943
  

 

 

   

 

 

 
   $ 200,592      $ 225,969   
  

 

 

   

 

 

 
     Six months ended  
     March 31,
2012
    March 31,
2011
 

Amortization expense

   $ 15,012      $ 16,018   

Loss on impairment of patents

     11,197        20,433   
  

 

 

   

 

 

 
   $ 26,209      $ 36,451   
  

 

 

   

 

 

 

Each quarter, the Company reviews the ongoing value of its capitalized patent costs. In the first six months of fiscal 2012 and 2011, some of these assets were identified as being associated with patents that are no longer consistent with its business strategy. As a result of this review, the Company recorded a loss as shown above from the impairment of patents that were previously capitalized.

 

5


8. PREPAID MAINTENANCE AGREEMENT

At March 31, 2011, prepaid expenses included $1,500,000 paid to a third party 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 under this contract. The total prepaid expense is being amortized on a straight-line basis at an annual rate of $187,500 over this eight-year period, and is being recognized as a component of cost of sales. Accordingly, as of March 31, 2012, $187,500 of the total prepayment was classified as a current asset and $1,125,000 was classified as noncurrent.

9. ACCRUED LIABILITIES AND OTHER LIABILITIES—NONCURRENT

Accrued liabilities consisted of the following:

 

     March 31,
2012
     September 30,
2011
 

Payroll and related

   $ 367,038       $ 2,628,210   

Warranty reserve

     163,694         265,658   

Customer deposits

     2,960         4,543   

Deferred revenue

     2,525         800   

Other

     —           —     
  

 

 

    

 

 

 

Total

   $ 536,217       $ 2,899,211   
  

 

 

    

 

 

 

Other liabilities—noncurrent consisted of the following:

     

Deferred revenue—noncurrent

   $ 270,141       $ 270,141   

Extended warranty

     53,546         6,603   
  

 

 

    

 

 

 

Total

   $ 323,687       $ 276,744   
  

 

 

    

 

 

 

Deferred Revenue

Deferred revenue at March 31, 2012 and September 30, 2011 included $270,559 and $270,941, respectively, collected from a license agreement in advance of recognized revenue, and $2,106 and $0 of customer prepayments, respectively.

Warranty Reserve

Changes in the warranty reserve during the six months ended March 31, 2012 and 2011 were as follows:

 

     Three Month Ended     Six Months Ended  
     March 31,     March 31,  
     2012     2011     2012     2011  

Beginning balance

   $ 323,476      $ 214,321      $ 272,261      $ 245,106   

Warranty provision

     (104,317     121,205        (40,007     106,258   

Warranty settlements

     (1,919     (5,489     (15,014     (21,327
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 217,240      $ 330,037      $ 217,240      $ 330,037   
  

 

 

   

 

 

   

 

 

   

 

 

 

Short-term warranty reserve

     163,694        321,279      $ 163,694      $ 321,279   

Long-term warranty reserve

     53,546        8,758        53,546        8,758   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 217,240      $ 330,037      $ 217,240      $ 330,037   
  

 

 

   

 

 

   

 

 

   

 

 

 

10. INCOME TAXES

At March 31, 2012, the Company had federal net operating losses (“NOLs”) and related state NOLs. In accordance with Financial Accounting Standards Board 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 six months ended March 31, 2012 as the Company expects its annual effective tax rate to be zero.

 

6


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.

The Company is subject to taxation in the U.S. and various state jurisdictions. All of the Company’s historical tax years are subject to examination by the Internal Revenue Service and various state jurisdictions due to the generation of NOL and credit carryforwards.

11. 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”), unlimited FDIC insurance is provided for all funds in non-interest bearing transaction accounts through December 31, 2012. In addition, certain of the Company’s interest bearing collateral money market and savings accounts are each insured up to $250,000 by the FDIC. The Company’s exposure for amounts in excess of FDIC insured limits at March 31, 2012 was approximately $10,800,000. 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. 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 an incentive bonus plan for fiscal year 2012 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, 2011. During the six months ended March 31, 2012, the Company did not record any bonus expense in connection with the 2012 plan, compared to $583,202 recorded during the three and six months ended March 31, 2011 in connection with the 2011 plan.

12. SHARE-BASED COMPENSATION

Stock Option Plans

At March 31, 2012, 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 March 31, 2012, there were options outstanding covering 3,969,714 shares of common stock under the 2005 Equity Plan and an additional 963,602 shares of common stock available for grant.

Stock Option Activity

The following table summarizes information about stock option activity during the six months ended March 31, 2012:

 

     Number
of Shares
    Weighted Average
Exercise Price
 

Outstanding October 1, 2011

     4,181,339      $ 2.40   

Granted

     10,000      $ 1.51   

Canceled/expired

     (721,625   $ 4.43   
  

 

 

   

Outstanding March 31, 2012

     3,469,714      $ 1.98   
  

 

 

   

Exercisable March 31, 2012

     3,189,622      $ 1.98   
  

 

 

   

Options outstanding are exercisable at prices ranging from $0.46 to $3.58 and expire over the period from 2012 to 2022 with an average life of 2.07 years. The aggregate intrinsic value of options outstanding and exercisable at March 31, 2012 was $1,029,372 and $1,007,699, respectively.

 

7


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
March 31,
     Six months ended
March 31,
 
     2012      2011      2012      2011  

Cost of revenue

   $ 6,244       $ 6,330       $ 13,125       $ 13,152   

Selling, general and administrative

     117,803         76,831         236,202         165,017   

Research and development

     14,137         14,206         28,143         32,501   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 138,184       $ 97,367       $ 277,470       $ 210,670   
  

 

 

    

 

 

    

 

 

    

 

 

 

The weighted-average estimated fair value of employee stock options granted during the periods below were calculated using the Black-Scholes option pricing model with the following weighted-average assumptions above (annualized percentages).

 

     Six months ended March 31,
     2012   2011

Volatility

   82.0%   89.0% - 93.0%

Risk-free interest rate

   1.10%   0.99% - 1.77%

Forfeiture rate

   10.0%   10.0%

Dividend yield

   0.0%   0.0%

Expected life in years

   6.4   3.4 - 4.0

Weighted average fair value of options granted during the year

   $1.07   $1.61

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 a NOL carryforward as of March 31, 2012, no excess tax benefit for the tax deductions related to share-based awards was recognized for the six months ended March 31, 2012 and 2011. As of March 31, 2012, there was approximately $500,000 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 1.3 years.

13. STOCK PURCHASE WARRANTS

At March 31, 2012, the Company had 1,627,945 shares purchasable under outstanding warrants (the “2011 Warrants”) at an exercise price of $2.67, which are exercisable through February 4, 2016. The Company entered into a Registration Rights Agreement with the holders of the 2011 Warrants (“Warrant Holders”). Under this agreement, if the Warrant Holders are unable to re-sell the shares purchased upon exercise of the 2011 Warrants, the Company will be obligated to pay liquidated damages to the purchasers in the amount of $0.0267 per day per applicable share, but not to exceed a total of $0.534 per applicable share or a maximum of $869,323. This obligation will be effective for the five year term of the Warrants, or until all 2011 Warrants have been exercised.

 

8


14. (LOSS) INCOME PER SHARE

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

 

    

Three Months Ended

March 31,

    

Six Months Ended

March 31,

 
     2012     2011      2012      2011  

Basic

          

(Loss) income from continuing operations

   $ (291,888   $ 5,704,157       $ 22,058       $ 5,267,270   

Income from discontinued operations

     —          105         —           81,625   
  

 

 

   

 

 

    

 

 

    

 

 

 

(Loss) income available to common stockholders

   $ (291,888   $ 5,704,262       $ 22,058       $ 5,348,895   
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     32,374,499        31,687,779         32,374,499         31,154,649   
  

 

 

   

 

 

    

 

 

    

 

 

 

Basic (loss) income per common share, continuing operations

   $ (0.01   $ 0.18       $ —         $ 0.17   
  

 

 

   

 

 

    

 

 

    

 

 

 

Basic income per common share, discontinued operations

   $ —        $ —         $ —         $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Basic (loss) income per common share

   $ (0.01   $ 0.18       $ —         $ 0.17   
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted

          

(Loss) income from continuing operations

   $ (291,888   $ 5,704,157       $ 22,058       $ 5,267,270   

Income from discontinued operations

     —          105         —           81,625   
  

 

 

   

 

 

    

 

 

    

 

 

 

(Loss) income available to common stockholders

   $ (291,888   $ 5,704,262       $ 22,058       $ 5,348,895   
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     32,374,499        31,687,779         32,374,499         31,154,649   

Assumed exercise of dilutive options and warrants

     —          918,635         632,495         913,595   
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted average dilutive shares outstanding

     32,374,499        32,606,414         33,006,994         32,068,244   
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluited (loss) income per common share, continuing operations

   $ (0.01   $ 0.17       $ —         $ 0.17   
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted income per common share, discontinued operations

   $ —        $ —         $ —         $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted (loss) income per common share

   $ (0.01   $ 0.17       $ —         $ 0.17   
  

 

 

   

 

 

    

 

 

    

 

 

 

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

          

Options

     2,004,075        2,220,700         1,994,075         2,220,700   

Warrants

     1,627,945        1,627,945         1,627,945         1,627,945   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

     3,632,020        3,848,645         3,622,020         3,848,645   
  

 

 

   

 

 

    

 

 

    

 

 

 

15. MAJOR CUSTOMERS

For the three months ended March 31, 2012, revenues from two customers accounted for 22% and 10% of revenues, respectively, and for the six months ended March 31, 2012, revenues from two customers accounted for 14% and 16% of revenues, with no other single customer accounting for more than 10% of revenues. At March 31, 2012, accounts receivable from two customers accounted for 46% 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 and six months ended March 31, 2011, revenues from one customer accounted for 78% and 68% of revenues, respectively, with no other single customer accounting for more than 10% of revenues. At March 31, 2011, accounts receivable from three customers accounted for 25%, 17% and 11% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.

 

9


16. DISCONTINUED OPERATIONS REPORTING

The Company spun-off its wholly-owned subsidiary Parametric Sound Corporation (“Parametric”) effective September 27, 2010. The prior year results of operations relating to the HSS business have been presented as discontinued operations in the Condensed Consolidated Statement of Operations. The prior year Condensed Consolidated Balance Sheets also identify assets and liabilities retained by the Company to fulfill remaining warranty obligations for previous HSS shipments. There were no discontinued operations financing or investing activities in the prior year. Current year results of operations and the assets and liabilities related to the HSS business are immaterial and are not reported as discontinued operations. The components of the Condensed Consolidated Statements of Operations, which are presented as discontinued operations, are as follows:

 

     Three months ended
March 31, 2011
    Six months ended
March 31, 2011
 

Total revenues

   $ 10,900      $ 142,484   

Cost of revenues

     (10,795     (60,859
  

 

 

   

 

 

 

Total income from discontinued operations

   $ 105      $ 81,625   
  

 

 

   

 

 

 

The components of the Condensed Consolidated Balance Sheets, which are presented as discontinued operations are as follows:

 

     September 30,  
     2011  

Assets:

  

Inventories, net

   $ 6,250   
  

 

 

 

Total current assets

   $ 6,250   
  

 

 

 

Liabilities:

  

Warranty reserve

   $ 9,263   
  

 

 

 

Total current liabilities

   $ 9,263   
  

 

 

 

Net assets

   $ (3,013
  

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis set forth below is presented to show the results of continuing operations only, and does not discuss the results of discontinued operations from our former HSS business (see Note 16 for further information on the discontinued operations). It 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, 2011.

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 that 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

We are a pioneer of highly intelligible, long range directed sound technologies and products. We aggressively seek to create markets for our products, and we are increasing our focus and investment in worldwide sales and marketing activities as we also continue to invest in product development.

In the quarter ended March 31, 2012, we had revenues of $2,400,441 compared to $15,503,075 in the quarter ended March 31, 2011. The quarter ended March 31, 2011 included delivery of a $12.1 million order to a foreign military customer, which was not repeated in the current year. We continue to pursue global opportunities, but orders have been slow due to military budget constraints. Gross margin for the quarter was 55% of net revenues, compared to 70% of net revenues for the quarter ended March 31, 2011, which was driven by higher margins on the foreign military order, which also resulted in a large commission payment of $3,062,000 in operating expenses. On a quarter over quarter basis, our revenues are expected to remain uneven.

 

10


Our LRAD-X product line uses directionality and focused acoustic output to clearly transmit critical information, instructions and warnings 1,500 meters and beyond. The LRAD-X product line features clear voice intelligibility and is available in a number of packages and form factors that meet stringent military environmental requirements. Through the use of powerful voice commands and deterrent tones, large safety zones can be created while determining the intent and influencing the behavior of potential security threats. Our LRAD-X product line provides a complete range of systems from single user portable to permanently installed, remotely operated. In fiscal 2011, we added wireless capability to our LRAD 100X product. Our LRAD products have been competitively selected over other commercially available systems by U.S. and several foreign militaries. Our LRAD-X product line includes the following:

 

   

LRAD 2000X—launched in fiscal 2012 to meet the requirements of larger security applications—is our largest and loudest acoustic hailing system and broadcasts highly intelligible voice communication that can be clearly heard and understood over five miles away.

 

   

LRAD 1000X—selected by the U.S. Navy as its acoustic hailing device (“AHD”) for Block 0 of the Shipboard Protection System—can be manually operated to provide long distance hailing and warning with highly intelligible communication. This unit is available in both fully integrated and remotely operated electronics.

 

   

LRAD 500X—selected by the U.S. Navy and U.S. Army as their AHD for small vessels and vehicles—is lightweight and can be easily transported to provide security personnel long-range communications and a highly effective hailing and warning capability where needed.

 

   

LRAD 300X is a lightweight mid-range AHD developed for small vessels and manned and unmanned vehicles and aircraft. This unit is available in both fully integrated and remotely operated electronics.

 

   

LRAD 100X is a self-contained, battery-powered, portable system designed for use in a variety of mass notification, law enforcement and commercial security applications. This unit is ideally suited for short-range perimeter security and communications and is available in a wireless version.

 

   

LRAD-RX—selected by the U.S. Navy in 2010 in a competitive bid as its AHD for Block 2 of the Shipboard Protection System—is our prescription for remotely controlled security. It enables system operators to detect and communicate with an intruder over long distances. LRAD-RX features an LRAD 1000X emitter head, integrated camera, high-intensity searchlight and a newly developed, robust, and Internet protocol-addressable full pan and tilt drive system for precise aiming and tracking. LRAD-RX can also be integrated with radar to provide automated intruder alerts. Because of its automated capabilities, LRAD-RX reduces manpower requirements and false alarms while providing an intelligent, cost-effective security solution.

In the quarter ended March 31, 2012, we received our first order for the newly developed LRAD 360o product, which is designed with 360 degree directionality to provide features needed for mass notification and emergency warning capabilities. The LRAD 360o is targeted for market applications including campus, border and perimeter security, tsunami, hurricane and tornado warnings, bird safety and control, and asset protection.

Overall Business Outlook

We continue to experience positive responses to our expanding LRAD-X product line and increased global acceptance of our LRAD products. We believe we have a solid technology and product foundation for business growth. We have strong market opportunities within the government, military and commercial maritime sectors due to increasing terrorist and piracy activity and growing global unrest. We are also experiencing growing interest from wind farms and mining operations with wildlife safety and control issues. We have continued to strengthen our selling network through the addition of in-house business development talent as well as key integrators and sales representatives within the U.S. and in a number of worldwide locations. However, we continue to face challenges in fiscal 2012 due to international market conditions that severely restrict credit and disrupt major economies, as well as uncertainty within the U.S. government budgeting process and restrictions that may be placed on military spending. A further or continued deterioration in financial markets and confidence in major economies, continued delays in U.S. government spending or extended reductions in military spending could negatively impact the expected continued growth of our business.

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, 2011. 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.

 

11


Comparison of Results of Operations for the Three Months Ended March 31, 2012 and 2011

Revenues

The following table sets forth for the periods indicated certain items of our condensed consolidated statement of operations expressed in dollars and as a percentage of net revenues. The financial information and the discussion below should be read in conjunction with the condensed consolidated financial statements and notes contained in this report.

 

     Three months ended              
     March 31, 2012     March 31, 2011              
           % of Net            % of Net     Increase/(Decrease)  
     Amount     Revenue     Amount      Revenue     Amount     %  

Revenues:

             

Product sales

   $ 2,340,731        97.5   $ 15,297,871         98.7   $ (12,957,140     (84.7 %) 

Contract and other

     59,710        2.5     205,204         1.3     (145,494     (70.9 %) 
  

 

 

     

 

 

      

 

 

   
     2,400,441        100.0     15,503,075         100.0     (13,102,634     (84.5 %) 

Cost of revenues

     1,083,438        45.1     4,635,260         29.9     (3,551,822     (76.6 %) 
  

 

 

     

 

 

      

 

 

   

Gross profit

     1,317,003        54.9     10,867,815         70.1     (9,550,812     (87.9 %) 

Operating Expenses:

             

Selling, general and administrative

     1,193,294        49.7     4,390,379         28.3     (3,197,085     (72.8 %) 

Research and development

     429,390        17.9     665,690         4.3     (236,300     (35.5 %) 
  

 

 

     

 

 

      

 

 

   
     1,622,684        67.6     5,056,069         32.6     (3,433,385     (67.9 %) 
  

 

 

     

 

 

      

 

 

   

(Loss) income from operations

     (305,681     (12.7 %)      5,811,746         37.5     (6,117,427     (105.3 %) 

Other Income

     6,778        0.3     4,506         0.0     2,272        50.4
  

 

 

     

 

 

      

 

 

   

(Loss) income from continuing operations before income taxes

     (298,903     (12.5 %)      5,816,252         37.5     (6,115,155     (105.1 %) 

Income tax (benefit) expense

     (7,015     (0.3 %)      112,095         0.7     (119,110     (106.3 %) 

Income from discontinued operations

     —          0.0     105         0.0     (105     (100.0 %) 
  

 

 

     

 

 

      

 

 

   

Net income

   $ (291,888     (12.2 %)    $ 5,704,262         36.8   $ (5,996,150     (105.1 %) 
  

 

 

     

 

 

      

 

 

   

The decrease in revenues was primarily due to a $12.1 million order that was delivered in the quarter ended March 31, 2011, that was not repeated in the quarter ended March 31, 2012. Due to the budgetary cycles of our customer base and the lack of established markets for our proprietary products, we expect continued uneven quarterly revenues in future periods.

At March 31, 2012, we had aggregate deferred revenue of $272,665 representing $270,559 collected from a license agreement in advance of recognized revenue and $2,106 of customer prepayments. This revenue component is subject to significant variability based on the timing, amount and recognition of new arrangements or payment terms.

Gross Profit

The decrease in gross profit in the quarter was primarily due to a much higher margin in the prior year as a result of the $12.1 million foreign military order in the quarter, lower product cost due to volume pricing, and higher fixed absorption due to the increased production levels to fulfill the large foreign military order. The gross profit in the quarter ended March 31, 2012, included a reduction in the warranty reserve upon completion of the one year warranty period for the large foreign military order, compared to an increase for the reserve in the prior year and lower freight cost, offset by an increase for amortization of prepaid expenses to support the large military sale in fiscal 2011.

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

 

12


Selling, General and Administrative Expenses

Selling, general and administrative expenses reflected a $2,959,376 reduction in commission expense, primarily related to the large military order in the prior year, and a $316,100 reduction in bonus expense as a result of not meeting current year performance targets, offset by an increase in bad debt expense due to a $50,819 recovery in the prior year and a $40,972 increase in non-cash share-based compensation expense.

We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three months ended March 31, 2012 and 2011 of $117,803 and $76,831, respectively.

We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize potential opportunities. In addition, commission expenses will fluctuate based on the nature of our sales. This may result in increased selling, general and administrative expenses in the future.

Research and Development Expenses

Research and development expenses decreased by $166,216 for bonus expense as a result of not meeting current year performance targets, $31,133 due to lower product development costs and $22,396 due to lower salaries.

Included in research and development expenses for the three months ended March 31, 2012 and 2011 was $14,137 and $14,206 of non-cash share-based compensation costs, respectively.

Each quarter, we review the ongoing value of our capitalized patent costs and in the second fiscal quarter we identified some of these assets as being associated with patents that are no longer consistent with our business strategy. As a result of this review, we reduced the value of our previously capitalized patents by $580 during the quarter ended March 31, 2012, compared to an impairment of $18,685 in the three months ended March 31, 2011.

Research and development costs vary period to period due to the timing of projects, the availability of funds for research and development and the timing and extent of the use of outside consulting, design and development firms. We continually improve our product offerings and we have further expanded the product line-up in 2012 and 2011 with new products, customizations and enhancements. Based on current plans, we expect research and development costs to continue in the current fiscal year on a basis comparable to the prior year.

(Loss) Income from Operations

The decrease in income from operations was primarily attributable to the decrease in revenues and gross margin, partially offset by a reduction in operating expenses.

Other Income

During the three months ended March 31, 2012, we earned $2,272 more in interest income from our cash and cash equivalents balances compared to the three months ended March 31, 2011 as a result of a higher balance in interest bearing accounts.

Net (Loss) Income

The decrease in net income was primarily the result of lower revenues and gross margin in the quarter, partially offset by a reduction in operating expenses. We also recognized an income tax benefit of $7,015 during the quarter ended March 31, 2012, compared to an income tax provision of $112,095 in the quarter ended March 31, 2011, based on the taxable loss and income during the respective quarters.

Comparison of Results of Operations for the Six Months Ended March 31, 2012 and 2011

Revenues

The following table sets forth for the periods indicated certain items of our condensed consolidated statement 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.

 

13


     Six months ended              
     March 31, 2012     March 31, 2011              
            % of Net            % of Net     Increase/(Decrease)  
     Amount      Revenue     Amount      Revenue     Amount     %  

Revenues:

              

Product sales

   $ 5,885,784         97.9   $ 17,435,860         98.5   $ (11,550,076     (66.2 %) 

Contract and other

     126,292         2.1     272,603         1.5     (146,311     (53.7 %) 
  

 

 

      

 

 

      

 

 

   
     6,012,076         100.0     17,708,463         100.0     (11,696,387     (66.0 %) 

Cost of revenues

     2,946,479         49.0     5,848,273         33.0     (2,901,794     (49.6 %) 
  

 

 

      

 

 

      

 

 

   

Gross profit

     3,065,597         51.0     11,860,190         67.0     (8,794,593     (74.2 %) 

Operating Expenses:

              

Selling, general and administrative

     2,249,853         37.4     5,444,105         30.7     (3,194,252     (58.7 %) 

Research and development

     810,708         13.5     1,044,910         5.9     (234,202     (22.4 %) 
  

 

 

      

 

 

      

 

 

   
     3,060,561         50.9     6,489,015         36.6     (3,428,454     (52.8 %) 
  

 

 

      

 

 

      

 

 

   

Income from operations

     5,036         0.1     5,371,175         30.3     (5,366,139     (99.9 %) 

Other Income

     19,722         0.3     8,190         0.0     11,532        140.8
  

 

 

      

 

 

      

 

 

   

Income from continuing operations before income taxes

     24,758         0.4     5,379,365         30.4     (5,354,607     (99.54 %) 

Income tax expense

     2,700         0.0     112,095         0.6     (109,395     (97.6 %) 

Income from discontinued operations

     -         0.0     81,625         0.5     (81,625     (100.0 %) 
  

 

 

      

 

 

      

 

 

   

Net income

   $ 22,058         0.4   $ 5,348,895         30.2   $ (5,326,837     (99.6 %) 
  

 

 

      

 

 

      

 

 

   

The decrease in revenues was primarily attributable to the shipment of $12.1 million of LRAD systems to a foreign military during the six-month period ended March 31, 2011 that was not repeated in the current year. We expect continued uneven quarterly revenues in future periods due to the lack of established markets for our proprietary products.

At March 31, 2012, we had aggregate deferred revenue of $272,665 representing $270,559 collected from a license agreement in advance of recognized revenue and $2,106 of customer prepayments. This revenue component is subject to significant variability based on the timing, amount and recognition of new arrangements or payment terms.

Gross Profit

The decrease in gross profit was primarily due to a much higher margin in the prior year as a result of the $12.1 million foreign military order, lower product cost due to volume pricing, and higher fixed absorption due to the increased production levels to fulfill the large foreign military order. The gross profit in the six-months ended March 31, 2012, included a reduction in the warranty reserve upon completion of the one year warranty period for the large foreign military order, compared to an increase for the reserve in the prior year, and lower freight cost, offset by an increase for amortization of prepaid expenses to support the large military sale in fiscal 2011.

Our products have varying gross margins, so product sales mix will materially affect gross profits. In addition, our margins vary based on the sales channels through which our products are sold in a given period. We continue to make 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

The decrease in selling general and administrative expenses was primarily attributed to a decrease of $2,939,397 for sales commission, primarily related to the foreign military sale, $316,095 decrease in bonus expense as a result of not meeting current year performance targets, and a decrease in bank fees due to higher fees in the prior year for bank guarantees related to the foreign military sale, partially offset by a $71,185 increase in non-cash share-based compensation expense for new option grants and a $34,571 increase in salaries and consultants due to an increase in business development staff.

We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the six months ended March 31, 2012 and 2011 of $236,202 and $165,017, respectively.

We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize potential opportunities. In addition, commission expenses may fluctuate based on the nature of our sales. This may result in increased selling, general and administrative expenses in the future.

 

14


Research and Development Expenses

The decrease in research and development expense was primarily due to a $166,216 decrease in accrued bonuses as a result of not meeting current year performance targets, $28,279 due to decreased staffing, $15,153 decrease in development costs and $9,236 for reduced patent impairment costs and other reductions.

Included in research and development expenses for the six months ended March 31, 2012 and 2011 was $28,143 and $32,501 of non-cash share-based compensation costs, respectively.

Each quarter, we review the ongoing value of our capitalized patent costs and in the current fiscal year to date identified some of these assets as being associated with patents that are no longer consistent with our business strategy. As a result of this review, we reduced the value of our previously capitalized patents by $11,197 during the six months ended March 31, 2012, compared to an impairment of $20,433 in the six months ended March 31, 2011.

Research and development costs vary period to period due to the timing of projects, the availability of funds for research and development and the timing and extent of the use of outside consulting, design and development firms. We continually improve our product offerings and we have further expanded the product line-up in recent years with new products, customizations and enhancements. Based on current plans, we expect research and development costs to continue in the current fiscal year on a basis comparable to the prior year.

Income from Operations

The decrease in income from operations was primarily attributable to the decrease in revenues and gross margin, partially offset by decreased operating expense.

Other Income

During the six months ended March 31, 2012, we earned $11,532 more in interest income from our cash and cash equivalents balances compared to the six months ended March 31, 2011.

Net Income

The decrease in net income was primarily the result of decreased revenues and gross margins, partially offset by decreased operating expenses. In addition, we recorded an income tax provision of $2,700 during the six months ended March 31, 2012, compared to a provision of $112,095 in the six months ended March 31, 2011.

Liquidity and Capital Resources

Cash and cash equivalents at March 31, 2012 was $13,884,772, compared to $13,870,762 at September 30, 2011. In addition, at March 31, 2011, we had $645,656 of cash, which we pledged to support bank guarantees related to a customer sales contract that was previously included as cash and cash equivalents. We reclassified $606,250 as “restricted cash” in the year ended September 30, 2011 and $39,406 in the quarter ended March 31, 2012. We expect the $606,250 to be reclassified as cash and cash equivalents during the fiscal year ended September 30, 2012. The change in cash and cash equivalents was primarily the result of a reduction in accounts receivable from strong year-end shipments in September 30, 2011, offset by a reduction in accrued liabilities as a result of the payment of fiscal 2011 bonuses and related payroll taxes. Cash, inventory and accounts receivable are our sources of liquidity at this time.

At March 31, 2012 and 2011, exclusive of discontinued operations, our current assets exceeded our current liabilities by $19,434,344 and $19,034,868, respectively.

Principal factors that could affect the availability of our internally generated funds 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; and

 

   

product acceptance in new markets.

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.

 

15


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

Operating Activities

Our net cash provided by operating activities from continuing operations was $40,197 for the six months ended March 31, 2012, compared to $1,462,335 for the six months ended March 31, 2011, which included $22,058 of net income, increased by expenses not requiring the use of cash of $194,985, $2,964,885 from reduced accounts receivable and $134,920 from reduced current and non-current prepaid expenses. Our net cash used in operating activities included $2,261,030 for reduced accrued liabilities, which was primarily for a reduction of payroll liabilities for the payout of the fiscal year 2011 bonus payment in the first fiscal quarter of 2012, $602,704 for reduced accounts payable, $358,497 for increased inventory, $15,014 for increased warranty settlements and $39,406 for the increase in restricted cash. Operating cash provided by continuing operations during the six months ended March 31, 2011 included $5,267,270 of net income, increased by expenses not requiring the use of cash of $416,214, and 1,797,555 from reduced accounts receivable. Our net cash used in operating activities included $3,031,250 for increased restricted cash, $1,906,151 for increased current and non-current prepaid expenses primarily related to warranty services to support our foreign military contract, $513,522 for increased inventory, $439,871 for decreased accrued liabilities, $106,583 for decreased accounts payable and $21,327 for increased warranty settlements.

At March 31, 2012, we had net accounts receivable of $2,133,263, compared to $5,098,148 in accounts receivable at September 30, 2011. The level of trade accounts receivable for the quarter ended March 31, 2012 represented approximately 81 days of revenue, compared to 73 days of revenue for the quarter ended September 30, 2011. Our receivables can vary significantly due to overall sales volumes and due to quarterly variations in sales and timing of shipments to and receipts from large customers and the timing of contract payments.

Investing Activities

We use cash in investing activities primarily for the purchase of tooling, computer equipment and software, and investment in new or existing patents. Cash used in investing activities for equipment and patents was $23,174 for the six months ended March 31, 2012 and $22,620 for the six months ended March 31, 2011. We anticipate some additional expenditure for equipment and patents during the balance of fiscal year 2012.

Financing Activities

In the six months ended March 31, 2012, we did not receive any proceeds from financing activities. We received $4,346,613 and $109,910 from the exercise of common stock warrants and stock options in the six months ended March 31, 2011, respectively.

Recent Accounting Pronouncements

There were no adopted or pending recent accounting pronouncements that are expected to have a material impact on our consolidated financial statements for the six months ended March 31, 2012.

 

Item 3. Qualitative and Quantitative Disclosures about Market Risk.

Interest Rate Risk

The Company’s interest income is sensitive to fluctuations in the general level of U.S. interest rates. Changes in U.S. interest rates affect the interest earned on the Company’s cash and cash equivalents. The Company’s exposure to market risk for changes in interest rates is minimal as a result of maintaining cash in savings accounts and short term money market accounts. The Company currently does not have any debt that could be subject to interest fluctuation or market risk.

Foreign Currency Risk

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, all sales to customers and all arrangements with third-party manufacturers, with one exception, provide for pricing and payment in U.S. dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the U.S. dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the U.S. dollar relative to other currencies could result in our suppliers raising their prices to continue doing business with us. Fluctuations in currency exchange rates could affect our business in the future.

 

16


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 March 31, 2012.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our fiscal quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.

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

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

We may at times be involved in litigation in the ordinary course of business. We will also, from time to time, when appropriate in management’s estimation, record adequate reserves in our financial statements for pending litigation. Currently, there are no pending material legal proceedings to which we are party or to which any of our 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 Thomas R. Brown, Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

  31.2

   Certification of Katherine H. McDermott, Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

  32.1

   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Thomas R. Brown, Principal Executive Officer and Katherine H. McDermott, Principal Financial Officer.*

 

17


  99.1   Press release dated May 7, 2012 regarding fiscal Q2 2012 financial results. (This exhibit has been furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.)*
101.INS**   XBRL Instance Document
101.SCH**   SBRL Taxonomy Extension Schema Document
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed concurrently herewith.
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

 

18


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: May 7, 2012     By:  

/S/    KATHERINE H. MCDERMOTT

      Katherine H. McDermott, Chief Financial Officer
      (Principal Financial Officer)

 

19

XNAS:LRAD LRAD Corp Quarterly Report 10-Q Filling

LRAD Corp XNAS:LRAD Stock - Get Quarterly Report SEC Filing of LRAD Corp XNAS:LRAD stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:LRAD LRAD Corp Quarterly Report 10-Q Filing - 3/31/2012
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