Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
The discussion and analysis set forth below should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included under Item 1 of this Quarterly Report on Form 10-Q, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended September 30, 2017.
Forward Looking Statements
This report contains certain statements of a forward-looking nature relating to future events or future performance. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements but are not the only means of identifying forward-looking statements. Prospective investors are cautioned that such statements are only predictions and actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider various factors identified in this report and any matters set forth under Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K, which could cause actual results to differ materially from those indicated by such forward-looking statements.
Overview
Our Company is a leading innovator and manufacturer of acoustic communication systems that control sound from 30° - 360° over short and long distances. By broadcasting audible voice messages and tones with exceptional clarity and only where needed, we offer novel sound applications that conventional bullhorns, loudspeakers, and public address and emergency warning systems cannot achieve. We have developed two LRAD
®
product lines using our proprietary technologies:
• Acoustic Hailing Devices (“AHDs”), which project audible broadcasts with exceptional intelligibility in a 30° beam from close range out to 5,500 meters, and;
• ONE VOICE
®
Mass Notification Systems (“MN systems”), which project 60° - 360° audible broadcasts with industry-leading vocal intelligibility from close range to over 14 square kilometers from a single installation.
LRAD systems are a technological breakthrough in broadcasting audible, highly intelligible voice messages and tones over long distances and high ambient noise using minimal power. Our AHDs meet stringent military requirements and are packaged in several form factors, from portable, hand held units to permanently installed, remotely operated systems. Through broadcasting directional alert tones and live prerecorded messages, our AHDs are designed to enable users to safely hail and warn, inform and direct, prevent misunderstandings, determine intent, establish large safety zones, resolve uncertain situations, and potentially save lives. We continue to enhance our acoustic communication technologies and product lines to provide a complete range of systems and accessories. Our recently patented XL driver technology, which generates higher audio output in a smaller and lighter form factor, is being incorporated into our AHD and ONE VOICE products.
Building on the success of our AHDs, we launched our multidirectional product line. Unlike most siren-based mass notification systems on the market, our ONE VOICE systems broadcast both emergency warning sirens and highly intelligible voice messages with uniform 60° - 360° coverage over local and wide areas. We believe our ability to shape the broadcast coverage area, our industry-leading speech intelligibility, and our multiple system activation and control options, make us more competitive in the large and growing mass notification market.
Our products are designed to meet a broad range of diverse applications, including emergency warning and mass notification, fixed and mobile military deployments, maritime, critical infrastructure, perimeter, commercial, border, and homeland security, law enforcement, emergency responder and fire rescue communications, asset protection, and wildlife preservation and control. By selling our industry-leading AHDs and advanced ONE VOICE MN systems into 72 countries, we have created a new worldwide market and a recognized global brand. We continue to develop new acoustic innovations and believe we have established a significant competitive advantage in our principal markets.
Business developments
in the fiscal quarter ended June 30, 2018:
|
●
|
Announced over $1.5 million in AHD orders for law enforcement and public safety applications from the Asia Pacific region.
|
|
●
|
Received $780,000 in follow-on LRAD 500X and SoundSaber
®
orders from the U.S. Navy.
|
|
●
|
Added four business development personnel to the Company’s inside sales team.
|
|
●
|
Repurchased 211,326 shares under the Company’s share buyback program.
|
On January 18, 2018, the Company completed its acquisition of Genasys for approximately $3.0 million (€2.4 million) paid or payable in cash and the assumption of approximately $1.5 million (€1.2 million) of debt. Genasys, headquartered in Madrid, Spain, is a leading software provider of advanced, location-based mass messaging solutions for emergency warning systems and workforce management. Genasys had sales of approximately $2.1 million (€1.9 million) for its year ended December 31, 2017 and has approximately 17 employees based primarily in Spain.
The Company believes the combination of Genasys’ mass messaging solutions and software development capabilities will enable the Company to enhance existing product offerings through integrated mass messaging solutions as well as provide growth opportunities in new markets. The results of Genasys’ operations were included in the Company’s consolidated financial statements beginning January 18, 2018.
Revenues in the Company’s third fiscal quarter ended June 30, 2018, were $7.5 million, an increase from $4.1 million in the third fiscal quarter of 2017. The increase in revenues was driven by a significant increase in AHD and MN systems revenue and the addition of Genasys in 2018. AHD revenues increased $1,216,426, or 31%, MN systems revenue increased $1,672,384 or 745% compared to the third fiscal quarter of 2017 and Genasys contributed $501,638 in revenue. Based on the timing of budget cycles, as well as financial issues and military conflict in certain areas of the world, delays in awarding contracts often occur, resulting in uneven quarterly revenues. Gross profit increased compared to the same quarter in the prior year as a result of higher sales and higher fixed overhead absorption. Operating expenses increased 43.3% from $2.7 million to $3.9 million in the quarter ended June 30, 2018, primarily due to the addition of Genasys’ operating expenses, acquisition related expenses, increased employee compensation and related expenses (including additional engineering and sales personnel), computer related expenses and commission expense. The third quarter of fiscal 2018 results, reflect a $73,749 income tax benefit which is a non-cash benefit that increased the balance of the deferred tax asset. We reported net loss of $80,219 for the quarter, or less than $0.01 per share, compared to net loss of $528,163, or $0.02 per share for the same quarter in the prior year.
Overall Business Outlook
Our product line-up continues to gain worldwide awareness and recognition through media exposure, trade show participations, product demonstrations and word of mouth as a result of positive responses and increased acceptance of our products. We believe we have a solid global brand, technology and product foundation with our AHD and MN systems product lines, which we have expanded over the years to service new markets and customers for greater business growth. We believe that we have strong market opportunities for our directional and multidirectional product offerings within the mass notification, defense, law enforcement, fire rescue, public safety, maritime, homeland security, critical infrastructure security, asset protection, and wildlife control and preservation business sectors. We intend to continue expanding our international mass notification business, particularly in the Middle East, Europe and Asia where we believe there are greater market opportunities for our multidirectional products. Our selling network has expanded through the addition of sales consultants as well as continuing to improve and increase our relationships with key integrators and sales representatives within the United States and in a number of worldwide locations. However, we may continue to face challenges due to continuing economic and geopolitical conditions in some international regions. We anticipate that the current U.S. government administration will support U.S. military spending, which we believe could benefit us, although there is uncertainty as to priorities and timing. We continue to pursue large business opportunities, but it is difficult to anticipate how long it will take to close these opportunities, or if they will ever ultimately come to fruition. It is also difficult to determine whether our multidirectional product will be accepted as a viable solution in the mass notification market, which includes a number of large, well-known competitors.
Critical Accounting Policies
We have identified a number of accounting policies as critical to our business operations and the understanding of our results of operations. These are described in our consolidated financial statements located in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, 2017. The impact and any associated risks related to these policies on our business operations is discussed below and throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results.
The methods, estimates and judgments we use in applying our accounting policies, in conformity with generally accepted accounting principles in the U.S., have a significant impact on the results we report in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The estimates affect the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Comparison of Results of Operations for the Three Months Ended
June 30
,
201
8
and
201
7
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
Fav(Unfav)
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
6,583,865
|
|
|
87.6%
|
|
|
$
|
3,852,676
|
|
|
93.3%
|
|
|
$
|
2,731,189
|
|
|
70.9%
|
|
Contract and other
|
|
|
930,203
|
|
|
12.4%
|
|
|
|
276,878
|
|
|
6.7%
|
|
|
|
653,325
|
|
|
236.0%
|
|
Total revenues
|
|
|
7,514,068
|
|
|
100.0%
|
|
|
|
4,129,554
|
|
|
100.0%
|
|
|
|
3,384,514
|
|
|
82.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
3,815,203
|
|
|
50.8%
|
|
|
|
2,420,126
|
|
|
58.6%
|
|
|
|
(1,395,077
|
)
|
|
(57.6%)
|
|
Gross Profit
|
|
|
3,698,865
|
|
|
49.2%
|
|
|
|
1,709,428
|
|
|
41.4%
|
|
|
|
1,989,437
|
|
|
116.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
2,904,135
|
|
|
38.6%
|
|
|
|
2,039,755
|
|
|
49.4%
|
|
|
|
(864,380
|
)
|
|
(42.4%)
|
|
Research and development
|
|
|
972,857
|
|
|
12.9%
|
|
|
|
666,244
|
|
|
16.1%
|
|
|
|
(306,613
|
)
|
|
(46.0%)
|
|
Total operating expenses
|
|
|
3,876,992
|
|
|
51.6%
|
|
|
|
2,705,999
|
|
|
65.5%
|
|
|
|
(1,170,993
|
)
|
|
(43.3%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(178,127
|
)
|
|
(2.4%)
|
|
|
|
(996,571
|
)
|
|
(24.1%)
|
|
|
|
818,444
|
|
|
82.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
24,159
|
|
|
0.3%
|
|
|
|
32,682
|
|
|
0.8%
|
|
|
|
(8,523
|
)
|
|
(26.1%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before income taxes
|
|
|
(153,968
|
)
|
|
(2.0%)
|
|
|
|
(963,889
|
)
|
|
(23.3%)
|
|
|
|
809,921
|
|
|
84.0%
|
|
Income tax benefit
|
|
|
(73,749
|
)
|
|
(1.0%)
|
|
|
|
(435,726
|
)
|
|
(10.6%)
|
|
|
|
(361,977
|
)
|
|
(83.1%)
|
|
Net loss
|
|
$
|
(80,219
|
)
|
|
(1.1%)
|
|
|
$
|
(528,163
|
)
|
|
(12.8%)
|
|
|
$
|
447,944
|
|
|
84.8%
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
Fav(Unfav)
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
Net revenue (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LRAD
|
|
$
|
7,012,430
|
|
|
93.3%
|
|
|
$
|
4,129,554
|
|
|
100.0%
|
|
|
$
|
2,882,876
|
|
|
69.8%
|
|
Genasys
|
|
|
501,638
|
|
|
6.7%
|
|
|
|
-
|
|
|
0.0%
|
|
|
|
501,638
|
|
|
100.0%
|
|
Total net revenue
|
|
$
|
7,514,068
|
|
|
100.0%
|
|
|
$
|
4,129,554
|
|
|
100.0%
|
|
|
$
|
3,384,514
|
|
|
82.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LRAD
|
|
$
|
(63,257
|
)
|
|
(0.8%)
|
|
|
$
|
(996,571
|
)
|
|
(24.1%)
|
|
|
$
|
933,314
|
|
|
93.7%
|
|
Genasys
|
|
|
(114,870
|
)
|
|
(1.5%)
|
|
|
|
-
|
|
|
0.0%
|
|
|
|
(114,870
|
)
|
|
(100.0%)
|
|
Total operating loss
|
|
$
|
(178,127
|
)
|
|
(2.4%)
|
|
|
$
|
(996,571
|
)
|
|
(24.1%)
|
|
|
$
|
818,444
|
|
|
82.1%
|
|
(a)
|
Net revenue excludes intercompany revenue of $96,192 and zero for the three months ended June 30, 2018 and 2017, respectively.
|
Revenues
The tables above set forth for the periods indicated certain items of our condensed consolidated statements of operations expressed in dollars and as a percentage of net revenues. The financial information and the discussion below should be read in conjunction with the condensed consolidated financial statements and notes contained in this report.
Revenues increased 82% in the current quarter compared to the prior year due to the larger backlog at March 31, 2018 compared to March 31, 2017 and the addition of $501,638 of Genasys sales in the 2018 fiscal quarter. Sales improved in the current quarter for the AHD product line (up $1,216,426, or 31%) and for the MN systems product line (up $1,672,384, or 745%) compared to the prior year quarter. The receipt of orders will often be uneven due to the timing of approvals or budgets. At June 30, 2018, we had aggregate deferred revenue of $1,175,948 for prepayments from customers in advance of product shipment and software support agreements.
Gross Profit
The increase in gross profit in the current quarter compared to the prior year was primarily due to the higher level of sales, partially offset by an increase in manufacturing overhead expenses to support the increased sales.
Our products have varying gross margins, so product mix may affect gross profits. In addition, our margins vary based on the sales channels through which our products are sold in a given period. We continue to implement product updates and changes, including raw material and component changes that may impact product costs. With such product updates and changes we have limited warranty cost experience and estimated future warranty costs can impact our gross margins. We do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $864,380 over the prior year quarter. This reflects the addition of $469,457 from Genasys (including $113,852 for one-time audit fees and $79,458 for amortization of intangible assets), $202,976 for salaries/benefits/consultants, $39,411 for information technology related expenses and $111,442 increase in commission expense. This was partially offset by a $148,807 decrease in non-cash share-based compensation expense, primarily due to non-recurring expense for separation costs related to the departure of the Company’s prior CEO in the prior year quarter.
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three-months ended June 30, 2018 and 2017 of $123,311 and $272,118, respectively.
We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize potential opportunities. Commission expenses will fluctuate based on the nature of our sales.
Research and Development Expenses
Research and development expenses increased $306,613 compared to the prior year primarily due to $172,594 for salaries and benefits due to increased engineering staff compared to the prior year quarter, and $97,736 for increased product development and product testing.
Included in research and development expenses for the three months ended June 30, 2018 and 2017 was $20,391 and $23,462 of non-cash share-based compensation costs, respectively.
Research and development costs vary period to period due to the timing of projects, and the timing and extent of the use of outside consulting, design and development firms. We continually improve our product offerings and we expect to continue to expand our product line with new products, customizations and enhancements. Based on current plans, we may expend additional resources on research and development in the current year compared to the prior year.
Net
Loss
The $447,944 decrease in net loss in the fiscal year 2018 third quarter was primarily due to the higher gross profits realized from increased sales in the 2018 quarter. Non-cash income tax benefit of $73,749 and $435,726 was recognized in the three months ended June 30, 2018 and 2017, respectively.
Comparison of Results of Operations for the
Nine
Months Ended
June
3
0
, 201
8
and 201
7
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
Fav(Unfav)
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
21,045,148
|
|
|
91.5%
|
|
|
$
|
12,026,248
|
|
|
93.9%
|
|
|
$
|
9,018,900
|
|
|
75.0%
|
|
Contract and other
|
|
|
1,965,934
|
|
|
8.5%
|
|
|
|
787,032
|
|
|
6.1%
|
|
|
|
1,178,902
|
|
|
149.8%
|
|
Total revenues
|
|
|
23,011,082
|
|
|
100.0%
|
|
|
|
12,813,280
|
|
|
100.0%
|
|
|
|
10,197,802
|
|
|
79.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
11,318,697
|
|
|
49.2%
|
|
|
|
6,945,496
|
|
|
54.2%
|
|
|
|
(4,373,201
|
)
|
|
(63.0%)
|
|
Gross Profit
|
|
|
11,692,385
|
|
|
50.8%
|
|
|
|
5,867,784
|
|
|
45.8%
|
|
|
|
5,824,601
|
|
|
99.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
7,610,424
|
|
|
33.1%
|
|
|
|
5,899,235
|
|
|
46.0%
|
|
|
|
(1,711,189
|
)
|
|
(29.0%)
|
|
Research and development
|
|
|
2,664,829
|
|
|
11.6%
|
|
|
|
1,858,894
|
|
|
14.5%
|
|
|
|
(805,935
|
)
|
|
(43.4%)
|
|
Total operating expenses
|
|
|
10,275,253
|
|
|
44.7%
|
|
|
|
7,758,129
|
|
|
60.5%
|
|
|
|
(2,517,124
|
)
|
|
(32.4%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
1,417,132
|
|
|
6.2%
|
|
|
|
(1,890,345
|
)
|
|
(14.8%)
|
|
|
|
3,307,477
|
|
|
175.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
73,894
|
|
|
0.3%
|
|
|
|
94,884
|
|
|
0.7%
|
|
|
|
(20,990
|
)
|
|
(22.1%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before income taxes
|
|
|
1,491,026
|
|
|
6.5%
|
|
|
|
(1,795,461
|
)
|
|
(14.0%)
|
|
|
|
3,286,487
|
|
|
183.0%
|
|
Income tax expense (benefit)
|
|
|
2,793,590
|
|
|
12.1%
|
|
|
|
(752,969
|
)
|
|
(5.9%)
|
|
|
|
(3,546,559
|
)
|
|
(471.0%)
|
|
Net loss
|
|
$
|
(1,302,564
|
)
|
|
(5.7%)
|
|
|
$
|
(1,042,492
|
)
|
|
(8.1%)
|
|
|
$
|
(260,072
|
)
|
|
(24.9%)
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
Fav(Unfav)
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
Net revenue (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LRAD
|
|
$
|
22,094,790
|
|
|
96.0%
|
|
|
$
|
12,813,280
|
|
|
100.0%
|
|
|
$
|
9,281,510
|
|
|
72.4%
|
|
Genasys
|
|
|
916,292
|
|
|
4.0%
|
|
|
|
-
|
|
|
0.0%
|
|
|
|
916,292
|
|
|
100.0%
|
|
Total net revenue
|
|
$
|
23,011,082
|
|
|
100.0%
|
|
|
$
|
12,813,280
|
|
|
100.0%
|
|
|
$
|
10,197,802
|
|
|
79.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LRAD
|
|
$
|
1,507,264
|
|
|
6.6%
|
|
|
$
|
(1,890,345
|
)
|
|
(14.8%)
|
|
|
$
|
3,397,609
|
|
|
179.7%
|
|
Genasys
|
|
|
(90,132
|
)
|
|
(0.4%)
|
|
|
|
-
|
|
|
0.0%
|
|
|
|
(90,132
|
)
|
|
(100.0%)
|
|
Total operating loss
|
|
$
|
1,417,132
|
|
|
6.2%
|
|
|
$
|
(1,890,345
|
)
|
|
(14.8%)
|
|
|
$
|
3,307,477
|
|
|
175.0%
|
|
(a)
|
Net sales excludes intercompany sales of $186,010 and zero for the nine months ended June 30, 2018 and 2017, respectively.
|
Revenues
The tables above set forth for the periods indicated certain items of our condensed consolidated statements of operations expressed in dollars and as a percentage of net revenues. The financial information and the discussion below should be read in conjunction with the condensed consolidated financial statements and notes contained in this report.
Revenues increased 80% for the year-to-date period ended June 30, 2018 compared to the prior year, due to the larger backlog at September 30, 2017 compared to September 30, 2016 and the addition of $916,292 of Genasys sales included in the first nine months of fiscal 2018. Sales increased in the current year nine months for both AHD (up $7,319,524 or 75%) and MN systems (up $1,968,042, or 64%) product lines compared to the prior year. The receipt of orders will often be uneven due to the timing of approvals or budgets. At June 30, 2018, we had aggregate deferred revenue of $1,175,948 for prepayments from customers in advance of product shipment and software support agreements.
Gross Profit
The increase in gross profit in the nine months ended June 30, 2018 was primarily due to increased sales volume. This was partially offset by an increase in manufacturing overhead expenses, primarily due to increased salaries and benefits, computer related expenses and depreciation expense to support the higher amount of sales in the current year period.
Our products have varying gross margins, so product mix may affect gross profits. In addition, our margins vary based on the sales channels through which our products are sold in a given period. We continue to implement product updates and changes, including raw material and component changes that may impact product costs. With such product updates and changes we have limited warranty cost experience and estimated future warranty costs can impact our gross margins. We do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1,711,189 in the nine months ended June 30, 2018 compared to the prior year period. As a percentage of sales, however, selling, general and administrative expense decreased to 33% for the nine months ended June 30, 2018 compared to 46% in the prior year period. The increase in selling, general and administrative expenses is primarily due to the addition of $779,884 of Genasys expenses for selling and administrative purposes, $604,965 in higher employee related costs, $473,484 for information technology related expenses, acquisition related costs of $315,532, and $231,805 in higher travel and related expenses. This was partially offset by a $503,449 decrease in non-cash share-based compensation expense, primarily due to non-recurring expense for separation costs related to the departure of the Company’s prior CEO and $103,702 in lower commission expense.
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the nine months ended June 30, 2018 and 2017 of $352,766 and $856,215, respectively.
We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize potential opportunities. Commission expenses will fluctuate based on the nature of our sales.
Research and Development Expenses
Research and development expenses increased $805,935 compared to the prior year, primarily due to $466,939 in higher salaries and benefits, including additional engineers hired in the last twelve months and $316,203 for product development and product testing activities.
Included in research and development expenses for the nine months ended June 30, 2018 and 2017 was $63,930 and $69,765 of non-cash share-based compensation costs, respectively.
Research and development costs vary period to period due to the timing of projects, and the timing and extent of the use of outside consultants and design and development firms. We continually improve our product offerings and we expect to continue to expand our product line with new products, customizations and enhancements. Based on current plans, we may expend additional resources on research and development in the current year compared to the prior year.
Net Loss
The increase in net loss compared to the prior year was primarily due to income tax expense for the nine months ended June 30, 2018, related to a reduction to the deferred tax asset resulting from the change to the U.S. Corporate income tax rates effective for the calendar year ended December 31, 2018. This was partially offset by the larger revenue and gross margin for the nine months ended June 30, 2018 compared to the prior year period.
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 2018 was $12,030,076, down $734,345 compared to $12,764,421 at September 30, 2017, primarily as a result of cash used to complete the acquisition of Genasys, cash used to repay debt and cash used to repurchase common stock offset by cash generated from operations and cash received from the exercise of stock options. Other than cash and cash equivalents, short and long-term marketable securities, other working capital and expected future cash flows from operating activities in subsequent periods, we have no unused sources of liquidity at this time.
Principal factors that could affect our liquidity include:
|
•
|
ability to meet sales projections;
|
|
•
|
government spending levels;
|
|
•
|
introduction of competing technologies;
|
|
•
|
product mix and effect on margins;
|
|
•
|
ability to reduce current inventory levels;
|
|
•
|
product acceptance in new markets;
|
|
•
|
value of shares repurchased; and
|
|
•
|
value of dividends declared.
|
Principal factors that could affect our ability to obtain cash from external sources include:
|
•
|
volatility in the capital markets; and
|
|
•
|
market price and trading volume of our common stock.
|
Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the twelve-month period subsequent to the issuance of the interim financial information. However, we operate in a rapidly evolving and unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that we may not be required to raise additional funds through the sale of equity or debt securities or from credit facilities. Additional capital, if needed, may not be available on satisfactory terms, or at all.
Cash Flows
Our cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows, are summarized in the table below:
|
|
Nine months ended
|
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
2,154,059
|
|
|
$
|
990,602
|
|
Investing activities
|
|
|
(2,285,948
|
)
|
|
|
(80,926
|
)
|
Financing activities
|
|
|
(195,846
|
)
|
|
|
-
|
|
Operating Activities
Net loss of $1,302,564 for the nine months ended June 30, 2018 was decreased by $3,668,190 of non-cash items that included a reduction to deferred income taxes primarily resulting from enactment of the “Act”, share-based compensation, depreciation and amortization, warranty provision, and inventory obsolescence. Cash provided by operating activities in the current year reflected an increase in accounts payable of $376,864 due to the timing of payments, decreases in prepaid expenses and other of $153,576, and an increase in accrued and other liabilities of $54,610. Cash used in operating activities included an increase in inventory of $239,360, an increase in accounts receivable of $496,642, and an increase in other assets of $60,615.
Net loss of $1,042,492 for the nine months ended June 30, 2017 was decreased by $96,441 of non-cash items that included deferred income taxes, share-based compensation, inventory obsolescence, and depreciation and amortization. Cash provided by operating activities in the current year reflected an increase in accounts payable of $1,223,342 due to increased inventory purchases, a decrease in accounts receivable of $1,024,797, an increase in accrued and other liabilities of $291,725 primarily for increased accrued bonuses and commissions, partially offset by a reduction in deferred revenue consisting of prepayments from customers, and other assets of $180,063. Cash used in operating activities included an increase in inventory of $760,351 and an increase in prepaid expenses and other of $22,923.
We had accounts receivable of $6,583,346 at June 30, 2018, compared to $5,681,882 at September 30, 2017. The level of trade accounts receivable at June 30, 2018 represented approximately 80 days of revenues compared to 70 days of revenues at September 30, 2017 due to the timing of shipments and related collections in this quarter compared to the fourth fiscal quarter of 2017. Terms with individual customers vary greatly. We regularly provide thirty-day terms to our customers if credit is approved. Our receivables can vary dramatically due to overall sales volume, quarterly variations in sales, timing of shipments to and receipts from large customers, payment terms, and the timing of contract payments.
At June 30, 2018 and September 30, 2017, our working capital was $23,071,995 and $25,412,106 respectively. The decrease in working capital was primarily due to the purchase price paid and debt assumed in the acquisition of Genasys.
Investing Activities
Our net cash used in investing activities was $2,285,948 for the nine months ended June 30, 2018, compared to cash used in investing activities of $80,926 for the nine months ended June 30, 2017. The 2018 amount includes $2,246,545 for the acquisition of Genasys. See the Overview section in this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding the Genasys acquisition. We also use cash for the purchase of tooling and computer equipment and software. Cash used in investing activities for the purchase of tooling, computer equipment and software was $166,845 and $171,735 for the nine months ended June 30, 2018 and 2017, respectively. In the nine months ended June 30, 2018, we decreased our holding of short and long-term marketable securities by $127,442, compared to a decrease of $98,598 in the nine months ended June 30, 2017. We anticipate some additional expenditures for leasehold improvements, tooling and equipment during the balance of fiscal year 2018.
Financing Activities
In the nine months ended June 30, 2018, we used $195,846 for financing activities, compared to no cash used, nor proceeds from, financing activities for the nine months ended June 30, 2017. The first nine months of 2018 included net payments of $786,437 to pay down debt assumed in the Genasys acquisition and payments of $500,272 to repurchase shares of common stock. Proceeds from the exercise of stock options were $1,027,719 and zero for the nine months ended June 30, 2018 and 2017, respectively. Total notes payable at June 30, 2018 was $740,352.
The Board of Directors approved a share buyback program in 2013 under which the Company was authorized to repurchase up to $4 million of its outstanding common shares. There were 211,326 shares repurchased during the quarter ended June 30, 2018 and no shares were repurchased in the prior year period. At June 30, 2018, all repurchased shares were retired. In December 2017, the Board of Directors extended the program through December 31, 2018. At June 30, 2018, $3.4 million was available for share repurchase under this program.
Recent Accounting Pronouncements
New pronouncements issued for future implementation are discussed in Note 3, Recent Accounting Pronouncements, to our condensed consolidated financial statements.