Notes to the Consolidated Fi
nancial Statements
1. OPERATIONS
LRAD Corporation, a Delaware corporation (the “Company”), is engaged in design, development and commercialization of directed
and omnidirectional sound technologies and products. The principal markets for the Company’s proprietary sound reproduction technologies and products are in North and South America, Europe, Middle East and Asia.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company has a currently inactive wholly owned subsidiary,
LRAD International Corporation, which the Company formed to conduct international marketing, sales and distribution activities. The consolidated financial statements include the accounts of this subsidiary after elimination of intercompany transactions and accounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions (e.g., share-based compensation valuation, valuation of inventory and intangible assets, warranty reserve, accrued bonus and valuation allowance related to deferred tax assets) that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period
s. Actual results could materially differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company sells its products to a large number of geographically diverse customers. The Company routinely assesses the financial strength of its customers and generally does not require collateral or other security to support customer receivables. At September
30, 2017, accounts receivable from three customers accounted for 31%, 22% and 14% of total accounts receivable with no other single customer accounting for more than 10% of the accounts receivable balance. At September 30, 2016, accounts receivable from three customers accounted for 27%, 24% and 12% of total accounts receivable with no other single customer accounting for more than 10% of the accounts receivable balance.
The Company maintains cash and cash equivalent accounts with Federal Deposit Insurance Corporation (“FDIC”) insured financial institutions.
The Company places its cash investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines such as money market funds, corporate bonds, municipal bonds and Certificates of Deposit. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument. It is generally the Company’s policy to invest in instruments that have a final maturity of no longer than three years
, with a portfolio weighted average maturity of no longer than 18 months
.
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents.
The Company considers any amounts pledged as collateral or otherwise restricted for use in current operations to be restricted cash. Restricted cash is classified as a current asset unless amounts are not expected to be released and available for use in operations within one year.
At September 30, 2017 and 2016, the amount of restricted cash was $39,406, which is included in Prepaid expenses and other – noncurrent.
MARKETABLE SECURITIES
The Company
accounts for investments in debt instruments as available-for-sale. Management determines the appropriate classification of such securities at the time of purchase and re-evaluates such classification as of each balance sheet date. Marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income (loss), net of tax. The realized gains and losses on marketable securities are determined using the specific identification method.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company carries its accounts receivable at their historical cost, less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for doubtful accounts for estimated losses considering the following factors when determining if collection of a receivable is reasonably assured: customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. If the Company has no previous experience with the customer, the Company may obtain reports from various credit organizations to ensure that the customer has a history of paying its creditors. The Company may also request financial information to ensure that the customer has the means of making payment. If these factors do not indicate collection is reasonably assured, revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of cash. There was no deferred revenue at September 30, 2017 or 2016 as a result of collection issues. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. The Company determines allowances on a customer specific basis. The Company had no allowances for doubtful accounts at September 30, 2017 and 2016.
CONTRACT MANUFACTURERS
The Company employs contract manufacturers for production of certain components and sub-assemblies. The Company may provide parts and components to such parties from time to time, but recognizes no revenue or markup on such transactions. During fiscal
year 2017, the Company performed assembly of products in-house using components and sub-assemblies from a variety of contract manufacturers and suppliers.
INVENTORIES
Inventories are valued at the lower of cost or net realizable value. Cost is determined using a standard cost system whereby differences between the standard cost and purchase price are recorded as a purchase price variance in cost of revenues. Inventory is comprised of raw materials, assemblies and finished products intended for sale
.
The Company periodically makes judgments and estimates regarding the future utility and carrying value of inventory. The carrying value of inventory is periodically reviewed and impairments, if any, are recognized when the expected net realizable value is less than carrying value. The Company has inventory reserves for estimated obsolescence or unmarketable inventory, which is equal to the difference between the cost of inventory and the estimated market value, based upon assumptions about future demand and market conditions. The Company decreased its inventory reserve by $161,600 and increased it by $159,954 during the years ended September 30, 2017 and 2016, respectively. These changes were based on the disposal of obsolete inventory in 2017 and expected usage of components resulting from changes in product lines and customer demand in 2016.
EQUIPMENT AND DEPRECIATION
Equipment is stated at cost. Depreciation on machinery and equipment and office furniture and equipment is computed over the estimated useful lives of t
wo to seven years using the straight-line method. Leasehold improvements are amortized over the life of the lease. Upon retirement or disposition of equipment, the related cost and accumulated depreciation is removed, and a gain or loss is recorded.
INTANGIBLES
Intangible assets, which consist of patents and trademarks, are carried at cost less accumulated amortization. Intangible assets are amortized over their estimated useful lives, which have been estimated to be 15 years. The carrying value of intangibles is periodically reviewed and impairments, if any, are recognized when the future undiscounted cash flows realized from the assets is less than its carrying value.
LEASES
Leases entered into are classified as either capital or operating leases. At the time a capital lease is entered into, an asset is recorded, together with its related long-term obligation to reflect the purchase and financing. At September
30, 2017 and 2016, the Company had no capital lease obligations.
REVENUE RECOGNITION
The Company derives its revenue primarily from two sources: (i)
product revenues, and (ii) contracts, license fees, other services, and freight.
Product revenues from customers, including resellers and system integrators, are recognized in the periods that products are shipped (FOB shipping point) or received by customers (FOB destination), when the fee is fixed or determinable, when collection of resulting receivables is reasonably assured, and there are no remaining obligations for the Company. Most revenues to resellers and system integrators are based on firm commitments from the end user; as a result, resellers and system integrators carry little or no inventory. Revenues from associated engineering and installation contracts are recognized based on milestones or completion of the contracted services. The Company
’s customers do not have the right to return product unless the product is found to be defective.
The Company also sells extended repair and maintenance contracts with terms ranging from one to several years
, which provide repair and maintenance services after expiration of the original one year warranty term. Revenues from separately priced extended repair and maintenance contracts are recognized on a straight-line basis over the contract period and classified as contract and other revenues.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of revenues.
Shipping and handling costs invoiced to customers are included in revenue. Actual shipping and handling costs were $148,862 and $128,380 for the fiscal years ended September 30, 2017 and 2016, respectively. Actual revenues from shipping and handling were $124,141 and $78,975 for the fiscal years ended September 30, 2017 and 2016, respectively.
ADVERTISING
Advertising costs are charged to expense as incurred. The Company expensed
$42,232 and $66,353 for the years ended September 30, 2017 and 2016, respectively, for advertising costs.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
WARRANTY RESERVES
The Company warrants its products to be free from defects in materials and workmanship for a period of one year from the date of purchase. The warranty is generally limited. The Company currently provides direct warranty service. Some agreements with OEM customers, from time to time, may require that certain quantities of product be made available for use as warranty replacements. International market warranties are generally similar to the U.S. market. The Company also sells extended warranty contracts and maintenance agreements.
The Company establishes a warranty reserve based on anticipated warranty claims at the time product revenues are recognized. Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs and anticipated rates of warranty claims. The Company evaluates the adequacy of the provision for warranty costs each reporting period. The warranty reserve was
$179,101 and $356,984 at September 30, 2017 and 2016, respectively.
INCOME TAXES
The Company determines its income tax provision using the asset and liability method. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. A valuation allowance is recorded by the Company to the extent it is more likely than not that
some portion or all of the deferred tax asset will not be realized. Significant management judgment is required in assessing the ability to realize the Company’s deferred tax assets. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income and the tax rates in effect at that time. Additional information regarding income taxes appears in Note 10, Income Taxes.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles held for use are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of undiscounted expected future cash flows is less than the carrying amount of the asset, or if changes in facts and circumstances indicate this, an impairment loss is measured and recognized using the asset
’s fair value.
SEGMENT INFORMATION
The Company presents its business as one reportable segment due to the similarity in nature of products provided, financial performance measures (revenue growth and gross margin), methods of distribution (direct and indirect) and customer markets (each product is sold by the same personnel to government and commercial customers, domestically and internationally). The Company
’s chief operating decision-making officer reviews financial information on sound products on a consolidated basis. See Note 15, Major Customers, Suppliers, Segment and Related Information, for additional information.
NET
(LOSS)
INCOME PER SHARE
Basic net
(loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding for the period. Diluted net (loss) income per share reflects the potential dilution of securities that could occur if outstanding securities convertible into common stock were exercised or converted. See Note 14, Net (Loss) Income Per Share, for additional information.
FOREIGN CURRENCY TRANSLATION
The Company
’s functional currency is U.S. dollars as substantially all of the Company’s operations use this denomination. Foreign sales to date have been denominated in U.S. dollars. Transactions undertaken in other currencies, which have not been material, are translated using the exchange rate in effect as of the transaction date. Any exchange gains and losses are included in the statements of operations.
SHARE-BASED COMPENSATION
The Company recognized share-based compensation expense related to
qualified and non-qualified stock options issued to employees and directors over the expected vesting term of the stock-based instrument based on the grant date fair value. 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. See Note 12, Share-based Compensation, for additional information.
RECLASSIFICATIONS
Where necessary, the prior year
’s information has been reclassified to conform to the fiscal year 2017 statement presentation. These reclassifications had no effect on previously reported results of operations or accumulated deficit.
SUBSEQUENT EVENTS
Management has evaluated events subsequent to September
30, 2017 through the date the accompanying consolidated financial statements were filed with the Securities and Exchange Commission and noted that there have been no events or transactions which would affect the Company’s consolidated financial statements for the year ended September 30, 2017.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This guidance changes how companies account for certain aspects of share-based payments to employees. Among other things, under the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in-capital (“APIC”), but will instead record such items as income tax expense or benefit in the income statement, and APIC pools will be eliminated. Companies will apply this guidance prospectively. Another component of the new guidance allows companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards, whereby forfeitures can be estimated, as required today, or recognized when they occur. If elected, the change to recognize forfeitures when they occur needs to be adopted using a modified retrospective approach. All of the guidance will be effective for the Company in the fiscal year beginning October 1, 2017. The Company is currently evaluating the impact of this guidance, if any, on its financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which issued new guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new guidance must be adopted using the modified retrospective approach and will be effective for the Company in the fiscal year beginning October 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of this guidance, if any, on its financial statements and related disclosures.
In May 2014,
the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles when it becomes effective.
In July 2015, the FASB deferred the effective date of the standard by an additional year; however, it provided companies the option to adopt one year earlier, commensurate with the original effective date. Accordingly, the standard will be effective for the Company in the fiscal year beginning October 1, 2018, with an option to adopt the standard for the fiscal year beginning October 1, 2017. Subsequently the FASB has issued additional guidance (ASUs 2015-14; 2016-08; 2016-10; 2016-12; 2016-13; 2016-20). The Company is currently evaluating this standard and has not yet selected a transition method or the effective date on which it plans to adopt the standard, nor has it determined the effect of the standard on its financial statements and related disclosures.
In November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”), which simplifies the presentation of deferred income taxes by eliminating the need for entities to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. This amendment is effective for the Company in the fiscal year beginning October 1, 2017. The Company early adopted this guidance effective in the September 30, 2016 consolidated financial statements
.
4. FAIR VALUE MEASUREMENTS
The Company
’s financial instruments consist principally of cash equivalents, short and long-term marketable securities, accounts receivable and accounts payable. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:
Level 1: Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.
Level 3: Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
The fair value of the majority of the Company
’
s cash equivalents and marketable securities was determined based on “
Level 1”
inputs. The fair value of certain marketable securities, long-term debt, hedge fund investments, and derivative contracts were determined based on “
Level 2”
inputs. The valuation techniques used to measure the fair value of the “
Level 2”
instruments were valued based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data. The Company does not have any financial instruments in the “Level 3” category.
There have been no changes to the inputs used in the fair value measurement of Level 1, Level 2, and Level 3 assets and no changes in valuation techniques for these assets for the
years ended September 30, 2017 and 2016.
Instruments Measured at Fair Value
The following table
s present the Company’s cash equivalents and marketable securities’ costs, gross unrealized gains and losses, and fair value by major security type recorded as cash equivalents or short-term or long-term marketable securities as of September 30, 2017 and 2016.
|
|
September 30, 2017
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Cash
|
|
|
Short-term
|
|
|
Long-term
|
|
|
|
Cost Basis
|
|
|
Gains/(Losses)
|
|
|
Value
|
|
|
Equivalents
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
55,257
|
|
|
$
|
-
|
|
|
$
|
55,257
|
|
|
$
|
55,257
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
2,436,647
|
|
|
$
|
-
|
|
|
$
|
2,436,647
|
|
|
$
|
-
|
|
|
$
|
1,937,647
|
|
|
$
|
499,000
|
|
Municipal securities
|
|
|
25,315
|
|
|
|
(12
|
)
|
|
|
25,303
|
|
|
|
-
|
|
|
|
25,303
|
|
|
|
-
|
|
Corporate bonds
|
|
|
2,609,973
|
|
|
|
(1,257
|
)
|
|
|
2,608,716
|
|
|
|
-
|
|
|
|
2,396,592
|
|
|
|
212,124
|
|
Subtotal
|
|
|
5,071,935
|
|
|
|
(1,269
|
)
|
|
|
5,070,666
|
|
|
|
-
|
|
|
|
4,359,542
|
|
|
|
711,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,127,192
|
|
|
$
|
(1,269
|
)
|
|
$
|
5,125,923
|
|
|
$
|
55,257
|
|
|
$
|
4,359,542
|
|
|
$
|
711,124
|
|
|
|
September 30, 2016
|
|
|
|
Cost Basis
|
|
|
Unrealized Gains/(Losses)
|
|
|
Fair Value
|
|
|
Cash Equivalents
|
|
|
Short-term Securities
|
|
|
Long-term Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
95,538
|
|
|
$
|
95,538
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
3,236,168
|
|
|
$
|
-
|
|
|
$
|
3,236,168
|
|
|
$
|
-
|
|
|
$
|
1,299,133
|
|
|
$
|
1,937,035
|
|
Municipal securities
|
|
|
140,637
|
|
|
|
-
|
|
|
|
140,637
|
|
|
|
-
|
|
|
|
140,637
|
|
|
|
-
|
|
Corporate bonds
|
|
|
1,748,404
|
|
|
|
(1,549
|
)
|
|
|
1,746,855
|
|
|
|
-
|
|
|
|
1,496,354
|
|
|
|
250,501
|
|
Subtotal
|
|
|
5,125,209
|
|
|
|
(1,549
|
)
|
|
|
5,123,660
|
|
|
|
-
|
|
|
|
2,936,124
|
|
|
|
2,187,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,125,209
|
|
|
$
|
(1,549
|
)
|
|
$
|
5,219,198
|
|
|
$
|
95,538
|
|
|
$
|
2,936,124
|
|
|
$
|
2,187,536
|
|
5
. INVENTORIES
Inventories consisted of the following:
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
3,784,935
|
|
|
$
|
4,393,928
|
|
Finished goods
|
|
|
1,742,960
|
|
|
|
775,628
|
|
Work in process
|
|
|
147,871
|
|
|
|
174,485
|
|
Inventories, gross
|
|
|
5,675,766
|
|
|
|
5,344,041
|
|
Reserve for obsolescence
|
|
|
(418,532
|
)
|
|
|
(580,132
|
)
|
Inventories, net
|
|
$
|
5,257,234
|
|
|
$
|
4,763,909
|
|
The Company had raw materials l
ocated at supplier locations of $69,693 and $97,515 at September 30, 2017 and 2016, respectively.
The Company relies on one supplier for compression drivers for its LRAD product
s and is making efforts to obtain alternative suppliers to reduce such reliance. The Company’s ability to manufacture its LRAD products could be adversely affected if it were to lose this sole source supplier and was unable to find an alternative supplier.
6
. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Machinery and equipment
|
|
$
|
994,157
|
|
|
$
|
957,829
|
|
Office furniture and equipment
|
|
|
1,093,502
|
|
|
|
976,856
|
|
Leasehold improvements
|
|
|
76,138
|
|
|
|
71,738
|
|
Property and equipment, gross
|
|
|
2,163,797
|
|
|
|
2,006,423
|
|
Accumulated depreciation
|
|
|
(1,654,194
|
)
|
|
|
(1,533,079
|
)
|
Property and equipment, net
|
|
$
|
509,603
|
|
|
$
|
473,344
|
|
|
|
Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Depreciation expense
|
|
$
|
146,067
|
|
|
$
|
160,941
|
|
7
. INTANGIBLE ASSETS
Intangible assets
related to patents and trademarks consisted of the following:
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cost
|
|
$
|
108,247
|
|
|
$
|
108,247
|
|
Accumulated amortization
|
|
|
(52,558
|
)
|
|
|
(45,342
|
)
|
Intangible assets, net
|
|
$
|
55,689
|
|
|
$
|
62,905
|
|
|
|
Year ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Amortization expense
|
|
$
|
7,216
|
|
|
$
|
6,752
|
|
Estimated Amortization Expense Years Ended September 30,
|
|
|
|
|
2018
|
|
$
|
6,535
|
|
2019
|
|
|
6,247
|
|
2020
|
|
|
5,924
|
|
2021
|
|
|
5,636
|
|
2022
|
|
|
5,506
|
|
Thereafter
|
|
|
25,841
|
|
Total estimated amortization expense
|
|
$
|
55,689
|
|
8
. PREPAID MAINTENANCE AGREEMENT
At March
31, 2011, prepaid expenses included $1,500,000 paid to a third party service provider in connection with the Company’s obligations under a sales contract to a foreign military service to provide repair and maintenance services over an eight year period for products sold thereunder. The total prepaid expense is being amortized on a straight-line basis at an annual rate of $187,500 over the eight-year contract period to correspond with the revenues for these services, and is being recognized as a component of cost of sales. Accordingly, as of September 30, 2017, $187,500 of the total prepayment was classified as a current asset and $93,750 was classified as noncurrent. As of September 30, 2016, $187,500 of the total prepayment was classified as a current asset and $281,250 was classified as noncurrent.
9
. ACCRUED AND OTHER LIABILITIES—NONCURRENT
Accrued liabilities consisted of the following:
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Payroll and related
|
|
$
|
1,870,579
|
|
|
$
|
382,845
|
|
Deferred revenue
|
|
|
268,580
|
|
|
|
637,763
|
|
Warranty reserve
|
|
|
179,101
|
|
|
|
285,402
|
|
Accrued contract costs
|
|
|
197,034
|
|
|
|
197,034
|
|
Deferred rent
|
|
|
46,101
|
|
|
|
-
|
|
Total
|
|
$
|
2,561,395
|
|
|
$
|
1,503,044
|
|
Other liabilities - noncurrent consisted of the following:
Deferred rent
|
|
$
|
-
|
|
|
$
|
93,456
|
|
Extended warranty
|
|
|
-
|
|
|
|
71,582
|
|
Total
|
|
$
|
-
|
|
|
$
|
165,038
|
|
Payroll and related
Accrued payroll and related consists primarily of accrued
bonus, accrued vacation, accrued sales commissions and benefits at September 30, 2017 and 2016.
Deferred Revenue
Deferred revenue at September 30, 201
7 included prepayments from customers on current orders scheduled for delivery in the year ended September 30, 2018.
Warranty Reserve
Details of the estimated warranty reserve were as follows:
|
|
Years ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
356,984
|
|
|
$
|
315,618
|
|
Warranty provision
|
|
|
(109,925
|
)
|
|
|
79,954
|
|
Warranty settlements
|
|
|
(67,958
|
)
|
|
|
(38,588
|
)
|
Ending balance
|
|
$
|
179,101
|
|
|
$
|
356,984
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Short-term warranty reserve
|
|
$
|
179,101
|
|
|
$
|
285,402
|
|
Long-term warranty reserve
|
|
|
-
|
|
|
|
71,582
|
|
Total warranty reserve
|
|
$
|
179,101
|
|
|
$
|
356,984
|
|
The Company establishes a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs and anticipated rates of warranty claims. The Company evaluates the adequacy of the provision for warranty costs each reporting period
and in the fourth quarter of fiscal 2017 reduced the accrued warranty liability by $203,000 to an amount equal to estimated warranty expense for products currently under warranty.
Accrued contract costs
Accrued contract costs consist of accrued expenses for contracting a third party service provider to fulfill repair and maintenance obligations required under a contract through 2019 with a foreign military for units sold in the year ended September 30, 2011. Payments to the service provider will be made annually upon completion of each year of service. These services are being recorded in cost of revenues to correspond with the revenues for these services.
1
0
. INCOME TAXES
Income taxes consisted of the following:
|
|
Years ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Current tax provision
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
1,600
|
|
|
|
1,840
|
|
Total current tax provision
|
|
|
1,600
|
|
|
|
1,840
|
|
Deferred provision (benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
|
166,600
|
|
|
|
(159,800
|
)
|
State
|
|
|
29,400
|
|
|
|
(28,200
|
)
|
Total deferred provision (benefit)
|
|
|
196,000
|
|
|
|
(188,000
|
)
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
197,600
|
|
|
$
|
(186,160
|
)
|
A reconciliation of income taxes at the federal statutory rate of 34% to the effective tax rate was as follows:
|
|
Years ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Income taxes computed at the federal statutory rate
|
|
$
|
(231,000
|
)
|
|
$
|
(499,000
|
)
|
Change in valuation allowance
|
|
|
197,000
|
|
|
|
(66,000
|
)
|
Expired net operating loss carryforwards
|
|
|
283,000
|
|
|
|
487,000
|
|
Nondeductible compensation, interest expense and other
|
|
|
21,000
|
|
|
|
99,000
|
|
State income taxes, net of federal tax benefit
|
|
|
(24,000
|
)
|
|
|
(36,000
|
)
|
Change in R&D credit carryover
|
|
|
(98,000
|
)
|
|
|
(98,000
|
)
|
Stock options and other prior year true-ups
|
|
|
48,000
|
|
|
|
(75,000
|
)
|
Other
|
|
|
1,600
|
|
|
|
1,840
|
|
Provision (benefit) for income taxes
|
|
$
|
197,600
|
|
|
$
|
(186,160
|
)
|
The types of temporary differences between the tax basis of assets and liabilities and their approximate tax effects that give rise to a significant portion of the net deferred tax asset at September 30, 2017 and 2016 were as follows:
|
|
At September 30,
|
|
Deferred tax assets:
|
|
2017
|
|
|
2016
|
|
Net operating loss carryforwards
|
|
$
|
16,443,000
|
|
|
$
|
16,410,000
|
|
Research and development credit
|
|
|
2,559,000
|
|
|
|
2,461,000
|
|
Share-based compensation
|
|
|
898,000
|
|
|
|
598,000
|
|
Equipment
|
|
|
(80,000
|
)
|
|
|
(23,000
|
)
|
Patents
|
|
|
69,000
|
|
|
|
102,000
|
|
Accruals and other
|
|
|
546,000
|
|
|
|
832,000
|
|
State tax deduction
|
|
|
(7,000
|
)
|
|
|
(7,000
|
)
|
Federal AMT Credit
|
|
|
52,000
|
|
|
|
52,000
|
|
Allowances
|
|
|
157,000
|
|
|
|
211,000
|
|
Gross deferred tax asset
|
|
|
20,637,000
|
|
|
|
20,636,000
|
|
Less valuation allowance
|
|
|
(12,306,000
|
)
|
|
|
(12,109,000
|
)
|
Total deferred tax assets, net of valuation allowance
|
|
$
|
8,331,000
|
|
|
$
|
8,527,000
|
|
At September
30, 2017, the Company had net deferred tax assets of approximately $8,331,000. The deferred tax assets are primarily composed of federal and state NOL carryforwards and federal and state research and development (“R&D”) credit carryforwards. At September 30, 2017, the Company had federal NOL carryforwards of approximately $47,019,000, which expire from 2022 through 2036. The Company also has an estimated $1,990,000 and $569,000 of federal and state R&D tax credits, respectively, at September 30, 2017, a portion of which will begin to expire in the 2018 tax year. The Company recognizes windfall tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. Accordingly, deferred tax assets are not recognized for NOL carryforwards resulting from windfall tax benefits occurring from October 1, 2008 onward. At September 30, 2017, deferred tax assets do not include excess tax benefits from stock-based compensation of approximately $1,130,000.
The Company reviews
its ability to realize its deferred tax assets on a quarterly basis.
In doing so, management considers historical and projected taxable income of the Company, along with any tax planning strategies and any other positive or negative evidence. Realization is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards and other deferred assets. The Company has sustained profitability over six of the seven most recent fiscal years. In the past few years, the Company has developed products and expanded its marketing efforts into the mass notification market, which is a very large and growing market. While the Company is still in the early stages of market penetration, it has increased its confidence in forecasted taxable income based on growth opportunities in this market. It has also increased its forecasted revenues and taxable income for its directional product opportunities, where it is a leading player in the world market. As a result, du
ring the quarter ended September 30, 2015, the Company determined it was more likely than not that a portion of the deferred tax assets will be realized and, accordingly, released a portion of the valuation allowance. While the Company incurred net losses in the years ended September 30, 2017 and 2016, it was significantly impacted by a non-recurring expense in fiscal 2017 and primarily due to non-recurring expense in fiscal 2016. The Company expects to utilize the deferred tax asset in the future. The Company adjusted its deferred tax asset value in the quarter ended September 30, 2017 and continues to maintain a valuation allowance of $12,306,000. Since future financial results may differ from previous estimates, periodic adjustments to the Company’s valuation allowances may be necessary.
The Company
recorded a tax provision for the minimum state tax requirement for the year ended September 30, 2017 as the Company’s annual effective tax rate is zero. During the quarter ended June 30, 2012, the Company amended its federal tax return for the year ended September 30, 2008 to make an election to carry back its fiscal year ended September 30, 2008 applicable NOL for a period of 3 years, and carry forward the loss for up to 20 years, as per Section 172(b)(1)(H) of the Internal Revenue Code of 1986 (“Section 172”), as amended per the American Recovery and Reinvestment Tax Act of 2009 for eligible small businesses. As of September 30, 2017, the Company had no unrecognized tax benefits. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense.
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.
1
1
. COMMITMENTS AND CONTINGENCIES
Facility Lease
On November
29, 2011, the Company entered into a lease for 31,360 square feet to replace the prior San Diego facility as the Company’s executive offices, research and development, assembly and operational facilities. The lease commenced July 1, 2012 and will expire June 30, 2018. The aggregate monthly payments, with abatements, averaged $16,306 per month in the first year, and is $25,088, $26,656, $28,224, $29,792 and $31,360 per month for the second through sixth years of the lease, plus certain other costs and charges as specified in the lease agreement, including the Company’s proportionate share of the building operating expenses and real estate taxes.
Operating Leases
Total operating lease expense, including facilities and business equipment commitments, recorded by the Company for the years ended September
30, 2017 and 2016 was $351,418 and $377,033, respectively.
The obligations under all operating leases are as follows:
Years ending September 30:
|
|
|
|
|
2018
|
|
|
298,797
|
|
2019
|
|
|
16,557
|
|
2020
|
|
|
15,177
|
|
Total lease obligations
|
|
$
|
330,531
|
|
Employment Agreements
The Company entered into an employment agreement in
August 2016 with its chief executive officer that provides for severance benefits including twelve months’ salary and health benefits, a pro-rata share of his annual cash bonus for the fiscal year in which the termination occurs to which he would have become entitled had he remained employed through the end of such fiscal year, and if his employment is terminated during fiscal year 2019 or later, vesting of a pro-rata share of the stock options held by him that are subject to performance-based vesting based on the extent to which the required performance criteria are achieved in the year of termination and on the portion of the year he was employed. The agreement also has a change of control clause whereby in the event of a specified termination event, the chief executive officer would be entitled to receive in a single lump sum (a) an amount equal to two times the sum of his base salary then in effect and his then target annual cash bonus, (b) a pro-rata share of his annual cash bonus for such year and (c) the cost of his and his dependents’ coverage under COBRA for an 18-month period. In addition, in such event, (i) all of the time-vesting stock options held will vest, unless the termination occurs within the first year of his employment, in which case only the number of options scheduled to vest on the first anniversary of his employment date will vest pro-rated for the period of time he was employed during such one-year period, (ii) 375,000 of the stock options held that are subject to performance-based vesting will vest and (iii) if employment is terminated during fiscal year 2019 or later, a pro-rata share of the stock options held that are subject to performance-based vesting will vest based on the extent to which the required performance criteria are achieved for the fiscal year in which the termination occurs and based on the period of time he was employed during such fiscal year prior to the termination.
There are no other employment agreements with executive officers or other employees providing future benefits or severance arrangements.
Bonus Plan
In
fiscal 2017, the Company implemented a bonus plan for employees, in accordance with their terms of employment, whereby they can earn a percentage of their salary, at three different levels, based on meeting targeted objectives for orders received, revenue, operating income and operating cash flow. In 2016, the Company had a bonus plan for employees, in accordance with their terms of employment, whereby they can earn a percentage of their salary at three different levels based on meeting three different targeted objectives for earnings per share. In fiscal year 2017, the company exceeded the minimum targeted level of orders received and revenues and has accrued $1,100,693 of expense. In fiscal year 2016, the Company did not meet the targeted objectives for earnings per share, so no accrual was recorded.
Employee Benefit
—401K Plan
The Company has a defined contribution plan (401(k))
covering its employees. Matching contributions are made on behalf of all participants at the discretion of the board of directors. During the fiscal years ended September 30, 2017 and 2016, the Company made matching contributions of $196,239 and $157,081, respectively.
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.
Guarantees and Indemnifications
The Company enters into indemnification provisions under (i)
its agreements with other companies in its ordinary course of business, typically with business partners, contractors, customers and landlords and (ii) its agreements with investors. Under these arrangements, the Company may indemnify other parties such as business partners, customers, underwriters, and investors for certain losses suffered, claims of intellectual property infringement, negligence and intentional acts in the performance of services, and violations of laws including certain violations of securities laws. The Company’s obligation to provide such indemnification in such circumstances would arise if, for example, a third party sued a customer for intellectual property infringement and the Company agreed to indemnify the customer against such claims. The Company is unable to estimate with any reasonable accuracy the liability that may be incurred pursuant to such indemnification obligations. Some of the factors that would affect this assessment include, but are not limited to, the nature of the claim asserted, the relative merits of the claim, the financial ability of the parties, the nature and amount of damages claimed, insurance coverage that the Company may have to cover such claims, and the willingness of the parties to reach settlement, if any. Because of the uncertainty surrounding these circumstances, the Company’s indemnification obligations could range from immaterial to having a material adverse impact on its financial position and its ability to continue in the ordinary course of business. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements in the past, and the Company had no liabilities recorded for these agreements as of September 30, 2017 and 2016.
Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity.
In addition, the Company executed indemnification agreements in June 2013 with the then current Directors and Officers of the Company, indemnifying them from any expenses arising out of any claims. All directors and officers have executed indemnification agreements. The term of the indemnification period is for the officer or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has a director and officers’ liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company does not believe that a material loss exposure related to these agreements is either probable or can be reasonably estimated. Accordingly, the Company has no liability recorded for these agreements as of September 30, 2017 and 2016.
1
2
. SHARE-BASED COMPENSATION
Stock Option Plans
At September 30, 201
7, the Company had two equity incentive plans. The 2005 Equity Incentive Plan (“2005 Equity Plan”) was terminated with respect to new grants in March 2015, but remains in effect for grants issued prior to that time. The Amended and Restated 2015 Equity Incentive Plan (“2015 Equity Plan”) was approved by the Company’s Board of Directors on December 6, 2016 and by the Company’s stockholders on March 14, 2017. The amendment to the Equity Incentive Plan was approved in 2015 authorizes for issuance as stock options, restricted stock, stock appreciation rights, restricted stock units and performance awards, an aggregate of 5,000,000 new shares of common stock to employees, directors, advisors or consultants. At September 30, 2017, there were options outstanding covering 2,377,502 and 2,411,000 shares of common stock under the 2005 Equity Plan and 2015 Equity Plan, respectively, and 2,330,667 shares of common stock available for grant for a total of 7,119,169 currently available under the two equity plans.
Share-Based Compensation
The Company
’s employee stock options have various restrictions that reduce option value, including vesting provisions and restrictions on transfer and hedging, among others, and are often exercised prior to their contractual maturity.
The Company recorded
$1,116,400 and $605,426 of stock compensation expense for the years ended September 30, 2017 and 2016, respectively. The weighted average estimated fair value of employee stock options granted during the year ended September 30, 2017 and 2016 was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions (annualized percentages):
|
|
2017
|
|
|
2016
|
|
Volatility
|
|
|
42.6%
|
-
|
53.7%
|
|
|
|
49.0%
|
-
|
52.0%
|
|
Risk-free interest rate
|
|
|
1.73%
|
-
|
2.01%
|
|
|
|
1.0%
|
-
|
1.7%
|
|
Forfeiture rate
|
|
|
|
10.0%
|
|
|
|
|
|
10.0%
|
|
|
Dividend yield
|
|
|
|
0.0%
|
|
|
|
|
2.2%
|
-
|
2.7%
|
|
Expected life in years
|
|
|
3.8
|
-
|
4.6
|
|
|
|
3.2
|
-
|
4.6
|
|
Weighted average fair value of options granted during the period
|
|
|
|
$0.71
|
|
|
|
|
|
$0.70
|
|
|
The Company
did not pay a dividend in fiscal 2017 but did pay a dividend during the year ended September 30, 2016. Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected life of the options. The risk-free interest rate is based on rates published by the Federal Reserve Board. The contractual term of the options was seven years. The expected life is based on observed and expected time to post-vesting exercise. The expected forfeiture rate is based on past experience and employee retention data. Forfeitures are estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from those estimates. Such revision adjustments to expense will be recorded as a cumulative adjustment in the period in which the estimate is changed.
As of September
30, 2017, there was approximately $683,000 of total unrecognized compensation costs related to outstanding employee stock options. This amount is expected to be recognized over a weighted average period of 2.2 years. To the extent the forfeiture rate is different from what the Company anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.
Performance-Based Stock Options
On August 1, 2016, the
Company awarded a performance-based stock option (PVO) to purchase 750,000 shares of the Company’s common stock to a key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2019 and 2020 (375,000 shares for each year) including a minimum Free Cash Flow margin and Net Revenue targets at four different target levels for each of the years.
Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets.
The Company determined that it is probable that the performance condition will be achieved at the low end of the expected revenue level for each of the years
, and therefore assumed that 187,500 shares of the PVO would vest. The weighted average grant date fair value for the PVO was $0.81 per share, which was estimated on the date of grant using the Black-Scholes option pricing model. Non-cash share-based compensation expense related to this award is recognized on a straight line basis and was $42,363 and $4,774 for the years ended September 30, 2017 and 2016 respectively. The Company will continue to review these targets each quarter and will adjust the expected outcome as needed, recognizing compensation expense cumulatively in such period for the difference in expense. The Company did not grant any PVOs in the year ended September 30, 2017.
Restricted
Stock
Units
In
the quarter ended December 31, 2016, the Board of Directors approved an amendment to the Company’s compensation program for non-employee directors that provides for the grant of 25,000 restricted stock units (“RSUs”) to each of the Company’s non-employee directors at each annual meeting of the Company’s stockholders, subject to stockholder approval of the
Amended and Restated 2015 Equity Incentive Plan at the 2017 Annual Meeting of Stockholders. These RSUs were granted as replacements for 20,000 stock options that would have been granted on the date of the 2016 Annual Meeting of Stockholders and would have vested on the first anniversary of the 2016 Annual Meeting of Stockholders, which was May 17, 2017.
As a result of the stockholders approval of the Amended and Restated 2015 Equity Incentive Plan at the 2017 Annual Meeting of Stockholders on March 14, 2017, the RSUs previously granted were made effective at a market value of $197,500 and were expensed on a straight line basis through the May 17, 2017 vest date.
O
n March 14, 2017, non-employee directors of the Company received 25,000 RSUs that will vest on the first anniversary of the grant date. These were also issued at a market value of $197,500, which will be expensed on a straight line basis through the March 14, 2018 vest date.
A summary of activity of the Company
’s restricted stock plan as of September 30, 2017 and 2016 is presented below:
|
|
Number
|
|
|
|
of Shares
|
|
Balance, September 30, 2016
|
|
|
-
|
|
Granted
|
|
|
250,000
|
|
Released
|
|
|
(125,000
|
)
|
Forfeited/cancelled
|
|
|
-
|
|
Balance, September 30, 2017
|
|
|
125,000
|
|
Stock Option Summary Information
A summary of activity for the Company
’s stock option plans as of September 30, 2017 and 2016 is presented below:
|
|
Number
|
|
|
Weighted Average
|
|
|
|
of Shares
|
|
|
Exercise Price
|
|
Outstanding October 1, 2016
|
|
|
4,404,002
|
|
|
$
|
2.18
|
|
Granted
|
|
|
574,500
|
|
|
$
|
2.09
|
|
Forfeited/expired
|
|
|
(81,667
|
)
|
|
$
|
2.51
|
|
Exercised
|
|
|
(233,333
|
)
|
|
$
|
1.60
|
|
Outstanding September 30, 2017
|
|
|
4,663,502
|
|
|
$
|
2.16
|
|
Exercisable September 30, 2017
|
|
|
3,329,437
|
|
|
$
|
2.25
|
|
The aggregate intrinsic value for options outstanding and options exercisable at September
30, 2017 was $869,955 and $673,225, respectively. The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last day of trading during the year, which was $2.13 per share, and the exercise price multiplied by the number of applicable options. The total intrinsic value of stock options exercised during the year ended September 30, 2017 was $72,709 and proceeds from these exercises was $373,228. The total intrinsic value of stock options exercised during the year ended September 30, 2016 was $288 and cash received from these exercises was $2,200. The Company recognized $72,709 and $288 as a tax benefit in the income tax provision for the years ended September 30, 2017 and 2016, respectively.
The following table summarizes information about stock options outstanding at September
30, 2017:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Range of
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Exercise
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Prices
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$0.93
|
-
|
$1.76
|
|
|
1,332,752
|
|
|
|
4.35
|
|
|
$
|
1.65
|
|
|
|
1,036,036
|
|
|
$
|
1.63
|
|
$1.77
|
-
|
$1.99
|
|
|
1,654,500
|
|
|
|
4.63
|
|
|
$
|
1.93
|
|
|
|
626,526
|
|
|
$
|
1.89
|
|
$2.00
|
-
|
$2.85
|
|
|
905,000
|
|
|
|
2.31
|
|
|
$
|
2.57
|
|
|
|
902,500
|
|
|
$
|
2.57
|
|
$2.86
|
-
|
$3.13
|
|
|
761,250
|
|
|
|
1.29
|
|
|
$
|
3.00
|
|
|
|
757,500
|
|
|
$
|
3.00
|
|
$3.14
|
-
|
$3.17
|
|
|
10,000
|
|
|
|
4.14
|
|
|
$
|
3.17
|
|
|
|
6,875
|
|
|
$
|
3.17
|
|
$0.93
|
-
|
$3.17
|
|
|
4,663,502
|
|
|
|
3.41
|
|
|
$
|
2.18
|
|
|
|
3,329,437
|
|
|
$
|
2.25
|
|
The Company recorded non-cash share-based compensation expense for employees, directors and consultants for
the fiscal years ended September 30, 2017 and 2016. The amounts of share-based compensation expense are classified in the Consolidated Statements of Operations as follows:
Years Ended September 30,
|
|
2017
|
|
|
2016
|
|
Cost of revenues
|
|
$
|
24,151
|
|
|
$
|
24,092
|
|
Selling, general and administrative
|
|
|
998,540
|
|
|
|
478,695
|
|
Research and development
|
|
|
93,709
|
|
|
|
102,639
|
|
Total
|
|
$
|
1,116,400
|
|
|
$
|
605,426
|
|
1
3
. STOCKHOLDERS’ EQUITY
Common Stock Activity
During the year ended September
30, 2017, the Company issued 233,333 shares of common stock and obtained gross proceeds of $373,228 ($240,228 of the proceeds are reported in accounts receivable as the transaction was in process at year-end) in connection with the exercise of stock options. During the year ended September 30, 2016, the Company issued 1,250 shares of common stock and obtained gross proceeds of $2,200 in connection with the exercise of stock options. During the year ended September 30, 2017, the Company issued 125,000 of shares of common stock upon full vesting of RSUs. No RSUs vested in the year ended September 30, 2016.
Preferred Stock
The Company is authorized under its certificate of incorporation and bylaws to issue 5,000,000 shares of preferred stock, $0.00001 par value, without any further action by the stockholders. The board of directors has the authority to divide any and all shares of preferred stock into series and to fix and determine the relative rights and preferences of the preferred stock, such as the designation of series and the number of shares constituting such series, dividend rights, redemption and sinking fund provisions, liquidation and dissolution preferences, conversion or exchange rights and voting rights, if any. Issuance of preferred stock by the board of directors could result in such shares having dividend and or liquidation preferences senior to the rights of the holders of common stock and could dilute the voting rights of the holders of common stock.
No shares of preferred stock were outstanding during the fiscal years ended September
30, 2017 or 2016.
Share Buyback Program
The Board of Directors approved a share buyback program under which the Company was authorized to repurchase up to $4 million of its outstanding common shares.
During the year ended September 30, 2017, no shares were repurchased and 1,099,608 shares were repurchased for $1,748,456 in the year ended September 30, 2016. At September 30, 2017, all repurchased shares were retired. In December 2017, the Board of Directors extended the program through December 31, 2018.
1
4
. NET
LOSS
PER SHARE
Basic earnings
per share are computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period increased to include the number of dilutive potential common shares outstanding during the period. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method, which assumes that the proceeds from the exercise of the outstanding options are used to repurchase common stock at market value. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities. If the Company has losses for the period, the inclusion of potential common stock instruments outstanding would be anti-dilutive. In addition, under the treasury stock method, the inclusion of stock options with an exercise price greater than the per-share market value would be antidilutive. Potential common shares that would be antidilutive are excluded from the calculation of diluted income per share.
The following table sets forth the computation of basic and diluted earnings per share:
|
|
Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Loss available to common stockholders
|
|
$
|
(876,754
|
)
|
|
$
|
(1,281,599
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
31,855,430
|
|
|
|
31,970,600
|
|
|
|
|
|
|
|
|
|
|
Basic loss income per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
Diluted loss income per common share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
1
5
. MAJOR CUSTOMERS, SUPPLIERS, SEGMENT AND RELATED INFORMATION
Major Customers
For the fiscal year ended September 30, 2017, revenues from one customer accounted for
15% of total revenues with no other single customer accounting for more than 10% of total revenues. For the fiscal year ended September 30, 2016, the Company did not have any single customer representing more than 10% of total revenues.
Suppliers
The Company has a large number of components and sub-assemblies produced by outside suppliers, some of which are sourced from a single supplier, which can magnify the risk of shortages and decrease the Company
’s ability to negotiate with suppliers on the basis of price. In particular, the Company depends on one supplier of compression drivers for its LRAD products. If supplier shortages occur, or quality problems arise, then production schedules could be significantly delayed or costs significantly increased, which could in turn have a material adverse effect on the Company’s financial condition, results of operation and cash flows.
Segment and Related Information
The Company presents its business as one reportable segment due to the similarity in nature of products marketed, financial performance measures (revenue growth and gross margin), methods of distribution (direct and indirect) and customer markets (each product is sold by the same personnel to government and commercial customers, domestically and internationally). The Company
’s chief operating decision making officer reviews financial information on sound products on a consolidated basis.
The following table summarizes revenues by geographic region. Revenues are attributed to countries based on customer
’s delivery location.
|
|
Years ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Americas
|
|
$
|
8,688,005
|
|
|
$
|
7,582,545
|
|
Europe, Middle East and Africa
|
|
|
1,439,157
|
|
|
|
1,035,559
|
|
Asia Pacific
|
|
|
10,187,016
|
|
|
|
7,742,901
|
|
Total Revenues
|
|
$
|
20,314,178
|
|
|
$
|
16,361,005
|
|