UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended DecemberMarch 31, 20120720
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 000-24248
LRAD CORPORATIONGENASYS INC.
(Exact name of registrant as specified in its charter)
Delaware | 87-0361799 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
California | 92127 |
(Address of principal executive offices) | (Zip Code) |
(858) 676-1112
(Registrant’sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which securities are registered |
Common stock, $0.00001 par value per share | GNSS | NASDAQ Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer |
| Smaller reporting company | ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The number of shares of Common Stock, $0.00001 par value, outstanding on February 1, 2018May 8, 2020 was 32,249,288 .33,128,729.
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
LRAD CorporationGenasys Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||||||||||
2017 | September 30, | March 31, | ||||||||||||||
(Unaudited) | 2017 | 2020 | September 30, | |||||||||||||
(Unaudited) | 2019 | |||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 15,117,544 | $ | 12,803,887 | $ | 16,398,928 | $ | 18,819,078 | ||||||||
Short-term marketable securities | 3,602,254 | 4,359,542 | 3,464,834 | 3,695,364 | ||||||||||||
Restricted cash | 264,633 | 263,136 | ||||||||||||||
Accounts receivable, net | 5,678,220 | 5,681,882 | 5,849,608 | 3,644,059 | ||||||||||||
Inventories, net | 5,259,934 | 5,257,234 | 6,921,829 | 5,835,163 | ||||||||||||
Prepaid expenses and other | 589,561 | 983,322 | 994,644 | 1,781,837 | ||||||||||||
Total current assets | 30,247,513 | 29,085,867 | 33,894,476 | 34,038,637 | ||||||||||||
Long-term marketable securities | 1,005,660 | 711,124 | 1,646,466 | 1,384,819 | ||||||||||||
Long-term restricted cash | 395,293 | 434,704 | ||||||||||||||
Deferred tax assets, net | 5,622,112 | 8,331,000 | 5,117,842 | 5,387,000 | ||||||||||||
Property and equipment, net | 505,469 | 509,603 | 2,105,633 | 2,269,506 | ||||||||||||
Goodwill | 2,318,863 | 2,305,750 | ||||||||||||||
Intangible assets, net | 53,885 | 55,689 | 1,034,161 | 1,175,634 | ||||||||||||
Operating lease right of use asset | 5,534,154 | - | ||||||||||||||
Other assets | 117,644 | 164,517 | 124,042 | 123,933 | ||||||||||||
Total assets | $ | 37,552,283 | $ | 38,857,800 | $ | 52,170,930 | $ | 47,119,983 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 1,903,001 | $ | 1,112,366 | $ | 1,932,485 | $ | 859,530 | ||||||||
Accrued liabilities | 1,858,548 | 2,561,395 | 5,442,301 | 8,134,341 | ||||||||||||
Notes payable, current portion | 281,178 | 279,588 | ||||||||||||||
Operating lease liabilities, current portion | 728,134 | - | ||||||||||||||
Total current liabilities | 8,384,098 | 9,273,459 | ||||||||||||||
Notes payable, less current portion | 16,546 | 32,903 | ||||||||||||||
Other liabilities, noncurrent | 435,880 | 2,432,272 | ||||||||||||||
Operating lease liabilities, noncurrent | 6,743,195 | - | ||||||||||||||
Total liabilities | 3,761,549 | 3,673,761 | 15,579,719 | 11,738,634 | ||||||||||||
Commitments and contingencies (Note 9) | ||||||||||||||||
Stockholders' equity: | ||||||||||||||||
Preferred stock, $0.00001 par value; 5,000,000 shares authorized; none issued and outstanding | - | - | - | - | ||||||||||||
Common stock, $0.00001 par value; 50,000,000 shares authorized; 32,249,288 and 32,158,436 shares issued and outstanding, respectively | 322 | 322 | ||||||||||||||
Common stock, $0.00001 par value; 50,000,000 shares authorized; 33,118,729 and | ||||||||||||||||
32,949,987 shares issued and outstanding, respectively | 331 | 330 | ||||||||||||||
Additional paid-in capital | 88,254,818 | 87,956,839 | 89,843,638 | 89,571,641 | ||||||||||||
Accumulated deficit | (54,455,106 | ) | (52,771,853 | ) | (52,810,001 | ) | (53,731,903 | ) | ||||||||
Accumulated other comprehensive loss | (9,300 | ) | (1,269 | ) | (442,757 | ) | (458,719 | ) | ||||||||
Total stockholders' equity | 33,790,734 | 35,184,039 | 36,591,211 | 35,381,349 | ||||||||||||
Total liabilities and stockholders' equity | $ | 37,552,283 | $ | 38,857,800 | $ | 52,170,930 | $ | 47,119,983 |
See accompanying notes
LRAD CorporationGenasys Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended | Three months ended | Six months ended | ||||||||||||||||||||||
December 31, | March 31, | March 31, | ||||||||||||||||||||||
2017 | 2016 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Product sales | $ | 7,336,025 | $ | 2,701,959 | $ | 7,553,481 | $ | 9,340,523 | 15,561,419 | 18,688,691 | ||||||||||||||
Contract and other | 292,542 | 239,375 | 723,292 | 851,168 | 1,497,056 | 1,680,559 | ||||||||||||||||||
Total revenues | 7,628,567 | 2,941,334 | 8,276,773 | 10,191,691 | 17,058,475 | 20,369,250 | ||||||||||||||||||
Cost of revenues | 3,671,027 | 1,716,824 | 4,266,881 | 5,001,183 | 8,446,478 | 10,089,484 | ||||||||||||||||||
Gross profit | 3,957,540 | 1,224,510 | ||||||||||||||||||||||
Gross Profit | 4,009,892 | 5,190,508 | 8,611,997 | 10,279,766 | ||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Selling, general and administrative | 2,188,398 | 1,966,436 | 2,732,340 | 2,475,378 | 5,553,865 | 5,226,386 | ||||||||||||||||||
Research and development | 778,037 | 587,410 | 948,811 | 1,279,744 | 2,032,734 | 2,328,119 | ||||||||||||||||||
Total operating expenses | 2,966,435 | 2,553,846 | 3,681,151 | 3,755,122 | 7,586,599 | 7,554,505 | ||||||||||||||||||
Income (loss) from operations | 991,105 | (1,329,336 | ) | |||||||||||||||||||||
Income from operations | 328,741 | 1,435,386 | 1,025,398 | 2,725,261 | ||||||||||||||||||||
Other income | 34,530 | 30,128 | 69,602 | 17,608 | 165,662 | 56,676 | ||||||||||||||||||
Income (loss) from operations before income taxes | 1,025,635 | (1,299,208 | ) | |||||||||||||||||||||
Income tax expense (benefit) | 2,708,888 | (486,528 | ) | |||||||||||||||||||||
Net loss | $ | (1,683,253 | ) | $ | (812,680 | ) | ||||||||||||||||||
Income before income taxes | 398,343 | 1,452,994 | 1,191,060 | 2,781,937 | ||||||||||||||||||||
Income tax expense | 96,768 | 274,144 | 269,158 | 557,147 | ||||||||||||||||||||
Net income | $ | 301,575 | $ | 1,178,850 | $ | 921,902 | $ | 2,224,790 | ||||||||||||||||
Net loss per common share - basic and diluted | $ | (0.05 | ) | $ | (0.03 | ) | ||||||||||||||||||
Weighted average common shares outstanding: - basic and diluted | 32,236,039 | 31,800,103 | ||||||||||||||||||||||
Net income per common share - basic and diluted | $ | 0.01 | $ | 0.04 | $ | 0.03 | $ | 0.07 | ||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||
Basic | 33,094,596 | 32,584,952 | 33,036,786 | 32,738,871 | ||||||||||||||||||||
Diluted | 33,732,619 | 33,077,255 | 33,708,832 | 33,272,164 |
See accompanying notes
| |||||
|
Three months ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
Net loss | $ | (1,683,253 | ) | $ | (812,680 | ) | ||
Other comprehensive loss, net of tax: | ||||||||
Unrealized loss on marketable securities, net of tax | (8,031 | ) | (6,310 | ) | ||||
Other comprehensive loss | (8,031 | ) | (6,310 | ) | ||||
Comprehensive loss | $ | (1,691,284 | ) | $ | (818,990 | ) |
See accompanying notes
LRAD CorporationGenasys Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income | $ | 301,575 | $ | 1,178,850 | $ | 921,902 | $ | 2,224,790 | ||||||||
Other comprehensive income | ||||||||||||||||
Unrealized gain (loss) on marketable securities | (7,692 | ) | 10,232 | (11,178 | ) | 9,620 | ||||||||||
Unrealized foreign currency gain (loss) | (61,660 | ) | (79,323 | ) | 27,140 | (133,046 | ) | |||||||||
Comprehensive income | $ | 232,223 | $ | 1,109,759 | $ | 937,864 | $ | 2,101,364 |
Genasys Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
December 31, | March 31, | |||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||
Operating Activities: | ||||||||||||||||
Net loss | $ | (1,683,253 | ) | $ | (812,680 | ) | ||||||||||
Net income | $ | 921,902 | $ | 2,224,790 | ||||||||||||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 60,105 | 32,506 | 415,031 | 417,637 | ||||||||||||
Warranty provision | 12,361 | 9,696 | (11,053 | ) | 44,037 | |||||||||||
Inventory obsolescence | 40,301 | 24 | 127,599 | 133,259 | ||||||||||||
Share-based compensation | 138,461 | 464,749 | 453,617 | 305,820 | ||||||||||||
Deferred income taxes | 2,708,888 | (486,528 | ) | 269,158 | 557,147 | |||||||||||
Amortization of operating lease right of use asset | 292,405 | - | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 3,662 | 1,929,765 | ||||||||||||||
Inventories | (43,001 | ) | (327,680 | ) | ||||||||||||
Accounts receivable, net | (2,204,894 | ) | (3,981,947 | ) | ||||||||||||
Inventories, net | (1,214,265 | ) | (1,704,919 | ) | ||||||||||||
Prepaid expenses and other | 393,761 | 80,378 | 787,613 | 2,518,276 | ||||||||||||
Other assets | 46,874 | 46,871 | ||||||||||||||
Accounts payable | 790,635 | 500,042 | 1,072,363 | (1,847,512 | ) | |||||||||||
Accrued and other liabilities | (715,209 | ) | (8,857 | ) | (3,035,960 | ) | 449,152 | |||||||||
Net cash provided by operating activities | 1,753,585 | 1,428,286 | ||||||||||||||
Net cash used in operating activities | (2,126,484 | ) | (884,260 | ) | ||||||||||||
Investing Activities: | ||||||||||||||||
Purchases of marketable securities | (1,673,295 | ) | (1,470,704 | ) | (2,013,441 | ) | (2,318,646 | ) | ||||||||
Proceeds from maturities of marketable securities | 2,128,016 | 1,555,314 | 1,971,146 | 2,316,764 | ||||||||||||
Capital expenditures | (54,167 | ) | (13,863 | ) | (102,126 | ) | (299,965 | ) | ||||||||
Patent costs paid | - | (1,721 | ) | |||||||||||||
Net cash provided by investing activities | 400,554 | 69,026 | ||||||||||||||
Net cash used in investing activities | (144,421 | ) | (301,847 | ) | ||||||||||||
Financing Activities: | ||||||||||||||||
Proceeds from exercise of stock options | 159,518 | - | 258,047 | 45,172 | ||||||||||||
Net cash provided by financing activities | 159,518 | - | ||||||||||||||
Net increase in cash | 2,313,657 | 1,497,312 | ||||||||||||||
Cash and cash equivalents, beginning of period | 12,803,887 | 13,466,711 | ||||||||||||||
Cash and cash equivalents, end of period | $ | 15,117,544 | $ | 14,964,023 | ||||||||||||
Repurchase of common stock | (398,256 | ) | (2,171,022 | ) | ||||||||||||
Shares retained for payment of taxes in connection with settlement of restricted stock units | (41,410 | ) | - | |||||||||||||
Payments on promissory notes | (16,700 | ) | (17,044 | ) | ||||||||||||
Net cash used in financing activities | (198,319 | ) | (2,142,894 | ) | ||||||||||||
Effect of foreign exchange rate on cash | 11,160 | (23,938 | ) | |||||||||||||
Net decrease in cash, cash equivalents, and restricted cash | (2,458,064 | ) | (3,352,939 | ) | ||||||||||||
Cash, cash equivalents and restricted cash, beginning of period | 19,516,918 | 11,806,074 | ||||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 17,058,854 | $ | 8,453,135 | ||||||||||||
Noncash investing activities: | ||||||||||||||||
Change in unrealized loss on marketable securities | $ | (8,031 | ) | $ | (6,310 | ) | ||||||||||
Reconciliation of cash, cash equivalents and restricted cash to the consolidated | ||||||||||||||||
balance sheets: | ||||||||||||||||
Cash and cash equivalents | $ | 16,398,928 | $ | 7,723,503 | ||||||||||||
Restricted cash, current portion | 264,633 | 390,008 | ||||||||||||||
Long-term restricted cash | 395,293 | 339,624 | ||||||||||||||
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows | $ | 17,058,854 | $ | 8,453,135 |
See accompanying notes
Genasys Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended March 31, | ||||||||
2020 | 2019 | |||||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid | $ | - | $ | 2,860 | ||||
Noncash investing and financing activities: | ||||||||
Change in unrealized gain (loss) on marketable securities | $ | (11,178 | ) | $ | 9,620 | |||
Initial measurement of operating lease ROU assets | $ | 5,823,972 | $ | - | ||||
Initial measurement of operating lease liabilities | $ | 7,814,701 | $ | - |
LRAD Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. OPERATIONS
Genasys Inc. (formerly LRAD® Corporation,Corporation), a Delaware corporation (the “Company”), is engaged in the design, development and commercialization of directed and omnidirectionalmultidirectional sound technologies, voice broadcast products, and products.location-based mass messaging solutions for emergency warning and workforce management. The principal markets for the Company’s proprietary sound reproduction technologies, voice broadcast products and productsmass messaging solutions are in North and South America, Europe, Middle East and Asia. On October 23, 2019, the Company announced its rebranding and began doing business as Genasys Inc.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
General
The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with the instructions to Form 10-Q10-Q and Article 8 of Regulation S-XS-X and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the footnotes. The condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended September 30,2017 2019 included in the Company’s Annual Report on Form 10-K,10-K, as filed with the SEC on December 13, 2017. 10, 2019. The accompanying condensed consolidated balance sheet at September 30, 2017 2019 has been derived from the audited consolidated balance sheet at September 30, 2017 2019 contained in the above referenced Form 10-K.10-K. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.
Principles of Consolidation
The Company has athree wholly owned subsidiaries, Genasys II Spain, S.A.U. (“Genasys Spain”) and two currently inactive wholly owned subsidiary, subsidiaries, Genasys America de CV and LRAD International Corporation, which the Company formed to conduct international marketing, sales and distribution activities.Corporation. The condensed consolidated financial statements include the accounts of this subsidiarythese subsidiaries after elimination of intercompany transactions and accounts.
Reclassifications
Where necessary, the prior year’syear’s information has been reclassified to conform to the current year presentation.
3. RECENT ACCOUNTING PRONOUNCEMENTS
New pronouncements pending adoption
In MarchJune 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.2016-09, 2016-13, CompensationMeasurement of Credit Losses on Financial Instruments, which supersedes current guidance by requiring recognition of credit losses when it is probable that a loss has been incurred. The new standard requires the establishment of an allowance for estimated credit losses on financial assets including trade and other receivables at each reporting date. The new standard will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Stock CompensationCredit Losses (Topic 718): Improvements to Employee Share-Based Payment Accounting326), Derivatives and Hedging (Topic 815) and Leases (Topic 842). This guidance changes how companies account, which extends the effective date of Topic 326 for certain aspects of share-based payments to employees. Among other things, under thecompanies until fiscal years beginning after December 15, 2022. The new guidance, companiesstandard will no longer record excess tax benefits and certain tax deficiencies in additional paid-in-capital (“APIC”), but will instead record such items as income tax expense or benefit in the income statement, and APIC pools will be eliminated. Companies will apply this guidance prospectively. Another component of the new guidance allows companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards, whereby forfeitures can be estimated, as required today, or recognized when they occur. If elected, the change to recognize forfeitures when they occur needs to be adopted using a modified retrospective approach. The guidance is effective for the Company in the first quarter of fiscal year beginning October 1, 2023, and early adoption is permitted. The Company has not completed its review of the impact of this standard on its consolidated financial statements. However, based on the Company’s history of immaterial credit losses from trade receivables, management does not expect that the adoption of this standard will have a material effect on the Company’s consolidated financial statements.
New pronouncements adopted
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 replaced most existing revenue recognition guidance in U.S. generally accepted accounting principles. 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 was effective for the Company in the fiscal year beginning October 1, 2018. Subsequently the FASB has issued additional guidance (ASUs 2015-14; 2016-08; 2016-10; 2016-12; 2016-13; 2016-20). The adoption of this standard resultedguidance by the Company, effective October 1, 2018, did not have a material impact on the Company’s consolidated financial statements (see Note 4, Revenue Recognition, for further detail). ASU No. 2014-09 and its amendments form Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”).
In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the recognitionTax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of $1.1 million of gross deferred tax assets relatedinformation reported to financial statement users. However, because the amendments only relate to the historical excessreclassification of the income tax benefits from stock-based compensationeffects of the Tax Cuts and Jobs Act, the underlying guidance that was not previouslyrequires that the effect of a change in tax laws or rates be included in deferredincome from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax assets and a corresponding increase ineffects. The guidance was effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within that fiscal year. Accordingly, this was effective for the Company’s valuation allowance.Company beginning October 1, 2019. The adoption of this ASU did not have an impact on its consolidated financial statements.
In February 2016, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) 2016-02,ASU No. 2016-02, Leases (Topic (“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 changesLeases with a term of 12 months or less will be accounted for in a manner similar to the definitionguidance for operating leases prior to the adoption of Topic 842. Topic 842 requires entities to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a lease and expandsmodified retrospective approach, with certain practical expedients available. In July 2018, the FASB issued ASU No. 2018-11 (“ASU 2018-11”), which offers a practical expedient that allows entities the option to apply the provisions of Topic 842 by recognizing a cumulative effect adjustment at the effective date of adoption without adjusting the prior comparative periods presented. In March 2019, the FASB issued ASU 2019-01 (“ASU 2019-01”), which explicitly provides disclosure requirements of lease arrangements. relief for interim periods during the year the standard is adopted.
The new guidance must be adopted using the modified retrospective approach and will bewas effective for the Company in the fiscal year beginning October 1, 2019. Early adoption is permitted. The Company is currently evaluatingadopted Topic 842 by applying the modified retrospective transition approach. Under this method, financial information related to periods prior to adoption will be as originally reported under the then-current standard (Topic 840, Leases). The Company elected the following practical expedients:
● | The transitional practical expedients, which must be elected as a package and applied consistently to all leases. In electing this practical expedient package, the Company is not required to: |
o | reassess whether an existing or expired contract is or contains a lease; |
o | reassess the lease classification for any expired or existing leases; and |
o | reassess initial direct lease costs for all leases that commenced before the adoption. |
● | Short-term lease practical expedient in which the Company can elect not to apply the recognition requirements of Topic 842 to short-term leases. |
As a result of adopting Topic 842 effective October 1, 2019, the Company recorded an initial measurement of $7,814,701 of operating lease liabilities and $5,823,972 of corresponding operating Right of Use (“ROU”) assets, net of tenant improvement allowances and deferred rent, primarily related to the Company’s facility lease. There was no other impact from the adoption of thisTopic 842. A portion of the existing leases are denominated in currencies other than the U.S. dollar. As a result, the associated lease liabilities will be remeasured using the current exchange rate in the applicable reporting periods, which may result in foreign exchange gains or losses. There was no cumulative effect adjustment to retained earnings as a result of the transition to Topic 842. See Note 12, Leases for further disclosures related to Topic 842.
4. | REVENUE RECOGNITION |
The Company adopted the guidance if any,in Topic 606 on its financial statements and related disclosures.October 1, 2018. The Company adopted the new standard using the full retrospective approach.
In May 2014, the FASB issued ASU No.2014-09,RevenueTopic 606 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from Contractscontracts with Customers (“ASU 2014-09”), whichcustomers and supersedes most revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized:
1. | Identify the contract(s) with customers |
2. | Identify the performance obligations |
3. | Determine the transaction price |
4. | Allocate the transaction price to the performance obligations |
5. | Recognize revenue when the performance obligations have been satisfied |
Topic 606 requires an entityrevenue recognition to recognize the amount of revenue to which it expects to be entitled fordepict the transfer of promised goods or services to customers. ASU 2014-09 will replace most existingcustomers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services.
The Company derives its revenue recognition guidance in U.S. generally accepted accounting principlesfrom the sale of products to customers, contracts, license fees, other services and freight. The Company sells its products through its direct sales force and through authorized resellers and system integrators. The Company recognizes revenue for goods including software when it becomes effective. In July 2015, all the FASB deferredsignificant risks and rewards have been transferred to the effective datecustomer, no continuing managerial involvement usually associated with ownership of the standard by an additional year; however,goods is retained, no effective control over the goods sold is retained, the amount of revenue can be measured reliably, it provided companiesis probable that the option to adopt one year earlier, commensurateeconomic benefits associated with the original effective date. Accordingly, the standardtransactions will be effective forflow to the Company and the costs incurred or to be incurred in respect of the fiscal year beginning October 1, 2018. The Company is currently evaluating the impact of this guidance, if any, on its financial statements and related disclosures.transaction can be measured reliably. Software license revenue, maintenance and/or software development service fees may be bundled in one arrangement or may be sold separately.
Product Revenue
Product revenue is recognized as a distinct single performance obligation when products are tendered to a carrier for delivery, which represents the point in time that the Company’s customer obtains control of the products. A smaller portion of product revenue is recognized when the customer receives delivery of the products. A portion of products are sold through resellers and system integrators based on firm commitments from an end user, and as a result, resellers and system integrators carry little or no inventory. The Company’s customers do not have a right to return product unless the product is found defective and therefore the Company’s estimate for returns has historically been insignificant
Perpetual licensed software
The sale and/or license of software products is deemed to have occurred when a customer either has taken possession of or has the ability to take immediate possession of the software and the software key. Perpetual software licenses can include one-year maintenance and support services. In addition, the Company sells maintenance services on a stand-alone basis and is therefore capable of determining their fair value. On this basis, the amount of the embedded maintenance is separated from the fee for the perpetual license and is recognized on a straight-line basis over the period to which the maintenance relates.
Time-based licensed software
The time-based license agreements include the use of a software license for a fixed term, generally one-year, and maintenance and support services during the same period. The Company does not sell time-based licenses without maintenance and support services and therefore revenues for the entire arrangements are recognized on a straight-line basis over the term.
Warranty, maintenance and services
The Company offers extended warranty, maintenance and other services. Extended warranty and maintenance contracts are offered with terms ranging from one to several years, which provide repair and maintenance services after expiration of the original one-year warranty term. Revenues from separately priced extended warranty and maintenance contracts are recognized based on time elapsed over the service period and classified as contract and other revenues. Revenue from other services such as training or installation is recognized when the service is completed.
Multiple element arrangements
The Company has entered into a number of multiple element arrangements, such as the sale of a product or perpetual licenses that may include maintenance and support (included in price of perpetual licenses) and time-based licenses (that include embedded maintenance and support, both of which may be sold with software development services, training, and other product sales). In some cases, the Company delivers software development services bundled with the sale of the software. In multiple element arrangements, the Company uses either the stand-alone selling price or an expected cost-plus margin approach to determine the fair value of each element within the arrangement, including software and software-related services such as maintenance and support. In general, elements in such arrangements are also sold on a stand-alone basis and stand-alone selling prices are available.
Revenue is allocated to each deliverable based on the fair value of each individual element and is recognized when the revenue recognition criteria described above are met, except for time-based licenses which are not unbundled. When software development services are performed and are considered essential to the functionality of the software, the Company recognizes revenue from the software development services on a stage of completion basis, and the revenue from the software when the related development services have been completed.
The Company disaggregates revenue by reporting segment (Hardware and Software) and geographically to depict the nature of revenue in a manner consistent with the Company’s business operations and to be consistent with other communications and public filings. Refer to Note 18, Segment Information and Note 19, Major Customers, Suppliers and Related Information for additional details of revenues by reporting segment and disaggregation of revenue.
Contract Assets and Liabilities
The Company enters into contracts to sell products and provide services and recognizes contract assets and liabilities that arise from these transactions. The Company recognizes revenue and corresponding accounts receivable according to Topic 606 and, at times, recognizes revenue in advance of the time when contracts gives the Company the right to invoice a customer. The Company may also receive consideration, per terms of a contract, from customers prior to transferring goods to the customer. The Company records customer deposits as a contract liability. Additionally, the Company may receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed. In such instances, a deferred revenue liability is recorded. The Company recognizes these contract liabilities as revenue after all revenue recognition criteria are met. The table below shows the balance of contract assets and liabilities as of March 31, 2020 and September 30, 2019, including the change between the periods. The current portion of contract liabilities and the non-current portion are included in “Accrued liabilities” and “Other liabilities, noncurrent”, respectively, on the accompanying Condensed Consolidated Balance Sheets. Refer to Note 10, Accrued Liabilities for additional details.
The Company’s contract liabilities were as follows:
Customer deposits | Deferred revenue | Total contract liabilities | ||||||||||
Balance at September 30, 2019 | $ | 5,063,091 | $ | 1,059,407 | $ | 6,122,498 | ||||||
New performance obligations | 2,302,269 | 285,555 | 2,587,824 | |||||||||
Recognition of revenue as a result of satisfying performance obligations | (4,099,364 | ) | (450,643 | ) | (4,550,007 | ) | ||||||
Effect of exchange rate on deferred revenue | - | 5,523 | 5,523 | |||||||||
Balance at March 31, 2020 | $ | 3,265,996 | $ | 899,842 | $ | 4,165,838 | ||||||
Less: non-current portion | - | (435,880 | ) | (435,880 | ) | |||||||
Current portion at March 31, 2020 | $ | 3,265,996 | $ | 463,962 | $ | 3,729,958 |
Remaining Performance Obligations
Remaining performance obligations related to Topic 606 represent the aggregate transaction price allocated to performance obligations under an original contract with a term greater than one year, which are fully or partially unsatisfied at the end of the period.
As of March 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $4,165,838. The Company expects to recognize revenue on approximately $3,729,958 or 90% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter.
Practical Expedients
In cases where the Company is responsible for shipping after the customer has obtained control of the goods, the Company has elected to treat these activities as fulfillment activities rather than as a separate performance obligation. Additionally, the Company has elected to capitalize the cost to obtain a contract only if the period of amortization would be longer than one year. The Company only gives consideration to whether a customer agreement has a financing component if the period of time between transfer of goods and services and customer payment is greater than one year. The Company also utilizes the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value the Company is providing to the customer.
| FAIR VALUE MEASUREMENTS |
The Company’sCompany’s financial instruments consist principally of cash equivalents, short and long-term marketable securities, accounts receivable and accounts payable. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:
Level 1: Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.
Level 3: Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
The fair value of the Company’s cash equivalents and marketable securities was determined based on Level 1 and Level 2 inputs. The Company did not have any marketable securities in the Level 3 category as of DecemberMarch 31, 2017 2020 or September 30, 2017. 2019. The Company believes that the recorded values of its other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
Instruments Measured at Fair Value
The following tablestables 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 DecemberMarch 31, 2017 2020 and September 30, 2017.2019.
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized | Fair | Cash | Short-term | Long-term | ||||||||||||||||||||||||||||||||||||||||||||
Cost Basis | Losses | Value | Equivalents | Securities | Securities | March 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||
Cost Basis | Unrealized Gain | Fair Value | Cash Equivalents | Short-term Securities | Long-term Securities | |||||||||||||||||||||||||||||||||||||||||||
Level 1: | ||||||||||||||||||||||||||||||||||||||||||||||||
Money Market Funds | $ | 531,566 | $ | - | $ | 531,566 | $ | 531,566 | $ | - | $ | - | $ | 296,372 | $ | - | $ | 296,372 | $ | 296,372 | $ | - | $ | - | ||||||||||||||||||||||||
Level 2: | ||||||||||||||||||||||||||||||||||||||||||||||||
Certificates of deposit | $ | 936,801 | $ | - | $ | 936,801 | $ | - | $ | 437,801 | $ | 499,000 | 1,943,752 | - | 1,943,752 | - | 499,000 | 1,444,752 | ||||||||||||||||||||||||||||||
Municipal securities | 86,186 | (198 | ) | 85,988 | - | 85,988 | - | 612,308 | 525 | 612,833 | - | 612,833 | - | |||||||||||||||||||||||||||||||||||
Corporate bonds | 3,594,227 | (9,102 | ) | 3,585,125 | - | 3,078,465 | 506,660 | 2,555,056 | (341 | ) | 2,554,715 | - | 2,353,001 | 201,714 | ||||||||||||||||||||||||||||||||||
Subtotal | 4,617,214 | (9,300 | ) | 4,607,914 | - | 3,602,254 | 1,005,660 | 5,111,116 | 184 | 5,111,300 | - | 3,464,834 | 1,646,466 | |||||||||||||||||||||||||||||||||||
Total | $ | 5,148,780 | $ | (9,300 | ) | $ | 5,139,480 | $ | 531,566 | $ | 3,602,254 | $ | 1,005,660 | $ | 5,407,488 | $ | 184 | $ | 5,407,672 | $ | 296,372 | $ | 3,464,834 | $ | 1,646,466 |
September 30, 2017 | ||||||||||||||||||||||||
Unrealized | Fair | Cash | Short-term | Long-term | ||||||||||||||||||||
Cost Basis | 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, 2019 | ||||||||||||||||||||||||
Cost Basis | Unrealized Gain | Fair Value | Cash Equivalents | Short-term Securities | Long-term Securities | |||||||||||||||||||
Level 1: | ||||||||||||||||||||||||
Money Market Funds | $ | 275,538 | $ | - | $ | 275,538 | $ | 275,538 | $ | - | $ | - | ||||||||||||
Level 2: | ||||||||||||||||||||||||
Certificates of deposit | 971,592 | - | 971,592 | - | 499,000 | 472,592 | ||||||||||||||||||
Municipal securities | 240,463 | 205 | 240,668 | - | 80,336 | 160,332 | ||||||||||||||||||
Corporate bonds | 3,856,766 | 11,157 | 3,867,923 | - | 3,116,028 | 751,895 | ||||||||||||||||||
Subtotal | 5,068,821 | 11,362 | 5,080,183 | - | 3,695,364 | 1,384,819 | ||||||||||||||||||
Total | $ | 5,344,359 | $ | 11,362 | $ | 5,355,721 | $ | 275,538 | $ | 3,695,364 | $ | 1,384,819 |
56. INVENTORIES
Inventories consisted of the following:
December 31, | September 30, | March 31, | September 30, | |||||||||||||
2017 | 2017 | 2020 | 2019 | |||||||||||||
Raw materials | $ | 4,619,587 | $ | 3,784,935 | $ | 5,591,252 | $ | 5,060,331 | ||||||||
Finished goods | 900,645 | 1,742,960 | 920,663 | 998,607 | ||||||||||||
Work in process | 198,535 | 147,871 | 1,068,097 | 306,809 | ||||||||||||
Inventories, gross | 5,718,767 | 5,675,766 | 7,580,012 | 6,365,747 | ||||||||||||
Reserve for obsolescence | (458,833 | ) | (418,532 | ) | (658,183 | ) | (530,584 | ) | ||||||||
Inventories, net | $ | 5,259,934 | $ | 5,257,234 | $ | 6,921,829 | $ | 5,835,163 |
67. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31, | September 30, | March 31, | September 30, | |||||||||||||
2017 | 2017 | 2020 | 2019 | |||||||||||||
Office furniture and equipment | $ | 1,097,619 | $ | 1,093,502 | $ | 1,554,306 | $ | 1,498,395 | ||||||||
Machinery and equipment | 1,044,206 | 994,157 | 1,237,617 | 1,223,726 | ||||||||||||
Leasehold improvements | 76,138 | 76,138 | 2,027,335 | 2,019,794 | ||||||||||||
Construction in progress | 7,565 | 7,565 | ||||||||||||||
Property and equipment, gross | 2,217,963 | 2,163,797 | 4,826,823 | 4,749,480 | ||||||||||||
Accumulated depreciation | (1,712,494 | ) | (1,654,194 | ) | (2,721,190 | ) | (2,479,974 | ) | ||||||||
Property and equipment, net | $ | 505,469 | $ | 509,603 | $ | 2,105,633 | $ | 2,269,506 |
Three months ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
Depreciation expense | $ | 58,301 | $ | 30,684 |
Depreciation expense was $132,062 and $139,737 for the three months ended March 31, 2020 and 2019, respectively. Depreciation expense was $266,037 and $264,197 for the six months ended March 31, 2020 and 2019, respectively.
78. GOODWILL AND INTANGIBLE ASSETS
Goodwill is attributable to the acquisition of Genasys Spain and is due to combining the mass messaging solutions and software development capabilities with existing LRAD products for enhanced offerings and the skill level of the workforce. The Company periodically reviews goodwill for impairment in accordance with relevant accounting standards. There were no additions or impairments to goodwill during the three months ended March 31, 2020.
Intangible assets and goodwill related to Genasys Spain are translated from Euros to U.S. dollars at the balance sheet date. The net impact of foreign currency exchange differences arising during the six month period related to goodwill and intangible assets was an increase of $21,044. The Company’s intangible assets consisted of the following:
March 31, | September 30, | |||||||
2020 | 2019 | |||||||
Technology | $ | 614,519 | $ | 611,043 | ||||
Customer relationships | 587,801 | 584,477 | ||||||
Trade name portfolio | 213,746 | 212,537 | ||||||
Non-compete agreements | 231,558 | 230,248 | ||||||
Patents | 72,126 | 72,126 | ||||||
1,719,750 | 1,710,431 | |||||||
Accumulated amortization | (685,589 | ) | (534,797 | ) | ||||
$ | 1,034,161 | $ | 1,175,634 |
Amortization expense was $74,431 and $76,633 for the three months ended March 31, 2020 and 2019, respectively. Amortization expense was $148,994 and $153,440 for the six months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020, future amortization expense is as follows:
Fiscal year ending September 30, | ||||
2020 (remaining six months) | $ | 148,666 | ||
2021 | 240,926 | |||
2022 | 218,285 | |||
2023 | 187,542 | |||
2024 | 174,661 | |||
Thereafter | 64,081 | |||
Total estimated amortization expense | $ | 1,034,161 |
9. PREPAID EXPENSES AND OTHER
Prepaid expenses and other current assets consisted of the following:
March 31, | September 30, | |||||||
2020 | 2019 | |||||||
Deposits for inventory | $ | 347,194 | $ | 1,064,640 | ||||
Prepaid insurance | 211,638 | 194,285 | ||||||
Prepaid rent | - | 87,782 | ||||||
Dues and subscriptions | 65,365 | 88,031 | ||||||
Trade shows and travel | 149,167 | 106,626 | ||||||
Other | 221,280 | 240,473 | ||||||
$ | 994,644 | $ | 1,781,837 |
Deposits for inventory
Deposits for inventory consisted of cash payments to vendors for inventory to be delivered in the future.
Prepaid Insurance
Prepaid insurance consisted of premiums paid for health, commercial and corporate insurance. These premiums are amortized on a straight-line basis over the term of the agreements.
Prepaid Rent
Prepaid rent consists of payments made in advance for the Company’s facility lease.
Dues and subscriptions
Dues and subscriptions consist of payments made in advance for software subscriptions and trade and professional organizations. These payments are amortized on a straight-line basis over the term of the agreements.
Trade shows and travel
Trade shows and travel consists of payments made in advance for trade show events.
10. ACCRUED LIABILITIES AND OTHER LIABILITIES - NONCURRENT
Accrued liabilities consisted of the following:
December 31, | September 30, | |||||||||||||||
2017 | 2017 | March 31, | September 30, | |||||||||||||
2020 | 2019 | |||||||||||||||
Payroll and related | $ | 847,042 | $ | 1,870,579 | $ | 1,149,679 | $ | 2,050,324 | ||||||||
Deferred revenue | 446,913 | 268,580 | 463,962 | 508,522 | ||||||||||||
Customer deposits | 3,265,996 | 5,063,091 | ||||||||||||||
Accrued contract costs | 345,551 | 197,034 | 441,923 | 252,833 | ||||||||||||
Warranty reserve | 188,308 | 179,101 | 120,741 | 150,229 | ||||||||||||
Deferred rent | 30,734 | 46,101 | - | 109,342 | ||||||||||||
Total | $ | 1,858,548 | $ | 2,561,395 | $ | 5,442,301 | $ | 8,134,341 |
Other liabilities-noncurrent consisted of the following:
March 31, | September 30, | |||||||
2020 | 2019 | |||||||
Deferred rent | $ | - | $ | 1,881,387 | ||||
Deferred extended warranty revenue | 435,880 | 550,885 | ||||||
Total | $ | 435,880 | $ | 2,432,272 |
Payroll and related
Payroll and related consistsconsisted primarily of accrued vacation, bonus, sales commissions, and benefits.
Deferred Revenue
Deferred revenue consists primarilyas of March 31, 2020 included prepayments from customers for services, including extended warranty, scheduled to be performed in advance of product shipment.the twelve months ended March 31, 2021.
WarrantyAccrued 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 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. A new contract was signed with the customer in May 2019 to continue repair and maintenance services through May 2024. These services are being recorded in cost of revenues to correspond with the revenues for these services.
Warranty Reserve
Changes in the warranty reserve and extended warranty were as follows:
Three months ended December 31 | March 31, | September 30, | ||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||
Beginning balance | $ | 179,101 | $ | 356,984 | $ | 150,229 | $ | 99,216 | ||||||||
Warranty provision | 12,361 | 9,696 | (11,053 | ) | 85,078 | |||||||||||
Warranty settlements | (3,154 | ) | (12,742 | ) | (18,435 | ) | (34,065 | ) | ||||||||
Ending balance | $ | 188,308 | $ | 353,938 | $ | 120,741 | $ | 150,229 |
Accrued contract costs
The Company has contracted withestablishes a third-party service providerwarranty 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 adjusts the accrued warranty liability to administeran amount equal to estimated warranty expense for products currently under warranty.
Deferred Rent
Deferred rent liability as of September 30, 2019 consists of the required servicesdifference between the average rental amount charged to expense and amounts payable under the termslease for the Company’s operating facility. Deferred rent also includes cash and leasehold incentives from the landlord in the aggregate amount of $1,990,729 as of September 30, 2019 to compensate for costs incurred by the Company to make the office space ready for operation (leasehold incentives). Prior to the adoption of Topic 842, leasehold incentives received from a repairlandlord are deferred and maintenance agreement withrecognized on a foreign military. This payment is madestraight-line basis as a reduction to rent expense over the lease term. Upon adoption of Topic 842, the leasehold incentives were a reduction to the measurement of the operating lease ROU asset. Refer to Note 3, Recent Accounting Pronouncements and Note 12, Leases for further detail on the adoption of Topic 842.
Deferred Extended Warranty Revenue
Deferred extended warranty revenue consists of warranties purchased in arrears for each contract year ended March 26.excess of the Company’s standard warranty. Extended warranties typically range from one to two years.
811. INCOME TAXESDEBT
In connection with the acquisition of Genasys Spain the Company acquired certain debts of Genasys Spain. The carrying value of the acquired debt approximates fair value. The balances of the acquired debt consist of loans with governmental agencies as of March 31, 2020. Loans with governmental agencies represent interest free debt granted by ministries within Spain for the purpose of stimulating economic development and promoting research and development. Loans with governmental agencies as of March 31, 2020 are as follows:
Agency | Due Date | Principal | |||
Ministry of Economy and Competitiveness | February 2, 2022 | 33,091 | |||
Ministry of Economy and Competitiveness | February 2, 2024 | 264,633 | (a) | ||
$ | 297,724 |
(a) | This loan is secured by $264,633 of cash pledged as collateral by Genasys Spain, which is the current balance of the loan. This amount is included in restricted cash at March 31, 2020. The Company expects the Ministry of Economy and Competitiveness to declare the terms of the loan satisfied within the next twelve months and that the outstanding balance of the loan will be paid in full during the next twelve months. Accordingly, this has been included in the current portion of notes payable as of March 31, 2020. |
The following is a schedule of future annual payments as of March 31, 2020:
2021 | $ | 281,178 | ||
2022 | 16,546 | |||
Total | $ | 297,724 |
The current portion of debt is $281,178 and the noncurrent portion of debt is $16,546.
12. LEASES
The Tax CutsCompany determines if an arrangement is a lease at inception. The guidance in Topic 842 defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Operating lease ROU assets and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. Subsequently, the SEC issued Staff Accounting Bulletin (“SAB”) 118, which allows for the recording of provisional amounts related to U.S. tax reform and subsequent adjustments related to U.S. tax reform during a measurement period not to exceed one year from the enactment date. Accordingly, the Company remeasured its net deferred tax assets on a provisional basislease liabilities are recognized based on the ratespresent value of future minimum lease payments over the lease term at which theycommencement date. The Company’s leases do not provide an implicit rate. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Additionally, the portfolio approach is used in determining the discount rate used to present value lease payments. The ROU asset includes any lease payments made and excludes lease incentives and initial direct costs incurred.
The Company entered into operating leases for office and production facilities and equipment under agreements that expire at various dates through 2028. The Company elected the package of practical expedients permitted under the new lease standard. In electing the practical expedient package, the Company is not required to reassess whether an existing or expired contract is or contains a lease, reassess the lease classification for expired or existing leases nor reassess the initial direct costs for leases that commenced before the adoption of Topic 842. The Company also elected the short-term lease exemption such that the new lease standard was applied to leases greater than one year in duration. Leases with an initial term of twelve months or less are expectednot recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
For leases beginning on or after October 1, 2019, lease components are accounted for separately from non-lease components for all asset classes. Certain of the Company’s leases contain renewal provisions and escalating rental clauses and generally require the Company to be realizedpay utilities, insurance, taxes and other operating expenses. The renewal provisions of existing lease agreements were not included in the future,determination of the operating lease liabilities and the ROU assets. Variable payments such as excess usage fees on existing equipment leases were not included in the determination of the lease liabilities and the ROU assets as the achievement of the specified target that triggers the variable lease payment is not considered probable. In addition, the Company’s facility lease in Spain has an escalating lease clause based on a consumer price index which is generally 21% resultingconsidered a variable lease payment and is not included in the determination of the lease liability and ROU asset. A 10% increase in the index would increase the total lease liability approximately $19,000. The Company’s leases do not contain any residual value guarantees or material restrictive covenants.
Upon adoption of Topic 842 as of October 1, 2019, the Company recognized on its consolidated balance sheet an initial measurement of approximately $7,814,701 of operating lease liabilities, and approximately $5,823,972 of corresponding operating ROU assets, net of tenant improvement allowances. There was no cumulative effect adjustment to retained earnings as a decreaseresult of the transition to our net deferred taxTopic 842. The adoption of Topic 842 did not have a material impact on the Company’s consolidated statement of operations.
The tables below show the initial measurement of the operating lease ROU assets and liabilities as of $2,474,000 forOctober 1, 2019 and the quarterbalances as of March 31, 2020, including the changes during the periods.
Operating right-of-use asset | ||||
Initial measurement at October 1, 2019 | $ | 7,814,701 | ||
Less lease incentives and tenant improvement allowance | (1,990,729 | ) | ||
Net operating lease right of use assets at October 1, 2019 | 5,823,972 | |||
Less amortization of operating lease right-of-use assets | (292,405 | ) | ||
Effect of exchange rate on operating lease right of use assets | 2,587 | |||
Operating lease right of use asset at March 31, 2020 | $ | 5,534,154 |
Operating lease liabilities | ||||
Initial measurement at October 1, 2019 | $ | 7,814,701 | ||
Less lease principal payments on operating lease liabilities | (345,959 | ) | ||
Effect of exchange rate on operating lease liabilities | 2,587 | |||
Operating lease liabilities at March 31, 2020 | 7,471,329 | |||
Less non-current portion | (6,743,195 | ) | ||
Current portion as March 31, 2020 | $ | 728,134 |
As of March 31, 2020, the Company’s operating leases have a weighted-average remaining lease term of 8.2 years and a weighted-average discount rate of 4.13%. The maturities of the operating lease liabilities are as follows:
Fiscal year ending September 30, | ||||
2020 (remaining six months) | $ | 503,493 | ||
2021 | 1,031,627 | |||
2022 | 1,058,622 | |||
2023 | 1,011,815 | |||
2024 | 1,008,177 | |||
Thereafter | 4,247,218 | |||
Total undiscounted operating lease payments | 8,860,952 | |||
Less imputed interest | (1,389,623 | ) | ||
Present value of operating lease liabilities | 7,471,329 | |||
Less lease liability, noncurrent | (6,743,195 | ) | ||
Lease liability, current portion | $ | 728,134 |
For the three months ended DecemberMarch 31, 2017. 2020 and 2019, total lease expense under operating leases was approximately $223,993 and $219,781 respectively. For the six months ended March 31, 2020 and 2019, total lease expense under operating leases was approximately $448,025 and $439,093, respectively. The Company will continue to analyze certain aspects of the Act, and refine its calculations as appropriatedid not have any short-term lease expense during the measurement period, which could affect the measurement of these balances.three and six months ended March 31, 2020.
13. INCOME TAXES
For the threesix months ended DecemberMarch 31, 2017, 2020, the Company recorded income tax expense of $234,888$269,158 reflecting an effective tax rate of 22.9% and an additional discrete tax expense of $2,474,000 due to the remeasurement of its deferred tax assets as a result of tax reform.21.6%. For the threesix months ended DecemberMarch 31, 2016, 2019, the Company recorded an income tax benefitexpense of $486,528$557,147 reflecting an effective tax rate of 37.4%21.1%. For the three months ended December 31, 2017, when compared to the same period in 2016, the decrease in the effective tax rate was primarily attributable to the decrease in Federal statutory tax rate due to tax reform. The Company continues to maintain a partial valuation allowance against its deferred tax assets as the Company believes that the negative evidence that it will be able to recover these net deferred tax assets outweighs the positive evidence.
Accounting Standards Codification (“ASC”) Topic 740,Accounting for Uncertainty in Income Taxes, requires the Company to recognize in its consolidated financial statements uncertainties in tax positions taken that may not be sustained upon examination by the taxing authorities. If interest or penalties are assessed, the Company would recognize these charges as income tax expense. The Company has not recorded any income tax expense or benefit for uncertain tax positions.
914. COMMITMENTS AND CONTINGENCIES
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’smanagement’s estimation, record adequate reserves in the Company’s consolidated financial statements for pending litigation. Currently, there are no pending material legal proceedings to which the Company is a party or to which any of its property is subject.
Bonus Plan
The Company has an incentivea bonus plan for fiscal year 2018 designed to motivate its key employees, to achieve the Company’s financial objectives. Allin accordance with their terms of the Company’s key employees are entitled to participate in the incentive plan. Target Bonus Amounts (“Target”) vary based onemployment, whereby they can earn a percentage of the employee’s basetheir salary which range from 25% to 75% of base salary and a bonus payment may be made at three levels, including at 50% of Target, at 100% of Target and at 200% of Target, depending upon the achievement by the Company of specified performance goals. Performance targets include certain fiscal 2018 metrics, including product bookings, net revenues,based on meeting targeted objectives for orders received, revenue, operating income and operating cash flow. Included in such calculation is In the cost of the incentive plan. During the threesix months ended DecemberMarch 31, 2017 and 2016,2020, the Company recorded $399,646 of bonus expense. In the six months ended March 31, 2019, the company recorded $785,102 of bonus expense. Bonus expense is recorded in accrued $405,267liabilities on the Company’s condensed consolidated balance sheet as of March 31, 2020 and $185,086, respectively, for bonuses and related payroll tax expenses in connection with the bonus plans.September 30, 2019.
1015. SHARE-BASED COMPENSATION
Stock Option Plans
At DecemberMarch 31, 2017, 2020, 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 2015amendment to the Equity Plan was approved in 2015 and 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 DecemberMarch 31, 2017, 2020, there were options and restricted stock units outstanding covering 2,216,002303,014 and 2,279,3153,103,558 shares of common stock under the 2005 Equity Plan and 2015 Equity Plan, respectively.
Stock Option Activity
The following table summarizes information aboutrespectively and 602,917 shares of common stock option activity during the three months ended December 31, 2017:
Number | Weighted Average | |||||||
of Shares | Exercise Price | |||||||
Outstanding October 1, 2017 | 4,663,502 | $ | 2.16 | |||||
Granted | 3,500 | $ | 2.21 | |||||
Forfeited/expired | (80,833 | ) | $ | 2.84 | ||||
Exercised | (90,852 | ) | $ | 1.76 | ||||
Outstanding December 31, 2017 | 4,495,317 | $ | 2.15 | |||||
Exercisable December 31, 2017 | 3,251,811 | $ | 2.24 |
Options outstanding are exercisable at prices ranging from $0.93 to $3.17 and expire over the period from 2018 to 2024 with an average life of 4.6 years. The aggregate intrinsic value of options outstanding and exercisable at December 31, 2017 was $1,780,084 and $1,368,424, respectively.
During the quarter ended December 31, 2016, the Company incurred non-cash share-based compensation expense of $307,324 resulting from the modification of stock options in accordance with a Separation Agreement and General Release related to the June 30, 2016 departure of the Company’s prior chief executive officer (“CEO”). As per the agreement, all unvested options became fully vested on December 31, 2016 and shall remain exercisableavailable for grant for a periodtotal of 24 months following4,009,489 currently available under the December 31, 2016 separation date as defined in the agreement. The expense is measured as the excess of the fair value of the modified awards over the fair value of the original awards immediately before its terms are modified as per ASC 718-20-35.
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 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 has made the assumption that the lowest performance target level for each of the years will be met, and therefore 187,500 shares of the PVO are assumed to 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 over the requisite service periods. The Company will continue to review these targets each quarter and will adjust the expected outcome as needed, recognizing compensation expense cumulatively in such period for the difference in expense.
Restricted Stock Units
During the quarter ended December 31, 2016, the Board of Directors approved the grant of 25,000 RSUs to each of our non-employee directors, 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 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.
On March 14, 2017, the Board of Directors approved an additional grant of 25,000 RSUs to each of our non-employee directors 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.two equity plans.
Share-Based Compensation
The Company recorded share-based compensation expenseCompany’s employee stock options have various restrictions that reduce option value, including vesting provisions and classified it in the condensed consolidated statements of operations as follows:restrictions on transfer and hedging, among others, and are often exercised prior to their contractual maturity.
Three months ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
Cost of revenues | $ | 6,209 | $ | 5,877 | ||||
Selling, general and administrative | 109,322 | 435,497 | ||||||
Research and development | 22,930 | 23,375 | ||||||
Total | $ | 138,461 | $ | 464,749 |
The employeeThere were 1,133,727 stock optionsoptions granted induring the threesix months ended DecemberMarch 31, 2017 and 2016 had a weighted-average2020. There were no stock options granted during fiscal 2019. The weighted average estimated fair value of $0.89 per share and $0.71 per share, respectively,employee stock options granted during the six months ended March 31, 2020 was calculated using the Black-Scholes option pricingoption-pricing model with the following weighted-averageweighted average assumptions (annualized percentages):
Three months ended | |||||||||
December 31, | |||||||||
2017 | 2016 | ||||||||
Volatility | 45.4% | 52.4% | - | 53.7% | |||||
Risk-free interest rate | 2.2% | 1.7% | - | 2.0% | |||||
Forfeiture rate | 10.0% | 10.0% | |||||||
Dividend yield | 0.0% | 0.0% | |||||||
Expected life in years | 4.6 | 3.8 | - | 4.6 |
Volatility | 44.5 | % | ||
Risk Free Interest Rate | 1.40 | % | ||
Forfeiture rate | 10.0 | % | ||
Dividend Yield | 0.0 | % | ||
Expected life in years | 5.35 |
The Company did not declare a dividend for the quarters ended December 31, 2017 and 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 or if the Company updates its estimated forfeiture rate.estimates. Such amountsrevision adjustments to expense will be recorded as a cumulative adjustment in the period in which the estimate is changed. The Company did not pay a dividend in fiscal 2019 or in fiscal 2018.
Since the Company has a net operating loss carryforward as of December 31, 2017, no excess tax benefit for the tax deductions related to share-based awards was recognized for the three months ended December 31, 2017 and 2016.As of DecemberMarch 31, 2017, 2020, there was approximately $600,000$420,168 of total unrecognized compensation costcosts related to non-vested share-basedoutstanding employee compensation arrangements. The coststock options. This amount is expected to be recognized over a weighted-averageweighted average period of 2.12.28 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. At the grant date, there were 375,000 performance-based stock options assigned to performance criteria within each of fiscal 2019 and 2020. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2019 and 2020 including a minimum free cash flow margin and net revenue targets. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets. As of September 30, 2019, 187,500 of the options related to the 2019 performance criteria vested. The Company recorded $151,181 in stock based compensation expense for these options. This agreement was modified in October 2019, and 93,750 of the unvested options initially allocated to the performance criteria for 2019 were assigned to fiscal 2020.
On October 4, 2019, the Company awarded a performance-based stock option (PVO) to purchase 800,000 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 2022 and 2023 including a minimum free cash flow margin and net revenue targets. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets.
The Company determined that as of March 31, 2020, it is probable that certain performance conditions related to the 2020 performance criteria will be achieved. During the three and six months ended March 31, 2020, the Company recorded $95,750 in stock based compensation expense related to performance-based stock options. The Company will continue to review these targets each quarter and will adjust the expected outcome as needed, recognizing compensation expense cumulatively in such period for the difference in expense.
Restricted Stock Units
During fiscal 2018, the Board of Directors granted 93,330 restricted stock units (“RSUs”) to employees that will vest equally over three years on each of the first three anniversary dates of the grant. These were issued at a market value of $210,176, which will be expensed on a straight line basis over the three-year life of the grants.
On February 7, 2019, the Board of Directors approved non-employee director compensation to include an annual grant of 30,000 RSUs to each of the Company’s five non-employee directors that will vest on the first anniversary of the grant date. These were issued at a market value of $412,500, which have been and were expensed on a straight-line basis through the March 12, 2020 vest date. Also, during fiscal 2019, 99,300 RSUs were granted to employees that will vest equally over three years on each of the first three anniversary dates of the grant. These were issued at a market value of $248,250, which will be expensed on a straight line basis over the three year life of the grants.
On March 10, 2020, each member of the Board of Directors received a grant of 30,000 RSUs that will vest on the first anniversary of the grant date. These were issued at a market value of $424,500, which have and will be expensed on a straight-line basis through the March 10, 2021 vest date. Also, during the quarter, 81,270 RSUs were granted to employees that will vest over three years on the anniversary date of the grant. These were issued at a market value of $257,626, which have and will be expensed on a straight-line basis over the three-year life of the grants.
During the six months ended March 31, 2020, the Company retained 13,063 shares of common stock to satisfy tax withholding obligations upon the vesting of RSUs issued to employees. These shares were not acquired pursuant to any repurchase plan or program. During the six months ended March 31, 2019, there were no shares retained to satisfy withholding obligations in connection with the vesting of RSUs issued to employees.
Compensation expense for RSUs was $167,724 for the three months ended March 31, 2020. Compensation expense for RSUs was $294,090 for the six months ended March 31, 2020. Compensation expense for RSUs was $140,370 for the three months ended March 31, 2019 and $219,482 for the six months ended March 31, 2019. As of March 31, 2020, there was approximately $788,161 of total unrecognized compensation costs related to outstanding RSUs. This amount is expected to be recognized over a weighted average period of 1.56 years.
A summary of the restricted stock units of the Company as of March 31, 2020 is presented below:
Number of Shares | Weighted Average Grant Date Fair Value | |||||||
Outstanding September 30, 2019 | 274,849 | $ | 2.59 | |||||
Granted | 231,270 | $ | 2.95 | |||||
Released | (198,106 | ) | $ | 2.66 | ||||
Forfeited/cancelled | (4,999 | ) | $ | 2.58 | ||||
Outstanding March 31, 2020 | 303,014 | $ | 2.82 |
Stock Option Summary Information
A summary of the activity in options to purchase the capital stock of the Company as of March 31, 2020 is presented below:
Number of Shares | Weighted Average Exercise Price | |||||||
Outstanding September 30, 2019 | 2,219,268 | $ | 1.94 | |||||
Granted | 1,133,727 | $ | 3.39 | |||||
Forfeited/expired | (109,233 | ) | $ | 2.11 | ||||
Exercised | (140,204 | ) | $ | 1.84 | ||||
Outstanding March 31, 2020 | 3,103,558 | $ | 2.48 | |||||
Exerciseable March 31, 2020 | 1,495,857 | $ | 1.98 |
Options outstanding are exercisable at prices ranging from $1.31 to $3.40 and expire over the period from 2020 to 2026 with an average life of 4.4 years. The aggregate intrinsic value of options outstanding and exercisable at March 31, 2020 was $2,603,494 and $1,931,620, respectively. The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last day of trading for the quarter, which was $3.27 per share, and the exercise price multiplied by the number of applicable options. The total intrinsic value of stock options exercised during the six months ended March 31, 2020 was $241,715 and proceeds from these exercises were $258,047. The total intrinsic value of stock options exercised during the six months ended March 31, 2019 was $34,903 and proceeds from these exercises were $45,172.
The following table summarized information about stock options outstanding at March 31, 2020:
Range of Exercise Prices |
Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price |
Number Exercisable | Weighted Average Exercise Price | |||||||||||||||||
$1.31 | - | $1.86 | 673,862 | 2.80 | $ | 1.69 | 628,455 | $ | 1.68 | |||||||||||||
$1.99 | - | $1.99 | 1,031,250 | 3.89 | $ | 1.99 | 562,500 | $ | 1.99 | |||||||||||||
$2.02 | - | $3.17 | 264,719 | 1.54 | $ | 2.46 | 263,187 | $ | 2.46 | |||||||||||||
$3.39 | - | $3.40 | 1,133,727 | 6.59 | $ | 3.39 | 41,715 | $ | 3.40 | |||||||||||||
3,103,558 | 4.44 | $ | 2.48 | 1,495,857 | $ | 1.98 |
The Company recorded $127,566 and $31,605 of stock option compensation expense for employees, directors and consultants for the three months ended March 31, 2020, and 2019, respectively. The Company recorded $159,527 and $86,338 of stock option compensation expense for employees, directors and consultants for the six months ended March 31, 2020, and 2019, respectively.
Share-Based Compensation
The Company recorded share-based compensation expense and classified it in the condensed consolidated statements of operations as follows:
Three months ended | Six months ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Cost of revenues | $ | 6,909 | $ | 4,201 | $ | 10,551 | $ | 8,499 | ||||||||
Selling, general and administrative | 283,314 | 163,932 | 427,241 | 284,973 | ||||||||||||
Research and development | 5,067 | 3,842 | 15,825 | 12,348 | ||||||||||||
$ | 295,290 | $ | 171,975 | $ | 453,617 | $ | 305,820 |
116. STOCKHOLDERS’ EQUITY
Summary
The following table summarizestables summarize changes in the components of stockholders’stockholders’ equity during the three and six months ended DecemberMarch 31, 2017:2020 and the three and six months ended March 31, 2019:
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Total | Additional | Other | Total | |||||||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders' | Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders' | |||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Equity | Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||||||||||||||
Balances, September 30, 2017 | 32,158,436 | $ | 322 | $ | 87,956,839 | $ | (52,771,853 | ) | $ | (1,269 | ) | $ | 35,184,039 | |||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 32,949,987 | $ | 330 | $ | 89,571,641 | $ | (53,731,903 | ) | $ | (458,719 | ) | $ | 35,381,349 | |||||||||||||||||||||||||||||||||||
Share-based compensation expense | - | - | 138,461 | - | - | 138,461 | - | - | 158,327 | - | - | 158,327 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, net | 90,852 | - | 159,518 | 159,518 | 83,343 | 1 | 144,213 | - | - | 144,214 | ||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | 85,314 | 85,314 | ||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | 620,327 | - | 620,327 | ||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 33,033,330 | $ | 331 | $ | 89,874,181 | $ | (53,111,576 | ) | $ | (373,405 | ) | $ | 36,389,531 | |||||||||||||||||||||||||||||||||||
Share-based compensation expense | - | - | 295,290 | - | - | 295,290 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, net | 56,861 | - | 113,833 | - | - | 113,833 | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units | 198,106 | 2 | (2 | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||
Shares retained for payment of taxes in connection with net share settlement of restricted stock units | (13,063 | ) | - | (41,410 | ) | - | - | (41,410 | ) | |||||||||||||||||||||||||||||||||||||||
Stock buyback | (156,505 | ) | (2 | ) | (398,254 | ) | (398,256 | ) | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | (8,031 | ) | (8,031 | ) | - | - | - | - | (69,352 | ) | (69,352 | ) | ||||||||||||||||||||||||||||||||
Net loss | - | - | - | (1,683,253 | ) | (1,683,253 | ) | |||||||||||||||||||||||||||||||||||||||||
Balances, December 31, 2017 | 32,249,288 | $ | 322 | $ | 88,254,818 | $ | (54,455,106 | ) | $ | (9,300 | ) | $ | 33,790,734 | |||||||||||||||||||||||||||||||||||
Net income | - | - | - | 301,575 | - | 301,575 | ||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | 33,118,729 | $ | 331 | $ | 89,843,638 | $ | (52,810,001 | ) | $ | (442,757 | ) | $ | 36,591,211 |
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
Balance at September 30, 2018 | 33,176,146 | $ | 332 | $ | 90,251,145 | $ | (56,516,895 | ) | $ | (245,375 | ) | $ | 33,489,207 | |||||||||||
Share-based compensation expense | - | - | 133,845 | - | - | 133,845 | ||||||||||||||||||
Issuance of common stock upon exercise of stock options, net | 1,600 | - | 2,528 | - | - | 2,528 | ||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units | - | - | - | - | - | - | ||||||||||||||||||
Stock buyback | (588,425 | ) | (6 | ) | (1,621,016 | ) | - | - | (1,621,022 | ) | ||||||||||||||
Other comprehensive loss | - | - | - | - | (54,335 | ) | (54,335 | ) | ||||||||||||||||
Net income | - | - | - | 1,045,940 | - | 1,045,940 | ||||||||||||||||||
Balance at December 31, 2018 | 32,589,321 | $ | 326 | $ | 88,766,502 | $ | (55,470,955 | ) | $ | (299,710 | ) | $ | 32,996,163 | |||||||||||
Share-based compensation expense | - | - | 171,977 | - | - | 171,977 | ||||||||||||||||||
Issuance of common stock upon exercise of stock options, net | 26,682 | - | 42,644 | - | - | 42,644 | ||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units | 156,115 | 2 | (2 | ) | - | - | - | |||||||||||||||||
Stock buyback | (200,000 | ) | (2 | ) | (549,998 | ) | - | (550,000 | ) | |||||||||||||||
Other comprehensive loss | - | - | - | - | (69,091 | ) | (69,091 | ) | ||||||||||||||||
Net income | - | - | - | 1,178,850 | - | 1,178,850 | ||||||||||||||||||
Balance at March 31, 2019 | 32,572,118 | $ | 326 | $ | 88,431,123 | $ | (54,292,105 | ) | $ | (368,801 | ) | $ | 33,770,543 |
Common Stock Activity
During the six months ended March 31, 2020, the Company issued 140,204 shares of common stock and obtained gross proceeds of $258,047 in connection with the exercise of stock options. During the six months ended March 31, 2019, the Company issued 28,282 shares of common stock and obtained gross proceeds of $45,172 in connection with the exercise of stock options. During the six months ended March 31, 2020, the Company issued 185,043 shares of commons stock in connection with the vesting of RSUs. During the six months ended March 31, 2019, the Company issued 156,115 shares of commons stock in connection with the vesting of RSUs.
Share Buyback Program
The Board of Directors approved a share buyback program in 20132015 under which the Company was authorized to repurchase up to $4$4 million of its outstanding common shares. There were no shares repurchased during the quarters ended December 31, 2017 and 2016 respectively. At December 31, 2017, all repurchased shares were retired. In December 2017, the Board of Directors extended the program through December 31, 2018.
In December 2018, the Board of Directors approved a new share buyback program beginning January 1, 2019 and expiring on December 31, 2020, under which the Company was authorized to repurchase up to $5 million of its outstanding common shares.
During the six months ended March 31, 2020, the Company repurchased 156,505 shares for $398,256. During the six months ended March 31, 2019, 788,425 shares were repurchased for $2,171,022. All repurchased shares were retired.
Dividends
There were no dividends declared in the threesix months ended DecemberMarch 31, 2017 2020 and 2016.2019.
127.NET LOSSINCOME PER SHARE
The following table sets forth the computation of basic and diluted lossnet income per share:
Three months ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
Numerator: | ||||||||
Loss available to common stockholders | $ | (1,683,253 | ) | $ | (812,680 | ) | ||
Denominator: | ||||||||
Weighted average common shares outstanding | 32,236,039 | 31,800,103 | ||||||
Basic loss per common share | $ | (0.05 | ) | $ | (0.03 | ) | ||
Diluted loss per common share | $ | (0.05 | ) | $ | (0.03 | ) | ||
Potentially dilutive securities outstanding at period end excluded from the diluted computation as the inclusion would have been antidilutive: | ||||||||
Options | 3,289,067 | 4,849,002 |
Three months Ended | Six months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income | $ | 301,575 | $ | 1,178,850 | $ | 921,902 | $ | 2,224,790 | ||||||||
Basic income per share | $ | 0.01 | $ | 0.04 | $ | 0.03 | $ | 0.07 | ||||||||
Diluted income per share | $ | 0.01 | $ | 0.04 | $ | 0.03 | $ | 0.07 | ||||||||
Weighted average shares outstanding - basic | 33,094,596 | 32,584,952 | 33,036,786 | 32,738,871 | ||||||||||||
Assumed exercise of dilutive options | 638,023 | 492,303 | 672,046 | 533,293 | ||||||||||||
Weighted average shares outstanding - diluted | 33,732,619 | 33,077,255 | 33,708,832 | 33,272,164 | ||||||||||||
Potentially diluted securities outstanding at period end excluded from diluted computation as the inclusion would have been antidilutive: | ||||||||||||||||
Options | 1,602,477 | 976,750 | 1,602,477 | 976,750 |
138. SEGMENT INFORMATION
The Company is engaged in the design, development and commercialization of directed and multidirectional sound technologies, voice broadcast products and location-based mass messaging solutions for emergency warning and workforce management. The Company operates in two business segments: Hardware and Software and its principle markets are North and South America, Europe, Middle East and Asia. As reviewed by the Company’s chief operating decision maker, the Company evaluates the performance of each segment based on sales and operating income. Cash and cash equivalents, marketable securities, accounts receivable, inventory, property and equipment, deferred tax assets, goodwill and intangible assets are primary assets identified by segment. The accounting policies for segment reporting are the same for the Company as a whole and transactions between the two operating segments are not material.
The following table presents the Company’s segment disclosures:
Three months ended March 31, | Six months ended March 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenue from external customers | ||||||||||||||||
Hardware | $ | 7,866,163 | $ | 9,646,513 | $ | 16,228,205 | $ | 19,303,215 | ||||||||
Software | 410,610 | 545,178 | 830,270 | 1,066,035 | ||||||||||||
$ | 8,276,773 | $ | 10,191,691 | $ | 17,058,475 | $ | 20,369,250 | |||||||||
Intercompany revenues | ||||||||||||||||
Hardware | $ | - | $ | - | $ | - | $ | - | ||||||||
Software | 443,907 | 279,997 | 828,902 | 466,969 | ||||||||||||
$ | 443,907 | $ | 279,997 | $ | 828,902 | $ | 466,969 | |||||||||
Segment operating income (loss) | ||||||||||||||||
Hardware | $ | 380,174 | $ | 1,282,308 | $ | 1,076,244 | $ | 2,584,954 | ||||||||
Software | (51,433 | ) | 153,078 | (50,846 | ) | 140,307 | ||||||||||
$ | 328,741 | $ | 1,435,386 | $ | 1,025,398 | $ | 2,725,261 | |||||||||
Other expenses: | ||||||||||||||||
Depreciation and amortization expense | ||||||||||||||||
Hardware | $ | 128,308 | $ | 138,665 | $ | 259,475 | $ | 262,966 | ||||||||
Software | 78,185 | 77,705 | 155,556 | 154,671 | ||||||||||||
$ | 206,493 | $ | 216,370 | $ | 415,031 | $ | 417,637 | |||||||||
Income tax expense | ||||||||||||||||
Hardware | $ | 96,768 | $ | 274,144 | $ | 269,158 | $ | 557,147 | ||||||||
Software | - | - | - | - | ||||||||||||
$ | 96,768 | $ | 274,144 | $ | 269,158 | $ | 557,147 |
March 31, 2020 | September 30, 2019 | |||||||
Long-lived assets | ||||||||
Hardware | $ | 2,109,517 | $ | 2,283,344 | ||||
Software | 3,349,140 | 3,467,546 | ||||||
$ | 5,458,657 | $ | 5,750,890 | |||||
Total assets | ||||||||
Hardware | $ | 47,315,471 | $ | 42,470,356 | ||||
Software | 4,855,459 | 4,649,627 | ||||||
$ | 52,170,930 | $ | 47,119,983 |
19. MAJOR CUSTOMERS, SUPPLIERS AND RELATED INFORMATION
For the three months ended DecemberMarch 31, 2017, 2020, revenues from two customersone customer accounted for 31% and 26%64% of total revenues respectively, with no other single customer accounting for more than 10% of revenues. At DecemberFor the six months ended March 31, 2017, accounts receivable2020, revenues from one customer accounted for 42%63% of total accounts receivable,revenues with no other single customer accounting for more than 10% of therevenues. As of March 31, 2020, accounts receivable balance.
For the three months ended December 31, 2016, revenues from one customertwo customers accounted for 11%63% and 15% of total revenues,accounts receivable, with no other single customer accounting for more than 10% of revenues. At December 31, 2016, the accounts receivable balance.
For the three months ended March 31, 2019, revenues from two customers accounted for 40%56% and 19%13% of total accounts receivable, respectively,revenues with no other single customer accounting for more than 10% of revenues. For the six months ended March 31, 2019, revenues from two customers accounted for 58% and 10% of total revenues with no other single customer accounting for more than 10% of revenues. As of March 31, 2019, accounts receivable from two customers accounted for 55% and 11% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.
The following table summarizes revenues by geographic region. Revenues are attributed to countries based on customer’scustomer’s delivery location.
Three months ended December 31, | ||||||||
2017 | 2016 | |||||||
Americas | $ | 6,053,038 | $ | 1,622,357 | ||||
Asia Pacific | 1,021,906 | 984,600 | ||||||
Europe, Middle East and Africa | 553,623 | 334,377 | ||||||
Total Revenues | $ | 7,628,567 | $ | 2,941,334 |
Three months ended March 31, | Six months ended March 31, | ||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||
Americas | $ | 7,046,654 | $ | 9,048,167 | $ | 13,850,474 | $ | 17,769,488 | |||||||||
Asia Pacific | 656,353 | 506,968 | 2,204,124 | 1,146,024 | |||||||||||||
Europe, Middle East and Africa | 573,766 | 636,556 | 1,003,877 | 1,453,738 | |||||||||||||
Total Revenues | $ | 8,276,773 | $ | 10,191,691 | $ | 17,058,475 | $ | 20,369,250 |
14. SUBSEQUENT EVENTS
On January 18, 2018, the Company acquired all of the issued and outstanding shares of capital stock of Genasys Holdings, S.L. and its subsidiaries (“Genasys”), pursuant to a Stock Purchase Agreement, dated January 18, 2018. Genasys is a leading software provider of advanced location-based mass messaging solutions for emergency warning systems and workforce management. The aggregate consideration paid by the Company was 3.1 million Euros (approximately $3.8 million), including the assumption of 1.2 million Euros (approximately $1.5 million) of debt subject to certain working capital adjustments as outlined in the Stock Purchase Agreement. The acquisition was funded from available cash on hand. The Company is in the initial stages of determining the accounting treatment for the transaction, specifically related to the fair value of acquired tangible and intangible assets, liabilities assumed and the related tax impact.
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, 2017.2019.
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 and as noted Part II, Item 1A (Risk Factors) below, which could cause actual results to differ materially from those indicated by such forward-looking statements.
Overview
On October 23, 2019, LRAD Corporation announced its rebranding as Genasys Inc. (“Genasys”). Genasys is a global provider of critical communications solutions designed to help keep people safe. Our unified mass notification platform provides a multi-channel approach to deliver alerts, notifications, instructions and information before, during and after public safety threats, critical events and other crisis situations.
Our Company is a leading innovator and manufacturer of acoustic communicationmulti-channel approach includes:
• LRAD® (Long Range Acoustic Device®) systems that control sound from 30° - 360° over shortproject sirens and long distances. By broadcasting audible voice messages and tones with exceptional vocal clarity and only where needed, we offer novel sound applications that conventional bullhorns, loudspeakers, and public address and emergency warning systems cannot achieve. We have developed two LRAD® product lines using our proprietary technologies:
• Acoustic Hailing Devices (“AHD’s”), which project audible broadcasts with exceptional intelligibility in a 30° beam from close range out to 5,500 meters, and;meters;
• ONE VOICE® Mass Notification Systems(“MNS”), whichCCaaS (Critical Communications as a Service)softwarethat provides a reliable, fast and intuitive solution for sending SMS, text, email and social media messages to mobile devices in defined geographic areas, and;
• Integrated Solutions that span multiple hardware and software mobile notification channels so that critical information can be delivered to the people who need it. These solutions include LRAD systems that project sirens and audible voice messages 60° - 360° audible broadcastsdirectionally with industry-leading vocal intelligibilityclarity from close range to over 14 square kilometers, from a single installation.and CCaaS software designed to deliver SMS, text, email, and social media to mobile devices in defined geographic areas. Our integrated solutions are compatible with the Federal Emergency Management Agency's (“FEMA”) Integrated Public Alert & Warning System (“IPAWS”) and other major emergency warning protocols.
The Company’s critical communication systems are being used in 72 countries throughout the world in diverse applications, including public safety, national emergency warning systems, mass notification, defense, law enforcement, critical infrastructure protection and many more. We continue to develop new communication innovations and believe we have significant competitive advantages in our principal markets.
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. By broadcasting audible voice messages with exceptional vocal clarity and only where needed, we offer novel sound applications that conventional bullhorns, loudspeakers, and public address and emergency warning systems cannot achieve. Our AHD's meet stringent military requirementsLRAD systems are designed to enable users to safely hail and are packaged in several form factors,warn, inform and direct, prevent misunderstandings, determine intent, establish large safety zones, resolve uncertain situations and save lives. The LRAD product line is comprised of a full range of communication solutions - from handheld, portable hand held unitsdevices to permanently installed, remotely operated systems. Through the use of powerful voice commands, prerecorded messages in multiple languages, and warning tones, our AHD's are designed to create large safety zones while determining the intent and influencing the behavior of security threats. We continue to add new models and features to meet specific customer requirements and to expand our AHD product line to provide a complete range of systems and accessories, including our recently patented XL driver technology, which generates higher audio output in a smaller and lighter form factor. We have incorporated, and plan to continue incorporating, this proprietary technology into our AHD and ONE VOICE products.new markets.
Building on the success of our AHD's,LRAD systems, we launcheddesigned and developed our omnidirectionalmultidirectional mass notification product line. Unlike most siren-basedsiren-only installations, our public safety 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 makeenable us more competitiveto successfully compete in the large and growing mass notification market.
CCaaS is a cloud-based mobile notification platform that enables emergency personnel, first responders, municipalities, companies and educational institutions to send public safety warnings and notifications to the mobile phones of affected populations in specific geographic areas with reliability, speed and ease. Alerts and notifications can be sent from a desktop or our mobile application.
Genasys offers the only unified critical communications platform that provides multi-modal, geo-targeted cellphone alerts and audible messages with industry-leading vocal clarity. Our products are designed to meet a broad range of diverse applications including emergency warning and mass notification, fixeduser-friendly software interface and mobile military deployments, maritime, critical infrastructure, perimeter, commercial, border,application manage and homeland security, law enforcement, emergency responderdeliver life-saving notifications and fire rescue communications, asset protection,information to people at risk, before, during and wildlife preservation and control. By selling our industry-leading AHD's and advanced ONE VOICE mass notification systems into over 70 countries, we have created a new worldwide market and a recognized global brand. We continue to develop new acoustic innovations and believe we have established a significant competitive advantage in our principal markets. after crisis situations.
Business developmentsin the fiscal quarter ended DecemberMarch 31, 2017:2020:
● | Released COVID-19 interactive map layer service for free public and enterprise use |
● | Homeland security and public safety agencies in the U.S., Spain, Poland, Morocco, South Africa, Thailand and Malaysia deployed LRAD systems in the agencies’ COVID-19 responses |
● | Launched the Company’s Personal Safety Service, a unified, multi-channel critical communications solution for governments and enterprises |
● | Received |
● | Announced |
● | Received |
|
|
Revenues inin the firstsecond fiscal quarter ended DecemberMarch 31, 2017,2020, were $7.6$8.3 million, an increasea decrease from $2.9$10.2 million in the firstsecond fiscal quarter of 2017.2019. The increasedecrease in revenues was primarily driven by increasesa decrease in both AHDAcoustic Hailing Device (“AHD”) revenues and public safety mass notification (“PSMN”) systems revenues. AHD revenues increased $2,559,000,were $7,295,728, a decrease of $1,789,388, or 128%20%, and mass notificationPSMN systems revenues increased $2,074,748,were $981,045, a decrease of $125,530, or 297%11%, compared to the firstsecond fiscal quarter of 2017.2019. Based on the timing of government budget cycles, as well as financial issues, the impact of the COVID-19 pandemic and military conflictleadership change in certain areas of the world, delays in awarding contracts often occur, resulting in uneven quarterly revenues. Gross profit increaseddecreased compared to the same quarter in the prior year primarily as a result of higher sales and higher fixed overhead absorption.lower sales. Operating expenses increased by 16.2%decreased 2% from $2.6$3.8 million to $3.0$3.7 million in the quarter ended DecemberMarch 31, 2017, primarily due to higher incentive expense accrual based on the Company’s expectation for meeting current year financial goals, computer related expenses and increased salaries and consulting for additional engineering and sales personnel.2020. The firstsecond fiscal quarter of fiscal 20182020 results reflect a $2.7 millionreflects $96,768 of income tax expense including $2.5 million for a decreasecompared to $274,144 in the deferred tax asset due to enactmentprior year similar quarter. We reported net income of the “Tax Cuts and Jobs Act” (the “Act”) on December 22, 2017, which reduces the U.S. federal corporate tax rate to 21% effective January 1, 2018. Primarily as a result of this fiscal 2018 income tax expense, we reported a net loss of $1,683,253$301,575 for the quarter, or $0.05$0.01 per share, compared to a net lossincome of $812,680,$1,178,850, or $0.03$0.04 per share, for the same quarter in the prior year.
On January 30, 2020, the World Health Organization (“WHO”) declared that the recent novel coronavirus (COVID-19) outbreak was a global health emergency, which prompted national governments to begin putting actions in place to slow the spread of COVID-19. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic. The outbreak of COVID-19 has resulted in travel restrictions, quarantines, “stay-at-home” and “shelter-in-place” orders and extended shutdown of certain businesses around the world. While the impact of the COVID-19 pandemic did not have a material adverse effect on our financial position or results of operations for the fiscal quarter ended March 31, 2020, these governmental actions and the widespread economic disruption arising from the pandemic have the potential to materially impact our business and influence our business decisions. The extent and duration of the pandemic is unknown, and the future effects on our business are uncertain and difficult to predict. The Company is continuing to monitor the events and circumstances surrounding the COVID-19 pandemic, which may require adjustments to the Company’s estimates and assumptions in the future.
Overall Business Outlook
Our product line-up continues to gain worldwide awareness and recognition through media exposure, trade show participations,shows, product demonstrations, and word of mouth as a result of positive responses and increased acceptance of our products. We believe we have a solid global brand, technology and product foundation with our LRAD-X directed product line,LRAD systems and integrated solutions, which we have expanded over the years to serviceserve new markets and customers for greater business growth. We have launched a line of omnidirectional products targeted to meet the needs of the large and growing mass notification market. We believe that we have strong market opportunities for our directional and omnidirectional product offerings withinthroughout the global governmentworld in the homeland security and military sector, as well as increasing commercial applicationsdefense sectors as a result of continuedincreasing threats to government, commerce, law enforcement borders, and critical infrastructure. Our directional and multidirectional product offerings also have many applications within the fire rescue, public safety, maritime, asset protection, and wildlife control and preservation business segments.
The proliferation of natural disasters, crisis situations and civil disturbances require technologically advanced, multi-channel solutions to deliver clear and timely critical communications to help keep the public safe during emergencies. Businesses are also incorporating communication systems that locate and help safeguard employees when critical events occur.
By providing the only unified platform that combines audible, highly intelligible voice broadcast systems and CCaaS software, Genasys seeks to deliver a reliable, fast and intuitive solution for sending location-based audible voice communications and geolocation-targeted messages and texts to mobile devices to help keep the public and employees safe.
Genasys has developed a global market for LRAD systems and advanced emergency warning notification solutions. We have a reputation for producing quality products that feature industry-leading vocal intelligibility and geo-targeted mass messaging. While the mass notification market is more mature with many established manufacturers and suppliers, we believe that our advanced technology and unified multi-channel platform provides opportunities to succeed in the large and growing public safety, emergency warning and mass notification markets. We also plan to expand and strengthen domestic and international sales channels by adding key mass notification partners, distributors, and dealers.
We plan to continue building on our AHD leadership position by offering enhanced directional and multidirectional voice broadcast systems and accessories for an expanding range of applications. In executing our strategy, we use direct sales to governments, commercemilitaries, large end-users, and system integrators. We have built a worldwide distribution channel consisting of partners and resellers that have significant expertise and experience selling integrated communication solutions into our various target markets. As our primary AHD sales opportunities are with domestic and international government, military and law enforcement agencies, we are subject to each customer’s unique budget cycle, which leads to long selling cycles and inuneven revenue flow, complicating our product planning.
In fiscal 2020, we intend to continue to pursue domestic and international business opportunities with the support of business development consultants, key representatives and resellers. We plan to grow our revenues through increased direct sales to militaries and large commercial and defense-related companies that desire to integrate our communication technologies into their product offerings. This includes building on fiscal 2019 domestic defense sales by pursuing further U.S. military opportunities. We also plan to pursue mass notification, government, law enforcement, fire rescue, homeland and international security, private and commercial security, border security, maritime security, and wildlife preservation and control applications. We intendbusiness opportunities.
In March 2020, the World Health Organization (“WHO”) classified the COVID-19 outbreak as a pandemic. While the impact of the COVID-19 pandemic did not have a material adverse effect on our financial position or results of operations for the quarter ended March 31, 2020, we have been monitoring the developments and assessing areas where there is potential for our business to continue expandingbe impacted. A significant portion of our international mass notification business, particularlylabor force is currently working remotely, which could, among other things, negatively impact our ability to engage in sales-related initiatives, or efficiently conduct day-to-day operations, and we are aware that other businesses and governments with which we engage are likely operating under similar restrictions and experiencing disruptions in their own operations, which may create obstacles in the Middle East, Europecoordination of business activities, including the negotiation and Asia wherefulfillment of orders. Disruptions in the supply chain could negatively impact our ability to source materials or manufacture and distribute product. While we do not currently anticipate a material reduction in demand for our commercialized products, we could experience a decrease in new orders which would negatively impact our revenues and reduce our liquidity and cash flows. Growth in revenue could also be impeded by these factors. The financial markets have been subject to significant volatility that could impact our ability to enter into, modify, and negotiate favorable terms and conditions relative to equity and debt financing activities. We currently have $16.4 million in cash and cash equivalents as of March 31, 2020, which we believe there are greater market opportunitiesprovides sufficient capital to fund our operations for at least the next twelve months and withstand the anticipated near-term consequences of the pandemic, although liquidity constraints and access to capital markets could adversely impact our omnidirectional products. Our selling network has expanded throughliquidity and warrant changes to our investment strategy. While we have not yet experienced a material impact, the additionfull magnitude of sales consultantsthe pandemic cannot be measured at this time, and therefore any of the aforementioned circumstances, as well as continuingother factors, may cause our results of operations to improvevary substantially from year to year and increase our relationships with key integrators and sales representatives within the United States and in aquarter to quarter.
A large number of worldwide locations. However, we may continue to face challengescomponents and sub-assemblies produced by outside suppliers in fiscal 2018 due to continuing economic and geopolitical conditionsour supply chain are produced within 50 miles of our facility. We source a small amount of component parts from suppliers in some international regions. We anticipate that the new U.S. government administration will support U.S. military spending, which we believe could benefit us, although there is uncertainty as to priorities and timing. We continue to pursue large business opportunities, but it is difficult to anticipate how long it will take to close these opportunities, or if they will ever ultimately come to fruition.China. It is also difficultlikely that some of our suppliers source parts from China. We are in contact with those suppliers and evaluating what impact, if any, may result from the coronavirus pandemic.
Based on various standards published to determine whetherdate, we believe the work our omnidirectional product will be acceptedassociates perform is critical, essential and life sustaining. We are taking a variety of measures to promote the safety and security of our employees while ensuring the availability and function of our critical infrastructure. We are following Center for Disease Control guidelines to reduce the transmission of COVID-19, such as the imposition of travel restrictions, cancellation of events, the promotion of social distancing, the adoption of work-from-home arrangements, and limiting access to our facilities. Some or all of these policies and initiatives could impact our operations. In addition, the following events related to the COVID-19 pandemic could result in lost or delayed revenue to the Company: limitations on the ability of our suppliers to meet delivery requirements and commitments; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver our products to customers; unforseen deviations from customers or foreign governments restricting the ability to do business and limitations on the ability of our customers to pay us on a viable solution in the mass notification market, which includes a number of large, well-known competitors.timely basis, if at all.
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’sManagement’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, 2017.2019. 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 U.S. 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 ThreeThree Months Ended December 31March, 31, 20201720 and 20120169
Revenues
Three Months Ended | ||||||||||||||||||||||||
March 31, 2020 | March 31, 2019 | |||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Total | Total | Fav (Unfav) | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Product sales | $ | 7,553,481 | 91.3% | $ | 9,340,523 | 91.6% | $ | (1,787,042 | ) | (19.1%) | ||||||||||||||
Contract and other | 723,292 | 8.7% | 851,168 | 8.4% | (127,876 | ) | (15.0%) | |||||||||||||||||
Total revenues | 8,276,773 | 100.0% | 10,191,691 | 100.0% | (1,914,918 | ) | (18.8%) | |||||||||||||||||
Cost of revenues | 4,266,881 | 51.6% | 5,001,183 | 49.1% | 734,302 | 14.7% | ||||||||||||||||||
Gross Profit | 4,009,892 | 48.4% | 5,190,508 | 50.9% | (1,180,616 | ) | (22.7%) | |||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Selling, general and administrative | 2,732,340 | 33.0% | 2,475,378 | 24.3% | (256,962 | ) | (10.4%) | |||||||||||||||||
Research and development | 948,811 | 11.5% | 1,279,744 | 12.6% | 330,933 | 25.9% | ||||||||||||||||||
Total operating expenses | 3,681,151 | 44.5% | 3,755,122 | 36.8% | 73,971 | 2.0% | ||||||||||||||||||
Income from operations | 328,741 | 4.0% | 1,435,386 | 14.1% | (1,106,645 | ) | (77.1%) | |||||||||||||||||
Other income | 69,602 | 0.8% | 17,608 | 0.2% | 51,994 | 295.3% | ||||||||||||||||||
Income before income taxes | 398,343 | 4.8% | 1,452,994 | 14.3% | (1,054,651 | ) | (72.6%) | |||||||||||||||||
Income tax expense | 96,768 | 1.2% | 274,144 | 2.7% | 177,376 | 64.7% | ||||||||||||||||||
Net income | $ | 301,575 | 3.6% | $ | 1,178,850 | 11.6% | $ | (877,275 | ) | (74.4%) | ||||||||||||||
Net sales | ||||||||||||||||||||||||
Hardware | $ | 7,866,163 | 95.0% | $ | 9,646,513 | 94.7% | (1,780,350 | ) | (18.5%) | |||||||||||||||
Software | 410,610 | 5.0% | 545,178 | 5.3% | (134,568 | ) | (24.7%) | |||||||||||||||||
Total net sales | $ | 8,276,773 | 100.0% | $ | 10,191,691 | 100.0% | $ | (1,914,918 | ) | (18.8%) |
The following table above sets forth for the periods indicated certain items of our condensed consolidated statements of operations expressed in dollars and as a percentage of net revenues. The financial information and the discussion below should be read in conjunction with the condensed consolidated financial statements and notes contained in this report.
Three months ended | ||||||||||||||||||||||||
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
% of Total | % of Total | Fav(Unfav) | ||||||||||||||||||||||
Amount | Revenues | Amount | Revenues | Amount | % | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Product sales | $ | 7,336,025 | 96.2 | % | $ | 2,701,959 | 91.9 | % | $ | 4,634,066 | 171.5 | % | ||||||||||||
Contract and other | 292,542 | 3.8 | % | 239,375 | 8.1 | % | 53,167 | 22.2 | % | |||||||||||||||
Total revenues | 7,628,567 | 100.0 | % | 2,941,334 | 100.0 | % | 4,687,233 | 159.4 | % | |||||||||||||||
Cost of revenues | 3,671,027 | 48.1 | % | 1,716,824 | 58.4 | % | (1,954,203 | ) | (113.8 | %) | ||||||||||||||
Gross profit | 3,957,540 | 51.9 | % | 1,224,510 | 41.6 | % | 2,733,030 | 223.2 | % | |||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Selling, general and administrative | 2,188,398 | 28.7 | % | 1,966,436 | 66.9 | % | (221,962 | ) | (11.3 | %) | ||||||||||||||
Research and development | 778,037 | 10.2 | % | 587,410 | 19.9 | % | (190,627 | ) | (32.5 | %) | ||||||||||||||
Total operating expenses | 2,966,435 | 38.9 | % | 2,553,846 | 86.8 | % | (412,589 | ) | (16.2 | %) | ||||||||||||||
Income (loss) from operations | 991,105 | 13.1 | % | (1,329,336 | ) | (45.2 | %) | 2,320,441 | (174.6 | %) | ||||||||||||||
Other income | 34,530 | 0.5 | % | 30,128 | 1.0 | % | 4,402 | 14.6 | % | |||||||||||||||
Income (loss) from continuing operations before income taxes | 1,025,635 | 13.4 | % | (1,299,208 | ) | (44.2 | %) | 2,324,843 | (178.9 | %) | ||||||||||||||
Income tax expense (benefit) | 2,708,888 | 35.5 | % | (486,528 | ) | (16.5 | %) | (3,195,416 | ) |
| na | |||||||||||||
Net loss | $ | (1,683,253 | ) | (22.1 | %) | $ | (812,680 | ) | (27.6 | %) | $ | (870,573 | ) | 107.1 | % |
Revenues
Revenues increaseddecreased in the current quarter compared to the same quarter in the prior year due to the largertiming of deliveries in backlog at September 30, 2017as of December 31, 2019, as compared to September 30, 2016. Sales improved in the currentDecember 31, 2018. Current year quarter bothLRAD AHD (up $2,559,319 or 128%)product line revenue was $7,295,728 and MNS (up $2,074,748, or 297%)PSMN systems product linesline revenue was $981,045, down $1,789,387 and $125,531 respectively, compared to the same prior year.year period. The receipt of orders willis often be uneven due to the timing of approvalsgovernment budgets or budgets. At Decemberapprovals. As of March 31, 2017,2020, we had aggregate deferred revenue of $437,945$899,842 for prepayments from customers in advance of product shipment.extended warranty obligations and software support agreements.
Gross Profit
The increasedecrease in gross profit in the current quarter compared to the same period in the prior year was primarily due to the higherlower level of revenue. Gross profit as a percentage of revenue was lower in the fiscal 2020 second quarter due the inclusion of $77,000 of engineering expenses in cost of sales partially offset by an increase inupon the implementation of more precise expense tracking of PSMN and manufacturing overhead expenses to support projects during the increased sales.current quarter.
Our products have varying gross margins, so product mix may affect gross profits. In addition, our margins vary based on the sales channels through which our products are sold in a given period. We continue to implement product updates and changes, including raw material and component changes that may impact product costs. With such product updates and changes we have limited warranty cost experience and estimated future warranty costs can impact our gross margins. We do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $221,962$256,962 over the prior year quarter. This reflects $209,322 higher information technology related expenses, $154,197 higher incentive compensation expense, $81,957 higher salaries, benefits and consulting expense, primarily for business development and $59,885 in increased travel. The increases were offset by a $326,175 decrease in non-cash compensation,quarter primarily due to the prior year non-recurringincreased spending for sales and marketing activities, including advertising ($81,783), commission expense ($40,184) and increased compensation and marketing related to a Separation Agreement and General Release related to the departure of the Company’s prior CEO. A new enterprise resource planning software system was implementedexpenses in the first quarter of fiscal year 2018 and this rate of expense is not expected to recur in future periods.our Spanish office ($74,422).
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three-months ended March 31, 2020 and 2019 of $283,314 and $163,932, 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, including the June 2022 European Mandate for Public Warning Systems by June 2022. Commission expenses will fluctuate based on the nature of our sales.
Research and Development Expenses
Research and development expenses decreased $330,933 compared to the same quarter in the prior year primarily due to lower total compensation related expense ($161,871), prototype material costs ($107,660) and engineering costs charged to cost of revenues ($77,000). We continue to expand our software development efforts to grow our emergency warning solutions product offerings.
Included in research and development expenses for the three months ended DecemberMarch 31, 20172020 and 20162019, was $5,067 and $3,842, respectively, of $109,322non-cash share-based compensation costs.
Research and $435,497, respectively.development costs vary period to period due to the timing of projects, and the timing and 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 Income
Net income in the second quarter of fiscal year 2020 was $301,575, a decrease of $877,275 compared to the second quarter of fiscal year 2019. The decrease was primarily due to the lower revenue in the second quarter of fiscal year 2020.
Comparison of Results of Operations for the Six Months Ended March 31, 2020 and 2019
Six Months Ended | ||||||||||||||||||||||||
March 31, 2020 | March 31, 2019 | |||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Total | Total | Fav (Unfav) | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Product sales | $ | 15,561,419 | 91.2% | $ | 18,688,691 | 91.7% | $ | (3,127,272 | ) | (16.7%) | ||||||||||||||
Contract and other | 1,497,056 | 8.8% | 1,680,559 | 8.3% | (183,503 | ) | (10.9%) | |||||||||||||||||
Total revenues | 17,058,475 | 100.0% | 20,369,250 | 100.0% | (3,310,775 | ) | (16.3%) | |||||||||||||||||
Cost of revenues | 8,446,478 | 49.5% | 10,089,484 | 49.5% | 1,643,006 | 16.3% | ||||||||||||||||||
Gross Profit | 8,611,997 | 50.5% | 10,279,766 | 50.5% | (1,667,769 | ) | (16.2%) | |||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Selling, general and administrative | 5,553,865 | 32.6% | 5,226,386 | 25.7% | (327,479 | ) | (6.3%) | |||||||||||||||||
Research and development | 2,032,734 | 11.9% | 2,328,119 | 11.4% | 295,385 | 12.7% | ||||||||||||||||||
Total operating expenses | 7,586,599 | 44.5% | 7,554,505 | 37.1% | (32,094 | ) | (0.4%) | |||||||||||||||||
Income from operations | 1,025,398 | 6.0% | 2,725,261 | 13.4% | (1,699,863 | ) | (62.4%) | |||||||||||||||||
Other income | 165,662 | 1.0% | 56,676 | 0.3% | 108,986 | 192.3% | ||||||||||||||||||
Income before income taxes | 1,191,060 | 7.0% | 2,781,937 | 13.7% | (1,590,877 | ) | (57.2%) | |||||||||||||||||
Income tax expense | 269,158 | 1.6% | 557,147 | 2.7% | 287,989 | 51.7% | ||||||||||||||||||
Net income | $ | 921,902 | 5.4% | $ | 2,224,790 | 10.9% | $ | (1,302,888 | ) | (58.6%) | ||||||||||||||
Net sales | ||||||||||||||||||||||||
Hardware | $ | 16,228,205 | 95.1% | $ | 19,303,215 | 94.8% | (3,075,010 | ) | (15.9%) | |||||||||||||||
Software | 830,270 | 4.9% | 1,066,035 | 5.2% | (235,765 | ) | (22.1%) | |||||||||||||||||
Total net sales | $ | 17,058,475 | 100.0% | $ | 20,369,250 | 100.0% | $ | (3,310,775 | ) | (16.3%) |
The table above sets forth for the periods indicated certain items of our condensed consolidated statements of operations expressed in dollars and as a percentage of net revenues. The financial information and the discussion below should be read in conjunction with the condensed consolidated financial statements and notes contained in this report.
Revenues
Revenues decreased 16% for the six-month period ended March 31, 2020 compared to the same prior year period due to the timing for delivery of the backlog at September 30, 2019 compared to the September 30, 2018 backlog. LRAD AHD product line revenues were $15,046,939 for the current year six-month period, down $2,709,188, and PSMN revenues were $2,011,536, down $601,587, compared to the same prior year period. The receipt of orders will often be uneven due to the timing of approvals or budgets. As of March 31, 2020, we had aggregate deferred revenue of $899,842 for extended warranty obligations and software support agreements.
Gross Profit
The decrease in gross profit in the six months ended March 31, 2020 was primarily due to lower sales volume. Gross profit as a percentage of revenue was unchanged compared to the prior year period, however, fiscal year 2020 results includes $77,000 of additional engineering charges resulting from a more precise process to charge engineering costs to costs of 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 $327,479 in the six months ended March 31, 2020 compared to the prior year period. The increase in selling, general and administrative expenses is primarily due to non-recurringincreased sales and marketing activities, including increases in commission expense ($134,732), advertising and related expenses ($98,159) and trade shows ($77,062).
We incurred non-cash share-based compensation expenses allocated to a Separation Agreementselling, general and General Release related to the departure of the Company’s prior CEOadministrative expenses in the prior year quarter.six months ended March 31, 2020 and 2019 of $427,241 and $284,973, 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 increaseddecreased $295,385 compared to the prior year, primarily due to $75,162 for increased product development, $58,609 for salarieslower total compensation related expense ($141,381), prototype component cost ($101,137), and benefits dueengineering costs charged to increased engineering staff compared to the prior year quarter and $60,405 for bonus accrual.cost of revenues ($77,000).
Included in research and development expenses for the threesix months ended DecemberMarch 31, 20172020 and 2016 was $22,9302019 were $15,825 and $23,375$12,348 of non-cash share-based compensation costs, respectively.
Research and development costs vary period to period due to the timing of projects, and the timing and extent of the use of outside consulting, design and development firms. We continually improve our product offerings and we expect to continue to expand our product line in 20182020 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 LossIncome
The increaseNet income of $921,902 for the first six months year to date in net lossfiscal year 2020 was a decrease of $1,302,888 compared to the net income in the prior year period. This decrease was due to income tax expense for the three months ended December 31, 2017 primarily due to a reductionthe lower revenue in the deferred tax asset resulting from the change to the U.S. Corporate income tax rates effective for the calendarcurrent year ended December 31, 2018. The additional non-cash expense was partially offset by an increase in gross profit. We recognized an income tax benefit of $486,528 for the three months ended December 31, 2016.period.
Liquidity and Capital Resources
The Company’s financial condition and liquidity remain strong. Cash and cash equivalents at DecemberMarch 31, 20172020 was $15,117,544,$16,398,928, down $2,420,150 compared to $12,803,887$18,819,078 at September 30, 2017 primarily as a result2019. We had short-term marketable securities of cash generated from operations.$3,464,834 at March 31, 2020, compared to $3,695,364 at September 30, 2019. We had long-term marketable securities of $1,646,466 at March 31, 2020, compared to $1,384,819 at September 30, 2019. 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.
Although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on the Company's future results, we believe our efficient business model and strong balance sheet leave us positioned to manage our business through this crisis as it continues to unfold. We continue to manage all aspects of our business including, but not limited to, monitoring the fmancial health of our customers, suppliers and other third-party relationships and developing new opportunities for growth.
Principal factors that could affect our liquidity include:
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ability to meet sales projections;
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government spending levels;
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introduction of competing technologies;
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product mix and effect on margins;
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ability to reduce current inventory levels;
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product acceptance in new markets;
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value of shares repurchased;
value of dividends declared;
impact of COVID-19 on global market conditions; and
impact of COVID-19 on customers’ ability to pay.
Principal factors that could affect our ability to obtain cash from external sources include:
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volatility in the capital markets; and
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market price and trading volume of our common stock.
Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the next twelve months.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,activities, as reflected in the condensed consolidated statements of cash flows, are summarized in the table below:
Three Months Ended | Six months ended | |||||||||||||||
December 31, | March 31, 2020 | March 31, 2019 | ||||||||||||||
2017 | 2016 | |||||||||||||||
Cash provided by: | ||||||||||||||||
Cash used in: | ||||||||||||||||
Operating activities | $ | 1,753,585 | $ | 1,428,286 | $ | (2,126,484 | ) | $ | (884,260 | ) | ||||||
Investing activities | 400,554 | 69,026 | (144,421 | ) | (301,847 | ) | ||||||||||
Financing activities | 159,518 | - | (198,319 | ) | (2,142,894 | ) |
Operating Activities
Net lossincome of $1,683,253$921,902 for the threesix months ended DecemberMarch 31, 20172020 was decreasedincreased by $2,960,116$1,546,757 of non-cash items that included a reduction to deferred income taxes primarily resulting from enactment of the “Act”, share-based compensation, depreciation and amortization, warranty provision, and inventory obsolescence. Cash provided by operating activities in the current year reflected an increase in accounts payable of $790,635 due to the timing of payments, decreases in prepaid expenses and other of $393,761, an increase in accrued and other liabilities of $311,483, a decrease in other assets of $46,874 and a decrease in accounts receivable of $3,662. Cash used in operating activities included a decrease in payroll and related of $1,023,538 primarily for payment of incentive compensation earned in fiscal 2017, an increase in inventory of $43,001 and warranty settlements of $3,154.
Net loss of $812,680 for the three months ended December 31, 2016 was decreased by $20,447 of non-cash items that included deferred income taxes, share-based compensation, depreciation and amortization, warranty provision and inventory obsolescence. Cash provided byused in operating activities in the current yearquarter reflected a decrease in accounts receivableaccrued and other liabilities of $1,929,765 due$3,035,960, primarily for a $1,797,094 decrease in customer deposits resulting from shipments for the year to date and $825,073 lower accrued payroll and related liabilities largely for the collectionpayment of a high year-end balance,incentive compensation earned in fiscal 2019, an increase in accounts payablereceivable of $500,042$2,204,894 due to higher sales with net credit terms in the timingquarter compared to the fourth quarter of payments, payrollfiscal 2019, and relatedan increase of $180,766 primarily for accrued bonuses, and decreases$1,214,265 in prepaid expenses and other of $80,378 and other assets of $46,871.inventory to support the current backlog. Cash used in operating activities included an increase in accounts payable of $1,072,363 primarily for inventory related purchases and a decrease in prepaid expenses and other of $787,613.
Net income of $2,224,790 for the six months ended March 31, 2019 was increased by $1,457,900 of non-cash items that included a reduction to deferred income taxes, share-based compensation, depreciation and amortization, warranty provision and inventory obsolescence. Cash used in operating activities in the current year reflected an increase in accounts receivable of $3,981,947, a decrease in accounts payable of $1,847,512, an increase in inventory of $327,680,$1,704,919 and a decrease in payroll related liabilities of $553,919. Cash used in operating activities included a decrease in prepaid expenses and other of $2,518,276 and an increase in accrued and other liabilities of $176,881 for decreased deferred revenue for customer prepayments and warranty settlements of $12,742.$449,152.
We had accounts receivable of $5,678,220 at December$5,849,608 as of March 31, 2017,2020, compared to $5,681,882$3,644,059 at September 30, 2017. The level of trade accounts receivable at December 31, 2017 represented approximately 68 days of revenues compared to 70 days of revenues at September 30, 2017 due to the timing of shipments and related collections in this quarter compared to the fourth fiscal quarter of 2017.2019. Terms with individual customers vary greatly. We typically requireregularly provide thirty-day terms fromto 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 DecemberAs of March 31, 2020 and September 30, 2017,2019, our working capital was $26,485,964$25,510,378 and $25,412,106$24,765,178, respectively. The increase in working capital was primarily due to cash generatedthe net income from operations.operations in the first six months of fiscal year 2020.
Investing Activities
Our net cash used in investing activities was $144,421 for the six months ended March 31, 2020, compared to cash used in investing activities of $301,847 for the six months ended March 31, 2019. In the threefirst six months ended December 31, 2017,of fiscal 2020, we decreasedincreased our holdingholdings of short and long-term marketable securities by $454,721,$42,295, compared to salesan increase of $84,610$1,882 in the threesix months ended DecemberMarch 31, 2016.
We also use cash in investing activities primarily for the purchase of tooling, computer equipment and software, and investment in new or existing patents.2019. Cash used in investing activities for toolingthe purchase of property and patentsequipment was $54,167$102,126 and $15,584$299,965 for the threesix months ended DecemberMarch 31, 20172020 and 2016,2019, respectively. We anticipate some additional expenditures for tooling and equipment during the balance of fiscal year 2018.2020.
Financing Activities
In the threesix months ended DecemberMarch 31, 2017, cash provided2020, we used $198,319 for financing activities, compared to a use of $2,142,894 for financing activities for the six months ended March 31, 2019. Proceeds from the exercise of stock options was $159,518. Inwere $258,047 for the threesix months ended DecemberMarch 31, 2016,2020 and we had no cashused $398,256 to repurchase company common stock. During the first six months of fiscal 2019 we used $2,171,022 to repurchase shares of common stock offset by $45,172 in proceeds from financing activities.the exercise of stock options.
The Board of Directors approved a share buyback program in 20132015 under which the Company was authorized to repurchase up to $4 million of its outstanding common shares. There were no shares repurchased during the quarters ended December 31, 2017 and 2016, respectively. At December 31, 2017, all repurchased shares were retired. In December 2017, the Board of Directors extended the program through December 31, 2018.2018, at which time it expired.
In December 2018, the Board of Directors approved a new share buyback program beginning January 1, 2019 under which the Company was authorized to repurchase up to $5 million of its outstanding common shares. During the quarter ended March 31, 2020, 156,505 shares were repurchased for $398,255. During the quarter ended March 31, 2019, 200,000 shares were repurchased for $550,000. As of March 31, 2020, all repurchased shares were retired. As of March 31, 2020, $4.1 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.
Item 3. |
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Foreign Currency Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, allThe transactions of our Spanish subsidiary are denominated primarily in Euros, which is a natural hedge against foreign currency fluctuations. All other sales to customers and all arrangements with third-party manufacturers, with one exception, provide for pricing and payment in U.S. dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the U.S. dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the U.S. dollar relative to other currencies could result in our suppliers raising their prices to continue doing business with us. Fluctuations in currency exchange rates could affect our business in the future.
Item 4. | Controls and Procedures. |
We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of our disclosure controls and procedures as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of DecemberMarch 31, 2017.2020.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our fiscal quarter ended DecemberMarch 31, 2017,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings. |
We may at times be involved in litigation in the ordinary course of business. We will also, from time to time, when appropriate in management’smanagement’s estimation, record adequate reserves in our consolidated financial statements for pending litigation. Currently, there are no pending material legal proceedings to which the Company is a party or to which any of its property is subject.
Item 1A. | Risk |
As a Smaller Reporting Company as defined by Rule 12b-2In addition to the other information set forth in this Quarterly Report, you should carefully consider the risks and uncertainties discussed in Part 1, “Item 1A, Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, which could materially affect our business, financial condition, or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be not material also may materially and adversely affect our business, financial condition and operating results. We are including the following additional risk factor, which updates the risk factors disclosed in our Annual Report on Form 10-K for the year ended September 30, 2019. In addition, many of the Exchange Actrisk factors in Part 1, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, will be amplified by the following additional risk factor.
Global economic conditions related to the COVID-19 pandemic may negatively impact the Company’s financial conditions and results of operations.
The Company is monitoring the impact of the recent COVID-19 outbreak, which has already caused a significant disruption to global financial markets and supply chains, beginning in item 10(f)(1)early calendar year 2020. The significance of Regulation S-K, wethe operational and financial impact to the Company will depend on how long and widespread this disruption proves to be. The extent to which COVID-19 impacts the Company’s results will depend on future developments, which are electing scaled disclosure reporting obligationshighly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the outbreak and the actions that are being taken to contain and treat it. While the Company currently expects this business disruption to be temporary, there is uncertainty around its duration and its broader impact, and therefore the effects it will have on the Company’s financial results and operations. If economic or market conditions in key global markets deteriorate, the Company may experience material adverse effects on its business, financial condition and results from operations.
Factors deriving from the COVID-19 response that may negatively impact sales and gross margin in the future include but are not requiredlimited to: limitations on the ability of our suppliers to providemeet delivery requirements and commitments; limitations on the information requestedability of employees to perform their work due to illness caused by this item.the pandemic or local, state or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver products to customers; limitations on the ability of our customers to conduct their business and purchase our products and services and limitations on the ability of our customers to pay us on a timely basis.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
NoneIn December 2018, the Board of Directors approved a new share buyback program beginning January 1, 2019 through December 31, 2020, under which the Company is authorized to repurchase up to $5 million of its outstanding common shares.
The following table discloses the stock repurchases during the quarter ended March 31, 2020.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum dollar value of shares that may be purchased under the program | |||||||||
January 1, 2020 - January 31, 2020 | - | $ | - | $ | 4,450,000 | |||||||
February 1, 2020 - February 29, 2020 | 12,026 | $ | 2.96 | $ | 4,414,412 | |||||||
March 1, 2020 - March 31, 2020 | 144,479 | $ | 2.51 | $ | 4,051,745 | |||||||
156,505 |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. | Mine Safety |
Not Applicable.
Item 5. | Other Information. |
None.
Item 6. |
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31.1 | |
31.2 | |
32.1 | |
101.INS | XBRL Instance |
101.SCH |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | XBRL Taxonomy Extension Definition Linkbase |
101.LAB | XBRL Taxonomy Extension Label Linkbase |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
* | Filed concurrently herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: | By: | /s/ DENNIS D. KLAHN |
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| Dennis D. Klahn, Chief Financial Officer |
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| (Principal Financial Officer) |
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