10.15. SHARE-BASED COMPENSATION
Stock Option Plansoption plans
At DecemberAs of March 31, 2017, 2022, 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 approvedadopted by the Company’s Board of Directors on December 6, 2016, and approved by the Company’s stockholders on March 14, 2017. The 2015 Equity Plan was amended by the Company’s Board of Directors on December 8, 2020, to increase the number of shares authorized for issuance from 5,000,000 to 10,000,000. On March 16, 2021, the Company’s stockholders approved the plan amendment. The 2015 Equity Plan authorizes forthe issuance asof stock options, restricted stock, stock appreciation rights, restricted stock units (“RSUs”) and performance awards, to an aggregate of 5,000,00010,000,000 new shares of common stock to employees, directors, advisors or consultants. At DecemberAs of March 31, 2017, 2023, there were options and restricted stock units outstanding covering 2,216,0021,000 and 2,279,3154,579,035 shares of common stock under the 2005 Equity Plan and the 2015 Equity Plan, respectively.respectively, and 2,861,077 shares of common stock available for grant, for a total of 7,441,112 shares of common stock authorized and unissued under the two equity plans.
Stock Option ActivityShare-based compensation
The following table summarizes information aboutCompany’s employee stock options have various restrictions that reduce 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 outstandingvalue, including vesting provisions and restrictions on transfer and hedging, among others, and are exercisable at prices ranging from $0.93often exercised prior 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.their contractual maturity.
During the quarter ended December 31, 2016, the Company incurred non-cash share-basedShare-based compensation expense of $307,324 resulting from the modification of stock optionsis accounted for in accordance with a Separation Agreement and General Release related toASC Topic 718: Compensation - Stock Compensation. Total compensation expense for all share-based awards is based on 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 exercisable for a period of 24 months following the December 31, 2016 separation date as defined in the agreement. The expense is measured as the excess of theestimated fair market value of the modifiedequity instrument issued on the grant date. For share-based awards that vest based solely on a service condition, compensation expense is recognized on a straight-line basis 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 valuetotal requisite service period for the PVO was $0.81 per share, which was estimatedentire award. For share-based awards that vest based on the date of grant using the Black-Scholes option pricing model. Non-cash share-baseda market condition, 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 targetsperiod of each quarter and will adjust the expected outcome as needed, recognizingseparately vesting tranche. For share-based awards that vest based on a performance condition, compensation expense cumulatively in such periodis recognized for the difference in expense.
Restricted Stock Units
Duringnumber of awards that are expected to vest based on 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 approvalprobable outcome of the Amended and Restated 2015 Equity Incentive Plan atperformance condition. Compensation cost for these awards will be adjusted to reflect the 2017 Annual Meetingnumber of Stockholders. These RSUs were granted as replacements for 20,000 stock optionsawards 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.ultimately vest.
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share and share amounts)
On There were 1,806,500 stock options granted during the six months ended March 14, 2017, the Board31, 2023, of Directors approved an additional grant of 25,000 RSUs to each of our non-employee directors that willwhich 225,000 vest based on the first anniversary of the grant date. These were also issued at a market valuecondition. There were 302,000 stock options granted during the six months ended March 31, 2022, none of $197,500,which will be expensedvest based on a straight line basis through the March 14, 2018 vest date.market condition.
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 | |
| | | 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 employee stock options granted in the three months ended December 31, 2017 and 2016 had a weighted-average estimated fair value of $0.89 per share and $0.71 per share, respectively,Stock options that do not contain market-based vesting conditions are valued using the Black-Scholes option pricing modelmodel. The weighted average estimated fair value of employee stock options granted, that vest without a market condition, during the six months ended March 31, 2023 and 2022, was calculated with the following weighted-averageweighted average assumptions (annualized percentages):
| | | Three months ended | | | Six months ended | |
| | | December 31, | | | March 31 | |
| | | 2017 | | | 2016 | | | 2023 | | | 2022 | |
Volatility | | | 45.4% | | | 52.4% | - | 53.7% | | | 52.1% | | | 48.1% | |
Risk-free interest rate | | | 2.2% | | | 1.7% | - | 2.0% | | | 4.0% | | | 1.5% | |
Forfeiture rate | | | 10.0% | | | | 10.0% | | | |
Dividend yield | | | 0.0% | | | | 0.0% | | | | 0.0% | | | 0.0% | |
Expected life in years | | | 4.6 | | | 3.8 | - | 4.6 | | |
Expected term in years | | | 5.8 | | | 6.8 | |
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 lifeterm 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 lifeterm 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 has not paid a dividend in fiscal 2023 and did not pay a dividend in fiscal 2022.
SinceFor stock options that contain market-based vesting conditions, the Company hasfair value of these options was determined using 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 Monte Carlo valuation approach and 2016.calculated by an independent valuation specialist.
As of DecemberMarch 31, 2017, 2023, there was approximately $600,000$1,976 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 2.12.4 years. To the extent the forfeiture rate is different from what the Company anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.
Performance-based stock options
On 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. During the year ended September 30, 2022, the Company modified the performance criteria for these PVOs to exclude certain strategic growth initiatives that were not planned at the time of grant. The Company recorded $209 in stock-based compensation expense related to these options in the year ended September 30, 2022. The Company did not record compensation expense related to the 2023 performance-based stock options during the six months ended March 31, 2023.
On October 8, 2022, the Company awarded additional performance-based stock options to purchase 800,000 shares of the Company’s common stock to the same key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2025 and 2026 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 did not record compensation expense related to these options for the six months ended March 31, 2023.
On August 10, 2022, the Company granted PVOs to purchase up to 750,000 shares of the Company’s common stock to a key member of management, with a contractual term of seven years. During the three months ended March 31, 2023, these options were forfeited due to a voluntary termination of employment. The Company did not record compensation expense related to these options for the six months ended March 31, 2022.
On March 20, 2023, the Company granted PVOs to purchase up to 450,000 shares of the Company’s stock to a key member of management with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of the first three twelve-month periods following the employee’s start date, including targets related to growth in the institutional ownership of the Company’s common stock and growth in the trading volume of the Company’s common stock during such periods. Additionally, vesting is subject to the employee being employed by the Company on each of the first three anniversaries of the employee’s start date. 225,000 of these options contain a market-based vesting condition and accounting principles do not require the market condition to be achieved in order for compensation expense to be recognized. The Company recorded $0.4 of compensation expense related to these options during the three and six months ended March 31, 2023.
The Company did not grant any PVO’s during the six months ended March 31, 2022.
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share and share amounts)
Restricted stock units
In fiscal 2020, 81,270 RSUs were granted to employees that vested over three years on the anniversary date of the grant. These were issued at a market value of $258 and have been expensed on a straight-line basis over the three-year life of the grants.
During fiscal 2021, 145,950 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 $989, which have and will be expensed on a straight-line basis over the three-year life of the grants.
On March 15, 2022, each non-employee member of the Board of Directors received a grant of 30,000 RSUs that vested on the first anniversary of the grant date. These were issued at a market value of $407, and expensed on a straight-line basis through the March 15, 2023, vest date. On November 1, 2021, 10,000 RSUs were granted to a non-employee advisor that vested on the first anniversary of the grant date. These were issued at a market value of $51, which were expensed on a straight-line basis though the November 1, 2022, vest date. On November 1, 2022, 10,000 RSUs were granted to a non-employee advisor that vest on the first anniversary of the grant date. These were issued at a market value of $29, which have and will be expensed on a straight-line basis though the November 1, 2023, vest date.
On March 14, 2023, each non-employee 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 RSUs were granted at a market value of $417 and have and will be expensed on a straight-line basis through the March 14, 2024, vest date. On February 14, 2023, 145,600 RSUs were granted to employees that will vest over three years on the anniversary date of the grant. These RSUs were issued at a market value of $582, which have and will be expensed on a straight-line basis over the three-year life of the grants. On March 20, 2023, 20,000 RSUs were granted to an employee with immediate vesting. These were issued at a market value of $66 and were expensed immediately.
Compensation expense for RSUs was $350 and $548 for the three and six months ended March 31, 2023, respectively. Compensation expense for RSUs was $586 and $1,023 for the three and six months ended March 31, 2022, respectively. As of March 31, 2023, there was approximately $1,473 of total unrecognized compensation costs related to outstanding RSUs. This amount is expected to be recognized over a weighted average period of 1.8 years.
A summary of the Company’s RSUs as of March 31, 2023, is presented below:
| | | Number of Shares | | | Weighted Average Grant Date Fair Value | |
Outstanding September 30, 2022 | | | 342,841 | | | $ | 4.11 | |
Granted | | | 295,600 | | | $ | 3.63 | |
Released | | | (245,428 | ) | | $ | 3.68 | |
Forfeited/cancelled | | | - | | | $ | - | |
Outstanding March 31, 2023 | | | 393,013 | | | $ | 4.01 | |
Stock option summary information
A summary of the activity in options to purchase the capital stock of the Company as of March 31, 2023, is presented below:
| | | Number of Shares | | | Weighted Average Exercise Price | |
Outstanding September 30, 2022 | | | 3,940,899 | | | $ | 3.31 | |
Granted | | | 1,806,500 | | | $ | 2.93 | |
| Forfeited/expired | | | (1,476,612 | ) | | $ | 3.99 | |
Exercised | | | (83,765 | ) | | $ | 1.60 | |
Outstanding March 31, 2023 | | | 4,187,022 | | | $ | 2.94 | |
Exerciseable March 31, 2023 | | | 1,698,888 | | | $ | 2.59 | |
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share and share amounts)
Options outstanding are exercisable at prices ranging from $1.31 to $8.03 per share and expire over the period from 2023 to 2030 with an average life of 4.39 years. The aggregate intrinsic value of options outstanding and exercisable as of March 31, 2023, was $1,381 and $1,095, respectively. The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last day of trading for the quarter, which was $2.95 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, 2023 was $147 and proceeds from these exercises was $86. The total intrinsic value of stock options exercised during the six months ended March 31, 2022 was $86 and proceeds from these exercises was $170.
The following table summarized information about stock options outstanding as of March 31, 2023:
| | | | | | | | | Weighted Average | | | Weighted Average | | | | | | | Weighted Average | |
Range of | | Number | | | Remaining | | | Exercise | | | Number | | | Exercise | |
Exercise Prices | | Outstanding | | | Contractual Term | | | Price | | | Exercisable | | | Price | |
| $1.31 | - | $1.99 | | | 1,097,657 | | | | 0.98 | | | $ | 1.95 | | | | 1,097,657 | | | $ | 1.95 | |
| $2.69 | - | $2.69 | | | 1,100,000 | | | | 6.52 | | | $ | 2.69 | | | | - | | | $ | - | |
| $3.12 | - | $3.39 | | | 1,151,138 | | | | 5.17 | | | $ | 3.33 | | | | 187,138 | | | $ | 3.39 | |
| $3.40 | - | $8.03 | | | 838,227 | | | | 5.01 | | | $ | 4.04 | | | | 414,093 | | | $ | 3.93 | |
| | | | | | 4,187,022 | | | | 4.39 | | | $ | 2.94 | | | | 1,698,888 | | | $ | 2.59 | |
The Company recorded $163 and $151 of stock option compensation expense for employees, directors and consultants for the three months ended March 31, 2023 and 2022, respectively. The Company recorded $385 and $272 of stock option compensation expense for employees, directors and consultants for the six months ended March 31, 2023 and 2022, 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, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Cost of revenues | | $ | 33 | | | $ | 28 | | | $ | 61 | | | $ | 43 | |
Selling, general and administrative | | | 447 | | | | 686 | | | | 820 | | | | 1,217 | |
Research and development | | | 33 | | | | 23 | | | | 52 | | | | 35 | |
| | | $ | 513 | | | $ | 737 | | | $ | 933 | | | $ | 1,295 | |
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share and share amounts)
116. STOCKHOLDERS’1. STOCKHOLDERS’ EQUITY
Summary
The following table summarizes changes in the components of stockholders’stockholders’ equity during the threesix months ended DecemberMarch 31, 2017:2023, and the six months ended March 31, 2022 (amounts in thousands, except par value and share amounts):
| | | | | | | | | | | | | | | | | | | Accumulated | | | | | |
| | | Common Stock | | | Additional | | | | | | | Other | | | Total | |
| | | Shares | | | Par Value Amount | | | Paid-in Capital | | | Accumulated Deficit | | | Comprehensive Loss | | | Stockholders' Equity | |
Balance as of September 30, 2022 | | | 36,611,240 | | | $ | 366 | | | $ | 108,551 | | | $ | (57,366 | ) | | $ | (792 | ) | | $ | 50,393 | |
Share-based compensation expense | | | - | | | | - | | | | 420 | | | | - | | | | - | | | | 420 | |
Issuance of common stock upon exercise of stock options, net | | | 20,000 | | | | - | | | | 32 | | | | - | | | | - | | | | 32 | |
Issuance of common stock upon vesting of restricted stock units | | | 12,667 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Release of obligation to issue commons stock | | | 69,564 | | | | 1 | | | | - | | | | - | | | | | | | | - | |
Accumulated other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | 266 | | | | 266 | |
Net loss | | | - | | | | - | | | | - | | | | (3,507 | ) | | | | | | | (3,507 | ) |
Balance as of December 31, 2022 | | | 36,713,471 | | | $ | 367 | | | $ | 109,003 | | | $ | (60,873 | ) | | $ | (526 | ) | | $ | 47,604 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation expense | | | - | | | | - | | | | 513 | | | | - | | | | - | | | | 513 | |
Issuance of common stock upon exercise of stock options, net | | | 33,765 | | | | 1 | | | | 54 | | | | - | | | | - | | | | 54 | |
Issuance of common stock upon cashless exercise of stock options, net | | | 15,914 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Issuance of common stock upon vesting of restricted stock units | | | 232,761 | | | | 2 | | | | (2 | ) | | | - | | | | - | | | | (2 | ) |
Shares retained for payment of taxes in connection with net share settlement of restricted stock units | | | (11,616 | ) | | | - | | | | (45 | ) | | | - | | | | - | | | | (45 | ) |
Accumulated other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | 81 | | | | 81 | |
Net loss | | | - | | | | - | | | | - | | | | (3,403 | ) | | | - | | | | (3,403 | ) |
Balance as of March 31, 2023 | | | 36,984,295 | | | $ | 370 | | | $ | 109,523 | | | $ | (64,276 | ) | | $ | (445 | ) | | $ | 44,802 | |
| | | | | | | | | | | | | | | | | | | Accumulated | | | | | |
| | | | | | | | | | | Additional | | | | | | | Other | | | Total | |
| | | Common Stock | | | Paid-in | | | Accumulated | | | Comprehensive | | | Stockholders' | |
| | | 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 | |
Share-based compensation expense | | | - | | | | - | | | | 138,461 | | | | - | | | | - | | | | 138,461 | |
Issuance of common stock upon exercise of stock options, net | | | 90,852 | | | | - | | | | 159,518 | | | | | | | | | | | | 159,518 | |
Other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (8,031 | ) | | | (8,031 | ) |
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 | |
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share and share amounts)
| | | Common Stock | | | Additional | | | | | | | Other | | | Total | |
| | | Shares | | | Par Value Amount | | | Paid-in Capital | | | Accumulated Deficit | | | Comprehensive Loss | | | Stockholders' Equity | |
Balance as of September 30, 2021 | | | 36,403,833 | | | $ | 364 | | | $ | 107,110 | | | $ | (41,154 | ) | | $ | 2 | | | $ | 65,958 | |
Share-based compensation expense | | | - | | | | - | | | | 558 | | | | - | | | | - | | | | 558 | |
Issuance of common stock upon exercise of stock options, net | | | 15,000 | | | | - | | | | 46 | | | | - | | | | - | | | | 46 | |
Stock buyback | | | (116,868 | ) | | | (1 | ) | | | (441 | ) | | | - | | | | - | | | | (441 | ) |
Release of obligation to issue commons stock | | | 69,564 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Accumulated other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (85 | ) | | | (85 | ) |
Net loss | | | - | | | | - | | | | - | | | | (1,305 | ) | | | - | | | | (1,305 | ) |
Balance as of December 31, 2021 | | | 36,371,529 | | | | 363 | | | $ | 107,273 | | | $ | (42,459 | ) | | $ | (83 | ) | | $ | 64,731 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Share-based compensation expense | | | - | | | | - | | | | 737 | | | | - | | | | - | | | | 737 | |
Issuance of common stock upon exercise of stock options, net | | | 55,000 | | | | 1 | | | | 124 | | | | - | | | | - | | | | 124 | |
Issuance of common stock upon vesting of restricted stock units | | | 262,342 | | | | 2 | | | | - | | | | - | | | | - | | | | - | |
Shares retained for payment of taxes in connection with net share settlement of restricted stock units | | | (18,344 | ) | | | - | | | | (70 | ) | | | - | | | | - | | | | (70 | ) |
Stock buyback | | | (142,442 | ) | | | (1 | ) | | | (557 | ) | | | - | | | | - | | | | (557 | ) |
Accumulated other comprehensive loss | | | - | | | | - | | | | - | | | | - | | | | (1 | ) | | | (1 | ) |
Net loss | | | - | | | | - | | | | - | | | | (492 | ) | | | - | | | | (492 | ) |
Balance as of March 31, 2022 | | | 36,528,085 | | | | 365 | | | $ | 107,507 | | | $ | (42,951 | ) | | $ | (84 | ) | | $ | 64,472 | |
Share Buyback ProgramCommon stock activity
During the six months ended March 31, 2023, the Company issued 69,679 shares of common stock and received gross proceeds of $86 in connection with the exercise of stock options, and the Company issued 233,812 shares of common stock in connection with the vesting of RSUs. During the six months ended March 31, 2022 the Company issued 70,000 shares of common stock and received gross proceeds of $170 in connection with the exercise of stock options, and the Company issued 243,998 shares of common stock in connection with the vesting of RSUs.
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share and share amounts)
In connection with the Amika Mobile asset purchase, the Company agreed to issue 191,267 shares of the Company’s common stock to the former owners of Amika Mobile on each of the first, second and third anniversaries of the closing date. The total number of shares of common stock the Company is obligated to issue is 573,801. The fair value of the Company’s common stock on the closing date was $5.98 per share, resulting in the addition of $3,431 to additional paid-in-capital. During the year ended September 30, 2021, the Company accelerated the issuance of 365,109 of such shares of common stock to a former owner of the Amika Mobile assets. During the year ended September 30, 2022, the Company issued 69,564 shares to the former owners of the Amika Mobile assets. During the six months ended March 31, 2023, the Company issued 69,564 shares to the former owners of the Amika Mobile assets. There are 69,564 remaining shares of the Company’s common stock subject to issuance under this obligation.
Share buyback program
In December 2018, the Board of Directors approved a new share buyback program in 2013beginning January 1, 2019, and expiring on December 31, 2020, under which the Company was authorized to repurchase up to $4$5 million of its outstanding common shares. There were no shares repurchased during the quarters ended In December 31, 2017 and 2016 respectively. At December 31, 2017, all repurchased shares were retired. In December 2017, 2020, the Board of Directors extended the buyback program until December 31, 2022. In December 2022, the Board of Directors extended the Company’s share buyback program through December 31, 2018.2024.
There were no shares repurchased during the six months ended March 31, 2023. During the six months ended March 31, 2022 259,310 shares were repurchased for $998. All repurchased shares have been retired as of March 31, 2023, and $3 million was available for share repurchase under the program.
Dividends
There were no dividends declared in the threesix months ended DecemberMarch 31, 2017 2023 and 2016.2022.
13.19. MAJOR CUSTOMERS, SUPPLIERS AND RELATED INFORMATION
For the three months ended DecemberMarch 31, 2017, 2023, revenues from two customers accounted for 31%54% and 26%12% 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 receivable2023, revenues from one customer accounted for 42%57% of total accounts receivable,revenues with no other single customer accounting for more than 10% of therevenues. As of March 31, 2023, accounts receivable balance.
For the three months ended December 31, 2016, revenues from one customertwo customers accounted for 11%26% and 23% 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, 2022 revenues from two customers accounted for 40%63% 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, 2022, revenues from one customer accounted for 65% of total revenues with no other single customer accounting for more than 10% of revenues. As of March 31, 2022, accounts receivable from two customers accounted for 56% and 17% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.
Notes to the Condensed Consolidated Financial Statements
(in thousands, except per share and share amounts)
Revenue from customers in the United States was $8,411 and $9,531 for the three months ended March 31, 2023 and 2022, respectively. Revenue from customers in the United States was $17,349 and $18,769 for the six months ended March 31, 2023 and 2022, respectively. Revenues are attributed to countries based on customers’ delivery location. The following table summarizes revenues by geographic region. Revenues are attributed to countries based on customer’s delivery location.
| | | Three months ended December 31, | | | Three months ended March 31, | | Six months ended March 31, | |
| | | 2017 | | | 2016 | | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Americas | | $ | 6,053,038 | | | $ | 1,622,357 | | | $ | 10,019 | | | $ | 10,095 | | | $ | 19,182 | | | $ | 19,531 | |
Asia Pacific | | | 1,021,906 | | | | 984,600 | | | 545 | | | 2,147 | | | 1,304 | | | 2,455 | |
| Europe, Middle East and Africa | | | 553,623 | | | | 334,377 | | | | 649 | | | | 926 | | | | 1,214 | | | | 1,859 | |
Total Revenues | | $ | 7,628,567 | | | $ | 2,941,334 | | | $ | 11,213 | | | $ | 13,168 | | | $ | 21,700 | | | $ | 23,845 | |
The following table summarizes long-lived assets by geographic region.
| | | March 31, | | | September 30, | |
| | | 2023 | | | 2022 | |
United States | | $ | 10,724 | | | $ | 11,800 | |
Americas (excluding the United States) | | | 12 | | | | 16 | |
Europe, Middle East and Africa | | | 451 | | | | 446 | |
Total long lived assets | | $ | 11,187 | | | $ | 12,262 | |
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.
Item2. | Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
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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, 2017.2022.
Forward Looking Statements
This report contains certain statements of a forward-looking nature relating to future events or future performance. Words such as “expects,“expects,” “anticipates,“anticipates,” “intends,“intends,” “plans,“plans,” “believes,“believes,” “seeks,“seeks,” “estimates”“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, Item1A (Risk Factors) of our Annual Report on Form 10-K, which could cause actual results to differ materially from those indicated by such forward-looking statements.
For purposes of this Quarterly Report, the terms “we,”“us,”“our”“Genasys” and the “Company” refer to Genasys Inc. and its consolidated subsidiaries.
Overview
Our CompanyGenasys is a leading innovatorglobal provider of critical communications software solutions and manufacturerhardware systems designed to alert, inform, and protect communities and organizations. The Genasys Protect™ unified platform collects information on developing and active emergency situations from a wide variety of acoustic communicationsensors and inputs and empowers governments, businesses, and organizations to deliver real-time, geo-targeted notifications and information to people in harm’s way before, during, and after public safety and enterprise threats.
The Genasys Protect unified platform includes:
Software
GEM
Genasys Emergency Management (“GEM”) is Genasys’ software-as-a-service (“SaaS”) product platform that includes GEM Public Safety, GEM Enterprise, Zonehaven and NEWS.
GEM Public Safetyis an interactive, cloud-based SaaS solution that enables State, Local and Education (“SLED”) customers to send critical information to at-risk individuals or groups when an emergency occurs. GEM acts as both a communications input and output, receiving information from state-of-the-art sensors and emergency services, and quickly relaying notifications, alerts, and instructions to at-risk populations and first responders. GEM customers can create and send critical, verified, and secure notifications and messages using emails, voice calls, text messages, panic buttons, desktop alerts, television, social media, and more. Additionally, Genasys is a certified provider of Integrated Public Alert and Warning System (“IPAWS”) notifications.
GEM Enterprise empowers businesses and organizations to send critical communications to at-risk employees, contractors, visitors, or groups based on geographic location or team status. Operated and controlled via a single dashboard that includes two-way polling, duress buttons, field check-ins, and recipient locations, GEM Enterprise integrates with data sources, including active directories, human resources, visitor management, and building control systems to find and deliver safety alerts and notifications to employees, staff, contractors, temporary workers, and visitors.
Zonehaven is a multipronged SaaS application that serves both first responders and the jurisdictions they protect. Emergency services agencies can prepare for natural or man-made disasters by developing evacuation plans that map routes, shelters, traffic control sound from 30° - 360° over shortlocations, and long distances. By broadcastingroad closures using Zonehaven's extensive public safety resources and mapped zones. This information is easily shared with the public and reduces the time it takes to execute emergency evacuations and conduct orderly repopulations.
NEWS – Genasys' National Emergency Warning System (“NEWS”) provides multichannel public safety notifications and instructions to designated areas, groups, or agencies when a crisis occurs. Genasys partners with mobile telecom networks to deliver NEWS SMS and cell broadcast alerts and notifications that can be sent to anyone, anywhere, with no recipient opt-in, registration, or download required. NEWS can locate recipients and deliver messages in near real time, compared with other SMS alert providers that can take up to 15 minutes. Even with NEWS’ reach and scope, all data is anonymized, ensuring individuals stay safe and informed without sacrificing their privacy.
Hardware
IMNS –Genasys' Integrated Mass Notification System (“IMNS”) product line unites Genasys next generation mass notification speaker systems with GEM command-and-control software. Genasys' advanced mass notification systems feature the industry's highest Speech Transmission Index (“STI”), large directional and omni-directional broadcast coverage areas, and an array of options that enable continued operation when power and telecommunications infrastructure fail.Emergency alerts and information can be sent via individual, grouped or networked IMNS installations, text messages, emails, IPAWS, desktop alerts, television, voice calls, and social media. IMNS' layered redundancy helps to ensure the maximum number of people receive critical communications.
LRAD is the world’s leading Acoustic Hailing Device (“AHD”). Projecting alert tones and 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;
• ONE VOICE® Mass Notification Systems(“MNS”), which project 60° - 360° audiblemeters. LRADs are used throughout the world in multiple applications and circumstances to safely hail, warn, inform, direct, prevent misunderstandings, determine intent, establish large safety zones, resolve uncertain situations, and save lives. LRAD voice and alert tone broadcasts with industry-leading vocal intelligibility from close range tocut through background noise and are clearly heard and understood over 14 square kilometers from a single installation.distance.
LRAD systems are a technological breakthrough in broadcasting audible, highly intelligible voice messages and tones over long distances and high ambient noiseis the de facto standard of the global AHD market with more than 100 countries using minimal power. Our AHD's meet stringent military requirements and are packaged in several form factors, from portable, hand held units 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 expand our AHD product line to provide a complete range oflong-range communication 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.
Building on the success of our AHD's, we launched our omnidirectional product line. Unlike most siren-based mass notification systems on the market, our ONE VOICE systems broadcast both emergency warning sirens and highly intelligible voice messages with uniform 60° - 360° coverage over local and wide areas. We believe our ability to shape the broadcast coverage area, our industry-leading speech intelligibility, and our multiple system activation and control options, make us more competitive in the large and growing mass notification market.
Our products are designed to meet a broad range of diverse applications includingthat include public safety, emergency warning, and mass notification, fixed and mobile military deployments, maritime, critical infrastructure, perimeter, commercial,defense, law enforcement, border and homeland security, law enforcement, emergency responder and fire rescue communications, assetcritical infrastructure protection, 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. many more.
We continue to develop new acousticcritical communications innovations and believe we have established a significant competitive advantageadvantages in our principal markets.
Recent Developments
Business developmentsin the fiscal quarter ended DecemberMarch 31, 2017:2023:
| • | ●Awarded multi-year GEM Enterprise contract to provide critical notifications for Aramco
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| • | Expanded Genasys Protect coverage in San Diego County with new Zonehaven contract |
| • | Helped to protect millions of California residents during multiple atmospheric river events |
| • | Announced new and follow-on IMNS orders from the University of California, Berkeley, the City of Laguna Beach, and the Southern Marin Fire Protection District |
| • | Secured GEM and Zonehaven software services contract from three contiguous Utah counties |
| • | Received $870,000 in AHD orders for the U.S. Army and U.S. Marine Corps. |
| ●
| Announced $1.1 million follow-on AHDLRAD systems order from Southeast Asiainternational mining operations for borderbird and maritime security.
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wildlife preservation | ●
| Received $1.5 million follow-on LRAD 360XT order from one of the largest oil & gas companies in Eurasia. The mobile mass notification systems are being equipped with our solar power option and integrated with a gas detection alarm system.
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| ●
| Announced $1.0 million LRAD 500X-RE systems and accessories order for domestic and international U.S. Air Force bases.
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Revenues infor the firstCompany’s second quarter of fiscal quarter ended December 31, 2017,2023 were $7.6$11.2 million, an increasea $2.0 million decrease from $2.9$13.2 million in the first fiscalsecond quarter of 2017.fiscal 2022. Quarterly software revenue of $853 thousand, increased $180 thousand, year over year, offset by a decrease of $2.1 million in hardware revenue ($10.4 million), in the March ended quarter. The increase in revenues was driven by increases in both AHD and mass notification revenues. AHD revenues increased $2,559,000, or 128%, and mass notification revenues increased $2,074,748, or 297%, compared to the first fiscal quarter of 2017. Based on the timing of budget cycles, as well asgovernment financial issues and military conflict in certain areas of the world, delays in awarding contracts often occur,delay hardware contract awards, resulting in uneven quarterly revenues.revenue. Gross profit increaseddecreased compared to the same quarter in the prior year, primarily as a result of higher salescomponent costs for LRADs delivered against legacy contracts and higher fixed overhead absorption.pricing. Operating expenses increased by 16.2% from $2.6 million to $3.0 million in the quarter ended DecemberMarch 31, 2017, primarily due2023, increased 8.2% to higher incentive expense accrual based on$8.3 million, compared with $7.7 million in the Company’s expectation for meeting current year financial goals, computer related expenses and increased salaries and consulting for additional engineering and sales personnel.same period in the prior year. The first quarter of fiscal 2018 results, reflect a $2.7 million income tax expense including $2.5 million for a decrease to the deferred tax asset due to enactmentprimary driver of the “Tax Cuts and Jobs Act” (the “Act”) on December 22, 2017, which reduceschange is personnel hired in conjunction with our stated investment in building our software business. The Company had 201 employees as of March 31, 2023, as compared with 180 in the U.S. federal corporate tax rate to 21% effective January 1, 2018. Primarily as a result of this fiscal 2018 income tax expense, weprior year period. We reported a net loss of $1,683,253$3.4 million for the second quarter of fiscal 2023, or $0.05$(0.09) per share, compared towith a net loss of $812,680,$492 thousand, or $0.03$(0.01) per share, for the same quarter in the prior year.
Overall Business Outlook
Our product line-up continuesproducts, systems, and solutions continue to gain worldwide awareness and recognition through our sales and marketing efforts, media exposure, trade show participations, product demonstrations, and word of mouth as a result of positive responses and increased acceptance of our products.acceptance. We believe we have a solid global brand, technology, and product foundation, with our LRAD-X directed product line, which we have expanded over the yearscontinue to serviceexpand to serve 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 defense, emergency warning, mass notification, critical event management, and military sector, as well as increasing commercial applicationslaw enforcement sectors as a result of continued threats to governments, commerceincreasing public safety, enterprise, government and law enforcement,organizational threats. Our products, systems, and insolutions also have many applications within the fire rescue, maritime, asset protection, and wildlife preservation business segments.
Genasys has developed a global market and control applications.increased demand for LRADs and advanced mass notification speakers. We have a reputation for producing quality products that feature industry-leading broadcast area coverage, vocal intelligibility, and product reliability. We intend to continue building on our AHD market leadership position by offering enhanced voice broadcast systems and accessories for an expanding range of applications. In executing our strategy, we use direct sales to governments, militaries, large end-users, system integrators, and prime vendors. 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 governments, military branches, and law enforcement agencies, we are subject to each customer’s unique budget cycle, which leads to long selling cycles and uneven revenue flow, complicating our product and financial planning.
The proliferation of natural and man-made disasters, emergency events, and civil unrest require technologically advanced, multi-channel solutions to deliver clear and timely critical communications to help keep people safe during crisis situations. Businesses are also incorporating critical communication and emergency management systems that locate and help safeguard employees when crises occur.
By providing the only SaaS platform that unifies sensors and inputs with multichannel, multiagency alerting and notifications, Genasys seeks to deliver reliable, fast, and intuitive solutions for creating and disseminating geolocation-targeted warnings, information, and instructions before, during, and after public safety and enterprise threats.
While the software and hardware mass notification business, particularlymarkets are more mature with many established suppliers, we believe that our advanced technology and unified platform provides opportunities to succeed in the Middle East, Europelarge and Asia wheregrowing public safety, emergency warning, and critical communications markets.
In the second half of fiscal 2023, we believe thereintend to continue pursuing 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 governments and agencies that desire to integrate our communication technologies into their homeland security and public safety systems. This includes building on fiscal 2022 domestic defense sales by pursuing further U.S. military opportunities. We also plan to pursue emergency warning, enterprise critical event management, government, law enforcement, fire rescue, homeland and international security, private and commercial security, border security, maritime security, and wildlife dispersion and preservation business opportunities. In addition to the matters above, we are greater market opportunitiesauthorized for the performance of services and provision of goods pursuant to Delaware General Corporation Law.
Our research and development strategy involves incorporating further innovations and capabilities into our omnidirectionalGenasys Protect platform, systems, and solutions to meet the needs of our target markets.
Our GEM, Zonehaven, and NEWS software solutions are complex offerings that we intend to message more succinctly with improved and expanded marketing. We are pursuing certain certifications, which are often required when bidding on government and mass notification opportunities. We continue to invest engineering resources to enhance our Genasys Protect software solutions to compete for larger emergency warning and critical communications business opportunities. We are also configuring alternative solutions to achieve lower price points to meet the needs of certain customers or applications. We also engage in ongoing value engineering to reduce the cost and simplify the manufacturing of our products. Our selling network has expanded through
A large number of components and sub-assemblies manufactured by outside suppliers within our supply chain are produced within 50 miles of our facility. We do not source component parts from suppliers in China. It is likely that some of our suppliers source parts or raw materials in China. The aftermath of the additionCOVID-19 pandemic continues to impact worldwide supply chains and the ability to obtain sufficient amounts of sales consultantscomponent parts, including semiconductor chips and integrated circuits, resins, coating and other equipment and components. Negative impacts on our supply chain could have material effects on our business. We communicate with our suppliers regarding measures to mitigate ongoing worldwide supply chain issues.
We have been affected by price increases from our suppliers and logistics as well as continuingother inflationary factors such as increased salary, labor, and overhead costs. We regularly review and adjust the sales price of our finished goods to improve and increase our relationships with key integrators and sales representatives within the United States and in a number of worldwide locations. However, we may continue to face challenges in fiscal 2018 due to continuing economic and geopolitical conditions 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 closeoffset these opportunities,inflationary factors. Sustained or if they will ever ultimately come to fruition. It is also difficult to determine whether our omnidirectional product will be accepted as a viable solutionincreased inflation in the mass notification market, which includes a numberfuture may affect our ability to achieve certain expectations in gross margin and operating expenses. If we are unable to offset the negative impacts of large, well-known competitors.inflation with increased prices, our future results could be materially affected.
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, 2017.2022. 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 Three Months Ended DecemberMarch 31,, 2017 2023 and 20162022 (in thousands)
Revenues
| | | Three Months Ended | | | | | | | | | |
| | | March 31, 2023 | | | March 31, 2022 | | | | | | | | | |
| | | | | | | % of | | | | | | | % of | | | | | | | | | |
| | | | | | | Total | | | | | | | Total | | | Fav(Unfav) | |
| | | Amount | | | Revenue | | | Amount | | | Revenue | | | Amount | | | % | |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Product revenue | | $ | 9,940 | | | | 88.6 | % | | $ | 11,854 | | | | 90.0 | % | | $ | (1,914 | ) | | | (16.1% | ) |
Contract and other | | | 1,273 | | | | 11.4 | % | | | 1,314 | | | | 10.0 | % | | | (41 | ) | | | (3.1% | ) |
Total revenues | | | 11,213 | | | | 100.0 | % | | | 13,168 | | | | 100.0 | % | | | (1,955 | ) | | | (14.8% | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of revenues | | | 6,288 | | | | 56.1 | % | | | 5,991 | | | | 45.5 | % | | | (297 | ) | | | (5.0% | ) |
Gross Profit | | | 4,925 | | | | 43.9 | % | | | 7,177 | | | | 54.5 | % | | | (2,252 | ) | | | (31.4% | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 6,054 | | | | 54.0 | % | | | 5,811 | | | | 44.1 | % | | | (243 | ) | | | (4.2% | ) |
Research and development | | | 2,281 | | | | 20.3 | % | | | 1,893 | | | | 14.4 | % | | | (388 | ) | | | (20.5% | ) |
Total operating expenses | | | 8,335 | | | | 74.3 | % | | | 7,704 | | | | 58.5 | % | | | (631 | ) | | | (8.2% | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Loss from operations | | | (3,410 | ) | | | (30.4% | ) | | | (527 | ) | | | (4.0% | ) | | | (2,883 | ) | | | 547.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense), net | | | 15 | | | | 0.1 | % | | | (10 | ) | | | (0.1% | ) | | | 25 | | | | (250.0% | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Loss before income taxes | | | (3,395 | ) | | | (30.3% | ) | | | (537 | ) | | | (4.1% | ) | | | (2,858 | ) | | | 532.2 | % |
Income tax expense (benefit) | | | 8 | | | | 0.1 | % | | | (45 | ) | | | (0.3% | ) | | | (53 | ) | | | 117.8 | % |
Net loss | | $ | (3,403 | ) | | | (30.3% | ) | | $ | (492 | ) | | | (3.7% | ) | | $ | (2,911 | ) | | | 591.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net revenue | | | | | | | | | | | | | | | | | | | | | | | | |
Hardware | | $ | 10,360 | | | | 92.4 | % | | $ | 12,495 | | | | 94.9 | % | | | (2,135 | ) | | | (17.1% | ) |
Software | | | 853 | | | | 7.6 | % | | | 673 | | | | 5.1 | % | | | 180 | | | | 26.7 | % |
Total net revenue | | $ | 11,213 | | | | 100.0 | % | | $ | 13,168 | | | | 100.0 | % | | $ | (1,955 | ) | | | (14.8% | ) |
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 were $1,955 lower compared with the same quarter in the prior year. Hardware revenue decreased $2,135, partially offset by a $180 increase in software revenue, compared with the prior fiscal year quarter. Lower revenue in the second quarter of fiscal 2023 was largely due to the lower backlog at the start of this fiscal year compared with the prior fiscal year backlog. The higher software revenue was primarily due to 34% increase in recurring revenue. The receipt of orders is often uneven due to the timing of budget cycles, government financial issues and military conflict. As of March 31, 2023, we had aggregate deferred revenue of $1,811 for extended warranty obligations and software support agreements.
Gross Profit
The decrease in gross profit compared with the same period in the prior year was due to higher component costs and lower revenue in this year’s quarter. Gross profit as a percentage of sales was lower compared with the prior year period (which included a favorable product mix) primarily due to higher costs of components, in line with inflation, in this year’s quarter.
As our products have varying gross margins, 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. We have limited warranty cost experience with product updates and changes 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 $243 over the prior year quarter. The increase was largely due to $407 of increased compensation expense and $218 from higher professional services in the current year period, partially offset by a $419 decrease in commission expense.
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three months ended March 31, 2023 and 2022 of $447 and $686, respectively.
We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize potential opportunities. Commission expenses will fluctuate based on the nature of our sales.
Research and Development Expenses
Research and development expenses increased $388 in this fiscal quarter as the number of engineers increased 5% over the same quarter of last fiscal year as we continue to increase the features and functionality of our software offerings.
Included in research and development expenses for the three months ended March 31, 2023 and 2022, was $33 and $23, respectively, of non-cash share-based compensation costs.
Research and development costs vary period to period due to the timing of projects, and the timing and extent of using outside consulting, design, and development firms. We seek to continually improve our product offerings, and we expect to continue to expand our product line with new products, customizations, and enhancements. Based on current plans, we may expend additional resources on research and development in the current year compared to the prior year.
Net Loss
Net loss in the second quarter of fiscal year 2023 was $3,403, compared with a net loss of $492 in the second quarter of fiscal year 2022. The increase in net loss was primarily attributable to the increased cost of sales due to higher component costs, plus higher operating expenses, which resulted from hiring additional engineering, sales, and marketing employees.
Comparison of Results of Operations for the Six Months Ended March 31, 2023 and 2022 (in thousands)
| | | March 31, 2023 | | | March 31, 2022 | | | | | | | | | |
| | | | | | | % of | | | | | | | % of | | | | | | | | | |
| | | | | | | Total | | | | | | | Total | | | Fav(Unfav) | |
| | | Amount | | | Revenue | | | Amount | | | Revenue | | | Amount | | | % | |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Product revenue | | $ | 19,058 | | | | 87.8 | % | | $ | 21,424 | | | | 89.8 | % | | $ | (2,366 | ) | | | (11.0 | %) |
Contract and other | | | 2,642 | | | | 12.2 | % | | | 2,421 | | | | 10.2 | % | | | 221 | | | | 9.1 | % |
Total revenues | | | 21,700 | | | | 100.0 | % | | | 23,845 | | | | 100.0 | % | | | (2,145 | ) | | | (9.0 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of revenues | | | 11,943 | | | | 55.0 | % | | | 11,365 | | | | 47.7 | % | | | (578 | ) | | | (5.1 | %) |
Gross Profit | | | 9,757 | | | | 45.0 | % | | | 12,480 | | | | 52.3 | % | | | (2,723 | ) | | | (21.8 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Selling, general and administrative | | | 12,439 | | | | 57.3 | % | | | 11,009 | | | | 46.2 | % | | | (1,430 | ) | | | (13.0 | %) |
Research and development | | | 4,216 | | | | 19.4 | % | | | 3,607 | | | | 15.1 | % | | | (609 | ) | | | (16.9 | %) |
Total operating expenses | | | 16,655 | | | | 76.8 | % | | | 14,616 | | | | 61.3 | % | | | (2,039 | ) | | | (14.0 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Loss from operations | | | (6,898 | ) | | | (31.8 | %) | | | (2,136 | ) | | | (9.0 | %) | | | (4,762 | ) | | | 222.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense), net | | | (4 | ) | | | (0.0 | %) | | | 3 | | | | 0.0 | % | | | (7 | ) | | | (233.3 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Loss before income taxes | | | (6,902 | ) | | | (31.8 | %) | | | (2,133 | ) | | | (8.9 | %) | | | (4,769 | ) | | | 223.6 | % |
Income tax expense (benefit) | | | 8 | | | | 0.0 | % | | | (336 | ) | | | (1.4 | %) | | | (344 | ) | | | 102.4 | % |
Net loss | | $ | (6,910 | ) | | | (31.8 | %) | | $ | (1,797 | ) | | | (7.5 | %) | | $ | (5,113 | ) | | | 284.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Net revenue | | | | | | | | | | | | | | | | | | | | | | | | |
Hardware | | $ | 19,945 | | | | 91.9 | % | | $ | 22,622 | | | | 94.9 | % | | | (2,677 | ) | | | (11.8 | %) |
Software | | | 1,755 | | | | 8.1 | % | | | 1,223 | | | | 5.1 | % | | | 532 | | | | 43.5 | % |
Total net revenue | | $ | 21,700 | | | | 100.0 | % | | $ | 23,845 | | | | 100.0 | % | | $ | (2,145 | ) | | | (9.0 | %) |
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 $2,145 for the six months ended March 31, 2023, compared with the same prior year period, primarily due to the largerlower backlog atas of September 30, 20172022, compared towith September 30, 2016. Sales improved2021. Hardware revenue decreased $2,677, partially offset by the $532 increase in the current quarter both AHD (up $2,559,319 or 128%) and MNS (up $2,074,748, or 297%) product lines compared to the prior year.software revenue. The receipt of orders will often be uneven due to the timing of approvals or budgets. At DecemberAs of March 31, 2017,2023, we had aggregate deferred revenue of $437,945$1,811 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 prior yearsix months ended March 31, 2023, was primarily due to the higher levelcost of components and lower sales partially offset by an increasevolume this year compared to the prior year period and a better product mix in manufacturing overhead expenses to support the increased sales.prior year.
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 over$1,430 in the six months ended March 31, 2023, compared with the prior year quarter. This reflects $209,322 higher information technologyperiod. The increase in selling, general and administrative expenses was largely due to an $852 increase in compensation related costs, $579 increase in professional services expenses, $154,197 higher incentive compensation expense, $81,957 higher salaries, benefits and consulting expense, primarily for business developmenta $309 increase in sales, marketing, and $59,885 in increased travel. The increases weretravel expenses, partially offset by a $326,175$303 decrease in non-cash compensation, primarily duecommission expense compared to the prior year non-recurring expense 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 implemented in the first quarter of fiscal year 2018 and this rate of expense is not expected to recur in future periods.date period.
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the threesix months ended DecemberMarch 31, 20172023 and 20162022 of $109,322$820 and $435,497,$1,217, respectively. The decrease is primarily due to non-recurring expense related to a Separation Agreement and General Release related to the departure of the Company’s prior CEO in the prior year quarter.
We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize potential opportunities. Commission expenses will fluctuate based on the nature of our sales.
Research and Development Expenses
Research and development expenses increased $609, primarily due to increased compensation-related costs associated with a 5% increase in headcount compared towith the prior year primarily due to $75,162 for increased product development, $58,609 for salaries and benefits due to increased engineering staff compared to the prior year quarter and $60,405 for bonus accrual.period.
Included inWe incurred non-cash share-based compensation expenses allocated to research and development expenses forin the threesix months ended DecemberMarch 31, 20172023 and 2016 was $22,9302022 of $52 and $23,375 of non-cash share-based compensation costs,$35, respectively.
Research and development costs vary period to period due to the timing of projects, amount of support provided on customer 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 2018 with new products, customizations, and enhancements. Based on current plans, we may expend additional resources on research and development in the current year compared to the prior year.
Net Loss
Net loss for the first six months of fiscal 2023 was $6,910, compared with the prior year period net loss of $1,797. The increase in net loss was primarily attributable to the increased cost of sales due to higher component costs and higher operating expenses, which resulted from hiring additional software engineering, sales, and marketing employees.
Other Metrics
We monitor a number of financial and operating metrics, including adjusted EBITDA, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. Our business metrics may be calculated in a manner different than similar other business metrics used by other companies.
Adjusted EBITDA
Adjusted EBITDA represents our net income before other income, net income tax expense (benefit), depreciation and amortization expense, and stock-based compensation. We do not consider these items to be indicative of our core operating performance. The items that are non-cash include depreciation and amortization expense and stock-based compensation. Adjusted EBITDA is a measure used by management to understand and evaluate our core operating performance and trends, and to generate future operating plans, make strategic decisions regarding allocation of capital, and invest in initiatives focused on cultivating new markets for our solutions. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis. Adjusted EBITDA is not a measure calculated in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). We believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Nevertheless, use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (1) although depreciation and amortization are non-cash charges, the intangible assets that are amortized and property and equipment that is depreciated, will need to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacement or for new capital expenditure requirements; (2) adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (3) adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (4) adjusted EBITDA does not reflect tax payments or receipts that may represent a reduction or increase in cash available to us; and (5) other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces the usefulness of the metric as a comparative measure. Because of these and other limitations, you should consider adjusted EBITDA alongside our other U.S. GAAP-based financial performance measures, net income and our other U.S. GAAP financial results.
The following table presents a reconciliation of adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for each of the periods indicated (in thousands):
| | | Three months ended | | | Six months ended | |
| | | March 31, | | | March 31, | |
| | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Net loss | | $ | (3,403 | ) | | $ | (492 | ) | | | (6,910 | ) | | | (1,797 | ) |
Other income (expense), net | | | (15 | ) | | | 10 | | | | 4 | | | | (3 | ) |
Income tax expense (benefit) | | | 8 | | | | (45 | ) | | | 8 | | | | (336 | ) |
Depreciation and amortization | | | 639 | | | | 643 | | | | 1,282 | | | | 1,282 | |
Stock-based compensation | | | 513 | | | | 737 | | | | 933 | | | | 1,295 | |
Adjusted EBITDA | | $ | (2,258 | ) | | $ | 853 | | | $ | (4,683 | ) | | $ | 441 | |
Segment Results
Segment results include net sales and operating income by segment. Corporate expense including various administrative expenses and costs of a publicly traded company are included in the Hardware segment as per historical financial reporting.
Comparison of Segment Adjusted EBITDA for the Three Months Ended March 31, 2023 and 2022 (in thousands)
| | | Software | | | Hardware | |
| | | Three months ended March 31, | | | | | | | | | | | Three months ended March 31, | | | | | | | | | |
| | | | | | | | | | | Fav (Unfav) | | | | | | | | | | | Fav (Unfav) | |
| | | 2023 | | | 2022 | | | | $ | | | | % | | | 2023 | | | 2022 | | | | $ | | | | % | |
Revenue | | $ | 853 | | | $ | 673 | | | $ | 180 | | | | 26.7 | % | | $ | 10,360 | | | $ | 12,495 | | | $ | (2,135 | ) | | | (17.1% | ) |
Operating (loss) Income | | | (3,797 | ) | | | (3,064 | ) | | | (733 | ) | | | 23.9 | % | | | 387 | | | | 2,537 | | | | (2,150 | ) | | | (84.7% | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reconciliation of GAAP to Non-GAAP | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 539 | | | | 547 | | | | (8 | ) | | | (1.5% | ) | | | 100 | | | | 96 | | | | 4 | | | | 4.2 | % |
Stock-based compensation | | | 122 | | | | 67 | | | | 55 | | | | 82.1 | % | | | 391 | | | | 670 | | | | (279 | ) | | | (41.6% | ) |
Adjusted EBITDA | | $ | (3,136 | ) | | $ | (2,450 | ) | | $ | (686 | ) | | | 28.0 | % | | $ | 878 | | | $ | 3,303 | | | $ | (2,425 | ) | | | (73.4% | ) |
Software Segment
Software segment revenue increased 27% over the prior fiscal year quarter. This primarily reflects a 34% increase in recurring revenue, partially offset by a 12% decrease in professional services, compared with the prior fiscal year period.
Operating loss increased $733 in the second fiscal quarter due to increases in payroll and related costs from increased hiring to support software development and sales and higher commission expense from the increased revenues.
Hardware Segment
Hardware segment revenue decreased $2,135 compared with the prior fiscal year period. The decrease was largely due to the lower backlog at the start of this fiscal year compared with the prior fiscal year beginning backlog.
Operating income decreased $2,150 in the fiscal 2023 second quarter compared with the same quarter in the prior year due to lower revenue and gross profit resulting from higher cost of components, and higher professional services expense, compensation expense, and sales and marketing expenses, partially offset by lower commission expense.
Comparison of Segment Adjusted EBITDA for the Six Months Ended March 31, 2023 and 2022 (in thousands)
| | | Software | | | Hardware | |
| | | Six months ended | | | | | | | | | | | Six months ended | | | | | | | | | |
| | | March 31, | | | Fav (Unfav) | | | March 31, | | | Fav (Unfav) | |
| | | 2023 | | | 2022 | | | | $ | | | | % | | | 2023 | | | 2022 | | | | $ | | | | % | |
Revenue | | $ | 1,755 | | | $ | 1,223 | | | $ | 532 | | | | 43.5 | % | | $ | 19,945 | | | $ | 22,622 | | | $ | (2,677 | ) | | | (11.8% | ) |
Operating (loss) Income | | | (7,257 | ) | | | (5,845 | ) | | | (1,412 | ) | | | 24.2 | % | | | 359 | | | | 3,709 | | | | (3,350 | ) | | | (90.3% | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reconciliation of GAAP to Non-GAAP | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 1,083 | | | | 1,092 | | | | (9 | ) | | | (0.8% | ) | | | 199 | | | | 190 | | | | 9 | | | | 4.7 | % |
Stock-based compensation | | | 222 | | | | 125 | | | | 97 | | | | 77.6 | % | | | 711 | | | | 1,170 | | | | (459 | ) | | | (39.2% | ) |
Adjusted EBITDA | | $ | (5,952 | ) | | $ | (4,628 | ) | | $ | (1,324 | ) | | | 28.6 | % | | $ | 1,269 | | | $ | 5,069 | | | $ | (3,800 | ) | | | (75.0% | ) |
Software Segment
Software segment revenue increased 44% over the prior fiscal year. This primarily reflects a 43% increase in recurring revenue compared with the first six months of fiscal 2022.
Operating loss increased $1,412 compared to the prior fiscal year wasperiod due to income taxincreases in payroll and related costs from increased hiring to support software development and sales, higher professional services expense, forand higher commission expense from the three months ended December 31, 2017 primarilyincreased revenues.
Hardware Segment
Hardware segment revenue decreased $2,677 compared with the prior year period. The decrease was largely due to a reduction in the deferred tax asset resultinglower backlog at the start of this fiscal year compared with the prior fiscal year beginning backlog.
Operating income decreased $3,350 compared with the prior fiscal year due to lower revenue and lower gross profit from the change to the U.S. Corporate income tax rates effective for the calendar year ended December 31, 2018. The additional non-cashhigher cost of components, higher sales and marketing expenses, and professional services 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.lower commission expense.
Liquidity and Capital Resources
Cash and cash equivalents at Decemberas of March 31, 20172023, was $15,117,544,$6,371, compared to $12,803,887 atwith $12,736 as of September 30, 2017 primarily2022. We had short-term marketable securities of $5,552 as a result of cash generated from operations.March 31, 2023, compared with $6,397 as of September 30, 2022. We had long-term marketable securities of $601 as of March 31, 2023, compared with $781 as of September 30, 2022. 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.
We continue to manage all aspects of our business including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, and developing new opportunities for growth.
Principal factors that could affect our liquidity include:
| | ●•
| ability to meet sales projections; |
| • | government spending levels; |
| • | introduction of competing technologies; |
| • | product mix and effect on margins; |
| • | ability to meet sales projections;reduce current inventory levels; |
| | ●•
| government spending levels;product acceptance in new markets;
|
| | ●
| introduction of competing technologies;
|
| ●
| product mix and effect on margins;
|
| ●
| ability to reduce current inventory levels;
|
| ●
| product acceptance in new markets;
|
| ●•
| value of shares repurchased; and |
| | ●•
| value of dividends declared.declared; |
| • | supply chain disruptions; |
| • | conflict between Russia and Ukraine; |
| • | 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:
| | ●•
| volatility in the capital markets; and | volatility in the capital markets; and
|
| | ●•
| market price and trading volume of our common stock. |
Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the 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, 2023 | | | March 31, 2022 | |
| | | 2017 | | | 2016 | | |
Cash provided by: | | | | | | | | | |
Cash provided by (used in): | | |
Operating activities | | $ | 1,753,585 | | | $ | 1,428,286 | | | $ | (7,466 | ) | | $ | (3,107 | ) |
Investing activities | | | 400,554 | | | | 69,026 | | | 918 | | | (146 | ) |
Financing activities | | | 159,518 | | | | - | | | 41 | | | (915 | ) |
Operating Activities
Net loss of $1,683,253$6,910 for the threesix months ended DecemberMarch 31, 20172023 was decreased by $2,960,116$2,774 of non-cash items that included a reduction to deferred income taxes primarily resulting from enactment of the “Act”, share-based compensation, warranty provision, depreciation and amortization, warranty provision,amortization of operating lease ROU assets, accretion of acquisition holdback liability, and inventory obsolescence. Cash providedused 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$3,469, 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 by operating activities in the current year reflected a decrease in accounts receivable of $1,929,765 due to the collection of a high year-end balance, an increase in accounts payable of $500,042 due to the timing of payments, payroll and related of $180,766 primarily for accrued bonuses, and decreases in prepaid expenses and other of $80,378 and other assets of $46,871. Cash used in operating activities included an increase in inventory of $327,680, a decrease in accrued and other liabilities of $176,881$6,004, comprised of a decrease in the balances of customer deposits received, payment of the Canadian GST/HST and payment of incentive compensation earned in fiscal year 2022. This was offset by a $3,158 decrease in accounts receivable, a $1,840 decrease in prepaid expenses, and a $1,145 increase in accounts payable.
Net loss of $1,797 for the six months ended March 31, 2022 was decreased by $2,715 of non-cash items that included share-based compensation, depreciation and amortization, amortization of operating lease ROU assets, an increase to deferred income taxes, warranty provision, and inventory obsolescence. Cash used by operating activities in the first six months of fiscal 2022, reflected an increase in inventory of $3,291, and a decrease in accrued and other liabilities and other of $4,412 reflecting a decrease in the balances of customer deposits received, and payment of incentive compensation earned in fiscal year 2021. This was offset by a $2,123 decrease in accounts receivable on lower revenue for customer prepaymentsin the period compared with the fourth quarter of fiscal year 2021, a $750 decrease in prepaid expenses and warranty settlements of $12,742.a $805 increase in accounts payable.
We had accounts receivable of $5,678,220 at December$3,623 as of March 31, 2017,2023, compared to $5,681,882 atwith $6,744 as of 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 2017.2022. 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, 2023, and September 30, 2017,2022, our working capital was $26,485,964$15,347 and $25,412,106$20,197, respectively. The increasedecrease in working capital was primarily due to cash generated from operations.the net loss this period and decrease in accounts receivable and prepaid expenses.
Investing Activities
Our net cash provided by investing activities was $918 for the six months ended March 31, 2023, compared with net cash used in investing activities of $146 for the six months ended March 31, 2022. In the threefirst six months ended December 31, 2017, we decreasedof fiscal 2023, our holding ofholdings in short and long-term marketable securities decreased by $454,721,$1,075, compared to saleswith a decrease of $84,610 in$25 for 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.2022. Cash used in investing activities for toolingthe purchase of property and patentsequipment was $54,167$157 and $15,584$171 for the threesix months ended DecemberMarch 31, 20172023 and 2016,2022, respectively. We anticipate some additional expenditures for tooling and equipment during the balance of fiscal year 2018.2023.
Financing Activities
In the threesix months ended DecemberMarch 31, 2017, cash provided2023, we received $41 for financing activities, compared with $915 used in financing activities for the six months ended March 31, 2022. In the first six months of fiscal 2023, we received $86 from the exercise of stock options was $159,518.and used $45 to settle statutory tax withholding requirements upon vesting of restricted stock units. In the threefirst six months ended December 31, 2016,of fiscal 2022 we had no cashreceived $170 from financing activities.the exercise of stock options and used $998 to repurchase shares of our common stock and $70 to settle statutory tax withholding requirements upon vesting of restricted stock units.
The
In December 2018, the Board of Directors approved a new share buyback program in 2013beginning January 1, 2019, and expiring on December 31, 2020, under which the Company was authorized to repurchase up to $4$5 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 2017,2020, the Board of Directors extended the buyback program until December 31, 2022. In December 2022, the Board of Directors extended the Company’s share buyback program through December 31, 2018.2024.
There were no shares repurchased during the six months ended March 31, 2023. During the six months ended March 31, 2022, 259,310 shares were purchased for $998. All repurchased shares have been retired and as of March 31, 2023, and $3.0 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.
Item3. | QuantitativeQuantitative and QualitativeQualitative Disclosures about Market Risk.
|
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 and the transactions of our Canadian subsidiary are denominated primarily in Canadian dollars, 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.
Item4. | 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, 2017.2023.
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, 2017,2023, 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.
There have been no material changes to the risk factors described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, filed with the SEC on December 16, 2022.
As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.
Item 2.
| Unregistered Sales of Equity Securities and Use of Proceeds. |
None
Item 3. Defaults Upon Senior Securities.
None.
Item 4.3. | Defaults Upon Senior Securities. |
None.
Item 4. | Mine Safety Disclosures.Disclosures. |
Not Applicable.
None.
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31.1 | Certification of Richard S. Danforth, Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
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31.2 | Certification of Dennis D. Klahn, Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* |
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32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Richard S. Danforth, Principal Executive Officer and Dennis D. Klahn, Principal Financial Officer.* |
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101.INS | Inline XBRL Instance Document*Document* |
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101.SCH | XBRLInline XBRL Taxonomy Extension Schema Document*
|
| | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document*Document* |
| | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document*Document* |
| | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document*Document* |
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101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document*Document* |
*
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| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
* 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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| LRAD CORPORATIONGENASYS INC.
|
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Date: February May 8, 20182023 | By: | /s/ DENNIS Dennis D. KLAHNKlahn |
| | Dennis D. Klahn,, ChiefFinancialOfficer |
| | (Principal Financial Officer) |
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