UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended March 31, 20120920

or

For the transition period from                         to                          .

Commission File Number: 000-24248

LRAD CORPORATIONGENASYS INC.

(Exact name of registrant as specified in its charter)

(858) 676-1112

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒  Yes    ☐  No

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

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

The number of shares of Common Stock, $0.00001 par value, outstanding on May 3, 20198, 2020 was 32,572,118.33,128,729.

1. OPERATIONS

Genasys Inc. (formerly LRAD^® Corporation,Corporation), a Delaware corporation (the “Company”), is engaged in the design, development and commercialization of directed and multidirectional sound technologies, voice broadcast products, and location-based public safety mass messaging solutions for emergency warning and workforce management. The principal markets for the Company’s proprietary sound reproduction technologies, voice broadcast products and mass messaging solutions are in North and South America, Europe, Middle East and Asia. On October 23, 2019, the Company announced its rebranding and began doing business as Genasys Inc.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

General

The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the footnotes. The condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended September 30, 20182019 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on December 21, 2018.10, 2019. The accompanying condensed consolidated balance sheet at September 30, 20182019 has been derived from the audited consolidated balance sheet at September 30, 20182019 contained in the above referenced Form 10-K. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

Principles of Consolidation

The Company has three wholly owned subsidiaries, Genasys II Spain, S.A.U. (“Genasys Spain”) and two currently inactive subsidiaries, Genasys America de CV and LRAD International Corporation. The condensed consolidated financial statements include the accounts of these subsidiaries after elimination of intercompany transactions and accounts.

Reclassifications

Where necessary, the prior year’s information has been reclassified to conform to the current year presentation.

3. RECENT ACCOUNTING PRONOUNCEMENTS

New pronouncements pending adoption

In June 2018,2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-7,2016-13, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment AccountingMeasurement of Credit Losses on Financial Instruments (“ASU 2018-7”), which amends and expands Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.supersedes current guidance by requiring recognition of credit losses when it is probable that a loss has been incurred. The new standard requires entitiesthe establishment of an allowance for estimated credit losses on financial assets including trade and other receivables at each reporting date. The new standard will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to measure nonemployee share-based payment transactions by estimatingreceive cash. In November 2019, the fair valueFASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842), which extends the effective date of the equity instrument it is obligated to issue, measure the equity-classified nonemployee share-based payment awards at the grant date, and consider the probability of satisfying performance conditions when accountingTopic 326 for nonemployee share based payment awards with such conditions. ASU 2018-7 is effective for annual reporting periodscertain companies until fiscal years beginning after December 15, 2018, including interim periods within2022. The new standard will be effective for the Company in the first quarter of fiscal year beginning October 1, 2023, and early adoption is permitted. The Company has not completed its review of the impact of this standard on its consolidated financial statements. However, based on the Company’s history of immaterial credit losses from trade receivables, management does not expect that fiscal year.the adoption of this standard will have a material effect on the Company’s consolidated financial statements.

New pronouncements adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 replaced most existing revenue recognition guidance in U.S. generally accepted accounting principles. In July 2015, the FASB deferred the effective date of the standard by an additional year; however, it provided companies the option to adopt one year earlier, commensurate with the original effective date. Accordingly, this guidance will bethe standard was effective for the Company in the fiscal year beginning October 1, 2019.2018. Subsequently the FASB has issued additional guidance (ASUs 2015-14; 2016-08; 2016-10; 2016-12; 2016-13; 2016-20). The Company is currently evaluating the impact, if any, adoption of this guidance willby the Company, effective October 1, 2018, did not have a material impact on itsthe Company’s consolidated financial statements (see Note 4, Revenue Recognition, for further detail). ASU No. 2014-09 and related disclosures.its amendments form Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”).

In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. The guidance iswas effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within that fiscal year. TheAccordingly, this was effective for the Company expects that thebeginning October 1, 2019. The adoption of this ASU willdid not have a materialan impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842)(“Topic 842”), which issued new guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. It also changes the definitionLeases with a term of a lease and expands the disclosure requirements of lease arrangements. The new guidance must be adopted using the modified retrospective approach and12 months or less will be effectiveaccounted for in a manner similar to the Company in the fiscal year beginning October 1, 2019. Although the Company has not completed its assessment of the full impact on its consolidated financial statements ofguidance for operating leases prior to the adoption of Topic 842. Topic 842 requires entities to recognize and measure leases existing at, or entered into after, the Company currently believes thatbeginning of the most significant changes will be related to the recognition ofearliest comparative period presented using a right-to-use asset and a corresponding lease liability on its consolidated balance sheet for the new facility lease described in Note 13.

New pronouncements adopted

modified retrospective approach, with certain practical expedients available. In November 2016,July 2018, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230)2018-11 (“ASU 2018-11”), Restricted Cash, which amends Topic 230offers a practical expedient that allows entities the option to add or clarify guidance onapply the classification and presentation of restricted cash in the statement of cash flows. The standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The provisions of this guidance are to be applied usingTopic 842 by recognizing a retrospective transition method to each periodcumulative effect adjustment at the effective date of adoption without adjusting the prior comparative periods presented. ASU No. 2016-18 was effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company adopted ASU No. 2016-18 effective January 1, 2018. For the year ended September 30, 2018 and the six months ended March 31, 2019, restricted cash balances are due to a security deposit for the Company’s new office lease, as described in Note 13, Commitments and Contingencies, and restricted cash held as collateral for notes payable, as described in Note 11, Debt. The adoption did not have a material impact on the Company's consolidated financial position, results of operations and cash flows, other than the impact discussed above.

In March 2016,2019, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This guidance changes how companies account2019-01 (“ASU 2019-01”), which explicitly provides disclosure relief for certain aspects of share-based payments to employees. Among other things, underinterim periods during the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in-capital (“APIC”), but will instead record such items as income tax expense or benefit inyear the income statement, and APIC pools will be eliminated. Companies will apply this guidance prospectively. Another component of thestandard is adopted.

The new guidance allows companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards, whereby forfeitures can be estimated, as required today, or recognized when they occur. If elected, the change to recognize forfeitures when they occur needs to be adopted using a modified retrospective approach. The guidance was effective for the Company inbeginning October 1, 2019. The Company adopted Topic 842 by applying the first quartermodified retrospective transition approach. Under this method, financial information related to periods prior to adoption will be as originally reported under the then-current standard (Topic 840, Leases). The Company elected the following practical expedients:

As a result of fiscal 2018. The adoptionadopting Topic 842 effective October 1, 2019, the Company recorded an initial measurement of this standard resulted in the recognition$7,814,701 of $1.1 millionoperating lease liabilities and $5,823,972 of grosscorresponding operating Right of Use (“ROU”) assets, net of tenant improvement allowances and deferred tax assetsrent, primarily related to the historical excess tax benefitsCompany’s facility lease. There was no other impact from stock based compensation that was not previously includedthe adoption of Topic 842. A portion of the existing leases are denominated in deferred tax assets andcurrencies other than the U.S. dollar. As a corresponding increaseresult, the associated lease liabilities will be remeasured using the current exchange rate in the Company’s valuation allowance.applicable reporting periods, which may result in foreign exchange gains or losses. There was no cumulative effect adjustment to retained earnings as a result of the transition to Topic 842. See Note 12, Leases for further disclosures related to Topic 842.

The Company adopted the guidance in Topic 606 on October 1, 2018. The Company adopted the new standard using the full retrospective approach.

In May 2014, the FASB issued ASU No. 2014-09, RevenueTopic 606 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from Contractscontracts with Customers (“ASU 2014-09”), whichcustomers and supersedes most revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized:

Topic 606 requires an entityrevenue recognition to recognize the amount of revenue to which it expects to be entitled fordepict the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles when it becomes effective. In July 2015, the FASB deferred the effective date of the standard by an additional year; however, it provided companies the option to adopt one year earlier, commensurate with the original effective date. Accordingly, the standard was effective for the Company in the fiscal year beginning October 1, 2018. Subsequently the FASB has issued additional guidance (ASUs 2015-14; 2016-08; 2016-10; 2016-12; 2016-13; 2016-20). The adoption of this guidance by the Company, effective October 1, 2018, did not have a material impact on the Company’s consolidated financial statements (see Note 4, Revenue Recognition, for further detail).

4. REVENUE RECOGNITION

On October 1, 2018, the Company adopted the new accounting standard FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) for all contracts using the modified retrospective method. Based on the Company’s analysis of contracts with customers in prior periods, there was no cumulative effect adjustmentan amount that reflects the consideration a company expects to the opening balance of the Company’s accumulated deficit as a result of the adoption of this new standard.receive in exchange for those goods or services.

The Company derives its revenue from the sale of products to customers, contracts, license fees, other services and freight. The Company sells its products through its direct sales force and through authorized resellers and system integrators. The Company recognizes revenue for goods including software when all the significant risks and rewards have been transferred to the customer, no continuing managerial involvement usually associated with ownership of the goods is retained, no effective control over the goods sold is retained, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transactions will flow to the Company and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Software license revenue, maintenance and/or software development service fees may be bundled in one arrangement or may be sold separately.

Product Revenue

Product revenue is recognized as a distinct single performance obligation when products are tendered to a carrier for delivery, which represents the point in time that ourthe Company’s customer obtains control of the products. A smaller portion of product revenue is recognized when the customer receives delivery of the products. A portion of products are sold through resellers and system integrators based on firm commitments from an end user, and as a result, resellers and system integrators carry little or no inventory. OurThe Company’s customers do not have a right to return product unless the product is found defective and therefore ourthe Company’s estimate for returns has historically been insignificant

Perpetual licensed software

The sale and/or license of software products is deemed to have occurred when a customer either has taken possession of or has the ability to take immediate possession of the software and the software key. Perpetual software licenses can include one-year maintenance and support services. In addition, the Company sells maintenance services on a stand-alone basis and is therefore capable of determining their fair value. On this basis, the amount of the embedded maintenance is separated from the fee for the perpetual license and is recognized on a straight-line basis over the period to which the maintenance relates.

Time-based licensed software

The time-based license agreements include the use of a software license for a fixed term, generally one-year, and maintenance and support services during the same period. The Company does not sell time-based licenses without maintenance and support services and therefore revenues for the entire arrangements are recognized on a straight-line basis over the term.

Warranty, maintenance and services

We offerThe Company offers extended warranty, maintenance and other services. Extended warranty and maintenance contracts are offered with terms ranging from one to several years, which provide repair and maintenance services after expiration of the original one-year warranty term. Revenues from separately priced extended warranty and maintenance contracts are recognized based on a straight-line basis,time elapsed over the contractservice period and classified as contract and other revenues. Revenue from other services such as training or installation is recognized when the service is completed.

Multiple element arrangements

The Company has entered into a number of multiple element arrangements, such as the sale of a product or perpetual licenses that may include maintenance and support (included in price of perpetual licenses) and time-based licenses (that include embedded maintenance and support, both of which may be sold with software development services, training, and other product sales). In some cases, the Company delivers software development services bundled with the sale of the software. In multiple element arrangements, the Company uses either the stand-alone selling price or vendor specific objective evidencean expected cost-plus margin approach to determine the fair value of each element within the arrangement, including software and software-related services such as maintenance and support. In general, elements in such arrangements are also sold on a stand-alone basis and stand-alone selling prices are available.

Revenue is allocated to each deliverable based on the fair value of each individual element and is recognized when the revenue recognition criteria described above are met, except for time-based licenses which are not unbundled. When software development services are performed and are considered essential to the functionality of the software, the Company recognizes revenue from the software development services on a stage of completion basis, and the revenue from the software when the related development services have been completed.

We disaggregateThe Company disaggregates revenue by reporting segment (Hardware (LRAD) and Software (Genasys))Software) and geographically to depict the nature of revenue in a manner consistent with ourthe Company’s business operations and to be consistent with other communications and public filings. SeeRefer to Note 17,18, Segment Information and Note 18,19, Major Customers, Suppliers and Related Information for additional details of revenues by reporting segment and disaggregation of revenue.

Contract Assets and Liabilities

We enterThe Company enters into contracts to sell products and provide services and we recognizerecognizes contract assets and liabilities that arise from these transactions. We recognizeThe Company recognizes revenue and corresponding accounts receivable according to ASCTopic 606 and, at times, recognizerecognizes revenue in advance of the time when contracts give usgives the Company the right to invoice a customer. WeThe Company may also receive consideration, per terms of a contract, from customers prior to transferring goods to the customer. We recordThe Company records customer deposits as a contract liability. Additionally, wethe Company may receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed. In such instances, we record a deferred revenue liability. We recognizeliability is recorded. The Company recognizes these contract liabilities as revenue after all revenue recognition criteria are met. The table below shows the balance of contract assets and liabilities as of March 31, 20192020 and September 30, 2018,2019, including the change between the periods. The current portion of contract liabilities and the non-current portion are included in “Accrued liabilities” and “Other liabilities, noncurrent”, respectively, on the accompanying Condensed Consolidated Balance Sheets. Refer to Note 10, Accrued Liabilities for additional details.

The Company’s contract assets areliabilities were as follows:

The Company’s contract liabilities are as follows:

Remaining Performance Obligations

Remaining performance obligations related to ASCTopic 606 represent the aggregate transaction price allocated to performance obligations under an original contract with a term greater than one year, which are fully or partially unsatisfied at the end of the period.

As of March 31, 2019,2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $1,348,854. We expect$4,165,838. The Company expects to recognize revenue on approximately $1,202,811$3,729,958 or 89%90% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter.

Practical Expedients 

In cases where we arethe Company is responsible for shipping after the customer has obtained control of the goods, we havethe Company has elected to treat these activities as fulfillment activities rather than as a separate performance obligation. Additionally, we havethe Company has elected to capitalize the cost to obtain a contract only if the period of amortization would be longer than one year. WeThe Company only givegives consideration to whether a customer agreement has a financing component if the period of time between transfer of goods and services and customer payment is greater than one year. WeThe Company also utilizeutilizes the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value we arethe Company is providing to the customer.

The Company’s financial instruments consist principally of cash equivalents, short and long-term marketable securities, accounts receivable and accounts payable. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

Level 1:     Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

Level 2:     Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.

Level 3:     Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

The fair value of the Company’s cash equivalents and marketable securities was determined based on Level 1 and Level 2 inputs. The Company did not have any marketable securities in the Level 3 category as of March 31, 20192020 or September 30, 2018.2019. The Company believes that the recorded values of its other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

Instruments Measured at Fair Value

The following tables present the Company’s cash equivalents and marketable securities’ costs, gross unrealized gains and losses, and fair value by major security type recorded as cash equivalents or short-term or long-term marketable securities as of March 31, 20192020 and September 30, 2018.2019.

6.6. INVENTORIES

Inventories consisted of the following:

7. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

8. GOODWILL AND INTANGIBLE ASSETS

Goodwill is attributable to the acquisition of Genasys Spain and is due to combining the mass messaging solutions and software development capabilities with existing LRAD products for enhanced offerings and the skill level of the workforce. The Company periodically reviews goodwill for impairment in accordance with relevant accounting standards. There were no additions or impairments to goodwill during the sixthree months ended March 31, 2019. At March 31, 2019 and September 30, 2018, goodwill was $2,364,633 and $2,445,990, respectively.2020.

During the year ended September 30, 2018, the Company determined that certain patents were impaired. These patents supported products that are no longer sold by the Company. The Company recorded a non-cash loss on the impairment of these patents of $11,133 for the year ended September 30, 2018. There was no impairment loss for the six months ended March 31, 2019.

Intangible assets and goodwill related to Genasys Spain are translated from Euros to U.S. dollars at the balance sheet date. The net impact of foreign currency exchange differences arising during the six months ended March 31, 2019,month period related to goodwill and intangible assets was a reductionan increase of $130,403.$21,044. The Company’s intangible assets consisted of the following:

9. 9. PREPAID EXPENSES AND OTHER

Prepaid expenses and other current assets consisted of the following:

10.10. ACCRUED LIABILITIES AND OTHER LIABILITIES - NONCURRENT

Accrued liabilities consisted of the following:

11. DEBT

In connection with the acquisition of Genasys Spain the Company assumedacquired certain debts of Genasys.Genasys Spain. The carrying value of the acquired debt approximates fair value. The balances of the acquired debt consist of loans with governmental agencies as of March 31, 2019.2020. Loans with governmental agencies represent interest free debt granted by ministries within Spain for the purpose of stimulating economic development and promoting research and development. Loans with governmental agencies as of March 31, 20192020 are as follows: