UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20120920
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 000-24248
LRAD CORPORATIONGENASYS INC.
(Exact name of registrant as specified in its charter)
Delaware | 87-0361799 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
16262West Bernardo Drive, San Diego, California | 92127 |
(Address of principal executive offices) | (Zip Code) |
(858) 676-1112
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which securities are registered |
Common stock, $0.00001 par value per share |
| NASDAQ Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically 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.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer |
| Smaller reporting company | ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The number of shares of Common Stock, $0.00001 par value, outstanding on May 3, 20198, 2020 was 32,572,118.33,128,729.
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
Item 1. Financial Statements
LRAD CorporationGenasys Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, | March 31, | |||||||||||||||
2019 | September 30, | 2020 | September 30, | |||||||||||||
(Unaudited) | 2018 | (Unaudited) | 2019 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 7,723,503 | $ | 11,063,091 | $ | 16,398,928 | $ | 18,819,078 | ||||||||
Short-term marketable securities | 3,108,878 | 3,592,175 | 3,464,834 | 3,695,364 | ||||||||||||
Restricted cash | 390,008 | 403,427 | 264,633 | 263,136 | ||||||||||||
Accounts receivable, net | 6,757,217 | 2,785,997 | 5,849,608 | 3,644,059 | ||||||||||||
Inventories, net | 8,305,843 | 6,734,183 | 6,921,829 | 5,835,163 | ||||||||||||
Prepaid expenses and other | 687,594 | 3,091,401 | 994,644 | 1,781,837 | ||||||||||||
Total current assets | 26,973,043 | 27,670,274 | 33,894,476 | 34,038,637 | ||||||||||||
Long-term marketable securities | 1,695,341 | 1,200,541 | 1,646,466 | 1,384,819 | ||||||||||||
Long-term restricted cash | 339,624 | 339,556 | 395,293 | 434,704 | ||||||||||||
Deferred tax assets, net | 5,399,853 | 5,957,000 | 5,117,842 | 5,387,000 | ||||||||||||
Property and equipment, net | 2,484,109 | 2,448,725 | 2,105,633 | 2,269,506 | ||||||||||||
Goodwill | 2,364,633 | 2,445,990 | 2,318,863 | 2,305,750 | ||||||||||||
Intangible assets, net | 1,355,709 | 1,557,346 | 1,034,161 | 1,175,634 | ||||||||||||
Operating lease right of use asset | 5,534,154 | - | ||||||||||||||
Other assets | 124,005 | 241,365 | 124,042 | 123,933 | ||||||||||||
Total assets | $ | 40,736,317 | $ | 41,860,797 | $ | 52,170,930 | $ | 47,119,983 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 1,227,925 | $ | 3,083,344 | $ | 1,932,485 | $ | 859,530 | ||||||||
Accrued liabilities | 3,334,159 | 3,199,864 | 5,442,301 | 8,134,341 | ||||||||||||
Notes payable, current portion | 286,728 | 296,594 | 281,178 | 279,588 | ||||||||||||
Operating lease liabilities, current portion | 728,134 | - | ||||||||||||||
Total current liabilities | 4,848,812 | 6,579,802 | 8,384,098 | 9,273,459 | ||||||||||||
Notes payable, less current portion | 33,744 | 52,358 | 16,546 | 32,903 | ||||||||||||
Other liabilities, noncurrent | 2,083,218 | 1,739,430 | 435,880 | 2,432,272 | ||||||||||||
Operating lease liabilities, noncurrent | 6,743,195 | - | ||||||||||||||
Total liabilities | 6,965,774 | 8,371,590 | 15,579,719 | 11,738,634 | ||||||||||||
Stockholders' equity: | ||||||||||||||||
Preferred stock, $0.00001 par value; 5,000,000 shares authorized; none issued and outstanding | - | - | - | - | ||||||||||||
Common stock, $0.00001 par value; 50,000,000 shares authorized; 32,572,118 and 33,176,146 shares issued and outstanding, respectively | 326 | 332 | ||||||||||||||
Common stock, $0.00001 par value; 50,000,000 shares authorized; 33,118,729 and | ||||||||||||||||
32,949,987 shares issued and outstanding, respectively | 331 | 330 | ||||||||||||||
Additional paid-in capital | 88,431,123 | 90,251,145 | 89,843,638 | 89,571,641 | ||||||||||||
Accumulated deficit | (54,292,105 | ) | (56,516,895 | ) | (52,810,001 | ) | (53,731,903 | ) | ||||||||
Accumulated other comprehensive loss | (368,801 | ) | (245,375 | ) | (442,757 | ) | (458,719 | ) | ||||||||
Total stockholders' equity | 33,770,543 | 33,489,207 | 36,591,211 | 35,381,349 | ||||||||||||
Total liabilities and stockholders' equity | $ | 40,736,317 | $ | 41,860,797 | $ | 52,170,930 | $ | 47,119,983 |
See accompanying notes
LRAD CorporationGenasys Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues: | ||||||||||||||||
Product sales | $ | 9,340,523 | $ | 7,125,258 | 18,688,691 | 14,461,283 | ||||||||||
Contract and other | 851,168 | 743,190 | 1,680,559 | 1,035,732 | ||||||||||||
Total revenues | 10,191,691 | 7,868,448 | 20,369,250 | 15,497,015 | ||||||||||||
Cost of revenues | 5,001,183 | 3,832,468 | 10,089,484 | 7,503,494 | ||||||||||||
Gross Profit | 5,190,508 | 4,035,980 | 10,279,766 | 7,993,521 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative | 2,475,378 | 2,517,891 | 5,226,386 | 4,706,289 | ||||||||||||
Research and development | 1,279,744 | 913,935 | 2,328,119 | 1,691,972 | ||||||||||||
Total operating expenses | 3,755,122 | 3,431,826 | 7,554,505 | 6,398,261 | ||||||||||||
Income from operations | 1,435,386 | 604,154 | 2,725,261 | 1,595,260 | ||||||||||||
Other income and expense, net | 17,608 | 15,205 | 56,676 | 49,735 | ||||||||||||
Income from operations before income taxes | 1,452,994 | 619,359 | 2,781,937 | 1,644,995 | ||||||||||||
Income tax expense | 274,144 | 158,451 | 557,147 | 2,867,339 | ||||||||||||
Net income (loss) | $ | 1,178,850 | $ | 460,908 | $ | 2,224,790 | $ | (1,222,344 | ) | |||||||
Net income (loss) per common share | ||||||||||||||||
Basic | $ | 0.04 | $ | 0.01 | $ | 0.07 | $ | (0.04 | ) | |||||||
Diluted | $ | 0.04 | $ | 0.01 | $ | 0.07 | $ | (0.04 | ) | |||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 32,584,952 | 32,275,647 | 32,738,871 | 32,212,286 | ||||||||||||
Diluted | 33,077,255 | 33,299,206 | 33,272,164 | 32,212,286 |
LRAD Corporation
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income (loss) | $ | 1,178,850 | $ | 460,908 | $ | 2,224,790 | $ | (1,222,344 | ) | |||||||
Other comprehensive income (loss), net of tax | ||||||||||||||||
Unrealized gain (loss) on marketable securities | 10,232 | (8,837 | ) | 9,620 | (16,868 | ) | ||||||||||
Unrealized foreign currency gain (loss) | (79,323 | ) | 4,355 | (133,046 | ) | 4,355 | ||||||||||
Comprehensive income (loss) | $ | 1,109,759 | $ | 456,426 | $ | 2,101,364 | $ | (1,234,857 | ) |
Three months ended | Six months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues: | ||||||||||||||||
Product sales | $ | 7,553,481 | $ | 9,340,523 | 15,561,419 | 18,688,691 | ||||||||||
Contract and other | 723,292 | 851,168 | 1,497,056 | 1,680,559 | ||||||||||||
Total revenues | 8,276,773 | 10,191,691 | 17,058,475 | 20,369,250 | ||||||||||||
Cost of revenues | 4,266,881 | 5,001,183 | 8,446,478 | 10,089,484 | ||||||||||||
Gross Profit | 4,009,892 | 5,190,508 | 8,611,997 | 10,279,766 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative | 2,732,340 | 2,475,378 | 5,553,865 | 5,226,386 | ||||||||||||
Research and development | 948,811 | 1,279,744 | 2,032,734 | 2,328,119 | ||||||||||||
Total operating expenses | 3,681,151 | 3,755,122 | 7,586,599 | 7,554,505 | ||||||||||||
Income from operations | 328,741 | 1,435,386 | 1,025,398 | 2,725,261 | ||||||||||||
Other income | 69,602 | 17,608 | 165,662 | 56,676 | ||||||||||||
Income before income taxes | 398,343 | 1,452,994 | 1,191,060 | 2,781,937 | ||||||||||||
Income tax expense | 96,768 | 274,144 | 269,158 | 557,147 | ||||||||||||
Net income | $ | 301,575 | $ | 1,178,850 | $ | 921,902 | $ | 2,224,790 | ||||||||
Net income per common share - basic and diluted | $ | 0.01 | $ | 0.04 | $ | 0.03 | $ | 0.07 | ||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 33,094,596 | 32,584,952 | 33,036,786 | 32,738,871 | ||||||||||||
Diluted | 33,732,619 | 33,077,255 | 33,708,832 | 33,272,164 |
See accompanying notes
Genasys Inc.
LRAD CorporationCONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income | $ | 301,575 | $ | 1,178,850 | $ | 921,902 | $ | 2,224,790 | ||||||||
Other comprehensive income | ||||||||||||||||
Unrealized gain (loss) on marketable securities | (7,692 | ) | 10,232 | (11,178 | ) | 9,620 | ||||||||||
Unrealized foreign currency gain (loss) | (61,660 | ) | (79,323 | ) | 27,140 | (133,046 | ) | |||||||||
Comprehensive income | $ | 232,223 | $ | 1,109,759 | $ | 937,864 | $ | 2,101,364 |
Genasys Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended | Six months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Operating Activities: | ||||||||||||||||
Net income (loss) | $ | 2,224,790 | $ | (1,222,344 | ) | |||||||||||
Net income | $ | 921,902 | $ | 2,224,790 | ||||||||||||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 417,637 | 193,809 | 415,031 | 417,637 | ||||||||||||
Warranty provision | 44,037 | 12,361 | (11,053 | ) | 44,037 | |||||||||||
Inventory obsolescence | 133,259 | 85,435 | 127,599 | 133,259 | ||||||||||||
Share-based compensation | 305,820 | 284,250 | 453,617 | 305,820 | ||||||||||||
Deferred income taxes | 557,147 | 2,867,339 | 269,158 | 557,147 | ||||||||||||
Amortization of operating lease right of use asset | 292,405 | - | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable, net | (3,981,947 | ) | 389,434 | (2,204,894 | ) | (3,981,947 | ) | |||||||||
Inventories, net | (1,704,919 | ) | (271,543 | ) | (1,214,265 | ) | (1,704,919 | ) | ||||||||
Prepaid expenses and other | 2,401,303 | 174,589 | 787,613 | 2,518,276 | ||||||||||||
Other assets | 116,973 | (60,614 | ) | |||||||||||||
Accounts payable | (1,847,512 | ) | 502,933 | 1,072,363 | (1,847,512 | ) | ||||||||||
Payroll and related | (553,919 | ) | (656,540 | ) | ||||||||||||
Warranty settlements | (18,078 | ) | (22,258 | ) | ||||||||||||
Accrued and other liabilities | 1,021,149 | 622,485 | (3,035,960 | ) | 449,152 | |||||||||||
Net cash (used in) provided by operating activities | (884,260 | ) | 2,899,336 | |||||||||||||
Net cash used in operating activities | (2,126,484 | ) | (884,260 | ) | ||||||||||||
Investing Activities: | ||||||||||||||||
Purchases of marketable securities | (2,318,646 | ) | (2,402,346 | ) | (2,013,441 | ) | (2,318,646 | ) | ||||||||
Proceeds from maturities of marketable securities | 2,316,764 | 2,401,856 | 1,971,146 | 2,316,764 | ||||||||||||
Capital expenditures | (299,965 | ) | (90,135 | ) | (102,126 | ) | (299,965 | ) | ||||||||
Purchase of Genasys, net of cash and restricted cash acquired | - | (2,246,545 | ) | |||||||||||||
Net cash used in investing activities | (301,847 | ) | (2,337,170 | ) | (144,421 | ) | (301,847 | ) | ||||||||
Financing Activities: | ||||||||||||||||
Proceeds from exercise of stock options | 45,172 | 185,718 | 258,047 | 45,172 | ||||||||||||
Repurchase of common stock | (2,171,022 | ) | - | (398,256 | ) | (2,171,022 | ) | |||||||||
Proceeds from the issuance of unsecured promissory notes | - | 63,144 | ||||||||||||||
Shares retained for payment of taxes in connection with settlement of restricted stock units | (41,410 | ) | - | |||||||||||||
Payments on promissory notes | (17,044 | ) | (414,477 | ) | (16,700 | ) | (17,044 | ) | ||||||||
Net cash used in financing activities | (2,142,894 | ) | (165,615 | ) | (198,319 | ) | (2,142,894 | ) | ||||||||
Effect of foreign exchange rate on cash | (23,938 | ) | 335 | 11,160 | (23,938 | ) | ||||||||||
Net decrease in cash, cash equivalents, and restricted cash | (3,352,939 | ) | 396,886 | (2,458,064 | ) | (3,352,939 | ) | |||||||||
Cash, cash equivalents and restricted cash, beginning of period | 11,806,074 | 12,803,887 | 19,516,918 | 11,806,074 | ||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 8,453,135 | $ | 13,200,773 | $ | 17,058,854 | $ | 8,453,135 | ||||||||
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets: | ||||||||||||||||
Reconciliation of cash, cash equivalents and restricted cash to the consolidated | ||||||||||||||||
balance sheets: | ||||||||||||||||
Cash and cash equivalents | $ | 7,723,503 | $ | 12,732,882 | $ | 16,398,928 | $ | 7,723,503 | ||||||||
Restricted cash, current portion | 390,008 | 363,745 | 264,633 | 390,008 | ||||||||||||
Long-term restricted cash | 339,624 | 104,146 | 395,293 | 339,624 | ||||||||||||
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows | $ | 8,453,135 | $ | 13,200,773 | $ | 17,058,854 | $ | 8,453,135 |
See accompanying notes
LRAD CorporationGenasys Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended March 31, | ||||||||
| 2019 | 2018 | ||||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid | $ | 2,860 | $ | 9,186 | ||||
Noncash investing and financing activities: | ||||||||
Change in unrealized loss on marketable securities | $ | 9,620 | $ | (16,868 | ) | |||
Business combinations accounted for as a purchase: | ||||||||
Fair value of assets acquired | $ | - | $ | 5,520,504 | ||||
Cash paid or payable | - | (3,011,439 | ) | |||||
Liabilities assumed | $ | - | $ | 2,509,065 |
Six months ended March 31, | ||||||||
2020 | 2019 | |||||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid | $ | - | $ | 2,860 | ||||
Noncash investing and financing activities: | ||||||||
Change in unrealized gain (loss) on marketable securities | $ | (11,178 | ) | $ | 9,620 | |||
Initial measurement of operating lease ROU assets | $ | 5,823,972 | $ | - | ||||
Initial measurement of operating lease liabilities | $ | 7,814,701 | $ | - |
See accompanying notes
LRAD Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. OPERATIONS
Genasys Inc. (formerly LRAD® Corporation,Corporation), a Delaware corporation (the “Company”), is engaged in the design, development and commercialization of directed and 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:
● | The transitional practical expedients, which must be elected as a package and applied consistently to all leases. In electing this practical expedient package, the Company is not required to: |
o | reassess whether an existing or expired contract is or contains a lease; |
o | reassess the lease classification for any expired or existing leases; and |
o | reassess initial direct lease costs for all leases that commenced before the adoption. |
● | Short-term lease practical expedient in which the Company can elect not to apply the recognition requirements of Topic 842 to short-term leases. |
As a result of 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.
4. | REVENUE RECOGNITION |
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:
1. | Identify the contract(s) with customers |
2. | Identify the performance obligations |
3. | Determine the transaction price |
4. | Allocate the transaction price to the performance obligations |
5. | Recognize revenue when the performance obligations have been satisfied |
Topic 606 requires an entityrevenue recognition to recognize the amount of revenue to which it expects to be entitled fordepict the transfer of promised goods or services to customers. ASU 2014-09 will replace most 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:
Prepaid maintenance | ||||
agreement | ||||
Balance at September 30, 2018 | $ | 93,750 | ||
New prepaid maintenance agreements | - | |||
Recognition of expense as a result of performing services | (93,750 | ) | ||
Balance at March 31, 2019 | $ | - |
Customer deposits | Deferred revenue | Total contract liabilities | ||||||||||
Balance at September 30, 2019 | $ | 5,063,091 | $ | 1,059,407 | $ | 6,122,498 | ||||||
New performance obligations | 2,302,269 | 285,555 | 2,587,824 | |||||||||
Recognition of revenue as a result of satisfying performance obligations | (4,099,364 | ) | (450,643 | ) | (4,550,007 | ) | ||||||
Effect of exchange rate on deferred revenue | - | 5,523 | 5,523 | |||||||||
Balance at March 31, 2020 | $ | 3,265,996 | $ | 899,842 | $ | 4,165,838 | ||||||
Less: non-current portion | - | (435,880 | ) | (435,880 | ) | |||||||
Current portion at March 31, 2020 | $ | 3,265,996 | $ | 463,962 | $ | 3,729,958 |
The Company’s contract liabilities are as follows:
Customer deposits | Deferred revenue | Total contract liabilities | ||||||||||
Balance at September 30, 2018 | $ | 199,596 | $ | 523,021 | $ | 736,054 | ||||||
New performance obligations | 951,719 | 601,313 | 1,553,032 | |||||||||
Recognition of revenue as a result of satisfying performance obligations | (418,798 | ) | (521,434 | ) | (940,232 | ) | ||||||
Balance at March 31, 2019 | $ | 732,517 | $ | 602,900 | $ | 1,348,854 | ||||||
Less: non-current portion | - | (146,043 | ) | (146,043 | ) | |||||||
Current portion at March 31, 2019 | $ | 732,517 | $ | 456,857 | $ | 1,202,811 |
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.
5. | FAIR VALUE MEASUREMENTS |
The Company’s financial instruments consist principally of cash equivalents, short and long-term marketable securities, accounts receivable and accounts payable. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:
Level 1: Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.
Level 3: Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
The fair value of the 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.
March 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized | Fair | Cash | Short-term | Long-term | March 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||
Cost Basis | Gain | Value | Equivalents | Securities | Securities | Cost Basis | Unrealized Gain | Fair Value | Cash Equivalents | Short-term Securities | Long-term Securities | |||||||||||||||||||||||||||||||||||||
Level 1: | ||||||||||||||||||||||||||||||||||||||||||||||||
Money Market Funds | $ | 480,856 | $ | - | $ | 480,856 | $ | 480,856 | $ | - | $ | - | $ | 296,372 | $ | - | $ | 296,372 | $ | 296,372 | $ | - | $ | - | ||||||||||||||||||||||||
Level 2: | ||||||||||||||||||||||||||||||||||||||||||||||||
Certificates of deposit | 499,000 | - | 499,000 | - | - | 499,000 | 1,943,752 | - | 1,943,752 | - | 499,000 | 1,444,752 | ||||||||||||||||||||||||||||||||||||
Municipal securities | 241,780 | 350 | 242,130 | - | 242,130 | - | 612,308 | 525 | 612,833 | - | 612,833 | - | ||||||||||||||||||||||||||||||||||||
Corporate bonds | 4,062,764 | 325 | 4,063,089 | - | 2,866,748 | 1,196,341 | 2,555,056 | (341 | ) | 2,554,715 | - | 2,353,001 | 201,714 | |||||||||||||||||||||||||||||||||||
Subtotal | 4,803,544 | 675 | 4,804,219 | - | 3,108,878 | 1,695,341 | 5,111,116 | 184 | 5,111,300 | - | 3,464,834 | 1,646,466 | ||||||||||||||||||||||||||||||||||||
Total | $ | 5,284,400 | $ | 675 | $ | 5,285,075 | $ | 480,856 | $ | 3,108,878 | $ | 1,695,341 | $ | 5,407,488 | $ | 184 | $ | 5,407,672 | $ | 296,372 | $ | 3,464,834 | $ | 1,646,466 |
September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized | Fair | Cash | Short-term | Long-term | September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||
Cost Basis | Losses | Value | Equivalents | Securities | Securities | Cost Basis | Unrealized Gain | Fair Value | Cash Equivalents | Short-term Securities | Long-term Securities | |||||||||||||||||||||||||||||||||||||
Level 1: | ||||||||||||||||||||||||||||||||||||||||||||||||
Money Market Funds | $ | 410,393 | $ | - | $ | 410,393 | $ | 410,393 | $ | - | $ | - | $ | 275,538 | $ | - | $ | 275,538 | $ | 275,538 | $ | - | $ | - | ||||||||||||||||||||||||
Level 2: | ||||||||||||||||||||||||||||||||||||||||||||||||
Certificates of deposit | 499,000 | - | 499,000 | - | - | 499,000 | 971,592 | - | 971,592 | - | 499,000 | 472,592 | ||||||||||||||||||||||||||||||||||||
Municipal securities | - | - | - | - | - | - | 240,463 | 205 | 240,668 | - | 80,336 | 160,332 | ||||||||||||||||||||||||||||||||||||
Corporate bonds | 4,302,661 | (8,945 | ) | 4,293,716 | - | 3,592,175 | 701,541 | 3,856,766 | 11,157 | 3,867,923 | - | 3,116,028 | 751,895 | |||||||||||||||||||||||||||||||||||
Subtotal | 4,801,661 | (8,945 | ) | 4,792,716 | - | 3,592,175 | 1,200,541 | 5,068,821 | 11,362 | 5,080,183 | - | 3,695,364 | 1,384,819 | |||||||||||||||||||||||||||||||||||
Total | $ | 5,212,054 | $ | (8,945 | ) | $ | 5,203,109 | $ | 410,393 | $ | 3,592,175 | $ | 1,200,541 | $ | 5,344,359 | $ | 11,362 | $ | 5,355,721 | $ | 275,538 | $ | 3,695,364 | $ | 1,384,819 |
6.6. INVENTORIES
Inventories consisted of the following:
March 31, | September 30, | March 31, | September 30, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Raw materials | $ | 6,079,243 | $ | 4,487,273 | $ | 5,591,252 | $ | 5,060,331 | ||||||||
Finished goods | 1,969,021 | 1,768,544 | 920,663 | 998,607 | ||||||||||||
Work in process | 789,889 | 875,417 | 1,068,097 | 306,809 | ||||||||||||
Inventories, gross | 8,838,153 | 7,131,234 | 7,580,012 | 6,365,747 | ||||||||||||
Reserve for obsolescence | (532,310 | ) | (397,051 | ) | (658,183 | ) | (530,584 | ) | ||||||||
Inventories, net | $ | 8,305,843 | $ | 6,734,183 | $ | 6,921,829 | $ | 5,835,163 |
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
March 31, | September 30, | March 31, | September 30, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Office furniture and equipment | $ | 1,483,577 | $ | 1,326,784 | $ | 1,554,306 | $ | 1,498,395 | ||||||||
Machinery and equipment | 1,224,183 | 1,095,099 | 1,237,617 | 1,223,726 | ||||||||||||
Leasehold improvements | 1,997,927 | - | 2,027,335 | 2,019,794 | ||||||||||||
Construction in progress | 10,957 | 2,001,539 | 7,565 | 7,565 | ||||||||||||
Property and equipment, gross | 4,716,644 | 4,423,422 | 4,826,823 | 4,749,480 | ||||||||||||
Accumulated depreciation | (2,232,535 | ) | (1,974,697 | ) | (2,721,190 | ) | (2,479,974 | ) | ||||||||
Property and equipment, net | $ | 2,484,109 | $ | 2,448,725 | $ | 2,105,633 | $ | 2,269,506 |
Depreciation expense was $132,062 and $139,737 for the three months ended March 31, 2020 and 2019, respectively. Depreciation expense was $266,037 and $264,197 for the six months ended March 31, 2020 and 2019, respectively.
Three months ended March 31, | Six months ended March 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Depreciation expense | $ | 139,737 | $ | 63,666 | $ | 264,197 | $ | 121,967 |
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:
March 31, | September 30, | March 31, | September 30, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Technology | $ | 626,648 | $ | 648,208 | $ | 614,519 | $ | 611,043 | ||||||||
Customer relationships | 599,403 | 620,026 | 587,801 | 584,477 | ||||||||||||
Trade name portfolio | 217,965 | 225,464 | 213,746 | 212,537 | ||||||||||||
Non-compete agreements | 236,128 | 244,252 | 231,558 | 230,248 | ||||||||||||
Patents | 72,126 | 72,126 | 72,126 | 72,126 | ||||||||||||
1,752,270 | 1,810,076 | 1,719,750 | 1,710,431 | |||||||||||||
Accumulated amortization | (396,561 | ) | (252,730 | ) | (685,589 | ) | (534,797 | ) | ||||||||
$ | 1,355,709 | $ | 1,557,346 | $ | 1,034,161 | $ | 1,175,634 |
Amortization expense was $74,431 and $76,633 for the three months ended March 31, 2020 and 2019, respectively. Amortization expense was $148,994 and $153,440 for the six months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020, future amortization expense is as follows:
Fiscal year ending September 30, | ||||
2020 (remaining six months) | $ | 148,666 | ||
2021 | 240,926 | |||
2022 | 218,285 | |||
2023 | 187,542 | |||
2024 | 174,661 | |||
Thereafter | 64,081 | |||
Total estimated amortization expense | $ | 1,034,161 |
Three months ended | Six months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Amortization expense | $ | 76,633 | $ | 70,038 | $ | 153,440 | $ | 71,842 |
Estimated Amortization Expense for the twelve months ended March 31, | ||||
2020 | $ | 301,741 | ||
2021 | 285,128 | |||
2022 | 222,575 | |||
2023 | 213,376 | |||
2024 | 178,288 | |||
Thereafter | 154,601 | |||
Total estimated amortization expense | $ | 1,355,709 |
9. 9. PREPAID EXPENSES AND OTHER
Prepaid expenses and other current assets consisted of the following:
March 31, | September 30, | March 31, | September 30, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Deposits for inventory | $ | 72,846 | $ | 1,366,069 | $ | 347,194 | $ | 1,064,640 | ||||||||
Leashold improvement receivable | 180,103 | 1,132,017 | ||||||||||||||
Prepaid insurance | 168,554 | 162,822 | 211,638 | 194,285 | ||||||||||||
Prepaid maintenance agreement | - | 93,750 | ||||||||||||||
Prepaid rent | - | 87,782 | ||||||||||||||
Dues and subscriptions | 109,991 | 92,097 | 65,365 | 88,031 | ||||||||||||
Trade shows and travel | 149,167 | 106,626 | ||||||||||||||
Other | 156,100 | 244,646 | 221,280 | 240,473 | ||||||||||||
$ | 687,594 | $ | 3,091,401 | $ | 994,644 | $ | 1,781,837 |
Deposits for inventory
Deposits for inventory consisted of cash payments to vendors for inventory to be delivered in the future.
Leasehold improvement receivable
Leasehold improvement receivable represents amounts owed to the Company by its landlord for costs incurred to renovate and prepare the Company’s new facility for use. The lease provided an allowance for tenant improvements of $1,588,214. (See Note 13, Commitments and Contingencies, for additional information about this lease). As of March 31, 2019, $180,103 has not been received by the Company.
Prepaid Insurance
Prepaid insurance consisted of premiums paid for health, commercial and corporate insurance. These premiums are amortized on a straight-line basis over the term of the agreements.
Prepaid maintenance agreementRent
At March 31, 2011, prepaid expenses included $1,500,000 paid to a third party service providerPrepaid rent consists of payments made in connection withadvance for the Company’s obligations under a sales contract to a foreign military service to provide repairfacility lease.
Dues and maintenance services over an eight- year periodsubscriptions
Dues and subscriptions consist of payments made in advance for products sold thereunder. The total prepaid expense wassoftware subscriptions and trade and professional organizations. These payments are amortized on a straight-line basis at an annual rate of $187,500 over the eight-year contract period to correspond with the revenues for these services and was recognized as a component of cost of sales. The amortizationterm of the prepaid maintenance agreement was completed during the period ended March 31, 2019. Asagreements.
Trade shows and travel
Trade shows and travel consists of September 30, 2018, $93,750 of the total prepayment was classified as a current asset.payments made in advance for trade show events.
10.10. ACCRUED LIABILITIES AND OTHER LIABILITIES - NONCURRENT
Accrued liabilities consisted of the following:
March 31, | September 30, | March 31, | September 30, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Payroll and related | $ | 1,484,278 | $ | 2,041,735 | $ | 1,149,679 | $ | 2,050,324 | ||||||||
Deferred revenue | 456,857 | 460,086 | 463,962 | 508,522 | ||||||||||||
Customer deposits | 732,517 | 199,596 | 3,265,996 | 5,063,091 | ||||||||||||
Accrued contract costs | 439,068 | 197,034 | 441,923 | 252,833 | ||||||||||||
Severance | - | 152,730 | ||||||||||||||
Warranty reserve | 125,175 | 99,216 | 120,741 | 150,229 | ||||||||||||
Deferred rent | 96,264 | 49,467 | - | 109,342 | ||||||||||||
Total | $ | 3,334,159 | $ | 3,199,864 | $ | 5,442,301 | $ | 8,134,341 |
Other liabilities-noncurrent consisted of the following:
March 31, | September 30, | March 31, | September 30, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Deferred rent | $ | 1,937,175 | $ | 1,663,058 | $ | - | $ | 1,881,387 | ||||||||
Deferred extended warranty revenue | 146,043 | 76,372 | 435,880 | 550,885 | ||||||||||||
Total | $ | 2,083,218 | $ | 1,739,430 | $ | 435,880 | $ | 2,432,272 |
Payroll and related
Payroll and related consistsconsisted primarily of accrued vacation, bonus, sales commissions, and benefits.
Deferred Revenue
Deferred revenue consists primarilyas of March 31, 2020 included prepayments from customers for services, including extended warranty, scheduled to be performed in advance of product shipment.the twelve months ended March 31, 2021.
Accrued contract costs
Accrued contract costs consist of accrued expenses for contracting a third partythird-party service provider to fulfill repair and maintenance obligations required under a contract through March 28, 2019 with a foreign military for units sold in the year ended September 30, 2011. Payments to the service provider will be made annually upon completion of each year of service. A new contract was signed with the customer in May 2019 to continue repair and maintenance services through May 2024. These services are being recorded in cost of revenues to correspond with the revenues for these services.
Severance
Severance liability at September 30, 2018, consistedof accrued payments to former employees of Genasys. All payments related to this liability were paid during the period ended March 31, 2019.
Warranty Reserve
Changes in the warranty reserve and extended warranty were as follows:
March 31, | September 30, | March 31, | September 30, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Beginning balance | $ | 99,216 | $ | 104,518 | $ | 150,229 | $ | 99,216 | ||||||||
Warranty provision | 44,037 | 6,093 | (11,053 | ) | 85,078 | |||||||||||
Warranty settlements | (18,078 | ) | (11,395 | ) | (18,435 | ) | (34,065 | ) | ||||||||
Ending balance | $ | 125,175 | $ | 99,216 | $ | 120,741 | $ | 150,229 |
The Company establishes a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs and anticipated rates of warranty claims. The Company evaluates the adequacy of the provision for warranty costs each reporting period and adjusts the accrued warranty liability to an amount equal to estimated warranty expense for products currently under warranty.
Deferred Rent
Deferred rent liability as of March 31, 2019 and September 30, 20182019 consists of the difference between the average rental amount charged to expense and amounts payable under the lease for the Company’s office space.operating facility. Deferred rent also includes cash and leasehold incentives from the landlord in the aggregate amount of $2,033,439 at March 31,$1,990,729 as of September 30, 2019 to compensate for costs incurred by the Company to make the office space ready for operation. Leaseholdoperation (leasehold incentives). Prior to the adoption of Topic 842, leasehold incentives received from a landlord are deferred and recognized on a straight-line basis as a reduction to rent expense over the lease term. Upon adoption of Topic 842, the leasehold incentives were a reduction to the measurement of the operating lease ROU asset. Refer to Note 3, Recent Accounting Pronouncements and Note 12, Leases for further detail on the adoption of Topic 842.
Deferred Extended Warranty Revenue
Deferred extended warranty revenue consists of warranties purchased in excess of the Company’s standard warranty. Extended warranties typically range from one to two years.
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:
Agency | Due Date | Principal | Due Date | Principal | ||||||
Ministry of Economy and Competitiveness | February 2, 2022 | 50,616 | February 2, 2022 | 33,091 | ||||||
Ministry of Economy and Competitiveness | February 2, 2024 | 269,856 | (a) | February 2, 2024 | 264,633 | (a) | ||||
$ | 320,472 | $ | 297,724 |
(a) | This loan is secured by |
The following is a schedule of future annual payments as of March 31, 2019:2020:
2019 | $ | 286,728 | ||||||
2020 | 16,872 | |||||||
2021 | 16,872 | $ | 281,178 | |||||
2022 | - | 16,546 | ||||||
Total | $ | 320,472 | $ | 297,724 |
The current portion of debt is $286,728$281,178 and the noncurrent portion of debt is $33,744.$16,546.
12. LEASES
The Company determines if an arrangement is a lease at inception. The guidance in Topic 842 defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Operating lease ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. The Company’s leases do not provide an implicit rate. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Additionally, the portfolio approach is used in determining the discount rate used to present value lease payments. The ROU asset includes any lease payments made and excludes lease incentives and initial direct costs incurred.
The Company entered into operating leases for office and production facilities and equipment under agreements that expire at various dates through 2028. The Company elected the package of practical expedients permitted under the new lease standard. In electing the practical expedient package, the Company is not required to reassess whether an existing or expired contract is or contains a lease, reassess the lease classification for expired or existing leases nor reassess the initial direct costs for leases that commenced before the adoption of Topic 842. The Company also elected the short-term lease exemption such that the new lease standard was applied to leases greater than one year in duration. Leases with an initial term of twelve months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
For leases beginning on or after October 1, 2019, lease components are accounted for separately from non-lease components for all asset classes. Certain of the Company’s leases contain renewal provisions and escalating rental clauses and generally require the Company to pay utilities, insurance, taxes and other operating expenses. The renewal provisions of existing lease agreements were not included in the determination of the operating lease liabilities and the ROU assets. Variable payments such as excess usage fees on existing equipment leases were not included in the determination of the lease liabilities and the ROU assets as the achievement of the specified target that triggers the variable lease payment is not considered probable. In addition, the Company’s facility lease in Spain has an escalating lease clause based on a consumer price index which is considered a variable lease payment and is not included in the determination of the lease liability and ROU asset. A 10% increase in the index would increase the total lease liability approximately $19,000. The Company’s leases do not contain any residual value guarantees or material restrictive covenants.
Upon adoption of Topic 842 as of October 1, 2019, the Company recognized on its consolidated balance sheet an initial measurement of approximately $7,814,701 of operating lease liabilities, and approximately $5,823,972 of corresponding operating ROU assets, net of tenant improvement allowances. There was no cumulative effect adjustment to retained earnings as a result of the transition to Topic 842. The adoption of Topic 842 did not have a material impact on the Company’s consolidated statement of operations.
The tables below show the initial measurement of the operating lease ROU assets and liabilities as of October 1, 2019 and the balances as of March 31, 2020, including the changes during the periods.
Operating right-of-use asset | ||||
Initial measurement at October 1, 2019 | $ | 7,814,701 | ||
Less lease incentives and tenant improvement allowance | (1,990,729 | ) | ||
Net operating lease right of use assets at October 1, 2019 | 5,823,972 | |||
Less amortization of operating lease right-of-use assets | (292,405 | ) | ||
Effect of exchange rate on operating lease right of use assets | 2,587 | |||
Operating lease right of use asset at March 31, 2020 | $ | 5,534,154 |
Operating lease liabilities | ||||
Initial measurement at October 1, 2019 | $ | 7,814,701 | ||
Less lease principal payments on operating lease liabilities | (345,959 | ) | ||
Effect of exchange rate on operating lease liabilities | 2,587 | |||
Operating lease liabilities at March 31, 2020 | 7,471,329 | |||
Less non-current portion | (6,743,195 | ) | ||
Current portion as March 31, 2020 | $ | 728,134 |
As of March 31, 2020, the Company’s operating leases have a weighted-average remaining lease term of 8.2 years and a weighted-average discount rate of 4.13%. The maturities of the operating lease liabilities are as follows:
Fiscal year ending September 30, | ||||
2020 (remaining six months) | $ | 503,493 | ||
2021 | 1,031,627 | |||
2022 | 1,058,622 | |||
2023 | 1,011,815 | |||
2024 | 1,008,177 | |||
Thereafter | 4,247,218 | |||
Total undiscounted operating lease payments | 8,860,952 | |||
Less imputed interest | (1,389,623 | ) | ||
Present value of operating lease liabilities | 7,471,329 | |||
Less lease liability, noncurrent | (6,743,195 | ) | ||
Lease liability, current portion | $ | 728,134 |
For the three months ended March 31, 2020 and 2019, total lease expense under operating leases was approximately $223,993 and $219,781 respectively. For the six months ended March 31, 2020 and 2019, total lease expense under operating leases was approximately $448,025 and $439,093, respectively. The Company did not have any short-term lease expense during the three and six months ended March 31, 2020.
13. INCOME TAXES
For the six months ended March 31, 2020, the Company recorded income tax expense of $269,158 reflecting an effective tax rate of 21.6%. For the six months ended March 31, 2019, the Company recorded an income tax expense of $557,147 reflecting an effective tax rate of 21.1%. For the six months ended March 31, 2018, the Company recorded an income tax expense of $393,339 and an additional discrete tax expense of $2,474,000 due to the remeasurement of its deferred tax assets as a result of tax reform. The Company continues to maintain a partial valuation allowance against its deferred tax assets as the Company believes that the negative evidence that it will be able to recover these net deferred tax assets outweighs the positive evidence.
ASCAccounting Standards Codification Topic 740, Accounting for Uncertainty in Income Taxes, requires the Company to recognize in its consolidated financial statements uncertainties in tax positions taken that may not be sustained upon examination by the taxing authorities. If interest or penalties are assessed, the Company would recognize these charges as income tax expense. The Company has not recorded any income tax expense or benefit for uncertain tax positions.
134. COMMITMENTS AND CONTINGENCIES
Facility Lease
On January 3, 2018, the Company entered into a lease for 54,766 square feet to replace the expired lease of the prior San Diego facility as the Company’s executive offices, research and development, assembly and operational facilities. The lease commenced July 1, 2018 and will expire August 30, 2028. The aggregate monthly payments, with abatements, average $36,146 per month for the first fourteen months, and are $74,460, $76,694, $78,994, $81,364, $83,805, $86,319, $88,909, $91,576 and $94,324 per month for the second through tenth years of the lease, plus certain other costs and charges as specified in the lease agreement, including the Company’s proportionate share of the building operating expenses and real estate taxes. The lease provided an allowance for tenant improvements of $1,588,214, which was classified as deferred rent on the Company’s consolidated balance sheet and will be amortized as an offset to rent expense with a corresponding charge to depreciation expense on a straight-line basis over the term of the lease.
Litigation
The Company may at times be involved in litigation in the ordinary course of business. The Company will, from time to time, when appropriate in management’s estimation, record adequate reserves in the Company’s consolidated financial statements for pending litigation. Currently, there are no pending material legal proceedings to which the Company is a party or to which any of its property is subject.
Bonus Plan
The Company has a bonus plan for employees, in accordance with their terms of employment, whereby they can earn a percentage of their salary at three different levels, based on meeting targeted objectives for orders received, revenue, operating income and operating cash flow. In the six months ended March 31, 2019,2020, the Company exceeded the minimum targeted levelrecorded $399,646 of orders received and revenues and has recorded $785,102 ofbonus expense. In the six months ended March 31, 2018,2019, the company exceededrecorded $785,102 of bonus expense. Bonus expense is recorded in accrued liabilities on the minimum targeted levelCompany’s condensed consolidated balance sheet as of orders receivedMarch 31, 2020 and revenues and recorded $738,543 of expense.September 30, 2019.
145. SHARE-BASED COMPENSATION
Equity Incentive Stock Option PlansPlans
At March 31, 2019,2020, the Company had two equity incentive plans. The 2005 Equity Incentive Plan (“2005 Equity Plan”) was terminated with respect to new grants in March 2015 but remains in effect for grants issued prior to that time. The Amended and Restated 2015 Equity Incentive Plan (“2015 Equity Plan”) was approved by the Company’s Board of Directors on December 6, 2016 and by the Company’s stockholders on March 14, 2017. The amendment to the Equity Plan was approved in 2015 and authorizes for issuance stock options, restricted stock, stock appreciation rights, restricted stock units and performance awards, an aggregate of 5,000,000 new shares of common stock to employees, directors, advisors or consultants. At March 31, 2019,2020, there were options and restricted stock units outstanding covering 694,883303,014 and 2,214,8743,103,558 shares of common stock under the 2005 Equity Plan and 2015 Equity Plan, respectively and 2,435,559602,917 shares of common stock available for grant for a total of 5,345,3164,009,489 currently available under the two equity plans.
Stock Option Information
A summary of the activity in options to purchase the capital stock of the Company as of March 31, 2019 is presented below:
Number of Shares | Weighted Average Exercise Price | |||||||
Outstanding September 30, 2018 | 3,394,858 | $ | 2.18 | |||||
Granted | - | $ | - | |||||
Forfeited/expired | (768,334 | ) | $ | 2.99 | ||||
Exercised | (28,282 | ) | $ | 1.60 | ||||
Outstanding March 31, 2019 | 2,598,242 | $ | 1.94 | |||||
Exerciseable March 31, 2019 | 1,702,145 | $ | 1.93 |
Options outstanding are exercisable at prices ranging from $0.93 to $3.17 and expire over the period from 2020 to 2024 with an average life of 3.71 years. The aggregate intrinsic value of options outstanding and exercisable at March 31, 2019 was $2,369,242 and $1,576,690, 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 $2.85 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, 2019 was $34,903 and proceeds from these exercises were $45,172.
The following table summarized information about stock options outstanding and exercisable at March 31, 2019:
Weighted Average | Weighted Average | Weighted Average | ||||||||||||||||||||
Range of | Number | Remaining | Exercise | Number | Exercise | |||||||||||||||||
Exercise Prices | Outstanding | Contractual Life | Price | Exercisable | Price | |||||||||||||||||
$0.93 | - | $1.69 | 577,766 | 4.20 | $ | 1.57 | 560,545 | $ | 1.57 | |||||||||||||
$1.71 | - | $1.86 | 525,226 | 3.29 | $ | 1.80 | 461,257 | $ | 1.81 | |||||||||||||
$1.99 | - | $1.99 | 1,125,000 | 4.34 | $ | 1.99 | 312,500 | $ | 1.99 | |||||||||||||
$2.02 | - | $3.13 | 360,250 | 2.59 | $ | 2.55 | 357,843 | $ | 2.55 | |||||||||||||
$3.17 | - | $3.17 | 10,000 | 2.64 | $ | 3.17 | 10,000 | $ | 3.17 | |||||||||||||
2,598,242 | 1,702,145 |
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 determined that as of March 31, 2019, it is probable that some but not all of the performance conditions will be achieved. The Company will continue to review these targets each quarter and will adjust the expected outcome as needed, recognizing compensation expense cumulatively in such period for the difference in expense.
Restricted Stock Units
On March 14, 2017, the Board of Directors approved a grant of 25,000 RSUs to each of the Company’s non-employee directors that will vest on the first anniversary of the grant date. These were also issued at a market value of $197,500, which was expensed on a straight line basis through the March 14, 2018 vest date.
On March 20, 2018, the Board of Directors approved an additional grant of 25,000 RSUs these were issued to each of the Company’s non-employee directors that will vest on the first anniversary of the grant date. These were issued at a market value of $278,750, which were expensed on a straight line basis through the March 20, 2019 vest date. Also during the quarter, 93,330 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 $210,176, which will be expensed on a straight line basis over the three-year life of the grants.
On February 7, 2019, the Board of Directors approved non-employee director compensation to include an annual grant of 30,000 RSU’s to each of the Company’s non-employee directors that will vest on the first anniversary of the grant date. These were issued at a market value of $412,500, which have been and will be expensed on a straight line basis through the March 12, 2020 vest date.
A summary of the restricted stock units of the Company as of March 31, 2019 is presented below:
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Share-Based Compensation
The Company’s employee stock options have various restrictions that reduce option value, including vesting provisions and restrictions on transfer and hedging, among others, and are often exercised prior to their contractual maturity.
There were no1,133,727 stock options granted during the six months ended March 31, 2020. There were no stock options granted during fiscal 2019. The weighted average estimated fair value of employee stock options granted during the six months ended March 31, 20182020 was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions (annualized percentages):
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Volatility | % | |||
Risk | % | |||
Forfeiture rate | % | |||
Dividend | % | |||
Expected life in years |
Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected life of the options. The risk-free interest rate is based on rates published by the Federal Reserve Board. The contractual term of the options was seven years. The expected life is based on observed and expected time to post-vesting exercise. The expected forfeiture rate is based on past experience and employee retention data. Forfeitures are estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from those estimates. Such revision adjustments to expense will be recorded as a cumulative adjustment in the period in which the estimate is changed. The Company did not declarepay a dividend for the six-month periods ended March 31,in fiscal 2019 or in fiscal 2018.
As of March 31, 2019,2020, there was approximately $736,226$420,168 of total unrecognized compensation costs related to outstanding employee stock options and restricted stock units.options. This amount is expected to be recognized over a weighted average period of 1.632.28 years. To the extent the forfeiture rate is different from what the Company anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.
Performance-Based Stock Options
On August 1, 2016, the Company awarded a performance-based stock option (PVO) to purchase 750,000 shares of the Company’s common stock to a key executive, with a contractual term of seven years. At the grant date, there were 375,000 performance-based stock options assigned to performance criteria within each of fiscal 2019 and 2020. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2019 and 2020 including a minimum free cash flow margin and net revenue targets. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets. As of September 30, 2019, 187,500 of the options related to the 2019 performance criteria vested. The Company recorded $151,181 in stock based compensation expense for these options. This agreement was modified in October 2019, and 93,750 of the unvested options initially allocated to the performance criteria for 2019 were assigned to fiscal 2020.
On October 4, 2019, the Company awarded a performance-based stock option (PVO) to purchase 800,000 shares of the Company’s common stock to a key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2022 and 2023 including a minimum free cash flow margin and net revenue targets. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets.
The Company determined that as of March 31, 2020, it is probable that certain performance conditions related to the 2020 performance criteria will be achieved. During the three and six months ended March 31, 2020, the Company recorded $95,750 in stock based compensation expense related to performance-based stock options. The Company will continue to review these targets each quarter and will adjust the expected outcome as needed, recognizing compensation expense cumulatively in such period for the difference in expense.
Restricted Stock Units
During fiscal 2018, the Board of Directors granted 93,330 restricted stock units (“RSUs”) to employees that will vest equally over three years on each of the first three anniversary dates of the grant. These were issued at a market value of $210,176, which will be expensed on a straight line basis over the three-year life of the grants.
On February 7, 2019, the Board of Directors approved non-employee director compensation to include an annual grant of 30,000 RSUs to each of the Company’s five non-employee directors that will vest on the first anniversary of the grant date. These were issued at a market value of $412,500, which have been and were expensed on a straight-line basis through the March 12, 2020 vest date. Also, during fiscal 2019, 99,300 RSUs were granted to employees that will vest equally over three years on each of the first three anniversary dates of the grant. These were issued at a market value of $248,250, which will be expensed on a straight line basis over the three year life of the grants.
On March 10, 2020, each member of the Board of Directors received a grant of 30,000 RSUs that will vest on the first anniversary of the grant date. These were issued at a market value of $424,500, which have and will be expensed on a straight-line basis through the March 10, 2021 vest date. Also, during the quarter, 81,270 RSUs were granted to employees that will vest over three years on the anniversary date of the grant. These were issued at a market value of $257,626, which have and will be expensed on a straight-line basis over the three-year life of the grants.
During the six months ended March 31, 2020, the Company retained 13,063 shares of common stock to satisfy tax withholding obligations upon the vesting of RSUs issued to employees. These shares were not acquired pursuant to any repurchase plan or program. During the six months ended March 31, 2019, there were no shares retained to satisfy withholding obligations in connection with the vesting of RSUs issued to employees.
Compensation expense for RSUs was $167,724 for the three months ended March 31, 2020. Compensation expense for RSUs was $294,090 for the six months ended March 31, 2020. Compensation expense for RSUs was $140,370 for the three months ended March 31, 2019 and $219,482 for the six months ended March 31, 2019. As of March 31, 2020, there was approximately $788,161 of total unrecognized compensation costs related to outstanding RSUs. This amount is expected to be recognized over a weighted average period of 1.56 years.
A summary of the restricted stock units of the Company as of March 31, 2020 is presented below:
Number of Shares | Weighted Average Grant Date Fair Value | |||||||
Outstanding September 30, 2019 | 274,849 | $ | 2.59 | |||||
Granted | 231,270 | $ | 2.95 | |||||
Released | (198,106 | ) | $ | 2.66 | ||||
Forfeited/cancelled | (4,999 | ) | $ | 2.58 | ||||
Outstanding March 31, 2020 | 303,014 | $ | 2.82 |
Stock Option Summary Information
A summary of the activity in options to purchase the capital stock of the Company as of March 31, 2020 is presented below:
Number of Shares | Weighted Average Exercise Price | |||||||
Outstanding September 30, 2019 | 2,219,268 | $ | 1.94 | |||||
Granted | 1,133,727 | $ | 3.39 | |||||
Forfeited/expired | (109,233 | ) | $ | 2.11 | ||||
Exercised | (140,204 | ) | $ | 1.84 | ||||
Outstanding March 31, 2020 | 3,103,558 | $ | 2.48 | |||||
Exerciseable March 31, 2020 | 1,495,857 | $ | 1.98 |
Options outstanding are exercisable at prices ranging from $1.31 to $3.40 and expire over the period from 2020 to 2026 with an average life of 4.4 years. The aggregate intrinsic value of options outstanding and exercisable at March 31, 2020 was $2,603,494 and $1,931,620, respectively. The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last day of trading for the quarter, which was $3.27 per share, and the exercise price multiplied by the number of applicable options. The total intrinsic value of stock options exercised during the six months ended March 31, 2020 was $241,715 and proceeds from these exercises were $258,047. The total intrinsic value of stock options exercised during the six months ended March 31, 2019 was $34,903 and proceeds from these exercises were $45,172.
The following table summarized information about stock options outstanding at March 31, 2020:
Range of Exercise Prices |
Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price |
Number Exercisable | Weighted Average Exercise Price | |||||||||||||||||
$1.31 | - | $1.86 | 673,862 | 2.80 | $ | 1.69 | 628,455 | $ | 1.68 | |||||||||||||
$1.99 | - | $1.99 | 1,031,250 | 3.89 | $ | 1.99 | 562,500 | $ | 1.99 | |||||||||||||
$2.02 | - | $3.17 | 264,719 | 1.54 | $ | 2.46 | 263,187 | $ | 2.46 | |||||||||||||
$3.39 | - | $3.40 | 1,133,727 | 6.59 | $ | 3.39 | 41,715 | $ | 3.40 | |||||||||||||
3,103,558 | 4.44 | $ | 2.48 | 1,495,857 | $ | 1.98 |
The Company recorded $127,566 and $31,605 of stock option compensation expense for employees, directors and consultants for the three months ended March 31, 2020, and 2019, respectively. The Company recorded $159,527 and $86,338 of stock option compensation expense for employees, directors and consultants for the six months ended March 31, 2020, and 2019, respectively.
Share-Based Compensation
The Company recorded share-based compensation expense and classified it in the condensed consolidated statements of operations as follows:
Three months ended | Six months ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Cost of revenues | $ | 4,201 | $ | 5,047 | $ | 8,499 | $ | 11,256 | ||||||||
Selling, general and administrative | 154,250 | 120,113 | 266,101 | 229,455 | ||||||||||||
Research and development | 13,524 | 20,609 | 31,220 | 43,539 | ||||||||||||
$ | 171,975 | $ | 145,769 | $ | 305,820 | $ | 284,250 |
Three months ended | Six months ended | |||||||||||||||
March 31 | March 31 | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Cost of revenues | $ | 6,909 | $ | 4,201 | $ | 10,551 | $ | 8,499 | ||||||||
Selling, general and administrative | 283,314 | 163,932 | 427,241 | 284,973 | ||||||||||||
Research and development | 5,067 | 3,842 | 15,825 | 12,348 | ||||||||||||
$ | 295,290 | $ | 171,975 | $ | 453,617 | $ | 305,820 |
156. STOCKHOLDERS’ EQUITY
Summary
The following table summarizestables summarize changes in the components of stockholders’ equity during the three and six months ended March 31, 2020 and the three and six months ended March 31, 2019:
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
Balance at September 30, 2019 | 32,949,987 | $ | 330 | $ | 89,571,641 | $ | (53,731,903 | ) | $ | (458,719 | ) | $ | 35,381,349 | |||||||||||
Share-based compensation expense | - | - | 158,327 | - | - | 158,327 | ||||||||||||||||||
Issuance of common stock upon exercise of stock options, net | 83,343 | 1 | 144,213 | - | - | 144,214 | ||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units | - | - | - | - | - | - | ||||||||||||||||||
Other comprehensive income | - | - | - | - | 85,314 | 85,314 | ||||||||||||||||||
Net income | - | - | - | 620,327 | - | 620,327 | ||||||||||||||||||
Balance at December 31, 2019 | 33,033,330 | $ | 331 | $ | 89,874,181 | $ | (53,111,576 | ) | $ | (373,405 | ) | $ | 36,389,531 | |||||||||||
Share-based compensation expense | - | - | 295,290 | - | - | 295,290 | ||||||||||||||||||
Issuance of common stock upon exercise of stock options, net | 56,861 | - | 113,833 | - | - | 113,833 | ||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units | 198,106 | 2 | (2 | ) | - | - | - | |||||||||||||||||
Shares retained for payment of taxes in connection with net share settlement of restricted stock units | (13,063 | ) | - | (41,410 | ) | - | - | (41,410 | ) | |||||||||||||||
Stock buyback | (156,505 | ) | (2 | ) | (398,254 | ) | (398,256 | ) | ||||||||||||||||
Other comprehensive loss | - | - | - | - | (69,352 | ) | (69,352 | ) | ||||||||||||||||
Net income | - | - | - | 301,575 | - | 301,575 | ||||||||||||||||||
Balance at March 31, 2020 | 33,118,729 | $ | 331 | $ | 89,843,638 | $ | (52,810,001 | ) | $ | (442,757 | ) | $ | 36,591,211 |
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
Balance at September 30, 2018 | 33,176,146 | $ | 332 | $ | 90,251,145 | $ | (56,516,895 | ) | $ | (245,375 | ) | $ | 33,489,207 | |||||||||||
Share-based compensation expense | - | - | 133,845 | - | - | 133,845 | ||||||||||||||||||
Issuance of common stock upon exercise of stock options, net | 1,600 | - | 2,528 | - | - | 2,528 | ||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units | - | - | - | - | - | - | ||||||||||||||||||
Stock buyback | (588,425 | ) | (6 | ) | (1,621,016 | ) | - | - | (1,621,022 | ) | ||||||||||||||
Other comprehensive loss | - | - | - | - | (54,335 | ) | (54,335 | ) | ||||||||||||||||
Net income | - | - | - | 1,045,940 | - | 1,045,940 | ||||||||||||||||||
Balance at December 31, 2018 | 32,589,321 | $ | 326 | $ | 88,766,502 | $ | (55,470,955 | ) | $ | (299,710 | ) | $ | 32,996,163 | |||||||||||
Share-based compensation expense | - | - | 171,977 | - | - | 171,977 | ||||||||||||||||||
Issuance of common stock upon exercise of stock options, net | 26,682 | - | 42,644 | - | - | 42,644 | ||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units | 156,115 | 2 | (2 | ) | - | - | - | |||||||||||||||||
Stock buyback | (200,000 | ) | (2 | ) | (549,998 | ) | - | (550,000 | ) | |||||||||||||||
Other comprehensive loss | - | - | - | - | (69,091 | ) | (69,091 | ) | ||||||||||||||||
Net income | - | - | - | 1,178,850 | - | 1,178,850 | ||||||||||||||||||
Balance at March 31, 2019 | 32,572,118 | $ | 326 | $ | 88,431,123 | $ | (54,292,105 | ) | $ | (368,801 | ) | $ | 33,770,543 |
Common Stock Activity
During the six months ended March 31, 2020, the Company issued 140,204 shares of common stock and obtained gross proceeds of $258,047 in connection with the exercise of stock options. During the six months ended March 31, 2019, the Company issued 28,282 shares of common stock and obtained gross proceeds of $45,172 in connection with the exercise of stock options. During the six months ended March 31, 2018:2020, the Company issued 185,043 shares of commons stock in connection with the vesting of RSUs. During the six months ended March 31, 2019, the Company issued 156,115 shares of commons stock in connection with the vesting of RSUs.
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
Balance at September 30, 2018 | 33,176,146 | $ | 332 | $ | 90,251,145 | $ | (56,516,895 | ) | $ | (245,375 | ) | $ | 33,489,207 | |||||||||||
Share-based compensation expense | - | - | 133,845 | - | 133,845 | |||||||||||||||||||
Issuance of common stock upon exercise of stock options, net | 1,600 | - | 2,528 | - | - | 2,528 | ||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units | - | - | - | - | - | - | ||||||||||||||||||
Stock buyback | (588,425 | ) | (6 | ) | (1,621,016 | ) | - | - | (1,621,022 | ) | ||||||||||||||
Other comprehensive loss | - | - | - | - | (54,335 | ) | (54,335 | ) | ||||||||||||||||
Net income | - | - | - | 1,045,940 | - | 1,045,940 | ||||||||||||||||||
Balance at December 31, 2018 | 32,589,321 | $ | 326 | $ | 88,766,502 | $ | (55,470,955 | ) | $ | (299,710 | ) | $ | 32,996,163 | |||||||||||
Share-based compensation expense | - | - | 171,975 | - | - | 171,975 | ||||||||||||||||||
Issuance of common stock upon exercise of stock options, net | 26,682 | - | 42,644 | - | - | 42,644 | ||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units | 156,115 | 2 | - | - | - | 2 | ||||||||||||||||||
Stock buyback | (200,000 | ) | (2 | ) | (549,998 | ) | (550,000 | ) | ||||||||||||||||
Other comprehensive loss | - | - | - | - | (69,091 | ) | (69,091 | ) | ||||||||||||||||
Net income | - | - | - | 1,178,850 | - | 1,178,850 | ||||||||||||||||||
Balance at March 31, 2019 | 32,572,118 | $ | 326 | $ | 88,431,123 | $ | (54,292,105 | ) | $ | (368,801 | ) | $ | 33,770,543 |
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
Balance at 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 | ||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units | - | - | - | - | - | - | ||||||||||||||||||
Stock buyback | - | - | - | - | - | - | ||||||||||||||||||
Other comprehensive loss | - | - | - | - | (8,031 | ) | (8,031 | ) | ||||||||||||||||
Net income | - | - | - | (1,683,252 | ) | - | (1,683,252 | ) | ||||||||||||||||
Balance at December 31, 2017 | 32,249,288 | $ | 322 | $ | 88,254,818 | $ | (54,455,105 | ) | $ | (9,300 | ) | $ | 33,790,735 | |||||||||||
Share-based compensation expense | - | - | 145,789 | - | - | 145,789 | ||||||||||||||||||
Issuance of common stock upon exercise of stock options, net | 20,000 | - | 26,200 | - | - | 26,200 | ||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units | 125,000 | - | - | - | - | - | ||||||||||||||||||
Stock buyback | - | - | - | - | ||||||||||||||||||||
Other comprehensive loss | - | - | - | - | (4,482 | ) | (4,482 | ) | ||||||||||||||||
Net income | - | - | - | 460,908 | - | 460,908 | ||||||||||||||||||
Balance at March 31, 2018 | 32,394,288 | $ | 322 | $ | 88,426,807 | $ | (53,994,197 | ) | $ | (13,782 | ) | $ | 34,419,150 |
Share Buyback Program
The Board of Directors approved a share buyback program in 2015 under which the Company was authorized to repurchase up to $4 million of its outstanding common shares. In December 2017, the Board of Directors extended the program through December 31, 2018.
In December 2018, the Board of Directors approved a new share buyback program beginning January 1, 2019 and expiring on December 31, 2020, under which the Company iswas authorized to repurchase up to $5 million of its outstanding common shares exclusive of any fees, commissions or other expenses related to such repurchases. At March 31, 2019, $4.5 million was available for share repurchase under this program. The previous program expired on December 31, 2018.shares.
There were 788,425 shares repurchased for $2,171,022 duringDuring the six months ended March 31, 2019. There were no2020, the Company repurchased 156,505 shares repurchased duringfor $398,256. During the six-month periodsix months ended March 31, 2018. At March 31, 2019, all788,425 shares were repurchased for $2,171,022. All repurchased shares were retired into treasury.retired.
Dividends
There were no dividends declared in the six months ended March 31, 20192020 and 2018.2019.
167. NET INCOME (LOSS)PER SHARE
Basic earnings per share are computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period increased to include the number of dilutive potential common shares outstanding during the period. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method, which assumes that the proceeds from the exercise of the outstanding options are used to repurchase common stock at market value. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities. If the Company has losses for the period, the inclusion of potential common stock instruments outstanding would be anti-dilutive. In addition, under the treasury stock method, the inclusion of stock options with an exercise price greater than the per-share market value would be antidilutive. Potential common shares that would be antidilutive are excluded from the calculation of diluted income per share
The following table sets forth the computation of basic and diluted net income (loss) per share:
Three months ended | Six months ended | |||||||||||||||
3/31/2019 | 3/31/2018 | 3/31/2019 | 3/31/2018 | |||||||||||||
Net income (loss) | 1,178,850 | 460,908 | 2,224,790 | (1,222,344 | ) | |||||||||||
Basic income (loss) per share | $ | 0.04 | $ | 0.01 | $ | 0.07 | $ | (0.04 | ) | |||||||
Diluted income (loss) per share | $ | 0.04 | $ | 0.01 | $ | 0.07 | $ | (0.04 | ) | |||||||
Weighted average shares outstanding - basic | 32,584,952 | 32,275,647 | 32,738,871 | 32,212,286 | ||||||||||||
Assumed exercise of dilutive options | 492,303 | 1,023,559 | 533,293 | - | ||||||||||||
Weighted average shares outstanding - diluted | 33,077,255 | 33,299,206 | 33,272,164 | 32,212,286 | ||||||||||||
Potentially diluted securities outstanding at period end excluded from diluted computation as the inclusion would have been antidilutive: | ||||||||||||||||
Options | 976,750 | 1,766,250 | 976,750 | 2,706,567 | ||||||||||||
RSU | - | 218,330 | - | 218,330 | ||||||||||||
Total | 976,750 | 1,984,580 | 976,750 | 2,924,897 |
Three months Ended | Six months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income | $ | 301,575 | $ | 1,178,850 | $ | 921,902 | $ | 2,224,790 | ||||||||
Basic income per share | $ | 0.01 | $ | 0.04 | $ | 0.03 | $ | 0.07 | ||||||||
Diluted income per share | $ | 0.01 | $ | 0.04 | $ | 0.03 | $ | 0.07 | ||||||||
Weighted average shares outstanding - basic | 33,094,596 | 32,584,952 | 33,036,786 | 32,738,871 | ||||||||||||
Assumed exercise of dilutive options | 638,023 | 492,303 | 672,046 | 533,293 | ||||||||||||
Weighted average shares outstanding - diluted | 33,732,619 | 33,077,255 | 33,708,832 | 33,272,164 | ||||||||||||
Potentially diluted securities outstanding at period end excluded from diluted computation as the inclusion would have been antidilutive: | ||||||||||||||||
Options | 1,602,477 | 976,750 | 1,602,477 | 976,750 |
178. SEGMENT INFORMATION
The Company is engaged in the design, development and commercialization of directed and multidirectional sound technologies, voice broadcast products and location-based mass messaging solutions for emergency warning and workforce management. The Company operates in two business segments: Hardware (LRAD) and Software (Genasys) and its principle markets are North and South America, Europe, Middle East and Asia. As reviewed by the Company’s chief operating decision maker, the Company evaluates the performance of each segment based on sales and operating income. Cash and cash equivalents, marketable securities, accounts receivable, inventory, property and equipment, deferred tax assets, goodwill and intangible assets are primary assets identified by segment. The accounting policies for segment reporting are the same for the Company as a whole and transactions between the two operating segments are not material.
The following table presents the Company’s segment disclosures:
Three months ended March 31, | Six months ended March 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue from external customers | ||||||||||||||||
LRAD | $ | 9,646,513 | $ | 7,453,794 | 19,303,215 | 15,082,361 | ||||||||||
Genasys | 545,178 | 414,654 | 1,066,035 | 414,654 | ||||||||||||
$ | 10,191,691 | $ | 7,868,448 | $ | 20,369,250 | $ | 15,497,015 | |||||||||
Intercompany revenues | ||||||||||||||||
LRAD | $ | - | $ | - | - | |||||||||||
Genasys | 279,997 | 89,818 | 466,969 | 89,818 | ||||||||||||
$ | 279,997 | $ | 89,818 | $ | 466,969 | $ | 89,818 | |||||||||
Segment operating income | ||||||||||||||||
LRAD | $ | 1,282,308 | $ | 579,498 | 2,584,954 | 1,570,604 | ||||||||||
Genasys | 153,078 | 24,656 | 140,307 | 24,656 | ||||||||||||
$ | 1,435,386 | $ | 604,154 | $ | 2,725,261 | $ | 1,595,260 | |||||||||
Other expenses: | ||||||||||||||||
Depreciation and amortization expense | ||||||||||||||||
LRAD | $ | (138,665 | ) | $ | (64,660 | ) | $ | (262,966 | ) | $ | (124,765 | ) | ||||
Genasys | (77,705 | ) | (69,044 | ) | (154,671 | ) | (69,044 | ) | ||||||||
$ | (216,370 | ) | $ | (133,704 | ) | $ | (417,637 | ) | $ | (193,809 | ) | |||||
Interest expense | ||||||||||||||||
LRAD | $ | - | $ | - | $ | - | $ | - | ||||||||
Genasys | - | (9,815 | ) | - | (9,815 | ) | ||||||||||
$ | - | $ | (9,815 | ) | $ | - | $ | (9,815 | ) | |||||||
Income tax expense | ||||||||||||||||
LRAD | $ | (274,144 | ) | $ | (158,451 | ) | $ | (557,147 | ) | $ | (2,867,339 | ) | ||||
Genasys | - | - | - | - | ||||||||||||
$ | (274,144 | ) | $ | (158,451 | ) | $ | (557,147 | ) | $ | (2,867,339 | ) |
Three months ended March 31, | Six months ended March 31, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenue from external customers | ||||||||||||||||
Hardware | $ | 7,866,163 | $ | 9,646,513 | $ | 16,228,205 | $ | 19,303,215 | ||||||||
Software | 410,610 | 545,178 | 830,270 | 1,066,035 | ||||||||||||
$ | 8,276,773 | $ | 10,191,691 | $ | 17,058,475 | $ | 20,369,250 | |||||||||
Intercompany revenues | ||||||||||||||||
Hardware | $ | - | $ | - | $ | - | $ | - | ||||||||
Software | 443,907 | 279,997 | 828,902 | 466,969 | ||||||||||||
$ | 443,907 | $ | 279,997 | $ | 828,902 | $ | 466,969 | |||||||||
Segment operating income (loss) | ||||||||||||||||
Hardware | $ | 380,174 | $ | 1,282,308 | $ | 1,076,244 | $ | 2,584,954 | ||||||||
Software | (51,433 | ) | 153,078 | (50,846 | ) | 140,307 | ||||||||||
$ | 328,741 | $ | 1,435,386 | $ | 1,025,398 | $ | 2,725,261 | |||||||||
Other expenses: | ||||||||||||||||
Depreciation and amortization expense | ||||||||||||||||
Hardware | $ | 128,308 | $ | 138,665 | $ | 259,475 | $ | 262,966 | ||||||||
Software | 78,185 | 77,705 | 155,556 | 154,671 | ||||||||||||
$ | 206,493 | $ | 216,370 | $ | 415,031 | $ | 417,637 | |||||||||
Income tax expense | ||||||||||||||||
Hardware | $ | 96,768 | $ | 274,144 | $ | 269,158 | $ | 557,147 | ||||||||
Software | - | - | - | - | ||||||||||||
$ | 96,768 | $ | 274,144 | $ | 269,158 | $ | 557,147 |
March 31, 2019 | September 30, 2018 | |||||||
Long-lived assets | ||||||||
LRAD | $ | 2,508,027 | $ | 2,478,144 | ||||
Genasys | 3,696,424 | 3,973,917 | ||||||
$ | 6,204,451 | $ | 6,452,061 | |||||
Total assets | ||||||||
LRAD | $ | 35,948,659 | $ | 36,770,872 | ||||
Genasys | 4,787,658 | 5,089,925 | ||||||
$ | 40,736,317 | $ | 41,860,797 |
March 31, 2020 | September 30, 2019 | |||||||
Long-lived assets | ||||||||
Hardware | $ | 2,109,517 | $ | 2,283,344 | ||||
Software | 3,349,140 | 3,467,546 | ||||||
$ | 5,458,657 | $ | 5,750,890 | |||||
Total assets | ||||||||
Hardware | $ | 47,315,471 | $ | 42,470,356 | ||||
Software | 4,855,459 | 4,649,627 | ||||||
$ | 52,170,930 | $ | 47,119,983 |
189. MAJOR CUSTOMERS, SUPPLIERS AND RELATED INFORMATION
For the three months ended March 31, 2020, revenues from one customer accounted for 64% of total revenues with no other single customer accounting for more than 10% of revenues. For the six months ended March 31, 2020, revenues from one customer accounted for 63% of total revenues with no other single customer accounting for more than 10% of revenues. As of March 31, 2020, accounts receivable from two customers accounted for 63% and 15% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.
For the three months ended March 31, 2019, revenues from two customers accounted for 56% and 13% of total revenues andwith no other single customer accounting for more than 10% of revenues. For the six months ended March 31, 2019, revenues from two customers accounted for 58% and 10% of total revenues with no other single customer accounting for more than 10% of revenues. AtAs of March 31, 2019, accounts receivable from two customers accounted for 55% and 11% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.
For the three months ended March 31, 2018, revenues from three customers accounted for 40%, 15% and 14% of total revenues, and for the six months ended March 31, 2018 revenues from two customers accounted for 33% and 16% of total revenues, with no other single customer accounting for more than 10% of revenues. At March 31, 2018, accounts receivable from one customer accounted for 56% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.
The following table summarizes revenues by geographic region. Revenues are attributed to countries based on customer’s delivery location.
Three months ended March 31, | Six months ended March 31, | Three months ended March 31, | Six months ended March 31, | ||||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||
Americas | $ | 9,048,167 | $ | 5,051,072 | $ | 17,769,488 | $ | 11,104,110 | $ | 7,046,654 | $ | 9,048,167 | $ | 13,850,474 | $ | 17,769,488 | |||||||||||||||||
Asia Pacific | 506,968 | 2,255,856 | 1,146,024 | 3,277,762 | 656,353 | 506,968 | 2,204,124 | 1,146,024 | |||||||||||||||||||||||||
Europe, Middle East and Africa | 636,556 | 561,520 | 1,453,738 | 1,115,143 | 573,766 | 636,556 | 1,003,877 | 1,453,738 | |||||||||||||||||||||||||
Total Revenues | $ | 10,191,691 | $ | 7,868,448 | $ | 20,369,250 | $ | 15,497,015 | $ | 8,276,773 | $ | 10,191,691 | $ | 17,058,475 | $ | 20,369,250 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The discussion and analysis set forth below should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included under Item 1 of this Quarterly Report on Form 10-Q, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended September 30, 2018.2019.
Forward Looking Statements
This report contains certain statements of a forward-looking nature relating to future events or future performance. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the only means of identifying forward-looking statements. Prospective investors are cautioned that such statements are only predictions and actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider various factors identified in this report and any matters set forth under Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K and as noted Part II, Item 1A (Risk Factors) below, which could cause actual results to differ materially from those indicated by such forward-looking statements.
Overview
On October 23, 2019, LRAD® Corporation announced its rebranding as Genasys Inc. (“Genasys”). Genasys is a leading innovatorglobal provider of critical communications solutions designed to help keep people safe. Our unified mass notification platform provides a multi-channel approach to deliver alerts, notifications, instructions and manufacturer of acoustic communicationinformation before, during and after public safety threats, critical events and other crisis situations.
Our multi-channel approach includes:
• LRAD® (Long Range Acoustic Device®) systems that project audible voice messages, tones,sirens and warning sirens over short and long distances. By broadcasting audible voice messages with exceptional vocal clarity and only where needed, we offer industry leading novel sound applications that conventional bullhorns, loudspeakers, and public address and emergency warning systems cannot achieve. With the January 2018 acquisition of Genasys Holding S.L., we combined our advanced mass notification voice broadcast systems with Genasys’ location-based mass messaging solutions. Using our proprietary technologies, we have developed two product lines:
• Acoustic Hailing Devices (“AHDs”), which project audible broadcasts with exceptional intelligibility in a 30° beam from close range out to 5,500 meters,meters;
• CCaaS (Critical Communications as a Service)softwarethat provides a reliable, fast and intuitive solution for sending SMS, text, email and social media messages to mobile devices in defined geographic areas, and;
• Genasys™ Public Safety Mass Notification (“MN”), whichIntegrated Solutions that span multiple hardware and software mobile notification channels so that critical information can be delivered to the people who need it. These solutions include LRAD systems that project sirens and audible voice messages 60° - 360° audible voice broadcastsdirectionally with industry-leading vocal clarity from close range to over 14 square kilometers, from a single installation and geospatial, mass messagingCCaaS software designed to deliver SMS, text, email, and social media to mobile alertdevices in defined geographic areas. Our integrated solutions that are compatible with the Federal Emergency Management Agency's (“FEMA”) Integrated Public Alert & Warning System (“IPAWS”) and other major emergency warning protocols.
We have sold our AHDs and Genasys solutions intoThe Company’s critical communication systems are being used in 72 countries and pioneered a worldwide market for AHDs and advancedthroughout the world in diverse applications, including public safety, national emergency warning systems, mass notification, solutions.defense, law enforcement, critical infrastructure protection and many more. We continue to develop new communication innovations and believe we have established significant competitive advantages in our principal markets.
LRAD systems are a technological breakthrough in broadcasting audible, highly intelligible voice messages and tones over long distances and above high ambient noise using minimal power. By broadcasting audible voice messages with exceptional vocal clarity and only where needed, we offer novel sound applications that conventional bullhorns, loudspeakers, and public address and emergency warning systems cannot achieve. Our AHDs meet stringent military specifications and are packaged in several form factors, from portable, hand held units to permanently installed, remotely operated systems. Through broadcasting directional alert tones and live prerecorded messages, our AHDsLRAD systems are designed to enable users to safely hail and warn, notifyinform and direct, prevent misunderstandings, determine intent, establish large safety zones, resolve uncertain situations and potentially save lives. The LRAD product line is comprised of a full range of communication solutions - from handheld, portable devices to permanently installed, remotely operated systems. We continue to enhance our acoustic communication technologiesadd new models and product linesfeatures to provide a complete range of systemsmeet specific customer requirements and accessories. Our patented XL driver technology, which generates higher audio output in a smaller and lighter form factor, is being incorporatedto expand into many of our AHD and MN products.new markets.
Building on the success of our AHDs,LRAD systems, we launcheddesigned and developed our multidirectional mass notification product line. Unlike most siren-basedsiren-only installations, our public safety mass notification systems on the market, our MN systems broadcast both emergency warning sirens and highly intelligible voice messages with uniform 60° - 360° coverage over local and wide areas. We believe our ability to shape the broadcast coverage area, our industry-leading speech intelligibility, and our multiple system activation and control options makeenable us more competitiveto successfully compete in the large and growing mass notification market.
Our products are designedCCaaS is a cloud-based mobile notification platform that enables emergency personnel, first responders, municipalities, companies and educational institutions to meetsend public safety warnings and notifications to the mobile phones of affected populations in specific geographic areas with reliability, speed and ease. Alerts and notifications can be sent from a broad range of diverse applications, including emergency warning and mass notification, fixed anddesktop or our mobile military deployments, maritime, critical infrastructure, perimeter, commercial, border, and homeland security, law enforcement, emergency responder and fire rescue communications, asset protection, and wildlife preservation and control. By selling our industry-leading AHDs and advanced MN systems into 72 countries, we have created a new worldwide market and a recognized global brand. We continue to develop new acoustic innovations and believe we have established a significant competitive advantage in our principal markets. application.
Genasys offers the only unified critical communications platform that provides multi-modal, geo-targeted cellphone alerts and audible messages with industry-leading vocal clarity. Our user-friendly software interface and mobile application manage and deliver life-saving notifications and information to people at risk, before, during and after crisis situations.
Business developmentsin the fiscal quarter ended March 31, 2019:2020:
● |
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● | Launched the Company’s Personal Safety Service, a unified, multi-channel critical communications solution for governments and enterprises |
● | Received |
● | Announced $1.5 million in international naval and port security orders |
● | Received $1.2 million in |
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Revenues in the second fiscal quarter ended March 31, 2019,2020, were $10.2$8.3 million, an increasea decrease from $7.9$10.2 million in the second fiscal quarter of 2018.2019. The increasedecrease in revenues was primarily driven by an increasea decrease in AHD revenue and an increase in public safety mass notification revenues. AHDboth Acoustic Hailing Device (“AHD”) revenues increased $1,947,475, or 21%, and public safety mass notification revenue increased $375,767,(“PSMN”) systems revenues. AHD revenues were $7,295,728, a decrease of $1,789,388, or 51%20%, and PSMN systems revenues were $981,045, a decrease of $125,530, or 11%, compared to the second fiscal quarter of 2018.2019. Based on the timing of government budget cycles, financial issues, the impact of the COVID-19 pandemic and leadership change in certain areas of the world, delays in awarding contracts often occur, resulting in uneven quarterly revenues. Gross profit increaseddecreased compared to the same quarter in the prior year primarily as a result of higherlower sales. Operating expenses increased 9%decreased 2% from $3.4$3.8 million to $3.8$3.7 million in the quarter ended March 31, 2019, primarily due to increased software development expenses in the current year period.2020. The second fiscal quarter fiscal 2019of 2020 results reflect $274,144reflects $96,768 of income tax expense which is a non-cash charge that reducedcompared to $274,144 in the balance of the deferred tax asset.prior year similar quarter. We reported net income of $1,178,850$301,575 for the quarter, or $0.04$0.01 per share, compared to net income of $460,908,$1,178,850, or $0.01$0.04 per share, for the same quarter in the prior year.
On January 30, 2020, the World Health Organization (“WHO”) declared that the recent novel coronavirus (COVID-19) outbreak was a global health emergency, which prompted national governments to begin putting actions in place to slow the spread of COVID-19. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic. The outbreak of COVID-19 has resulted in travel restrictions, quarantines, “stay-at-home” and “shelter-in-place” orders and extended shutdown of certain businesses around the world. While the impact of the COVID-19 pandemic did not have a material adverse effect on our financial position or results of operations for the fiscal quarter ended March 31, 2020, these governmental actions and the widespread economic disruption arising from the pandemic have the potential to materially impact our business and influence our business decisions. The extent and duration of the pandemic is unknown, and the future effects on our business are uncertain and difficult to predict. The Company is continuing to monitor the events and circumstances surrounding the COVID-19 pandemic, which may require adjustments to the Company’s estimates and assumptions in the future.
Overall Business Outlook
Our products and solutions continueproduct line-up continues to gain worldwide awareness and recognition through media exposure, trade show participations,shows, product demonstrations, and word of mouth as a result of positive responses and increased acceptance.acceptance of our products. We believe we have a solid global brand, technology and product foundation with our AHDLRAD systems and MN systems product lines,integrated solutions, which we have expanded over the years to serviceserve new markets and customers for greater business growth. We believe that we have strong market opportunities for our product offerings throughout the world in the homeland security and defense sectors as a result of increasing threats to government, commerce, law enforcement borders, and critical infrastructure. Our directional and multidirectional product offerings also have many applications within the mass notification, defense, law enforcement, fire rescue, public safety, maritime, homeland security, critical infrastructure security, asset protection, and wildlife control and protectionpreservation business sectors.segments.
The proliferation of natural disasters, crisis situations and civil disturbances require technologically advanced, multi-channel solutions to deliver clear and timely critical communications to help keep the public safe during emergencies. Businesses are also incorporating communication systems that locate and help safeguard employees when critical events occur.
By providing the only unified platform that combines audible, highly intelligible voice broadcast systems and CCaaS software, Genasys seeks to deliver a reliable, fast and intuitive solution for sending location-based audible voice communications and geolocation-targeted messages and texts to mobile devices to help keep the public and employees safe.
Genasys has developed a global market for LRAD systems and advanced emergency warning notification solutions. We have a reputation for producing quality products that feature industry-leading vocal intelligibility and geo-targeted mass messaging. While the mass notification market is more mature with many established manufacturers and suppliers, we believe that our advanced technology and unified multi-channel platform provides opportunities to succeed in the large and growing public safety, emergency warning and mass notification markets. We also plan to expand and strengthen domestic and international sales channels by adding key mass notification partners, distributors, and dealers.
We plan to continue building on our AHD leadership position by offering enhanced directional and multidirectional voice broadcast systems and accessories for an expanding range of applications. In executing our strategy, we use direct sales to governments, militaries, large end-users, and system integrators. We have built a worldwide distribution channel consisting of partners and resellers that have significant expertise and experience selling integrated communication solutions into our various target markets. As our primary AHD sales opportunities are with domestic and international government, military and law enforcement agencies, we are subject to each customer’s unique budget cycle, which leads to long selling cycles and uneven revenue flow, complicating our product planning.
In fiscal 2020, we intend to continue expandingto pursue domestic and international business opportunities with the support of business development consultants, key representatives and resellers. We plan to grow our internationalrevenues through increased direct sales to militaries and large commercial and defense-related companies that desire to integrate our communication technologies into their product offerings. This includes building on fiscal 2019 domestic defense sales by pursuing further U.S. military opportunities. We also plan to pursue mass notification, government, law enforcement, fire rescue, homeland and international security, private and commercial security, border security, maritime security, and wildlife preservation and control business particularlyopportunities.
In March 2020, the World Health Organization (“WHO”) classified the COVID-19 outbreak as a pandemic. While the impact of the COVID-19 pandemic did not have a material adverse effect on our financial position or results of operations for the quarter ended March 31, 2020, we have been monitoring the developments and assessing areas where there is potential for our business to be impacted. A significant portion of our labor force is currently working remotely, which could, among other things, negatively impact our ability to engage in sales-related initiatives, or efficiently conduct day-to-day operations, and we are aware that other businesses and governments with which we engage are likely operating under similar restrictions and experiencing disruptions in their own operations, which may create obstacles in the Middle East, Europecoordination of business activities, including the negotiation and Asia wherefulfillment of orders. Disruptions in the supply chain could negatively impact our ability to source materials or manufacture and distribute product. While we do not currently anticipate a material reduction in demand for our commercialized products, we could experience a decrease in new orders which would negatively impact our revenues and reduce our liquidity and cash flows. Growth in revenue could also be impeded by these factors. The financial markets have been subject to significant volatility that could impact our ability to enter into, modify, and negotiate favorable terms and conditions relative to equity and debt financing activities. We currently have $16.4 million in cash and cash equivalents as of March 31, 2020, which we believe there are greater market opportunitiesprovides sufficient capital to fund our operations for at least the next twelve months and withstand the anticipated near-term consequences of the pandemic, although liquidity constraints and access to capital markets could adversely impact our multidirectional products. Our selling network has expanded throughliquidity and warrant changes to our investment strategy. While we have not yet experienced a material impact, the additionfull magnitude of sales consultantsthe pandemic cannot be measured at this time, and therefore any of the aforementioned circumstances, as well as continuingother factors, may cause our results of operations to improvevary substantially from year to year and increase our relationships with key integrators and sales representatives within the United States and in aquarter to quarter.
A large number of worldwide locations. However, we may continue to face challengescomponents and sub-assemblies produced by outside suppliers in fiscal 2019 due to continuing economic and geopolitical conditionsour supply chain are produced within 50 miles of our facility. We source a small amount of component parts from suppliers in some international regions. We anticipate that the current U.S. government administration will support U.S. military spending, which we believe could benefit us, although there is uncertainty as to priorities and timing. We continue to pursue large business opportunities, but it is difficult to anticipate how long it will take to close these opportunities, or if they will ever ultimately come to fruition.China. It is also difficultlikely that some of our suppliers source parts from China. We are in contact with those suppliers and evaluating what impact, if any, may result from the coronavirus pandemic.
Based on various standards published to determine whetherdate, we believe the work our multidirectionalassociates perform is critical, essential and life sustaining. We are taking a variety of measures to promote the safety and security of our employees while ensuring the availability and function of our critical infrastructure. We are following Center for Disease Control guidelines to reduce the transmission of COVID-19, such as the imposition of travel restrictions, cancellation of events, the promotion of social distancing, the adoption of work-from-home arrangements, and limiting access to our facilities. Some or all of these policies and initiatives could impact our operations. In addition, the following events related to the COVID-19 pandemic could result in lost or delayed revenue to the Company: limitations on the ability of our suppliers to meet delivery requirements and commitments; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver our products to customers; unforseen deviations from customers or foreign governments restricting the ability to do business and software will be accepted as viable solutions inlimitations on the public safety mass notification market, which includesability of our customers to pay us on a number of large, well-known competitors.timely basis, if at all.
Critical Accounting Policies
We have identified a number of accounting policies as critical to our business operations and the understanding of our results of operations. These are described in our consolidated financial statements located in Management’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, 2018.2019. The impact and any associated risks related to these policies on our business operations is discussed below and throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results.
The methods, estimates and judgments we use in applying our accounting policies, in conformity with U.S. generally accepted accounting principles, in the U.S., have a significant impact on the results we report in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The estimates affect the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Comparison of Results of Operations for the ThreeThree Months Ended March31, 20, 20 and 2019 and 2018
Three Months Ended | ||||||||||||||||||||||||
March 31, 2020 | March 31, 2019 | |||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Total | Total | Fav (Unfav) | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Product sales | $ | 7,553,481 | 91.3% | $ | 9,340,523 | 91.6% | $ | (1,787,042 | ) | (19.1%) | ||||||||||||||
Contract and other | 723,292 | 8.7% | 851,168 | 8.4% | (127,876 | ) | (15.0%) | |||||||||||||||||
Total revenues | 8,276,773 | 100.0% | 10,191,691 | 100.0% | (1,914,918 | ) | (18.8%) | |||||||||||||||||
Cost of revenues | 4,266,881 | 51.6% | 5,001,183 | 49.1% | 734,302 | 14.7% | ||||||||||||||||||
Gross Profit | 4,009,892 | 48.4% | 5,190,508 | 50.9% | (1,180,616 | ) | (22.7%) | |||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Selling, general and administrative | 2,732,340 | 33.0% | 2,475,378 | 24.3% | (256,962 | ) | (10.4%) | |||||||||||||||||
Research and development | 948,811 | 11.5% | 1,279,744 | 12.6% | 330,933 | 25.9% | ||||||||||||||||||
Total operating expenses | 3,681,151 | 44.5% | 3,755,122 | 36.8% | 73,971 | 2.0% | ||||||||||||||||||
Income from operations | 328,741 | 4.0% | 1,435,386 | 14.1% | (1,106,645 | ) | (77.1%) | |||||||||||||||||
Other income | 69,602 | 0.8% | 17,608 | 0.2% | 51,994 | 295.3% | ||||||||||||||||||
Income before income taxes | 398,343 | 4.8% | 1,452,994 | 14.3% | (1,054,651 | ) | (72.6%) | |||||||||||||||||
Income tax expense | 96,768 | 1.2% | 274,144 | 2.7% | 177,376 | 64.7% | ||||||||||||||||||
Net income | $ | 301,575 | 3.6% | $ | 1,178,850 | 11.6% | $ | (877,275 | ) | (74.4%) | ||||||||||||||
Net sales | ||||||||||||||||||||||||
Hardware | $ | 7,866,163 | 95.0% | $ | 9,646,513 | 94.7% | (1,780,350 | ) | (18.5%) | |||||||||||||||
Software | 410,610 | 5.0% | 545,178 | 5.3% | (134,568 | ) | (24.7%) | |||||||||||||||||
Total net sales | $ | 8,276,773 | 100.0% | $ | 10,191,691 | 100.0% | $ | (1,914,918 | ) | (18.8%) |
The following table above sets forth for the periods indicated certain items of our condensed consolidated statements of operations expressed in dollars and as a percentage of net revenues. The financial information and the discussion below should be read in conjunction with the condensed consolidated financial statements and notes contained in this report.
Three Months Ended | ||||||||||||||||||||||||
March 31, 2019 | March 31 2018 | |||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Total | Total | Fav(Unfav) | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Product sales | $ | 9,340,523 | 91.6 | % | $ | 7,125,258 | 90.6 | % | $ | 2,215,265 | 31.1 | % | ||||||||||||
Contract and other | 851,168 | 8.4 | % | 743,190 | 9.4 | % | 107,978 | 14.5 | % | |||||||||||||||
Total revenues | 10,191,691 | 100.0 | % | 7,868,448 | 100.0 | % | 2,323,243 | 29.5 | % | |||||||||||||||
Cost of revenues | 5,001,183 | 49.1 | % | 3,832,468 | 48.7 | % | (1,168,715 | ) | (30.5 | %) | ||||||||||||||
Gross Profit | 5,190,508 | 50.9 | % | 4,035,980 | 51.3 | % | 1,154,528 | 28.6 | % | |||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Selling, general and administrative | 2,475,378 | 24.3 | % | 2,517,891 | 32.0 | % | 42,513 | 1.7 | % | |||||||||||||||
Research and development | 1,279,744 | 12.6 | % | 913,935 | 11.6 | % | (365,809 | ) | (40.0 | %) | ||||||||||||||
Total operating expenses | 3,755,122 | 36.8 | % | 3,431,826 | 43.6 | % | (323,296 | ) | (9.4 | %) | ||||||||||||||
Income from operations | 1,435,386 | 14.1 | % | 604,154 | 7.7 | % | 831,232 | 137.6 | % | |||||||||||||||
Other income and expense, net | 17,608 | 0.2 | % | 15,205 | 0.2 | % | 2,403 | 15.8 | % | |||||||||||||||
Income from operations before income taxes | 1,452,994 | 14.3 | % | 619,359 | 7.9 | % | 833,635 | 134.6 | % | |||||||||||||||
Income tax expense | 274,144 | 2.7 | % | 158,451 | 2.0 | % | (115,693 | ) | (73.0 | %) | ||||||||||||||
Net income | $ | 1,178,850 | 11.6 | % | $ | 460,908 | 5.9 | % | $ | 717,942 | 155.8 | % | ||||||||||||
Net sales | ||||||||||||||||||||||||
LRAD | $ | 9,646,513 | 94.7 | % | $ | 7,453,794 | 94.7 | % | $ | 2,192,719 | 29.4 | % | ||||||||||||
Genasys | 545,178 | 5.3 | % | 414,654 | 5.3 | % | 130,524 | 31.5 | % | |||||||||||||||
Total net sales | $ | 10,191,691 | 100.0 | % | $ | 7,868,448 | 100.0 | % | $ | 2,323,243 | 29.5 | % |
Revenues
Revenues increaseddecreased in the current quarter compared to the same quarter in the prior year due to the largertiming of deliveries in backlog atas of December 31, 20182019, as compared to December 31, 2017. Sales improved in the current2018. Current year quarter for theLRAD AHD product line (up $1,947,475 or 21%)revenue was $7,295,728 and public safety mass notificationPSMN systems product line ($375,767, or 51%)revenue was $981,045, down $1,789,387 and $125,531 respectively, compared to the same prior year quarter.period. The receipt of orders willis often be uneven due to the timing of approvalsgovernment budgets or budgets. Atapprovals. As of March 31, 2019,2020, we had aggregate deferred revenue of $602,900$899,842 for extended warranty obligations and software support agreements.
Gross Profit
The increasedecrease in gross profit in the current quarter compared to the same period in the prior year was primarily due to the higherlower level of revenue. Gross profit as a percentage of revenue was lower in the fiscal 2020 second quarter due the inclusion of $77,000 of engineering expenses in cost of sales partially offsetupon the implementation of more precise expense tracking of PSMN and manufacturing support projects during the current quarter.
Our products have varying gross margins, so product mix may affect gross profits. In addition, our margins vary based on the sales channels through which our products are sold in a given period. We continue to implement product updates and changes, including raw material and component changes that may impact product costs. With such product updates and changes we have limited warranty cost experience and estimated future warranty costs can impact our gross margins. We do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $256,962 over the prior year quarter primarily due to increased spending for sales and marketing activities, including advertising ($81,783), commission expense ($40,184) and increased compensation and marketing related expenses in our Spanish office ($74,422).
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three-months ended March 31, 2020 and 2019 of $283,314 and $163,932, respectively.
We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize potential opportunities, including the June 2022 European Mandate for Public Warning Systems by an increaseJune 2022. Commission expenses will fluctuate based on the nature of our sales.
Research and Development Expenses
Research and development expenses decreased $330,933 compared to the same quarter in manufacturing overheadthe prior year primarily due to lower total compensation related expense ($161,871), prototype material costs ($107,660) and engineering costs charged to cost of revenues ($77,000). We continue to expand our software development efforts to grow our emergency warning solutions product offerings.
Included in research and development expenses for the three months ended March 31, 2020 and 2019, was $5,067 and $3,842, 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 use of outside consulting, design and development firms. We continually improve our product offerings and we expect to continue to expand our product line with new products, customizations and enhancements. Based on current plans, we may expend additional resources on research and development in the current year compared to the prior year.
Net Income
Net income in the second quarter of fiscal year 2020 was $301,575, a decrease of $877,275 compared to the second quarter of fiscal year 2019. The decrease was primarily due to the lower revenue in the second quarter of fiscal year 2020.
Comparison of Results of Operations for the Six Months Ended March 31, 2020 and 2019
Six Months Ended | ||||||||||||||||||||||||
March 31, 2020 | March 31, 2019 | |||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Total | Total | Fav (Unfav) | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Product sales | $ | 15,561,419 | 91.2% | $ | 18,688,691 | 91.7% | $ | (3,127,272 | ) | (16.7%) | ||||||||||||||
Contract and other | 1,497,056 | 8.8% | 1,680,559 | 8.3% | (183,503 | ) | (10.9%) | |||||||||||||||||
Total revenues | 17,058,475 | 100.0% | 20,369,250 | 100.0% | (3,310,775 | ) | (16.3%) | |||||||||||||||||
Cost of revenues | 8,446,478 | 49.5% | 10,089,484 | 49.5% | 1,643,006 | 16.3% | ||||||||||||||||||
Gross Profit | 8,611,997 | 50.5% | 10,279,766 | 50.5% | (1,667,769 | ) | (16.2%) | |||||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Selling, general and administrative | 5,553,865 | 32.6% | 5,226,386 | 25.7% | (327,479 | ) | (6.3%) | |||||||||||||||||
Research and development | 2,032,734 | 11.9% | 2,328,119 | 11.4% | 295,385 | 12.7% | ||||||||||||||||||
Total operating expenses | 7,586,599 | 44.5% | 7,554,505 | 37.1% | (32,094 | ) | (0.4%) | |||||||||||||||||
Income from operations | 1,025,398 | 6.0% | 2,725,261 | 13.4% | (1,699,863 | ) | (62.4%) | |||||||||||||||||
Other income | 165,662 | 1.0% | 56,676 | 0.3% | 108,986 | 192.3% | ||||||||||||||||||
Income before income taxes | 1,191,060 | 7.0% | 2,781,937 | 13.7% | (1,590,877 | ) | (57.2%) | |||||||||||||||||
Income tax expense | 269,158 | 1.6% | 557,147 | 2.7% | 287,989 | 51.7% | ||||||||||||||||||
Net income | $ | 921,902 | 5.4% | $ | 2,224,790 | 10.9% | $ | (1,302,888 | ) | (58.6%) | ||||||||||||||
Net sales | ||||||||||||||||||||||||
Hardware | $ | 16,228,205 | 95.1% | $ | 19,303,215 | 94.8% | (3,075,010 | ) | (15.9%) | |||||||||||||||
Software | 830,270 | 4.9% | 1,066,035 | 5.2% | (235,765 | ) | (22.1%) | |||||||||||||||||
Total net sales | $ | 17,058,475 | 100.0% | $ | 20,369,250 | 100.0% | $ | (3,310,775 | ) | (16.3%) |
The table above sets forth for the periods indicated certain items of our condensed consolidated statements of operations expressed in dollars and as a percentage of net revenues. The financial information and the discussion below should be read in conjunction with the condensed consolidated financial statements and notes contained in this report.
Revenues
Revenues decreased 16% for the six-month period ended March 31, 2020 compared to the same prior year period due to the timing for delivery of the backlog at September 30, 2019 compared to the September 30, 2018 backlog. LRAD AHD product line revenues were $15,046,939 for the current year six-month period, down $2,709,188, and PSMN revenues were $2,011,536, down $601,587, compared to the same prior year period. The receipt of orders will often be uneven due to the timing of approvals or budgets. As of March 31, 2020, we had aggregate deferred revenue of $899,842 for extended warranty obligations and software support agreements.
Gross Profit
The decrease in gross profit in the increasedsix months ended March 31, 2020 was primarily due to lower sales volume. Gross profit as a percentage of revenue was unchanged compared to the prior year period, however, fiscal year 2020 results includes $77,000 of additional engineering charges resulting from a more precise process to charge engineering costs to costs of sales.
Our products have varying gross margins, so product mix may affect gross profits. In addition, our margins vary based on the sales channels through which our products are sold in a given period. We continue to implement product updates and changes, including raw material and component changes that may impact product costs. With such product updates and changes we have limited warranty cost experience and estimated future warranty costs can impact our gross margins. We do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $42,513 over the prior year quarter. This reflects decreases of $87,319 in travel and related expenses, and $58,322 lower professional services (largely acquisition related). This was offset by a $135,968 increase in compensation expense.
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three-months ended March 31, 2019 and 2018 of $154,250 and $120,133, 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 $365,809 compared to the prior year primarily due to $303,339 for increased product development and product testing expenses.
Included in research and development expenses for the three months ended March 31, 2019 and 2018 was $13,524 and $20,609 of non-cash share-based compensation costs, respectively.
Research and development costs vary period to period due to the timing of projects, and the timing and extent of the use of outside consulting, design and development firms. We continually improve our product offerings and we expect to continue to expand our product line in 2019 with new products, customizations and enhancements. Based on current plans, we may expend additional resources on research and development in the current year compared to the prior year.
Net Income
The $717,942 increase in net income in the fiscal year 2019 second quarter was primarily due to the higher gross profit realized from increased sales in the 2019 quarter and a lower effective tax rate in 2019. Non-cash income tax expense of $274,144 and $158,451 was recognized in the three months ended March 31, 2019 and 2018, respectively.
Comparison of Results of Operations for the Six Months Ended March 31, 2019 and 2018
The following table 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.
Six Months Ended | ||||||||||||||||||||||||
March 31, 2019 | March 31, 2018 | |||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Total | Total | Fav(Unfav) | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Product sales | $ | 18,688,691 | 91.7 | % | $ | 14,461,283 | 93.3 | % | $ | 4,227,408 | 29.2 | % | ||||||||||||
Contract and other | 1,680,559 | 8.3 | % | 1,035,732 | 6.7 | % | 644,827 | 62.3 | % | |||||||||||||||
Total revenues | 20,369,250 | 100.0 | % | 15,497,015 | 100.0 | % | 4,872,235 | 31.4 | % | |||||||||||||||
Cost of revenues | 10,089,484 | 49.5 | % | 7,503,494 | 48.4 | % | (2,585,990 | ) | (34.5 | %) | ||||||||||||||
Gross Profit | 10,279,766 | 50.5 | % | 7,993,521 | 51.6 | % | 2,286,245 | 28.6 | % | |||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Selling, general and administrative | 5,226,386 | 25.7 | % | 4,706,289 | 30.4 | % | (520,097 | ) | (11.1 | %) | ||||||||||||||
Research and development | 2,328,119 | 11.4 | % | 1,691,972 | 10.9 | % | (636,147 | ) | (37.6 | %) | ||||||||||||||
Total operating expenses | 7,554,505 | 37.1 | % | 6,398,261 | 41.3 | % | (1,156,244 | ) | (18.1 | %) | ||||||||||||||
Income from operations | 2,725,261 | 13.4 | % | 1,595,260 | 10.3 | % | 1,130,001 | 70.8 | % | |||||||||||||||
Other income and expense, net | 56,676 | 0.3 | % | 49,735 | 0.3 | % | 6,941 | 14.0 | % | |||||||||||||||
Income from operations before income taxes | 2,781,937 | 13.7 | % | 1,644,995 | 10.6 | % | 1,136,942 | 69.1 | % | |||||||||||||||
Income tax expense | 557,147 | 2.7 | % | 2,867,339 | 18.5 | % | 2,310,192 | 80.6 | % | |||||||||||||||
Net income (loss) | $ | 2,224,790 | 10.9 | % | $ | (1,222,344 | ) | (7.9 | %) | $ | 3,447,134 | 282.0 | % | |||||||||||
Net sales | ||||||||||||||||||||||||
LRAD | $ | 19,303,215 | 94.8 | % | $ | 15,082,361 | 97.3 | % | 4,220,854 | 28.0 | % | |||||||||||||
Genasys | 1,066,035 | 5.2 | % | 414,654 | 2.7 | % | 651,381 | 157.1 | % | |||||||||||||||
Total net sales | $ | 20,369,250 | 100.0 | % | $ | 15,497,015 | 100.0 | % | $ | 4,872,235 | 31.4 | % |
Revenues
Revenues increased 31% for the six-month period ended March 31, 2019 compared to the same prior year period due to the larger backlog at September 30, 2018 compared to September 30, 2017 and the addition of $520,857 of Genasys sales in the first quarter of fiscal 2019 (no Genasys sales were reported in the first quarter of fiscal 2018 as it was acquired on January 18, 2018). AHD sales increased $5,805,041, or 49%, and public safety mass notification systems decreased $932,806, or 26%, compared to the same prior year period. The receipt of orders will often be uneven due to the timing of approvals or budgets. At March 31, 2019, we had aggregate deferred revenue of $602,900 for extended warranty obligations and software support agreements.
Gross Profit
The increase in gross profit$327,479 in the six months ended March 31, 2019 was primarily due to increased sales volume and better product mix, partially offset by an increase in manufacturing overhead expenses, primarily due to increased freight, salaries and benefits, computer related expenses and depreciation expense.
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 $520,097 in the six months ended March 31, 20192020 compared to the prior year period. The increase in selling, general and administrative expenses is primarily due to $462,770 of Genasys sellingincreased sales and general administrative expensesmarketing activities, including increases in the first quarter of fiscal 2019 compared to zero in 2018commission expense ($134,732), advertising and $288,323 in higher compensation expenses. This was partially offset by $126,465 in lower information technology related expenses ($98,159) and $101,686 in lower travel and related expenses. As a percentage of sales, selling, general and administrative expense decreased to 26% for the six months ended March 31, 2019 compared to 30% in the prior year period.trade shows ($77,062).
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the six months ended March 31, 2020 and 2019 of $427,241 and 2018 of $266,101 and $229,455,$284,973, respectively.
We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize potential opportunities. Commission expenses will fluctuate based on the nature of our sales.
Research and Development Expenses
Research and development expenses increased $636,147decreased $295,385 compared to the prior year, primarily due to increased product development activities ($432,591), occupancy related costs ($108,783) and increasedlower total compensation and related expense ($90,161)141,381), prototype component cost ($101,137), and engineering costs charged to cost of revenues ($77,000).
Included in research and development expenses for the six months ended March 31, 2020 and 2019 were $15,825 and 2018 was $31,220 and $43,539$12,348 of non-cash share-based compensation costs, respectively.
Research and development costs vary period to period due to the timing of projects, and the timing and extent of the use of outside consulting, design and development firms. We continually improve our product offerings and we expect to continue to expand our product line in 20192020 with new products, customizations and enhancements. Based on current plans, we may expend additional resources on research and development in the current year compared to the prior year.
Net Income (Loss)
The $2,224,790 netNet income of $921,902 for the first six months year to date in fiscal year 20192020 was an improvementa decrease of $3,447,134 over$1,302,888 compared to the net lossincome in the prior year period. The improved results wereThis decrease was primarily due to the $2,474,000 tax expenselower revenue in fiscalthe current year 2018 from the remeasurement of its deferred tax assets as a result of tax reform, plus higher sales in fiscal year 2019.period.
Liquidity and Capital Resources
The Company’s financial condition and liquidity remain strong. Cash and cash equivalents at March 31, 20192020 was $7,723,503,$16,398,928, down $2,420,150 compared to $11,063,091$18,819,078 at September 30, 2018 primarily as a result2019. We had short-term marketable securities of cash used in operating activities and cash used$3,464,834 at March 31, 2020, compared to repurchase LRAD common stock.$3,695,364 at September 30, 2019. We had long-term marketable securities of $1,646,466 at March 31, 2020, compared to $1,384,819 at September 30, 2019. Other than cash and cash equivalents, short and long-term marketable securities, other working capital and expected future cash flows from operating activities in subsequent periods, we have no unused sources of liquidity at this time.
Although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on the Company's future results, we believe our efficient business model and strong balance sheet leave us positioned to manage our business through this crisis as it continues to unfold. We continue to manage all aspects of our business including, but not limited to, monitoring the fmancial health of our customers, suppliers and other third-party relationships and developing new opportunities for growth.
Principal factors that could affect our liquidity include:
ability to meet sales projections;
government spending levels;
introduction of competing technologies;
product mix and effect on margins;
ability to reduce current inventory levels;
product acceptance in new markets;
value of shares repurchased; and
value of dividends declared.declared;
impact of COVID-19 on global market conditions; and
impact of COVID-19 on customers’ ability to pay.
Principal factors that could affect our ability to obtain cash from external sources include:
volatility in the capital markets; and
market price and trading volume of our common stock.
Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the twelve-month period subsequent to the issuance of the interim financial information. However, we operate in a rapidly evolving and unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that we may not be required to raise additional funds through the sale of equity or debt securities or from credit facilities. Additional capital, if needed, may not be available on satisfactory terms, or at all.
Cash Flows
Our cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows, are summarized in the table below:
Six months ended | Six months ended | |||||||||||||||
March 31, 2019 | March 31, 2018 | March 31, 2020 | March 31, 2019 | |||||||||||||
Cash provided by (used in): | ||||||||||||||||
Cash used in: | ||||||||||||||||
Operating activities | $ | (884,260 | ) | $ | 2,899,336 | $ | (2,126,484 | ) | $ | (884,260 | ) | |||||
Investing activities | $ | (301,847 | ) | $ | (2,337,170 | ) | (144,421 | ) | (301,847 | ) | ||||||
Financing activities | $ | (2,142,894 | ) | $ | (165,615 | ) | (198,319 | ) | (2,142,894 | ) |
Operating Activities
Net income of $921,902 for the six months ended March 31, 2020 was increased by $1,546,757 of non-cash items that included a reduction to deferred income taxes, share-based compensation, depreciation and amortization, warranty provision and inventory obsolescence. Cash used in operating activities in the quarter reflected a decrease in accrued and other liabilities of $3,035,960, primarily for a $1,797,094 decrease in customer deposits resulting from shipments for the year to date and $825,073 lower accrued payroll and related liabilities largely for the payment of incentive compensation earned in fiscal 2019, an increase in accounts receivable of $2,204,894 due to higher sales with net credit terms in the quarter compared to the fourth quarter of fiscal 2019, and an increase of $1,214,265 in inventory to support the current backlog. Cash used in operating activities included an increase in accounts payable of $1,072,363 primarily for inventory related purchases and a decrease in prepaid expenses and other of $787,613.
Net income of $2,224,790 for the six months ended March 31, 2019 was increased by $1,457,900 of non-cash items that included a reduction to deferred income taxes, share-based compensation, depreciation and amortization, warranty provision and inventory obsolescence. Cash used byin operating activities in the current year reflected an increase in accounts receivable of $3,981,947, a decrease in accounts payable of $1,847,512, an increase in inventory of $1,704,919 and a decrease in payroll related liabilities of $553,919. Cash provided byused in operating activities included a decrease in prepaid expenses and other of $2,401,303$2,518,276 and an increase in accrued and other liabilities of $1,021,149.
Net loss of $1,222,344 for the six months ended March 31, 2018 was decreased by $3,443,194 of non-cash items that included a reduction to deferred income taxes primarily resulting from enactment of tax reform, share-based compensation, depreciation and amortization, warranty provision, and inventory obsolescence. Cash provided by operating activities in the prior year reflected an increase in accounts payable of $502,933 due to the timing of payments, increase in accrued and other liabilities of $622,485, decreases in prepaid expenses and other of $174,589, and a decrease in accounts receivable of $389,434. Cash used in operating activities included a decrease in payroll related liabilities of $656,540 and an increase in inventory of $271,543.$449,152.
We had accounts receivable of $6,757,217 at$5,849,608 as of March 31, 2019,2020, compared to $2,785,997$3,644,059 at September 30, 2018. The level of trade accounts receivable at March 31, 2019 represented approximately 60 days of revenues compared to 78 days of revenues at September 30, 2018 due to the timing of shipments and related collections in this quarter compared to the fourth fiscal quarter of 2018.2019. Terms with individual customers vary greatly. We typically requireregularly provide thirty-day terms fromto our customers if credit is approved. Our receivables can vary dramatically due to overall sales volume, quarterly variations in sales, timing of shipments to and receipts from large customers, payment terms and the timing of contract payments.
AtAs of March 31, 20192020 and September 30, 2018,2019, our working capital was $22,124,231$25,510,378 and $21,090,472$24,765,178, respectively. The increase in working capital was primarily due to the net income generated from operations in the first six months of fiscal year 2019.2020.
Investing Activities
Our net cash used in investing activities was $144,421 for the six months ended March 31, 2020, compared to cash used in investing activities of $301,847 for the six months ended March 31, 2019,2019. In the first six months of fiscal 2020, we increased our holdings of short and long-term marketable securities by $42,295, compared to cash usedan increase of $1,882 in investing activities of $2,337,170 for the six months ended March 31, 2018. The 2018 amount included $2,246,545 for the acquisition of Genasys.2019. Cash used in investing activities for the purchase of property and equipment was $299,965$102,126 and $90,135$299,965 for the six months ended March 31, 2020 and 2019, and 2018, respectively. In the six months ended March 31, 2019, we increased our holding of short and long-term marketable securities by $1,882, compared to an increase of $490 in the six months ended March 31, 2018. We anticipate some additional expenditures for tooling and equipment during the balance of fiscal year 2019.2020.
Financing Activities
In the six months ended March 31, 2019,2020, we used $2,142,894$198,319 for financing activities, compared to using $165,615 ina use of $2,142,894 for financing activities for the six months ended March 31, 2018.2019. Proceeds from the exercise of stock options were $258,047 for the six months ended March 31, 2020 and we used $398,256 to repurchase company common stock. During the first six months of fiscal 2019 we used $2,171,022 to repurchase shares of common stock offset by $45,172 in proceeds from the exercise of stock options. The first six months of 2018 included net payments of $414,477 to pay down debt assumed in the Genasys acquisition. Proceeds from the exercise of stock options were $185,718 for the six months ended March 31, 2018. Total debt at March 31, 2019 was $320,472.
The Board of Directors approved a share buyback program in 2015 under which the Company was authorized to repurchase up to $4 million of its outstanding common shares. In December 2017, the Board of Directors extended the program through December 31, 2018. There were no shares repurchased during the six months ended March 31, 2018.2018, at which time it expired.
In December 2018, the Board of Directors approved a new share buyback program beginning January 1, 2019 under which the Company iswas authorized to repurchase up to $5 million of its outstanding common shares. During the quarter ended March 31, 2020, 156,505 shares were repurchased for $398,255. During the quarter ended March 31, 2019, 200,000 shares were repurchased for $550,000. AtAs of March 31, 2019,2020, all repurchased shares were retired into treasury. Atretired. As of March 31, 2019, $4.52020, $4.1 million was available for share repurchase under this program.
Recent Accounting Pronouncements
New pronouncements issued for future implementation are discussed in Note 3, Recent Accounting Pronouncements, to our condensed consolidated financial statements.
Item 3. |
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Foreign Currency Risk
We consider our direct exposure to foreign exchange rate fluctuations to be minimal. The transactions of our Spanish subsidiary are denominated primarily in Euros, which is a natural hedge against foreign currency fluctuations. All other sales to customers and all arrangements with third-party manufacturers, with one exception, provide for pricing and payment in U.S. dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the U.S. dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the U.S. dollar relative to other currencies could result in our suppliers raising their prices to continue doing business with us. Fluctuations in currency exchange rates could affect our business in the future.
Item 4. | Controls and Procedures. |
We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of our disclosure controls and procedures as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2019.2020.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our fiscal quarter ended March 31, 2019,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings. |
We may at times be involved in litigation in the ordinary course of business. We will also, from time to time, when appropriate in management’s estimation, record adequate reserves in our consolidated financial statements for pending litigation. Currently, there are no pending material legal proceedings to which the Company is a party or to which any of its property is subject.
Item 1A. | Risk |
As a Smaller Reporting Company as defined by Rule 12b-2In addition to the other information set forth in this Quarterly Report, you should carefully consider the risks and uncertainties discussed in Part 1, “Item 1A, Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, which could materially affect our business, financial condition, or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be not material also may materially and adversely affect our business, financial condition and operating results. We are including the following additional risk factor, which updates the risk factors disclosed in our Annual Report on Form 10-K for the year ended September 30, 2019. In addition, many of the Exchange Actrisk factors in Part 1, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, will be amplified by the following additional risk factor.
Global economic conditions related to the COVID-19 pandemic may negatively impact the Company’s financial conditions and results of operations.
The Company is monitoring the impact of the recent COVID-19 outbreak, which has already caused a significant disruption to global financial markets and supply chains, beginning in item 10(f)(1)early calendar year 2020. The significance of Regulation S-K, wethe operational and financial impact to the Company will depend on how long and widespread this disruption proves to be. The extent to which COVID-19 impacts the Company’s results will depend on future developments, which are electing scaled disclosure reporting obligationshighly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the outbreak and the actions that are being taken to contain and treat it. While the Company currently expects this business disruption to be temporary, there is uncertainty around its duration and its broader impact, and therefore the effects it will have on the Company’s financial results and operations. If economic or market conditions in key global markets deteriorate, the Company may experience material adverse effects on its business, financial condition and results from operations.
Factors deriving from the COVID-19 response that may negatively impact sales and gross margin in the future include but are not requiredlimited to: limitations on the ability of our suppliers to providemeet delivery requirements and commitments; limitations on the information requestedability of employees to perform their work due to illness caused by this item.the pandemic or local, state or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver products to customers; limitations on the ability of our customers to conduct their business and purchase our products and services and limitations on the ability of our customers to pay us on a timely basis.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
In December 2018, the Board of Directors approved a new share buyback program beginning January 1, 2019 through December 31, 2020, under which the Company wasis authorized to repurchase up to $5 million of its outstanding common shares. The previous program expired on December 31, 2018.
The following table discloses the stock repurchases during the quarter ended March 31, 2109.2020.
Period | Total number of Shares Purchased | Average Price Paid per Share | Maximum dollar value of shares that may yet be purchased under the program | |||||||||
January 1, 2019 - January 31, 2019 | - | - | $ | 5,000,000 | ||||||||
February 1, 2019 - February 28, 2019 | - | - | $ | 5,000,000 | ||||||||
March 1, 2019 - March 31, 2019 | 200,000 | $ | 2.75 | $ | 4,450,000 | |||||||
200,000 |
None
Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum dollar value of shares that may be purchased under the program | |||||||||
January 1, 2020 - January 31, 2020 | - | $ | - | $ | 4,450,000 | |||||||
February 1, 2020 - February 29, 2020 | 12,026 | $ | 2.96 | $ | 4,414,412 | |||||||
March 1, 2020 - March 31, 2020 | 144,479 | $ | 2.51 | $ | 4,051,745 | |||||||
156,505 |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. | Mine Safety |
Not Applicable.
Item 5. | Other Information. |
None.
Item 6. |
|
31.1 | |
31.2 | |
32.1 | |
101.INS | XBRL Instance Document* |
101.SCH | XBRL Taxonomy Extension Schema Document* |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document* |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* |
* | 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.
|
| |
Date: May | By: | /s/ DENNIS D. KLAHN |
|
| Dennis D. Klahn, Chief Financial Officer |
|
| (Principal Financial Officer) |
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