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 June 30December 31, 2019
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 CORPORATION
GENASYS 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)
LRAD Corporation
(former name, former address, and former fiscal year, if changed since last report)
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 August 9, 2019February 7, 2020 was 32,593,869.33,100,939.
PART I. FINANCIAL INFORMATION
Item 1. |
|
LRAD CorporationGenasys Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||||||||||||
2019 | September 30, | 2019 | September 30, | |||||||||||||
(Unaudited) | 2018 | (Unaudited) | 2019 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 11,290,068 | $ | 11,063,091 | $ | 17,092,203 | $ | 18,819,078 | ||||||||
Short-term marketable securities | 2,978,354 | 3,592,175 | 4,181,909 | 3,695,364 | ||||||||||||
Restricted cash | 369,551 | 403,427 | 269,830 | 263,136 | ||||||||||||
Accounts receivable, net | 6,814,225 | 2,785,997 | 5,936,915 | 3,644,059 | ||||||||||||
Inventories, net | 6,412,842 | 6,734,183 | 6,061,746 | 5,835,163 | ||||||||||||
Prepaid expenses and other | 759,365 | 3,091,401 | 1,022,816 | 1,781,837 | ||||||||||||
Total current assets | 28,624,405 | 27,670,274 | 34,565,419 | 34,038,637 | ||||||||||||
Long-term marketable securities | 1,499,795 | 1,200,541 | 945,833 | 1,384,819 | ||||||||||||
Long-term restricted cash | 434,660 | 339,556 | 395,254 | 434,704 | ||||||||||||
Deferred tax assets, net | 5,281,543 | 5,957,000 | 5,214,610 | 5,387,000 | ||||||||||||
Property and equipment, net | 2,357,863 | 2,448,725 | 2,222,248 | 2,269,506 | ||||||||||||
Goodwill | 2,396,320 | 2,445,990 | 2,364,401 | 2,305,750 | ||||||||||||
Intangible assets, net | 1,296,965 | 1,557,346 | 1,129,282 | 1,175,634 | ||||||||||||
Operating lease right of use asset | 5,685,985 | - | ||||||||||||||
Other assets | 124,224 | 241,365 | 124,364 | 123,933 | ||||||||||||
Total assets | $ | 42,015,775 | $ | 41,860,797 | $ | 52,647,396 | $ | 47,119,983 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 812,536 | $ | 3,083,344 | $ | 1,468,475 | $ | 859,530 | ||||||||
Accrued liabilities | 3,635,181 | 3,199,864 | 6,328,218 | 8,134,341 | ||||||||||||
Notes payable, current portion | 290,571 | 296,594 | 286,700 | 279,588 | ||||||||||||
Operating lease liabilities, current portion | 715,864 | - | ||||||||||||||
Total current liabilities | 4,738,288 | 6,579,802 | 8,799,257 | 9,273,459 | ||||||||||||
Notes payable, less current portion | 34,196 | 52,358 | 33,740 | 32,903 | ||||||||||||
Other liabilities, noncurrent | 2,511,154 | 1,739,430 | 490,794 | 2,432,272 | ||||||||||||
Operating lease liabilities, noncurrent | 6,934,074 | - | ||||||||||||||
Total liabilities | 7,283,638 | 8,371,590 | 16,257,865 | 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; 32,579,118 and 33,176,146 shares issued and outstanding, respectively | 326 | 332 | ||||||||||||||
Common stock, $0.00001 par value; 50,000,000 shares authorized; 33,033,330 and 32,949,987 shares issued and outstanding, respectively | 331 | 330 | ||||||||||||||
Additional paid-in capital | 88,698,138 | 90,251,145 | 89,874,181 | 89,571,641 | ||||||||||||
Accumulated deficit | (53,654,064 | ) | (56,516,895 | ) | (53,111,576 | ) | (53,731,903 | ) | ||||||||
Accumulated other comprehensive loss | (312,263 | ) | (245,375 | ) | (373,405 | ) | (458,719 | ) | ||||||||
Total stockholders' equity | 34,732,137 | 33,489,207 | 36,389,531 | 35,381,349 | ||||||||||||
Total liabilities and stockholders' equity | $ | 42,015,775 | $ | 41,860,797 | $ | 52,647,396 | $ | 47,119,983 |
See accompanying notes
LRAD CorporationGenasys Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended | Nine months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues: | ||||||||||||||||
Product sales | $ | 8,037,460 | $ | 6,583,865 | $ | 26,726,151 | $ | 21,045,148 | ||||||||
Contract and other | 826,266 | 930,203 | 2,506,825 | 1,965,934 | ||||||||||||
Total revenues | 8,863,726 | 7,514,068 | 29,232,976 | 23,011,082 | ||||||||||||
Cost of revenues | 4,261,733 | 3,815,203 | 14,351,217 | 11,318,697 | ||||||||||||
Gross Profit | 4,601,993 | 3,698,865 | 14,881,759 | 11,692,385 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative | 2,712,846 | 2,904,135 | 7,939,232 | 7,610,424 | ||||||||||||
Research and development | 1,202,686 | 972,857 | 3,530,805 | 2,664,829 | ||||||||||||
Total operating expenses | 3,915,532 | 3,876,992 | 11,470,037 | 10,275,253 | ||||||||||||
Income (loss) from operations | 686,461 | (178,127 | ) | 3,411,722 | 1,417,132 | |||||||||||
Other income and expense, net | 69,890 | 24,159 | 126,566 | 73,894 | ||||||||||||
Income (loss) from operations before income taxes | 756,351 | (153,968 | ) | 3,538,288 | 1,491,026 | |||||||||||
Income tax expense (benefit) | 118,310 | (73,749 | ) | 675,457 | 2,793,590 | |||||||||||
Net income (loss) | $ | 638,041 | $ | (80,219 | ) | $ | 2,862,831 | $ | (1,302,564 | ) | ||||||
Net income (loss) per common share | ||||||||||||||||
Basic | $ | 0.02 | $ | (0.00 | ) | $ | 0.09 | $ | (0.04 | ) | ||||||
Diluted | $ | 0.02 | $ | (0.00 | ) | $ | 0.09 | $ | (0.04 | ) | ||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 32,575,118 | 32,306,207 | 32,684,311 | 32,314,038 | ||||||||||||
Diluted | 33,372,777 | 32,306,207 | 33,341,057 | 32,314,038 |
LRAD Corporation
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three months ended | Nine months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income (loss) | $ | 638,041 | $ | (80,219 | ) | $ | 2,862,831 | $ | (1,302,564 | ) | ||||||
Other comprehensive income (loss) | ||||||||||||||||
Unrealized gain (loss) on marketable securities | 9,483 | 5,805 | 19,102 | (11,064 | ) | |||||||||||
Unrealized foreign currency gain (loss) | 47,055 | (217,231 | ) | (85,990 | ) | (212,875 | ) | |||||||||
Comprehensive income (loss) | $ | 694,579 | $ | (291,645 | ) | $ | 2,795,943 | $ | (1,526,503 | ) |
Three months ended | ||||||||
December 31, | ||||||||
2019 | 2018 | |||||||
Revenues: | ||||||||
Product sales | $ | 8,007,938 | $ | 9,348,168 | ||||
Contract and other | 773,764 | 829,391 | ||||||
Total revenues | 8,781,702 | 10,177,559 | ||||||
Cost of revenues | 4,179,597 | 5,088,301 | ||||||
Gross Profit | 4,602,105 | 5,089,258 | ||||||
Operating expenses | ||||||||
Selling, general and administrative | 2,821,525 | 2,751,008 | ||||||
Research and development | 1,083,923 | 1,048,375 | ||||||
Total operating expenses | 3,905,448 | 3,799,383 | ||||||
Income from operations | 696,657 | 1,289,875 | ||||||
Other income | 96,060 | 39,068 | ||||||
Income before income taxes | 792,717 | 1,328,943 | ||||||
Income tax expense | 172,390 | 283,003 | ||||||
Net income | $ | 620,327 | $ | 1,045,940 | ||||
Net income per common share - basic and diluted | $ | 0.02 | $ | 0.03 | ||||
Weighted average common shares outstanding: | ||||||||
Basic | 32,977,765 | 32,896,021 | ||||||
Diluted | 33,710,620 | 33,570,866 |
See accompanying notes
LRAD CorporationGenasys Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended | ||||||||
December 31, | ||||||||
2019 | 2018 | |||||||
Net income | $ | 620,327 | $ | 1,045,940 | ||||
Other comprehensive income | ||||||||
Unrealized gain on marketable securities | (3,486 | ) | (613 | ) | ||||
Unrealized foreign currency gain (loss) | 88,800 | (53,722 | ) | |||||
Comprehensive income | $ | 705,641 | $ | 991,605 |
Genasys Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended | ||||||||
June 30, | ||||||||
2019 | 2018 | |||||||
Operating Activities: | ||||||||
Net income (loss) | $ | 2,862,831 | $ | (1,302,564 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 623,317 | 337,200 | ||||||
Warranty provision | 62,689 | 12,361 | ||||||
Inventory obsolescence | 121,035 | 91,976 | ||||||
Share-based compensation | 563,386 | 433,063 | ||||||
Deferred income taxes | 675,457 | 2,793,590 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | (4,029,608 | ) | (496,642 | ) | ||||
Inventories, net | 200,306 | (239,360 | ) | |||||
Prepaid expenses and other | 2,330,897 | 153,576 | ||||||
Other assets | 116,973 | (60,615 | ) | |||||
Accounts payable | (2,267,016 | ) | 376,864 | |||||
Payroll and related | (583,162 | ) | (81,631 | ) | ||||
Warranty settlements | (30,287 | ) | (42,602 | ) | ||||
Accrued and other liabilities | 1,766,516 | 178,843 | ||||||
Net cash provided by operating activities | 2,413,334 | 2,154,059 | ||||||
Investing Activities: | ||||||||
Purchases of marketable securities | (3,290,667 | ) | (3,208,197 | ) | ||||
Proceeds from maturities of marketable securities | 3,624,338 | 3,335,639 | ||||||
Capital expenditures | (303,912 | ) | (166,845 | ) | ||||
Purchase of Genasys, net of cash and restricted cash acquired | - | (2,246,545 | ) | |||||
Net cash provided by (used in) investing activities | 29,759 | (2,285,948 | ) | |||||
Financing Activities: | ||||||||
Proceeds from exercise of stock options | 54,621 | 1,027,719 | ||||||
Repurchase of common stock | (2,171,022 | ) | (500,272 | ) | ||||
Proceeds from the issuance of unsecured promissory notes | - | 63,144 | ||||||
Payments on promissory notes | (17,044 | ) | (786,437 | ) | ||||
Net cash used in financing activities | (2,133,445 | ) | (195,846 | ) | ||||
Effect of foreign exchange rate on cash | (21,443 | ) | (1,594 | ) | ||||
Net increase (decrease) in cash, cash equivalents, and restricted cash | 288,205 | (329,329 | ) | |||||
Cash, cash equivalents and restricted cash, beginning of period | 11,806,074 | 12,803,887 | ||||||
Cash, cash equivalents and restricted cash, end of period | $ | 12,094,279 | $ | 12,474,558 |
Three months ended | ||||||||||||||||
December 31, | ||||||||||||||||
2019 | 2018 | |||||||||||||||
Operating Activities: | ||||||||||||||||
Net income | $ | 620,327 | $ | 1,045,940 | ||||||||||||
Adjustments to reconcile net income to net cash used in operating activities | ||||||||||||||||
Depreciation and amortization | 208,537 | 201,267 | ||||||||||||||
Warranty provision | (19,516 | ) | 20,618 | |||||||||||||
Inventory obsolescence | 94,415 | 54,854 | ||||||||||||||
Share-based compensation | 158,327 | 133,845 | ||||||||||||||
Deferred income taxes | 172,390 | 283,003 | ||||||||||||||
Amortization of operating lease right of use asset | 145,382 | - | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable, net | (2,286,618 | ) | (5,916,242 | ) | ||||||||||||
Inventories, net | (320,998 | ) | (2,029,403 | ) | ||||||||||||
Prepaid expenses and other | 760,823 | 2,136,282 | ||||||||||||||
Accounts payable | 604,134 | (66,849 | ) | |||||||||||||
Accrued and other liabilities | (1,918,180 | ) | (957,199 | ) | ||||||||||||
Net cash used in operating activities | (1,780,977 | ) | (5,093,884 | ) | ||||||||||||
Investing Activities: | ||||||||||||||||
Purchases of marketable securities | (639,794 | ) | (874,353 | ) | ||||||||||||
Proceeds from maturities of marketable securities | 588,749 | 982,834 | ||||||||||||||
Capital expenditures | (86,159 | ) | (38,813 | ) | ||||||||||||
Net cash (used in) provided by investing activities | (137,204 | ) | 69,668 | |||||||||||||
Financing Activities: | ||||||||||||||||
Proceeds from exercise of stock options | 144,214 | 2,528 | ||||||||||||||
Repurchase of common stock | - | (1,621,022 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 144,214 | (1,618,494 | ) | |||||||||||||
Effect of foreign exchange rate on cash | 14,336 | (9,734 | ) | |||||||||||||
Net decrease in cash, cash equivalents, and restricted cash | (1,759,631 | ) | (6,652,444 | ) | ||||||||||||
Cash, cash equivalents and restricted cash, beginning of period | 19,516,918 | 11,806,074 | ||||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 17,757,287 | $ | 5,153,630 | ||||||||||||
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets: | ||||||||||||||||
Cash and cash equivalents | $ | 11,290,068 | $ | 12,030,076 | $ | 17,092,203 | $ | 4,416,106 | ||||||||
Restricted cash, current portion | 369,551 | 346,027 | 269,830 | 397,933 | ||||||||||||
Long-term restricted cash | 434,660 | 98,455 | 395,254 | 339,591 | ||||||||||||
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows | $ | 12,094,279 | $ | 12,474,558 | $ | 17,757,287 | $ | 5,153,630 |
See accompanying notes
LRAD CorporationGenasys Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended June 30, | ||||||||
| 2019 | 2018 | ||||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid | $ | 2,860 | $ | 12,235 | ||||
Noncash investing and financing activities: | ||||||||
Change in unrealized gain (loss) on marketable securities | $ | 19,102 | $ | (11,064 | ) | |||
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 |
Three months ended December 31, | ||||||||
2019 | 2018 | |||||||
Noncash investing and financing activities: | ||||||||
Change in unrealized loss on marketable securities | $ | (3,486 | ) | $ | (613 | ) | ||
Initial measurement of operating lease right of use assets and liabilities | $ | 7,814,701 | $ | - |
See accompanying notes
LRAD Corporation
1. | OPERATIONS |
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. |
|
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, 2018December 31, 2019 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. |
|
New pronouncements pending adoption
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance by requiring recognition of credit losses when it is probable that a loss has been incurred. The new standard requires the establishment of an allowance for estimated credit losses on financial assets including trade and other receivables at each reporting date. The new standard will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842), which extends the effective date of Topic 326 for certain companies until fiscal years beginning after December 15, 2022. The new standard will be effective for the Company in the first quarter of fiscal year beginning October 1, 2020,2023, and early adoption is permitted. The Company is currently reviewing this standard to assess the impact on its condensed consolidated financial statements and related disclosures.
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-7, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-7”), which amends and expands Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The standard requires entities to measure nonemployee share-based payment transactions by estimating the fair value 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 accounting for nonemployee share based payment awards with such conditions. ASU 2018-7 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that fiscal year. Accordingly, this guidance will be effective for the Company in the fiscal year beginning October 1, 2019. The Company expects that the adoption of this ASU will not have a material impact on its consolidated financial statements.
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 is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within that fiscal year. Accordingly, this guidance will beis effective for the Company in the fiscal year beginning October 1, 2019. The Company expects that the adoption of this ASU will not have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which issued new guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new guidance must be adopted using the modified retrospective approach and will be effective for the Company in the fiscal year beginning October 1, 2019. Although the Company has not completed its assessment of the full impact on its consolidated financial statements of the adoption of Topic 842, the Company currently believes that the most significant changes will be related to the recognition of a right-to-use asset and a corresponding lease liability on its consolidated balance sheet for the new facility lease described in Note 13, Commitments and Contingencies.
New pronouncements adopted
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, which amends Topic 230 to add or clarify guidance on 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 using a retrospective transition method to each period 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 nine months ended June 30, 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, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This guidance changes how companies account for certain aspects of share-based payments to employees. Among other things, under the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in-capital (“APIC”), but will instead record such items as income tax expense or benefit in the income statement, and APIC pools will be eliminated. Companies will apply this guidance prospectively. Another component of the new guidance allows companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards, whereby forfeitures can be estimated, as required today, or recognized when they occur. If elected, the change to recognize forfeitures when they occur needs to be adopted using a modified retrospective approach. The guidance was effective for the Company in the first quarter of fiscal 2018. The adoption of this standard resulted in the recognition of $1.1 million of gross deferred tax assets related to the historical excess tax benefits from stock based compensation that was not previously included in deferred tax assets and a corresponding increase in the Company’s valuation allowance.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles when it becomes effective. In July 2015, the FASB deferred the effective date of the standard by an additional year; however, it provided companies the option to adopt one year earlier, commensurate with the original effective date. Accordingly, the standard 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). ASU No. 2014-09 and its amendments form Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”).
4. REVENUE RECOGNITIONIn February 2016, the FASB issued ASU No. 2016-02, Leases (“Topic 842”), which issued new guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. Leases with a term of 12 months or less will be accounted for in a manner similar to the guidance for operating leases prior to the adoption of Topic 842. Topic 842 requires entities to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available. In July 2018, the FASB issued ASU No. 2018-11 (“ASU 2018-11”), which offers a practical expedient that allows entities the option to apply the provisions of Topic 842 by recognizing a cumulative effect adjustment at the effective date of adoption without adjusting the prior comparative periods presented. In March 2019, the FASB issued ASU 2019-01 (“ASU 2019-01”), which explicitly provides disclosure relief for interim periods during the year the standard is adopted.
OnThe new guidance was effective for the Company beginning October 1, 2018, the2019. The Company adopted the new accounting standard FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) for all contracts using842 by applying the modified retrospective method. Based ontransition approach. Under this method, financial information related to periods prior to adoption will be as originally reported under the then-current standard (Topic 840, Leases). The Company elected the following practical expedients:
● | The transitional practical expedients, which must be elected as a package and applied consistently to all leases. In electing this practical expedient package the Company is not required to: |
o | reassess whether an existing or expired contract is or contains a lease |
o | reassess the lease classification for any expired or existing leases and |
o | reassess initial direct lease costs for all leases that commenced before the adoption |
● | Short-term lease practical expedient in which the Company can elect not to apply the recognition requirements of Topic 842 to short-term leases. |
As a result of adopting Topic 842 effective October 1, 2019, the Company recorded an initial measurement of $7,814,701 of operating lease liabilities and $5,823,972 of corresponding operating Right of Use (“ROU”) assets, net of tenant improvement allowances and deferred rent, primarily related to the Company’s analysisfacility lease. There was no other impact from the adoption of contracts with customersTopic 842. A portion of the existing leases are denominated in priorcurrencies other than the U.S. dollar. As a result, the associated lease liabilities will be remeasured using the current exchange rate in the applicable reporting periods, therewhich may result in foreign exchange gains or losses. There was no cumulative effect adjustment to the opening balance of the Company’s accumulated deficitretained earnings as a result of the adoptiontransition 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.
Topic 606 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers 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 revenue recognition to depict the transfer of this new standard.promised goods or services to customers in an amount that reflects the consideration a company expects to 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.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 June 30,December 31, 2019 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. SeeRefer 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 June 30, 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 | 1,473,433 | 30,424 | 1,503,857 | |||||||||
Recognition of revenue as a result of satisfying performance obligations | (2,089,763 | ) | (238,919 | ) | (2,328,682 | ) | ||||||
Effect of exchange rate on deferred revenue | - | 9,136 | 9,136 | |||||||||
Balance at December 31, 2019 | $ | 4,446,761 | $ | 860,048 | $ | 5,306,809 | ||||||
Less: non-current portion | - | (490,795 | ) | (490,795 | ) | |||||||
Current portion at December 31, 2019 | $ | 4,446,761 | $ | 369,253 | $ | 4,816,014 |
The Company’s contract liabilities are as follows:
Customer deposits | Deferred revenue | Total contract liabilities | ||||||||||
Balance at September 30, 2018 | $ | 199,596 | $ | 536,458 | $ | 736,054 | ||||||
New performance obligations | 1,588,880 | 1,445,037 | 3,033,917 | |||||||||
Recognition of revenue as a result of satisfying performance obligations | (870,521 | ) | (883,629 | ) | (1,754,150 | ) | ||||||
Effect of exchange rate on deferred revenue | - | (6,596 | ) | (6,596 | ) | |||||||
Balance at June 30, 2019 | $ | 917,955 | $ | 1,091,270 | $ | 2,009,225 | ||||||
Less: non-current portion | - | (600,756 | ) | (600,756 | ) | |||||||
Current portion at June 30, 2019 | $ | 917,955 | $ | 490,514 | $ | 1,408,469 |
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 June 30,December 31, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $2,009,225. We expect$5,306,809. The Company expects to recognize revenue on approximately $1,408,469$4,816,014 or 70%91% 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 June 30,December 31, 2019 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 June 30,December 31, 2019 and September 30, 2018.2019.
June 30, 2019 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
Cost Basis | Unrealized Gain | Fair Value | Cash Equivalents | Short-term Securities | Long-term Securities | Cost Basis | Unrealized Gain | Fair Value | Cash Equivalents | Short-term Securities | Long-term Securities | |||||||||||||||||||||||||||||||||||||
Level 1: | ||||||||||||||||||||||||||||||||||||||||||||||||
Money Market Funds | $ | 848,402 | $ | - | $ | 848,402 | $ | 848,402 | $ | - | $ | - | $ | 254,408 | $ | - | $ | 254,408 | $ | 254,408 | $ | - | $ | - | ||||||||||||||||||||||||
Level 2: | ||||||||||||||||||||||||||||||||||||||||||||||||
Certificates of deposit | 499,000 | - | 499,000 | - | - | 499,000 | 1,444,833 | - | 1,444,833 | - | 499,000 | 945,833 | ||||||||||||||||||||||||||||||||||||
Municipal securities | - | - | - | - | - | - | 270,221 | 453 | 270,674 | - | 270,674 | - | ||||||||||||||||||||||||||||||||||||
Corporate bonds | 3,968,992 | 10,157 | 3,979,149 | - | 2,978,354 | 1,000,795 | 3,404,812 | 7,423 | 3,412,235 | - | 3,412,235 | - | ||||||||||||||||||||||||||||||||||||
Subtotal | 4,467,992 | 10,157 | 4,478,149 | - | 2,978,354 | 1,499,795 | 5,119,866 | 7,876 | 5,127,742 | - | 4,181,909 | 945,833 | ||||||||||||||||||||||||||||||||||||
Total | $ | 5,316,394 | $ | 10,157 | $ | 5,326,551 | $ | 848,402 | $ | 2,978,354 | $ | 1,499,795 | $ | 5,374,274 | $ | 7,876 | $ | 5,382,150 | $ | 254,408 | $ | 4,181,909 | $ | 945,833 |
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. INVENTORIES6. INVENTORIES
Inventories consisted of the following:
June 30, | September 30, | December 31, | September 30, | |||||||||||||
2019 | 2018 | 2019 | 2019 | |||||||||||||
Raw materials | $ | 5,405,868 | $ | 4,487,273 | $ | 4,952,553 | $ | 5,060,331 | ||||||||
Finished goods | 1,235,468 | 1,768,544 | 1,108,310 | 998,607 | ||||||||||||
Work in process | 289,592 | 875,417 | 625,882 | 306,809 | ||||||||||||
Inventories, gross | 6,930,928 | 7,131,234 | 6,686,745 | 6,365,747 | ||||||||||||
Reserve for obsolescence | (518,086 | ) | (397,051 | ) | (624,999 | ) | (530,584 | ) | ||||||||
Inventories, net | $ | 6,412,842 | $ | 6,734,183 | $ | 6,061,746 | $ | 5,835,163 |
7. | PROPERTY AND EQUIPMENT |
Property and equipment consisted of the following:
June 30, | September 30, | December 31, | September 30, | |||||||||||||
2019 | 2018 | 2019 | 2019 | |||||||||||||
Office furniture and equipment | $ | 1,313,273 | $ | 1,326,784 | $ | 1,573,439 | $ | 1,498,395 | ||||||||
Machinery and equipment | 1,223,726 | 1,095,099 | 1,239,885 | 1,223,726 | ||||||||||||
Leasehold improvements | 2,000,951 | - | 2,019,794 | 2,019,794 | ||||||||||||
Construction in progress | 7,207 | 2,001,539 | 7,565 | 7,565 | ||||||||||||
Property and equipment, gross | 4,545,157 | 4,423,422 | 4,840,683 | 4,749,480 | ||||||||||||
Accumulated depreciation | (2,187,294 | ) | (1,974,697 | ) | (2,618,435 | ) | (2,479,974 | ) | ||||||||
Property and equipment, net | $ | 2,357,863 | $ | 2,448,725 | $ | 2,222,248 | $ | 2,269,506 |
Three months ended December 31, | ||||||||
2019 | 2018 | |||||||
Depreciation expense | $ | 133,975 | $ | 124,460 |
Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Depreciation expense | $ | 150,327 | $ | 62,207 | $ | 394,524 | $ | 184,174 |
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 ninethree months ended June 30, 2019. At June 30, 2019 and September 30, 2018, goodwill was $2,396,320 and $2,445,990, respectively.
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 nine months ended June 30,December 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 nine months ended June 30, 2019,period related to goodwill and intangible assets was a reductionan increase of $81,018.$87,720. The Company’s intangible assets consisted of the following:
June 30, | September 30, | December 31, | September 30, | |||||||||||||
2019 | 2018 | 2019 | 2019 | |||||||||||||
Technology | $ | 635,045 | $ | 648,208 | $ | 626,587 | $ | 611,043 | ||||||||
Customer relationships | 607,435 | 620,026 | 599,344 | 584,477 | ||||||||||||
Trade name portfolio | 220,886 | 225,464 | 217,943 | 212,537 | ||||||||||||
Non-compete agreements | 239,292 | 244,252 | 236,105 | 230,248 | ||||||||||||
Patents | 72,126 | 72,126 | 72,126 | 72,126 | ||||||||||||
1,774,784 | 1,810,076 | 1,752,105 | 1,710,431 | |||||||||||||
Accumulated amortization | (477,819 | ) | (252,730 | ) | (622,823 | ) | (534,797 | ) | ||||||||
$ | 1,296,965 | $ | 1,557,346 | $ | 1,129,282 | $ | 1,175,634 |
Three months ended December 31, | ||||||||
2019 | 2018 | |||||||
Amortization expense | $ | 74,562 | $ | 76,807 |
Future amortization expense is as follows:
Fiscal year ending September 30: | ||||
2020 (remaining nine months) | $ | 226,197 | ||
2021 | 245,581 | |||
2022 | 222,498 | |||
2023 | 191,342 | |||
2024 | 178,078 | |||
Thereafter | 65,586 | |||
Total estimated amortization expense | $ | 1,129,282 |
Three months ended | Nine months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Amortization expense | $ | 75,354 | $ | 81,262 | $ | 228,793 | $ | 153,026 |
Estimated Amortization expense for the twelve months ended June 30,
2020 | $ | 305,695 | ||
2021 | 268,860 | |||
2022 | 225,455 | |||
2023 | 205,087 | |||
2024 | 180,507 | |||
Thereafter | 111,361 | |||
Total estimated amortization expense | $ | 1,296,965 |
9. PREPAID EXPENSES AND OTHER9. PREPAID EXPENSES AND OTHER
Prepaid expenses and other current assets consisted of the following:
June 30 | September 30, | December 31, | September 30, | |||||||||||||
2019 | 2018 | 2019 | 2019 | |||||||||||||
Deposits for inventory | $ | 7,740 | $ | 1,366,069 | $ | 625,610 | $ | 1,064,640 | ||||||||
Leashold improvement receivable | 180,103 | 1,132,017 | ||||||||||||||
Prepaid insurance | 293,656 | 162,822 | 144,709 | 194,285 | ||||||||||||
Prepaid maintenance agreement | - | 93,750 | ||||||||||||||
Prepaid rent | - | 87,782 | ||||||||||||||
Dues and subscriptions | 69,674 | 92,097 | 28,572 | 88,031 | ||||||||||||
Other | 208,192 | 244,646 | 223,925 | 347,099 | ||||||||||||
$ | 759,365 | $ | 3,091,401 | $ | 1,022,816 | $ | 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 June 30, 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 repair and maintenance services over an eight- year period for products sold thereunder. The total prepaid expense was 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 amortization of the prepaid maintenance agreement was completed during the period ended March 31, 2019. As of September 30, 2018, $93,750 of the total prepayment was classified as a current asset.facility lease.
10. ACCRUED LIABILITIES 10. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
June 30, | September 30, | |||||||
2019 | 2018 | |||||||
Payroll and related | $ | 1,483,678 | $ | 2,041,735 | ||||
Deferred revenue | 490,514 | 460,086 | ||||||
Customer deposits | 917,955 | 199,596 | ||||||
Accrued contract costs | 508,645 | 197,034 | ||||||
Severance | - | 152,730 | ||||||
Warranty reserve | 131,618 | 99,216 | ||||||
Deferred rent | 102,771 | 49,467 | ||||||
Total | $ | 3,635,181 | $ | 3,199,864 |
December 31, | September 30, | |||||||
2019 | 2019 | |||||||
Payroll and related | $ | 993,089 | $ | 2,050,324 | ||||
Deferred revenue | 369,253 | 508,522 | ||||||
Customer deposits | 4,446,761 | 5,063,091 | ||||||
Accrued contract costs | 391,083 | 252,833 | ||||||
Warranty reserve | 128,032 | 150,229 | ||||||
Deferred rent | - | 109,342 | ||||||
Total | $ | 6,328,218 | $ | 8,134,341 |
Other liabilities-noncurrent consisted of the following:
June 30, | September 30, | December 31, | September 30, | |||||||||||||
2019 | 2018 | 2019 | 2019 | |||||||||||||
Deferred rent | $ | 1,910,398 | $ | 1,663,058 | $ | - | $ | 1,881,387 | ||||||||
Deferred extended warranty revenue | 600,756 | 76,372 | 490,794 | 550,885 | ||||||||||||
Total | $ | 2,511,154 | $ | 1,739,430 | $ | 490,794 | $ | 2,432,272 |
Payroll and related
Payroll and related consistsconsisted primarily of accrued vacation, bonus, sales commissions, and benefits.
Deferred Revenue
Deferred revenue consists primarily ofat December 31, 2019 included prepayments from customers for services, including extended warranty, obligations and prepayments for software support agreements.scheduled to be performed in the twelve months ended December 31, 2020.
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 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:
June 30, | September 30, | December 31, | September 30, | |||||||||||||
2019 | 2018 | 2019 | 2019 | |||||||||||||
Beginning balance | $ | 99,216 | $ | 104,518 | $ | 150,229 | $ | 99,216 | ||||||||
Warranty provision | 62,689 | 6,093 | (19,516 | ) | 85,078 | |||||||||||
Warranty settlements | (30,287 | ) | (11,395 | ) | (2,681 | ) | (34,065 | ) | ||||||||
Ending balance | $ | 131,618 | $ | 99,216 | $ | 128,032 | $ | 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 JuneSeptember 30, 2019 and September 30, 2018 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 $2,013,169 at June$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 Note12, Leases for further detail on the adoption of Topic 842.
Deferred extended warranty revenueExtended 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 June 30,December 31, 2019. 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 June 30,December 31, 2019 are as follows:
Agency | Due Date | Principal | Due Date | Principal | |||||||
Ministry of Economy and Competitiveness | February 2, 2022 | $ | 51,295 | February 2, 2022 | 50,610 | ||||||
Ministry of Economy and Competitiveness | February 2, 2024 | 273,472 | (a) | February 2, 2024 | 269,830 | (a) | |||||
$ | 324,767 | $ | 320,440 |
(a) | This loan is secured by |
The following is a schedule of future annual payments as of June 30,December 31, 2019:
2020 | $ | 290,571 | $ | 286,700 | ||||
2021 | 17,098 | 16,870 | ||||||
2022 | 17,098 | 16,870 | ||||||
2023 | - | |||||||
Total | $ | 324,767 | $ | 320,440 |
The current portion of debt is $290,571$286,700 and the noncurrent portion of debt is $34,196.$33,740.
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 December 31, 2019, including the changes during the periods.
Operating ROU asset | ||||
Initial measurement at October 1, 2019 | $ | 7,814,701 | ||
Less lease incentives and tenant improvement allowance | (1,990,729 | ) | ||
Net operating lease ROU assets at October 1, 2019 | 5,823,972 | |||
Less amortization of operating lease ROU assets | (145,382 | ) | ||
Effect of exchange rate on operating lease ROU assets | 7,395 | |||
Operating lease ROU assets at December 31, 2019 | $ | 5,685,985 |
Operating lease liabilities | ||||
Initial measurement at October 1, 2019 | $ | 7,814,701 | ||
Less lease principal payments on operating lease liabilities | (172,158 | ) | ||
Effect of exchange rate on operating lease liabilities | 7,395 | |||
Operating lease liabilities at December 31, 2019 | 7,649,938 | |||
Less non-current portion | (6,934,074 | ) | ||
Current portion as December 31, 2019 | $ | 715,864 |
As of December 31, 2019, the Company’s operating leases have a weighted-average remaining lease term of 8.43 years and a weighted-average discount rate of 4.13%. INCOME TAXESThe maturities of the operating lease liabilities are as follows:
As of | ||||
December 31, 2019 | ||||
Fiscal year ending September 30: | ||||
2020 (remaining nine months) | $ | 755,464 | ||
2021 | 1,033,413 | |||
2022 | 1,060,395 | |||
2023 | 1,012,109 | |||
2024 | 1,008,177 | |||
Thereafter | 4,247,217 | |||
Total undiscounted operating lease payments | 9,116,775 | |||
Less imputed interest | (1,466,837 | ) | ||
Present value of operating lease liabilities | 7,649,938 | |||
Less lease liability, noncurrent | (6,934,074 | ) | ||
Lease liability, current portion | $ | 715,864 |
For the ninethree months ended June 30,December 31, 2019 and 2018, total lease expense under operating leases was approximately $224,031 and $224,690 respectively. The Company did not have any short-term lease expense during the three months ended December 31, 2019.
13. | INCOME TAXES |
For the three months ended December 31, 2019, the Company recorded income tax expense of $675,457$172,390 reflecting an effective tax rate of 20.03%21.8%. For the ninethree months ended June 30,December 31, 2018, the Company recorded an income tax expense of $319,590 and$283,003 reflecting an additional discreteeffective tax expenserate of $2,474,000 due to the remeasurement of its deferred tax assets as a result of tax reform.21.1%. 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.
13. COMMITMENTS AND CONTINGENCIES
Facility Lease
On January 3, 2018, the Company entered into a lease for a facility of 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.
14. | COMMITMENTS AND CONTINGENCIES |
Litigation
The Company may at times be involved in litigation in the ordinary course of business. The Company will, from time to time, when appropriate in management’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 ninethree months ended June 30,December 31, 2019, the Company exceeded the minimum targeted level of orders received and revenuestargets and has recorded $902,274$408,155 of expense. Bonus related expense is included in “Accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2019 and September 30, 2018. In the ninethree months ended June 30,December 31, 2018, the company exceeded the minimum targeted level of orders received and revenuestargets and recorded $1,223,543$392,930 of expense.
15. SHARE-BASED COMPENSATION14 SHARE-BASED COMPENSATION
Equity Incentive Stock Option Plans
At June 30,December 31, 2019, 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 June 30,December 31, 2019, there were options and restricted stock units outstanding covering 691,383461,494 and 2,174,7082,093,285 shares of common stock under the 2005 Equity Plan and 2015 Equity Plan, respectively and 1,873,0591,727,937 shares of common stock available for grant for a total of 4,739,1504,282,716 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 June 30, 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 | (35,282 | ) | $ | 1.55 | ||||
Outstanding June 30, 2019 | 2,591,242 | $ | 1.94 | |||||
Exerciseable June 30, 2019 | 1,736,114 | $ | 1.93 |
Options outstanding are exercisable at prices ranging from $1.31 to $3.17 and expire over the period from 2020 to 2024 with an average life of 3.22 years. The aggregate intrinsic value of options outstanding and exercisable at June 30, 2019 was $3,495,052 and $2,364,061, 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 $3.29 per share, and the exercise price multiplied by the number of applicable options. The total intrinsic value of stock options exercised during the nine months ended June 30, 2019 was $97,609 and proceeds from these exercises were $54,621.
The following table summarized information about stock options outstanding and exercisable at June 30, 2019:
Weighted Average | Weighted Average | Weighted Average | ||||||||||||||||||||
Range of | Number | Remaining | Exercise | Number | Exercise | |||||||||||||||||
Exercise Prices | Outstanding | Contractual Life | Price | Exercisable | Price | |||||||||||||||||
$1.31 | - | $1.69 | 572,266 | 2.91 | $ | 1.57 | 557,639 | $ | 1.57 | |||||||||||||
$1.71 | - | $1.86 | 523,726 | 2.58 | $ | 1.80 | 466,663 | $ | 1.81 | |||||||||||||
$1.99 | - | $1.99 | 1,125,000 | 4.09 | $ | 1.99 | 343,750 | $ | 1.99 | |||||||||||||
$2.02 | - | $3.13 | 360,250 | 1.98 | $ | 2.55 | 358,062 | $ | 2.55 | |||||||||||||
$3.17 | - | $3.17 | 10,000 | 2.39 | $ | 3.17 | 10,000 | $ | 3.17 | |||||||||||||
2,591,242 | 1,736,114 |
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 June 30, 2019, it is probable that some of the performance conditions will be achieved and recorded $101,447 in share-based compensation expense related to these options for the three months ended June 30, 2019. 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 to each of the Company’s non-employee directors and 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.
During the quarter ended March 31, 2019, 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.
Compensation expense for RSUs was $124,991 for the three months ended June 30, 2019 and $344,473 for the nine months ended June 30, 2019. Compensation expense for RSUs was $78,252 for the three months ended June 30, 2018 and $197,325 for the nine months ended June 30, 2018.
A summary of the restricted stock units of the Company as of June 30, 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 333,727 stock options granted during the three months ended December 31, 2019. There were no stock options granted during the nine months ended June 30,fiscal 2019. The weighted average estimated fair value of employee stock options granted during the ninethree months ended June 30, 2018December 31, 2019 was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions (annualized percentages):
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Volatility | ||||
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Forfeiture rate | 10.0% | |||
Dividend yield | 0.0% | |||
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 nine-month periods ended June 30,in fiscal 2019 or in fiscal year 2018.
As of June 30,December 31, 2019, there was approximately $575,955$341,456 of total unrecognized compensation costs related to outstanding non-performance-based employee stock options and restricted stock units.options. This amount is expected to be recognized over a weighted average period of 1.052.9 years. To the extent the forfeiture rate is different from what the Company anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.
Performance-Based Stock Options
On August 1, 2016, the Company awarded a performance-based stock option (PVO) to purchase 750,000 shares of the Company’s common stock to a key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2019 and 2020 (375,000 shares for each year) including a minimum free cash flow margin and net revenue targets at four different target levels for each of the years. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets. As of December 31, 2019, 187,500 of the options related to the 2019 targets vested.
The Company determined that as of December 31, 2019, it is not probable that the performance conditions related to the 2020 options 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. The company did not grant any PVO’s during the three months ended December 31, 2019.
Restricted Stock Units
On March 20, 2018, the Board of Directors approved an additional 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 issued at a market value of $278,750, which have been and will be expensed on a straight line basis through the March 20, 2019 vest date. Also, during fiscal 2018, 93,330 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 $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 will be 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. There were no RSU’s granted during the three months ended December 31, 2019.
Compensation expense for RSU’s was $126,367 for the three months ended December 31, 2019. Compensation expense for RSU’s was $79,112 for the three months ended December 31, 2018.
A summary of the restricted stock units of the Company as of December 31, 2019 is presented below:
Number of Shares | Weighted Average Grant Date Fair Value | |||||||
Outstanding September 30, 2019 | 274,849 | $ | 2.59 | |||||
Granted | - | $ | - | |||||
Released | - | $ | - | |||||
Forfeited/cancelled | (2,222 | ) | $ | 2.50 | ||||
Outstanding December 31, 2019 | 272,627 | $ | 2.60 |
Stock Option Summary Information
A summary of the activity in options to purchase the capital stock of the Company as of December 31, 2019 is presented below:
Number of Shares | Weighted Average Exercise Price | |||||||
Outstanding September 30, 2019 | 2,219,268 | $ | 1.94 | |||||
Granted | 333,727 | $ | 3.40 | |||||
Forfeited/expired | (187,500 | ) | $ | 1.99 | ||||
Exercised | (83,343 | ) | $ | 1.73 | ||||
Outstanding December 31, 2019 | 2,282,152 | $ | 2.17 | |||||
Exerciseable December 31, 2019 | 1,539,220 | $ | 1.97 |
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 3.6 years. The aggregate intrinsic value of options outstanding and exercisable at December 31, 2019 was $2,562,099 and $1,997,716, 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 three months ended December 31, 2019 was $128,318 and proceeds from these exercises were $144,214. The total intrinsic value of stock options exercised during the three months ended December 31, 2018 was $1,504 and proceeds from these exercises were $2,528.
The following table summarized information about stock options outstanding at December 31, 2019:
Weighted Average | Weighted Average | Weighted Average | ||||||||||||||||||||
Range of | Number | Remaining | Exercise | Number | Exercise | |||||||||||||||||
Exercise Prices | Outstanding | Contractual Life | Price | Exercisable | Price | |||||||||||||||||
$1.31 | - | $1.76 | 584,533 | 2.91 | $ | 1.65 | 531,220 | $ | 1.65 | |||||||||||||
$1.86 | - | $1.86 | 130,142 | 2.96 | $ | 1.86 | 130,142 | $ | 1.86 | |||||||||||||
$1.99 | - | $1.99 | 937,500 | 3.58 | $ | 1.99 | 562,500 | $ | 1.99 | |||||||||||||
$2.02 | - | $3.40 | 629,977 | 4.35 | $ | 2.97 | 315,358 | $ | 2.97 | |||||||||||||
2,282,152 | 3.59 | $ | 2.17 | 1,539,220 | $ | 1.97 |
The Company recorded $31,960 and $54,733 of stock option compensation expense for employees, directors and consultants for the three months ended December 31, 2019, and 2018, 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 | Nine months ended | Three months ended | ||||||||||||||||||||||
June 30, | June 30, | December 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Cost of revenues | $ | 3,627 | $ | 5,111 | $ | 12,126 | $ | 16,367 | $ | 3,642 | $ | 4,298 | ||||||||||||
Selling, general and administrative | 242,660 | 123,311 | 508,761 | 352,766 | ||||||||||||||||||||
Selling, general, and administrative | 143,927 | 111,851 | ||||||||||||||||||||||
Research and development | 11,279 | 20,391 | 42,499 | 63,930 | 10,758 | 17,696 | ||||||||||||||||||
$ | 257,566 | $ | 148,813 | $ | 563,386 | $ | 433,063 | $ | 158,327 | $ | 133,845 |
16. STOCKHOLDERS’ EQUITY15 STOCKHOLDERS’ EQUITY
Summary
The following table summarizes changes in the components of stockholders’ equity during the ninethree months ended June 30,December 31, 2019 and the ninethree months ended June 30,December 31, 2018:
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
Additional | Other | Total | Additional | Other | Total | |||||||||||||||||||||||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders' | Common Stock | Paid-in | Accumulated | Comprehensive | Stockholders' | |||||||||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Equity | Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||||
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 | |||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | 32,949,987 | 330 | $ | 89,571,641 | $ | (53,731,903 | ) | $ | (458,719 | ) | $ | 35,381,349 | ||||||||||||||||||||||||||||||||||||
Share-based compensation expense | - | - | 171,975 | - | - | 171,975 | - | - | 158,327 | - | - | 158,327 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, net | 26,682 | - | 42,644 | - | - | 42,644 | 83,343 | 1 | 144,213 | - | - | 144,214 | ||||||||||||||||||||||||||||||||||||
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 | ) | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | - | - | - | - | 85,314 | 85,314 | ||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | 1,178,850 | - | 1,178,850 | - | - | - | 620,327 | - | 620,327 | ||||||||||||||||||||||||||||||||||||
Balance at March 31, 2019 | 32,572,118 | $ | 326 | $ | 88,431,123 | $ | (54,292,105 | ) | $ | (368,801 | ) | $ | 33,770,543 | |||||||||||||||||||||||||||||||||||
Share-based compensation expense | - | - | $ | 257,566 | $ | - | $ | - | 257,566 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, net | 7,000 | - | 9,449 | - | - | 9,449 | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | 56,538 | 56,538 | ||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | 638,041 | - | 638,041 | |||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 32,579,118 | $ | 326 | $ | 88,698,138 | $ | (53,654,064 | ) | $ | (312,263 | ) | $ | 34,732,137 | |||||||||||||||||||||||||||||||||||
Balance at December 31, 20119 | 33,033,330 | 331 | $ | 89,874,181 | $ | (53,111,576 | ) | $ | (373,405 | ) | $ | 36,389,531 |
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 |
Common Stock Activity
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 | ||||||||||||||||||
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 | - | - | - | - | - | ||||||||||||||||||
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-based compensation expense | - | - | 148,813 | - | - | 148,813 | ||||||||||||||||||
Issuance of common stock upon exercise of stock options, net | 468,801 | 5 | 842,001 | - | - | 842,006 | ||||||||||||||||||
Stock buyback | (211,326 | ) | (2 | ) | (500,272 | ) | - | - | (500,274 | ) | ||||||||||||||
Other comprehensive loss | - | - | - | - | (211,426 | ) | (211,426 | ) | ||||||||||||||||
Net income | - | - | - | (80,220 | ) | - | (80,220 | ) | ||||||||||||||||
Balance at June 30, 2018 | 32,651,763 | $ | 325 | $ | 88,917,349 | $ | (54,074,417 | ) | $ | (225,208 | ) | $ | 34,618,049 |
During the three months ended December 31, 2019, the Company issued 83,343 shares of common stock and obtained gross proceeds of $144,214 in connection with the exercise of stock options. During the three months ended December 31, 2018, the Company issued 1,600 shares of common stock and obtained gross proceeds of $2,528 in connection with the exercise of stock options.
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 June 30, 2019, $4.5 million was available for share repurchase under this program.shares. The previous program expired on December 31, 2018.
ThereDuring the three months ended December 31, 2019 no shares were 788,425repurchased by the Company. During the three months ended December 31, 2018, 588,425 shares were repurchased for $2,171,022 during the nine months ended June 30, 2019. There were 211,236 shares repurchased for $500,274 during the nine-month period ended June 30, 2018. At June 30, 2019, all$1,621,022. All repurchased shares were retired into treasury.retired.
Dividends
There were no dividends declared in the ninethree months ended June 30,December 31, 2019 and 2018.
16.NET INCOME (LOSS)PER SHARE
Basic earnings per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income (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
17. | NET INCOME PER SHARE |
The following table sets forth the computation of basic and diluted net income (loss) per share:
Three months ended | Nine months ended | Three months Ended | ||||||||||||||||||||||
June 30, | June 30, | December 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Net income (loss) | 638,041 | (80,219 | ) | 2,862,831 | (1,302,564 | ) | ||||||||||||||||||
Net income | $ | 620,327 | $ | 1,045,940 | ||||||||||||||||||||
Basic income (loss) per share | $ | 0.02 | $ | (0.00 | ) | $ | 0.09 | $ | (0.04 | ) | ||||||||||||||
Diluted income (loss) per share | $ | 0.02 | $ | (0.00 | ) | $ | 0.09 | $ | (0.04 | ) | ||||||||||||||
Basic income per share | $ | 0.02 | $ | 0.03 | ||||||||||||||||||||
Diluted income per share | $ | 0.02 | $ | 0.03 | ||||||||||||||||||||
Weighted average shares outstanding - basic | 32,575,118 | 32,306,207 | 32,684,311 | 32,314,038 | 32,977,765 | 32,896,021 | ||||||||||||||||||
Assumed exercise of dilutive options | 797,659 | - | 656,746 | - | 732,855 | 674,845 | ||||||||||||||||||
Weighted average shares outstanding - diluted | 33,372,777 | 32,306,207 | 33,341,057 | 32,314,038 | 33,710,620 | 33,570,866 | ||||||||||||||||||
Potentially diluted securities outstanding at period end excluded from diluted computation as the inclusion would have been antidilutive: | ||||||||||||||||||||||||
Options | 761,250 | 1,766,250 | 976,750 | 2,706,567 | 708,727 | 991,750 | ||||||||||||||||||
RSU | - | 218,330 | - | 218,330 | ||||||||||||||||||||
Total | 761,250 | 1,984,580 | 976,750 | 2,924,897 |
18. SEGMENT INFORMATION17 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:
For the three months ended December 31, 2019:
Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenue from external customers | ||||||||||||||||
LRAD | $ | 8,302,811 | $ | 7,012,430 | $ | 27,606,026 | $ | 22,094,790 | ||||||||
Genasys | 560,915 | 501,638 | 1,626,950 | 916,292 | ||||||||||||
$ | 8,863,726 | $ | 7,514,068 | $ | 29,232,976 | $ | 23,011,082 | |||||||||
Intercompany revenues | ||||||||||||||||
LRAD | $ | - | $ | - | $ | - | $ | - | ||||||||
Genasys | 257,302 | 96,192 | 724,271 | 186,010 | ||||||||||||
$ | 257,302 | $ | 96,192 | $ | 724,271 | $ | 186,010 | |||||||||
Segment operating income (loss) | ||||||||||||||||
LRAD | $ | 660,106 | $ | (63,257 | ) | $ | 3,245,060 | $ | 1,507,264 | |||||||
Genasys | 26,355 | (114,870 | ) | 166,662 | (90,132 | ) | ||||||||||
$ | 686,461 | $ | (178,127 | ) | $ | 3,411,722 | $ | 1,417,132 | ||||||||
Other expenses: | ||||||||||||||||
Depreciation and amortization expense | ||||||||||||||||
LRAD | $ | 149,331 | $ | 62,665 | $ | 392,296 | $ | 187,433 | ||||||||
Genasys | 76,350 | 80,804 | 231,021 | 149,767 | ||||||||||||
$ | 225,681 | $ | 143,469 | $ | 623,317 | $ | 337,200 | |||||||||
Interest expense | ||||||||||||||||
LRAD | $ | - | $ | - | $ | - | $ | - | ||||||||
Genasys | - | 4,388 | - | 14,205 | ||||||||||||
$ | - | $ | 4,388 | $ | - | $ | 14,205 | |||||||||
Income tax expense (benefit) | ||||||||||||||||
LRAD | $ | 118,310 | $ | (73,749 | ) | $ | 675,457 | $ | 2,793,590 | |||||||
Genasys | - | - | - | - | ||||||||||||
$ | 118,310 | $ | (73,749 | ) | $ | 675,457 | $ | 2,793,590 |
Revenue from External Customers | Intercompany Revenues | Operating Income | Depreciation and amortization expense | Income Tax Expense | ||||||||||||||||
Hardware | $ | 8,362,042 | $ | - | $ | 696,070 | $ | 131,167 | $ | 172,390 | ||||||||||
Software | 419,660 | 384,995 | 587 | 77,370 | - | |||||||||||||||
$ | 8,781,702 | $ | 384,995 | $ | 696,657 | $ | 208,537 | $ | 172,390 |
June 30, 2019 | September 30, 2018 | |||||||
Long-lived assets | ||||||||
LRAD | $ | 2,381,722 | $ | 2,478,144 | ||||
Genasys | 3,669,426 | 3,973,917 | ||||||
$ | 6,051,148 | $ | 6,452,061 | |||||
Total assets | ||||||||
LRAD | $ | 37,029,052 | $ | 36,770,872 | ||||
Genasys | 4,986,723 | 5,089,925 | ||||||
$ | 42,015,775 | $ | 41,860,797 |
As of December 31, 2019:
Long-lived assets | Total Assets | |||||||
Hardware | $ | 2,226,938 | $ | 47,904,766 | ||||
Software | 3,488,993 | 4,742,630 | ||||||
$ | 5,715,931 | $ | 52,647,396 |
18. MAJOR CUSTOMERS
For the three months ended JuneDecember 31, 2018:
Revenue from External Customers | Intercompany Revenues | Operating Income (loss) | Depreciation and amortization expense | Income Tax Expense | ||||||||||||||||
Hardware | $ | 9,656,702 | $ | - | $ | 1,302,646 | $ | 124,301 | $ | 283,003 | ||||||||||
Software | 520,857 | 186,972 | (12,771 | ) | 76,966 | - | ||||||||||||||
$ | 10,177,559 | $ | 186,972 | $ | 1,289,875 | $ | 201,267 | $ | 283,003 |
As of September 30, 2019, revenues from one customer accounted for 30% of total revenues and for2019:
Long-lived assets | Total Assets | |||||||
Hardware | $ | 2,283,344 | $ | 42,470,356 | ||||
Software | 3,467,546 | 4,649,627 | ||||||
$ | 5,750,890 | $ | 47,119,983 |
19. | MAJOR CUSTOMERS, SUPPLIERS AND RELATED INFORMATION |
For the ninethree months ended June 30,December 31, 2019, revenues from two customers accounted for 43%62% and 11%13% of total revenues with no other single customer accounting for more than 10% of revenues. At June 30,December 31, 2019, accounts receivable from threetwo customers accounted for 30%, 14%66% and 11%10% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.
For the three months ended June 30,December 31, 2018, revenues from three customersone customer accounted for 15%, 11% and 10% of total revenues and for the nine months ended June 30, 2018 revenues from three customers accounted for 22%, 11% and 11%60% of total revenues with no other single customer accounting for more than 10% of revenues. At June 30,December 31, 2018, accounts receivable from three customersone customer accounted for 15%, 13% and 12%64% 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 June 30, | Nine months ended June 30, | Three months ended December 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Americas | $ | 5,661,496 | $ | 3,814,782 | $ | 23,430,521 | $ | 14,918,891 | 6,803,820 | 8,721,320 | ||||||||||||||
Asia Pacific | 2,681,229 | 3,089,770 | 3,827,716 | 6,367,532 | 1,547,771 | 639,056 | ||||||||||||||||||
Europe, Middle East and Africa | 521,001 | 609,516 | 1,974,739 | 1,724,659 | 430,111 | 817,183 | ||||||||||||||||||
Total Revenues | $ | 8,863,726 | $ | 7,514,068 | $ | 29,232,976 | $ | 23,011,082 | 8,781,702 | 10,177,559 |
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, 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 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 unique 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;
• Public Safety Mass Notification, 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 leadingindustry-leading vocal clarity from close range to over 14 square kilometers, and from a single installation, and geospecific 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 created a new worldwide market and a recognized global brand by selling our industry-leading AHDs and advancedThe Company’s critical communication systems are being used in 72 countries throughout the world in diverse applications, including public safety, national emergency warning systems, mass notification, systems into 72 countries.defense, law enforcement, critical infrastructure protection and many more. We continue to develop new acousticcommunication innovations and believe we have established a significant competitive advantageadvantages 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 comprises a full range of communication solutions - from handheld, portable devices to permanently installed, remotely operated systems. We continue to enhanceadd new models and features to meet specific customer requirements and to expand into new markets.
We designed and developed our acoustic communication technologies and product lines to provide a complete range of systems and accessories. Our patented XL driver technology, which generates higher audio output in a smaller and lighter form factor, is being incorporated into many of our AHD and public safetymultidirectional mass notification products.
Our multidirectional product line was builtbuilding on the success of our AHD’s.LRAD systems. Unlike most siren-based public mass notification systems on the market,siren-only installations, our public safety mass notification 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 multi-modalmultiple system activation and control options makeenable us more competitiveto successfully compete in the large and growing mass notification market.
CCaaS is a cloud-based mobile notification platform that enables emergency personnel, first responders, municipalities, companies and educational institutions to send public safety warnings and notifications to the mobile phones of affected populations in specific geographic areas with reliability, speed and ease. Alerts and notifications can be sent from a desktop or our mobile application. Genasys offers the only unified critical communications platform that provides multi-modal, geo-targeted cellphone alerts and audible messages with industry-leading vocal clarity. Our products are designed to meet a broad range of diverse applications for emergency warning and mass notification, fixeduser-friendly software interface and mobile military deployments; maritime, critical infrastructure, perimeter, commercial, border,application manage and homeland security; law enforcement, emergency responderdeliver life-saving notifications and fire rescue communications; asset protection,information to people at risk, before, during and wildlife preservation and control. after crisis situations.
Business developmentsin the fiscal quarter ended June 30,December 31, 2019:
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Revenues infor the thirdCompany’s first quarter of fiscal quarter ended June 30, 2019,2020, were $8.9$8.8 million, an increase of $1.4 milliona decrease from $7.5$10.2 million in the third fiscalfirst quarter of 2018. The increase infiscal 2019. LRAD Acoustic Hailing Device (“AHD”) revenues was primarily driven by an increase in public safety mass notification revenues.decreased $919,801 and Public safety mass notificationSafety Mass Notification (“PSMN”) systems revenue increased $1,587,711, or 66%,decreased $476,056, compared to the third fiscal quarter of 2018, offset by a $238,053, or 5%, decrease in AHD revenues. Based on theprior year period. The timing of government budget cycles, government financial issues and leadership changemilitary conflict in certain areas of the world, delays in awarding contracts often occur,delay contract awards, resulting in uneven quarterly revenues. Gross profit increaseddecreased compared to the same quarter in the prior year primarily as a result of higher sales.lower sales, however, gross profit as a percentage of revenue increase this year due to a more favorable mix of product sales in the current year. Operating expenses were essentially unchanged compartedincreased 2.8% from $3.8 million to $3.9 million in the quarter ended December 31, 2019, as compared to the similar priorsame period a year period. The third quarter fiscal 2019 results reflect $118,310 of income tax expense which is a non-cash charge that reduced the balance of the deferred tax asset.ago. We reported net income of $638,041$620,327 for the first quarter of fiscal 2020, or $0.02 per share, compared to a net lossincome of $80,219,$1,045,940, or $0.00$0.03 per share, for the same quarter in the prior year.
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 public safety mass notification 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 make and 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 and an increased demand for LRAD systems and revolutionary public safety notification solutions. We have a reputation for producing quality products that feature industry-leading broadcast area coverage, 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 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 particularly in the Middle East, Europe and Asia where we believe there are greater market opportunities for our multidirectional products. Our selling network has expanded through the addition of sales consultants as well as continuing to improve and increase our relationships with key integrators and sales representatives within the U.S. and in aopportunities.
A large number of worldwide locations. However, we may continue to face challenges during the remaindercomponents and sub-assemblies produced by outside suppliers within our supply chain are produced within 50 miles of fiscal 2019 and into fiscal 2020 due to continuing economic and geopolitical conditionsour facility. We source a small amount of component parts form 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 difficult to determine whetherlikely that some of our multidirectional productssuppliers source parts in China. We are in contact with those suppliers and software will be accepted as viable solutions inevaluating what impact, if any, may result from the public safety mass notification market, which includes a number of large, well-known competitors.Coronavirus.
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 ThreeThee Months Ended June 30, 2019December 31, 2019 and 20182018
Three Months Ended | |||||||||||||||||||||
December 31, 2019 | December 31, 2018 | ||||||||||||||||||||
% of | % of | ||||||||||||||||||||
Total | Total | Fav(Unfav) | |||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | ||||||||||||||||
Revenues: | |||||||||||||||||||||
Product sales | $ | 8,007,938 | 91.2% | $ | 9,348,168 | 91.9% | $ | (1,340,230 | ) | (14.3%) | |||||||||||
Contract and other | 773,764 | 8.8% | 829,391 | 8.1% | (55,627 | ) | (6.7%) | ||||||||||||||
Total revenues | 8,781,702 | 100.0% | 10,177,559 | 100.0% | (1,395,857 | ) | (13.7%) | ||||||||||||||
Cost of revenues | 4,179,597 | 47.6% | 5,088,301 | 50.0% | 908,704 | 17.9% | |||||||||||||||
Gross Profit | 4,602,105 | 52.4% | 5,089,258 | 50.0% | (487,153 | ) | (9.6%) | ||||||||||||||
Operating expenses | |||||||||||||||||||||
Selling, general and administrative | 2,821,525 | 32.1% | 2,751,008 | 27.0% | (70,517 | ) | (2.6%) | ||||||||||||||
Research and development | 1,083,923 | 12.3% | 1,048,375 | 10.3% | (35,548 | ) | (3.4%) | ||||||||||||||
Total operating expenses | 3,905,448 | 44.5% | 3,799,383 | 37.3% | (106,065 | ) | (2.8%) | ||||||||||||||
Income from operations | 696,657 | 7.9% | 1,289,875 | 12.7% | (593,218 | ) | (46.0%) | ||||||||||||||
Other income | 96,060 | 1.1% | 39,068 | 0.4% | 56,992 | 145.9% | |||||||||||||||
Income before income taxes | 792,717 | 9.0% | 1,328,943 | 13.1% | (536,226 | ) | (40.3%) | ||||||||||||||
Income tax expense | 172,390 | 2.0% | 283,003 | 2.8% | 110,613 | 39.1% | |||||||||||||||
Net income | $ | 620,327 | 7.1% | $ | 1,045,940 | 10.3% | $ | (425,613 | ) | (40.7%) | |||||||||||
Net sales | |||||||||||||||||||||
LRAD | $ | 8,362,042 | 95.2% | $ | 9,656,702 | 94.9% | (1,294,660 | ) | (13.4%) | ||||||||||||
Genasys | 419,660 | 4.8% | 520,857 | 5.1% | (101,197 | ) | (19.4%) | ||||||||||||||
Total net sales | $ | 8,781,702 | 100.0% | $ | 10,177,559 | 100.0% | $ | (1,395,857 | ) | (13.7%) |
The following table setstables above set 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 | ||||||||||||||||||||||||
June 30, 2019 | June 30, 2018 | |||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Total | Total | Fav(Unfav) | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Product sales | $ | 8,037,460 | 90.7 | % | $ | 6,583,865 | 87.6 | % | $ | 1,453,595 | 22.1 | % | ||||||||||||
Contract and other | 826,266 | 9.3 | % | 930,203 | 12.4 | % | (103,937 | ) | (11.2 | %) | ||||||||||||||
Total revenues | 8,863,726 | 100.0 | % | 7,514,068 | 100.0 | % | 1,349,658 | 18.0 | % | |||||||||||||||
Cost of revenues | 4,261,733 | 48.1 | % | 3,815,203 | 50.8 | % | (446,530 | ) | (11.7 | %) | ||||||||||||||
Gross Profit | 4,601,993 | 51.9 | % | 3,698,865 | 49.2 | % | 903,128 | 24.4 | % | |||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Selling, general and administrative | 2,712,846 | 30.6 | % | 2,904,135 | 38.6 | % | 191,289 | 6.6 | % | |||||||||||||||
Research and development | 1,202,686 | 13.6 | % | 972,857 | 12.9 | % | (229,829 | ) | (23.6 | %) | ||||||||||||||
Total operating expenses | 3,915,532 | 44.2 | % | 3,876,992 | 51.6 | % | (38,540 | ) | (1.0 | %) | ||||||||||||||
Income (loss) from operations | 686,461 | 7.7 | % | (178,127 | ) | (2.4 | %) | 864,588 | 485.4 | % | ||||||||||||||
Other income and expense, net | 69,890 | 0.8 | % | 24,159 | 0.3 | % | 45,731 | 189.3 | % | |||||||||||||||
Income (loss) from operations before income taxes | 756,351 | 8.5 | % | (153,968 | ) | (2.0 | %) | 910,319 | 591.2 | % | ||||||||||||||
Income tax expense (benefit) | 118,310 | 1.3 | % | (73,749 | ) | (1.0 | %) | (192,059 | ) | 260.4 | % | |||||||||||||
Net income (loss) | $ | 638,041 | 7.2 | % | $ | (80,219 | ) | (1.1 | %) | $ | 718,260 | 895.4 | % | |||||||||||
Net sales | ||||||||||||||||||||||||
LRAD | $ | 8,302,811 | 93.7 | % | $ | 7,012,430 | 93.3 | % | $ | 1,290,381 | 18.4 | % | ||||||||||||
Genasys | 560,915 | 6.3 | % | 501,638 | 6.7 | % | 59,277 | 11.8 | % | |||||||||||||||
Total net sales | $ | 8,863,726 | 100.0 | % | $ | 7,514,068 | 100.0 | % | $ | 1,349,658 | 18.0 | % |
Revenues
Revenues increaseddecreased in the current quarter compared to the correspondingsame quarter in the prior year due to a largerthe timing of deliveries in backlog at March 31,September 30, 2019, as compared to March 31,September 30, 2018. Revenues improvedSales decreased in the current quarter for both the public safety mass notificationLRAD AHD product line (down $919,801, or 11%) and in the PSMN systems product line ($1,587,711,(down $476,056, or 66%32%) compared to the prior year quarter. The lower revenue in the in the first quarter offset by a slight decrease ($238,053, or 5%)of fiscal 2020 is largely due to one order scheduled for shipment late in AHD product line revenues.the quarter, that was delayed because the customer did not make required full payment prior to the quarter end. The receipt of orders willis often be uneven due to the timing of approvalsgovernment budgets or budgets.approvals. At June 30,December 31, 2019, we had aggregate deferred revenue of $1,091,270$860,048 for extended warranty obligations and software support agreements.
Gross Profit
The increase in gross profit in the current quarter compared to the prior year was primarily due to the higher level of sales, offset by an increase in manufacturing overhead expenses to support the increased 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 $191,289 over the prior year quarter. This reflects a decrease to compensation related expenses and smaller decreases in trade show, travel and computer related expenses.
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three months ended June 30, 2019 and 2018 of $242,660 and $123,311, respectively. The increase in the current quarter period is largely due to $101,447 for catch up performance option expense as we now believe that it is probable that certain goals under an employment agreement will be achieved.
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 $229,829 in the current quarter compared to the prior year largely due to $199,301 for increased product development and product testing expenses.
Included in research and development expenses for the three months ended June 30, 2019 and 2018 was $11,279 and $20,391 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 $718,260 increase in net income in the fiscal year 2019 third quarter was primarily due to the higher gross profit realized from increased sales in the 2019 quarter. Non-cash income tax expense of $118,310 was recognized in the three months ended June 30, 2019 compared to a non-cash income tax benefit of $73,749 in the three months ended June 30, 2018.
Comparison of Results of Operations for the Nine Months Ended June 30, 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.
Nine Months Ended | ||||||||||||||||||||||||
June 30, 2019 | June 30, 2018 | |||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Total | Total | Fav(Unfav) | ||||||||||||||||||||||
Amount | Revenue | Amount | Revenue | Amount | % | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Product sales | $ | 26,726,151 | 91.4 | % | $ | 21,045,148 | 91.5 | % | $ | 5,681,003 | 27.0 | % | ||||||||||||
Contract and other | 2,506,825 | 8.6 | % | 1,965,934 | 8.5 | % | 540,891 | 27.5 | % | |||||||||||||||
Total revenues | 29,232,976 | 100.0 | % | 23,011,082 | 100.0 | % | 6,221,894 | 27.0 | % | |||||||||||||||
Cost of revenues | 14,351,217 | 49.1 | % | 11,318,697 | 49.2 | % | (3,032,520 | ) | (26.8 | %) | ||||||||||||||
Gross Profit | 14,881,759 | 50.9 | % | 11,692,385 | 50.8 | % | 3,189,374 | 27.3 | % | |||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Selling, general and administrative | 7,939,232 | 27.2 | % | 7,610,424 | 33.1 | % | (328,808 | ) | (4.3 | %) | ||||||||||||||
Research and development | 3,530,805 | 12.1 | % | 2,664,829 | 11.6 | % | (865,976 | ) | (32.5 | %) | ||||||||||||||
Total operating expenses | 11,470,037 | 39.2 | % | 10,275,253 | 44.7 | % | (1,194,784 | ) | (11.6 | %) | ||||||||||||||
Income from operations | 3,411,722 | 11.7 | % | 1,417,132 | 6.2 | % | 1,994,590 | 140.7 | % | |||||||||||||||
Other income and expense, net | 126,566 | 0.4 | % | 73,894 | 0.3 | % | 52,672 | 71.3 | % | |||||||||||||||
Income from operations before income taxes | 3,538,288 | 12.1 | % | 1,491,026 | 6.5 | % | 2,047,262 | 137.3 | % | |||||||||||||||
Income tax expense | 675,457 | 2.3 | % | 2,793,590 | 12.1 | % | 2,118,133 | 75.8 | % | |||||||||||||||
Net income (loss) | $ | 2,862,831 | 9.8 | % | $ | (1,302,564 | ) | (5.7 | %) | $ | 4,165,395 | 319.8 | % | |||||||||||
Net sales | ||||||||||||||||||||||||
LRAD | $ | 27,606,026 | 94.4 | % | $ | 22,094,790 | 96.0 | % | 5,511,236 | 24.9 | % | |||||||||||||
Genasys | 1,626,950 | 5.6 | % | 916,292 | 4.0 | % | 710,658 | 77.6 | % | |||||||||||||||
Total net sales | $ | 29,232,976 | 100.0 | % | $ | 23,011,082 | 100.0 | % | $ | 6,221,894 | 27.0 | % |
Revenues
Revenues increased 27% for the nine-month period ended June 30, 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 included in the first quarter of fiscal 2018 as it was acquired on January 18, 2018). AHD revenues were $22,633,707 an increase of $5,566,987, or 33%, compared to the same prior year period, and public safety mass notification systems revenues were $6,599,269, an increase of $654,905, or 11%, compared to the same prior year period. The receipt of orders will often be uneven due to the timing of approvals or budgets. At June 30, 2019, we had aggregate deferred revenues of $1,091,270 for extended warranty obligations and software support agreements.
Gross Profit
The increasedecrease in gross profit in the nine months ended June 30, 2019quarter compared to the same period in the prior year was primarily due to increased sales volume partially offset by an increasethe lower level of revenue. Gross profit as a percentage of revenue was higher in manufacturing overhead expensesthe fiscal 2020 first quarter due to support increased sales.a more favorable mix of product revenue in the current year.
Our products have varying gross margins, so product mix may affect gross profits. In addition, our margins vary based on the sales channels through which our products are sold in a given period. We continue to implement product updates and changes, including raw material and component changes that may impact product costs. With such product updates and changes we have limited warranty cost experience and estimated future warranty costs can impact our gross margins. We do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $328,808 in the nine months ended June 30, 2019 compared to$70,517 over the prior year period. The increase in selling, general and administrative expenses isquarter primarily due to Genasys sellinghigher spending for sales and general administrative expenses totaling $462,770 in the first quarter of fiscal 2019 compared to zero in 2018. In addition, compensation expense was $191,512 higher than the prior year. This was partially offset by $151,679 in lower information technology related expenses, $115,359 in lower travel expenses and $65,156 in lower commission expense. As a percentage of sales, selling, general and administrative expense decreased to 27% for the nine months ended June 30, 2019 compared to 33% in the prior year period.marketing.
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the nine monthsthree-months ended June 30,December 31, 2019 and 2018 of $508,762$143,927 and $352,766,$111,851, respectively. The increase in the current fiscal year to date period is largely due to $101,447 for catch up performance option expense as we now believe that it is probable that certain goals under an employment agreement will be achieved.
We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize potential opportunities.opportunities including the European Mandate for Public Warning Systems by June 2022. Commission expenses will fluctuate based on the nature of our sales.
Research and Development Expenses
Research and development expenses increased $865,976 in the nine months ended June 30, 2019$35,548 compared to the same quarter in the prior year primarily due to increased product development activities ($632,892) and compensation and related expenses ($145,655).development.
Included in research and development expenses for the ninethree months ended June 30,December 31, 2019 and 2018, was $42,499$10,758 and $63,930$17,696, respectively, of non-cash share-based compensation costs, respectively.costs.
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 (Loss)
The $2,862,831 netNet income forin the first nine monthsquarter of fiscal year 20192020 was an improvement$620,327, a decrease of $4,165,395 over$425,613 compared to the net loss in the priorfirst quarter of fiscal year period.2019. The improved results weredecrease was primarily due to the $2,474,000 tax expenselower revenue in the first quarter of fiscal year 2018 from the remeasurement of its deferred tax assets as a result of tax reform, plus higher sales in fiscal year 2019.2020.
Liquidity and Capital Resources
Cash and cash equivalents at June 30,December 31, 2019 was $11,290,068,$17,092,203, down $1,726,875 compared to $11,063,091$18,819,078 at September 30, 2018.2019. We had short-term marketable securities of $2,978,354$4,181,909 at June 30,December 31, 2019, compared to $3,592,175$3,695,364 at September 30, 2018, and2019. We had long-term marketable securities of $1,499,795 and $1,200,541$945,833 at June 30,December 31, 2019, andcompared to $1,384,819 at September 30, 2018 respectively.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.
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.
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:
Nine months ended | ||||||||
June 30, 2019 | June 30, 2018 | |||||||
Cash provided by (used in): | ||||||||
Operating activities | $ | 2,413,334 | $ | 2,154,059 | ||||
Investing activities | $ | 29,759 | $ | (2,285,948 | ) | |||
Financing activities | $ | (2,133,445 | ) | $ | (195,846 | ) |
Three months ended | ||||||||
December 31, 2019 | December 31, 2018 | |||||||
Cash provided by (used in): | ||||||||
Operating activities | $ | (1,780,977 | ) | $ | (5,093,884 | ) | ||
Investing activities | (137,204 | ) | 69,668 | |||||
Financing activities | 144,214 | (1,618,494 | ) |
Operating Activities
Net income of $2,862,831$620,327 for the ninethree months ended June 30,December 31, 2019 was increased by $2,045,884$759,535 of non-cash items that included a reduction to deferred income taxes, share-based compensation, depreciation and amortization, warranty provision, and inventory obsolescence. Cash providedused by operating activities in the quarter reflected an increase in accounts receivable of $2,286,618 due to higher sales with net credit terms in the quarter compared to the fourth quarter of fiscal 2019, a decrease in payroll and related of $1,008,271, primarily for payment of incentive compensation earned in fiscal 2019, and lower accrued and other liabilities of $907,228, largely a decrease in customer deposits resulting from shipments in the quarter and an increase of $320,998 in inventory to support the current year reflectedbacklog,. Cash provided by operating activities included a decrease in prepaid expenses and other of $2,330,897, an increase in accrued$760,823, and other liabilities of $1,766,516, a decrease in inventory of $200,306 and a decrease in other assets of $116,973. Cash used in operating activities included an increase in accounts receivable of $4,029,608, a decrease in accounts payable of $2,267,016 and a decrease in payroll and related liabilities of $583,162.$604,134.
Net lossincome of $1,302,564$1,045,940 for the ninethree months ended June 30,December 31, 2018 was decreasedincreased by $3,668,190$693,587 of non-cash items that included a reduction to deferred income taxes, primarily resulting from enactment of the tax reform act, share-based compensation, depreciation and amortization, warranty provision, and inventory obsolescence. Cash providedused by operating activities in the prior yearfiscal quarter reflected an increase in accounts receivable of $5,916,242 due to higher sales in the quarter compared to the fourth quarter of fiscal 2018, an increase of $2,029,403 in inventory to support backlog, a decrease in payroll and related of $1,047,037, primarily for payment of incentive compensation earned in fiscal 2018, and lower accounts payable of $376,864 due to the timing of payments, decreases$66,849. Cash provided by operating activities included a decrease in prepaid expenses and other of $153,576$2,136,282 and an increase in accrued and other liabilities of $178,843. Cash used in operating activities included an increase in inventory of $239,360, an increase in accounts receivable of $496,642, an increase in other assets of $60,615, a decrease in payroll and related liabilities of $81,631 and warranty settlements of $42,602.$94,627.
We had accounts receivable of $6,814,225$5,936,915 at June 30,December 31, 2019, compared to $2,785,997$3,644,059 at September 30, 2018. The level of trade accounts receivable at June 30, 2019 represented approximately 70 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.
At June 30,December 31, 2019 and September 30, 2018,2019, our working capital was $23,886,117$25,766,162 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 nine monthsquarter of fiscal year 2019.2020.
Investing Activities
Our net cash used in investing activities was $137,204 for the three months ended December 31, 2019, compared to cash provided by investing activities was $29,759of $69,668 for the ninethree months ended June 30, 2019,December 31, 2018. In the first quarter of fiscal 2020, we increased our holdings of short and long-term marketable securities by $51,045 compared to cash useda decrease of $108,481 in investing activities of $2,285,948 for the ninethree months ended June 30,December 31, 2018. The 2018 amount included $2,246,545 for the acquisition of Genasys. Cash used in investing activities for the purchase of property and equipment was $303,912$86,159 and $166,845$38,813 for the ninethree months ended June 30,December 31, 2019 and 2018, respectively. In the nine months ended June 30, 2019, we decreased our holding of short and long-term marketable securities by $314,567, compared to a decrease of $127,442 in the nine months ended June 30, 2018. We anticipate some additional expenditures for tooling and equipment during the balance of fiscal year 2019.2020.
Financing Activities
In the ninethree months ended June 30,December 31, 2019, financing activities provided $144,214 of cash, compared to a use of $1,618,494 for financing activities for the three months ended December 31, 2018. Proceeds from the exercise of stock options were $144,214 for the three months ended December 31, 2019 and there were no repurchases of company stock. During the first three months of fiscal 2019 we used $2,133,445 for financing activities, compared to $195,846 for the nine months ended June 30, 2018. During the first nine months of 2019 we used $2,171,022$1,621,022 to repurchase shares of common stock and paid $17,044 on promissory notes, offset by $54,621$2,528 in proceeds from the exercise of stock options. The first nine months of 2018 included net payments of $786,437 to pay down debt assumed in the Genasys acquisition. Proceeds from the exercise of stock options were $1,027,719 for the nine months ended June 30, 2018. Total debt at June 30, 2019 was $324,767.
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 no588,425 shares repurchased during the nine monthsquarter ended June 30,December 31, 2018.
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 June 30,December 31, 2019 no shares were repurchased. At June 30,December 31, 2019, all repurchased shares were retired into treasury.retired. At June 30,December 31, 2019, $4.5 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 June 30,December 31, 2019.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our fiscal quarter ended June 30,December 31, 2019, 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-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
NoneNone.
Item 3. |
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None.
Item 4. | Mine Safety |
Not Applicable.
Item 5. | Other Information. |
None.
Item 6. |
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31.1 | |
31.2 | |
32.1 | |
101.INS | XBRL Instance 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.
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Date: | By: | /s/ DENNIS D. KLAHN |
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| Dennis D. Klahn, Chief Financial Officer |
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| (Principal Financial Officer) |
31
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