Genasys Inc. - Quarter Report: 2020 December (Form 10-Q)

 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

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FORM 10-Q

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(Mark one)

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2020

 

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

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GENASYS INC.

(Exact name of registrant as specified in its charter)

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Delaware	87-0361799
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
16262 West Bernardo Drive, San Diego, California	92127
(Address of principal executive offices)	(Zip Code)

 

(858) 676-1112

(Registrant’s telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which securities are registered
Common stock, $0.00001 par value per share	GNSS	NASDAQ Capital Market

 

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

 

Indicate by check mark whether the registrant has submitted electronically 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 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”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
Emerging growth company	☐

 

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

 

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

 

The number of shares of Common Stock, $0.00001 par value, outstanding on February 8, 2021 was 33,641,235.

 

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		December 31,
		2020				September 30,
		(Unaudited)				2020
ASSETS
Current assets:
Cash and cash equivalents		$	19,584			$	23,319
Short-term marketable securities			5,517				4,265
Restricted cash			295				282
Accounts receivable, net			3,159				5,442
Inventories, net			6,963				5,949
Prepaid expenses and other			713				860
Total current assets			36,231				40,117
Long-term marketable securities			2,419				3,805
Long-term restricted cash			1,180				395
Deferred tax assets, net			11,100				11,095
Property and equipment, net			1,885				1,930
Goodwill			8,500				2,472
Intangible assets, net			3,743				943
Operating lease right of use asset			5,384				5,285
Other assets			161				125
Total assets		$	70,603			$	66,167
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	1,618			$	1,370
Accrued liabilities			7,848				7,880
Notes payable, current portion			314				300
Operating lease liabilities, current portion			848				771
Total current liabilities			10,628				10,321
Notes payable, less current portion			18				18
Other liabilities, noncurrent			915				293
Operating lease liabilities, noncurrent			6,385				6,395
Total liabilities			17,946				17,027
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; 33,587,443 and 33,561,544 shares issued and outstanding, respectively			-				-
Additional paid-in capital			94,915				91,248
Accumulated deficit			(42,477	)			(41,858	)
Accumulated other comprehensive income (loss)			219				(250	)
Total stockholders' equity			52,657				49,140
Total liabilities and stockholders' equity		$	70,603			$	66,167

 

		Three months ended
		December 31,
		2020				2019
Revenues:
Product sales		$	6,950			$	8,008
Contract and other			1,078				774
Total revenues			8,028				8,782
Cost of revenues			4,324				4,180
Gross Profit			3,704				4,602
Operating expenses
Selling, general and administrative			3,331				2,822
Research and development			1,066				1,084
Total operating expenses			4,397				3,906
(Loss) income from operations			(693	)			696
Other income			69				96
(Loss) income before income taxes			(624	)			792
Income tax (benefit) expense			(5	)			172
Net (loss) income		$	(619	)		$	620
Net (loss) income per common share - basic and diluted		$	(0.02	)		$	0.02
Weighted average common shares outstanding:
Basic			33,574				32,978
Diluted			33,574				33,711

 

		Three months ended
		December 31,
		2020				2019
Net (loss) income		$	(619	)		$	620
Other comprehensive income
Unrealized loss on marketable securities			(3	)			(3	)
Unrealized foreign currency translation gain			472				88
Comprehensive (loss) income		$	(150	)		$	705

 

		Three months ended
		December 31,
		2020				2019
Operating Activities:
Net (loss) income		$	(619	)		$	620
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			281				209
Warranty provision			15				(19	)
Inventory obsolescence			100				94
Share-based compensation			182				158
Realized loss on foreign currency forward contract			(48	)			-
Unrealized loss on foreign currency forward contract			(28	)			-
Deferred income taxes			(5	)			172
Amortization of operating lease right of use assets			170				145
Changes in operating assets and liabilities:
Accounts receivable, net			2,300				(2,286	)
Inventories, net			(1,114	)			(321	)
Prepaid expenses and other			120				761
Accounts payable			232				604
Accrued and other liabilities			(314	)			(1,918	)
Net cash provided by (used in) operating activities			1,272				(1,781	)
Investing Activities:
Purchases of marketable securities			(1,793	)			(640	)
Proceeds from maturities of marketable securities			1,925				589
Purchase of Amika Mobile			(4,367	)			-
Capital expenditures			(29	)			(86	)
Net cash used in investing activities			(4,264	)			(137	)
Financing Activities:
Proceeds from exercise of stock options			54				144
Net cash provided by financing activities			54				144
Effect of foreign exchange rate on cash			1				14
Net decrease in cash, cash equivalents, and restricted cash			(2,937	)			(1,760	)
Cash, cash equivalents and restricted cash, beginning of period			23,996				19,517
Cash, cash equivalents and restricted cash, end of period		$	21,059			$	17,757
			-				-
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets:
Cash and cash equivalents		$	19,584			$	17,092
Restricted cash, current portion			295				270
Long-term restricted cash			1,180				395
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows		$	21,059			$	17,757

		Three months ended December 31,
		2020				2019
Noncash investing and financing activities:
Change in unrealized loss on marketable securities		$	(3	)		$	(3	)
Obligation to issue common stock in connection with the purchase of Amika Mobile		$	(3,431	)		$	-
Initial measurement of operating lease right of use assets		$	248			$	5,824
Initial measurement of operating lease liabilities		$	248			$	7,815
Business combination accounted for as a purchase
Fair value of net assets acquired		$	8,411			$	-

 

1.	OPERATIONS

 

Genasys Inc. (formerly LRAD^® 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 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, the Middle East and Asia. On October 23, 2019, the Company announced its rebranding and began doing business as Genasys Inc.

 

2.	BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

General

 

The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the accompanying financial 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, 2020 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on December 10, 2020. The accompanying condensed consolidated balance sheet at September 30, 2020 has been derived from the audited consolidated balance sheet at September 30, 2020 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 seven wholly owned subsidiaries, Genasys II Spain, S.A.U (“Genasys Spain”), Genasys Communications Canada ULC, Genasys Singapore PTE Ltd, Genasys Puerto Rico, LLC and Genasys Inc. (branch) in the United Arab Emirates 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.

 

Cash, cash equivalents and restricted cash

 

The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. At December 31, 2020 the amount of cash and cash equivalents was $19,584. At September 30, 2020 the amount of cash and cash equivalents was $23,319.

 

The Company considers any amounts pledged as collateral or otherwise restricted for use in current operations to be restricted cash. In addition, the Company considers cash and cash equivalents designated to fund specific future contractual obligations related to business combinations to be restricted cash. Restricted cash is classified as a current asset unless amounts are not expected to be released and available for use in operations within one year. At December 31, 2020 the current portion of restricted cash was $295 and the noncurrent portion was $1,180. At September 30, 2020 the current portion of restricted cash was $270 and the noncurrent portion was $395.

 

Immaterial Correction of Prior Period Financial Statements 

 

During the quarter ended December 31, 2020, Company management identified an immaterial error in the previously issued September 30, 2020 consolidated balance sheet. This error resulted in an overstatement of prepaid expenses and accrued liabilities of $5,205 related to a foreign currency forward contract which was presented on a gross basis rather than on a net basis. There was no impact to the consolidated statement of operations or the consolidated statement of cash flows as of September 30, 2020, as a result of this misstatement. Further, there was no impact to the condensed consolidated financial statements as of, and for the quarter ended December 31, 2020, as the forward contract was settled during this period. SEC Staff Accounting Bulletin: No. 99 – Materiality and No. 108 – Financial Statement Misstatement were used by management to evaluate the impact of the misstatement. Management concluded that this misstatement had no material impact on either the accompanying condensed consolidated balance sheet as of December 31, 2020 or the previously issued consolidated balance sheet as of September 30, 2020, and therefore the misstatement was corrected in the accompanying condensed consolidated balance sheet as of September 30, 2020. All financial information contained in the accompanying notes to these condensed consolidated financial statements has been revised to reflect the correction of this error.

 

Reclassifications

 

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

 

3.	RECENT ACCOUNTING PRONOUNCEMENTS

 

New pronouncements pending adoption

 

In June 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, 2023, and early adoption is permitted. The Company has not completed its review of the impact of this standard on its consolidated financial statements. However, based on the Company’s history of immaterial credit losses from trade receivables, management does not expect that the adoption of this standard will have a material effect on the Company’s consolidated financial statements.

 

 

New pronouncements adopted

 

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which improves fair value disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements and adding relevant disclosure requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The new guidance is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company adopted ASU No. 2018-13 on October 1, 2020, with no impact to the condensed consolidated financial statements.

 

4.	BUSINESS COMBINATION

 

On October 2, 2020, the Company completed the purchase of the assets of Amika Mobile Corporations (“Amika Mobile”) pursuant to an Asset Purchase Agreement. Amika Mobile is a leading provider of integrated emergency critical communications based in Ottawa, Canada. The Company believes the Amika Mobile asset purchase will expand the Company’s enterprise software solutions and enhance the Company’s unified multi-channel critical communications platform.

 

The Amika Mobile asset purchase was accounted for as a business combination using the acquisition method pursuant to ASC Topic 805. As the acquirer for accounting purposes, the Company has estimated the purchase consideration, assets acquired and liabilities assumed as of the acquisition date, with the excess of the purchase consideration over the fair value of net assets acquired recognized as goodwill. The estimated fair value of assets purchased and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value.

 

The consideration consisted of the following:

 

 

Under the terms of the Asset Purchase Agreement, the Company is required to deposit a holdback liability in the amount of CAD$1,000 into an interest-bearing account as security for potential indemnification claims against the seller. The holdback amount will be released three years from the closing date subject to amounts withheld for actual, pending or potential claims. The Company also agreed to issue 191,267 shares of the Company’s common stock to the former owners of Amika Mobile on each of the first, second and third anniversaries of the closing date. The total number of shares of common stock the Company is obligated to issue is 573,801. The fair value of the Company’s common stock on the closing date was $5.98, resulting in an addition of $3,431 to additional paid-in-capital. The cash portion of the purchase price was funded from cash on hand.

 

The Company incurred $242 in expenses related to this transaction, through December 31, 2020. These expenses were recorded in selling, general and administrative expenses in the condensed consolidated statement of operations as follows: $10 in the first quarter of fiscal 2021, $132 in the fourth quarter of fiscal 2020 and $100 in the third quarter of fiscal 2020.

 

 

Purchase Price Allocation

 

 

The estimated fair value of the identifiable intangible assets acquired and their estimated useful lives are as follows:

 

 

Identifiable intangible assets consist of certain technology and customer relationships purchased from Amika Mobile. Identifiable intangible assets are amortized over their useful lives based upon a number of assumptions including the estimated period of economic benefit and utilization. The weighted average amortization period for identifiable intangible assets acquired is 7 years. These intangible assets are classified as Level 3 in the ASC Topic 820 three-tier fair value hierarchy.

 

The goodwill for Amika Mobile is attributable to combining the Company’s existing emergency communications solutions with the software and software development capabilities of Amika Mobile to enhance product offerings. Goodwill is also attributable to the skill level of the acquired workforce. The Company will continue to analyze the transaction and refine its calculations, as appropriate during the measurement period, which could affect the value of goodwill. Goodwill from the Amika Mobile asset purchase will not be deductible for tax purposes.

 

5.	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 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 the Company’s customer obtains control of the products. A smaller portion of product revenue is recognized when the customer receives delivery of the products. A portion of products are sold through resellers and system integrators based on firm commitments from an end user, and as a result, resellers and system integrators carry little or no inventory. The Company’s customers do not have a right to return product unless the product is found defective and therefore the Company’s estimate for returns has historically been insignificant

 

Perpetual licensed software

 

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

 

Time-based licensed software

 

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

 

Warranty, maintenance and services

 

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

 

Multiple element arrangements

 

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

 

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

 

The Company disaggregates revenue by reporting segment (Hardware and Software) and geographically to depict the nature of revenue in a manner consistent with the Company’s business operations and to be consistent with other communications and public filings. Refer to Note 19, Segment Information and Note 20, Major Customers, Suppliers and Related Information for additional details of revenues by reporting segment and disaggregation of revenue.

 

 Contract Assets and Liabilities

 

The Company enters into contracts to sell products and provide services and recognizes contract assets and liabilities that arise from these transactions. The Company recognizes revenue and corresponding accounts receivable according to Topic 606 and, at times, recognizes revenue in advance of the time when contracts give the Company the right to invoice a customer. The Company may also receive consideration, per terms of a contract, from customers prior to transferring goods to the customer. The Company records customer deposits as a contract liability. Additionally, the Company may receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed. In such instances, a deferred revenue liability is recorded. The Company recognizes these contract liabilities as revenue after all revenue recognition criteria are met. The table below shows the balance of contract assets and liabilities as of December 31, 2020 and September 30, 2020, including the change between the periods. The current portion of contract liabilities and the non-current portion are included in “Accrued liabilities” and “Other liabilities, noncurrent”, respectively, on the accompanying Condensed Consolidated Balance Sheets. Refer to Note 11, Accrued Liabilities for additional details.

 

 

The Company’s contract liabilities were as follows:

 

 

Remaining Performance Obligations

 

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

 

As of December 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $5,789. The Company expects to recognize revenue on approximately $5,514 or 95% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter.

 

 Practical Expedients 

 

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

 

6.	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 December 31, 2020 or September 30, 2020. 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 on a Recurring Basis

 

Cash equivalents and marketable securities: 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 December 31, 2020 and September 30, 2020. Unrealized gains and losses from the remeasurement of marketable securities are recorded in accumulated other comprehensive income (loss) until recognized in earnings upon the sale or maturity of the security.

 

 

 

 

Foreign currency forward contract: In August 2020, the Company entered into a foreign currency forward contract as an economic hedge against exposure to changes in the Canadian dollar in connection with the Amika Mobile asset purchase. At September 30, 2020, the notional value of the foreign currency forward contract was CAD$6,955 with a maturity date in October 2020. The foreign currency forward contract was fair valued at $76 and classified under Level 2 of the fair value hierarchy. The valuation techniques used to measure the fair value were based on quoted market prices. On October 1, 2020, the foreign currency forward contract was settled for CAD$6,955 (USD$5,281), resulting in a realized loss of $48 on the contract that was recorded in earnings as other income (expense). The estimated foreign currency forward contract liability was recorded in accrued liabilities in the consolidated balance sheet as of September 30, 2020.

 

7.	INVENTORIES, NET

 

Inventories, net consisted of the following:

 

 

 

 

8.	PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following:

 

 

 

 

9.	GOODWILL AND INTANGIBLE ASSETS

 

Goodwill is attributable to the acquisition of Genasys Spain and Amika Mobile asset purchase and is due to combining the integrated emergency critical communications, mass messaging solutions and software development capabilities with existing LRAD products for enhanced offerings and the skill level of the acquired workforces. The Company periodically reviews goodwill for impairment in accordance with relevant accounting standards. During the three months ended December 31, 2020, the Company added $5,663 in goodwill related to the Amika Mobile asset purchase. There were no impairments to goodwill during the three months ended December 31, 2020.

 

Intangible assets and goodwill related to Genasys Spain are translated from Euros to U.S. dollars at the balance sheet date. The net impact of foreign currency exchange differences arising during the period related to goodwill and intangible assets was an increase of $156. Intangible assets and goodwill related to Amika Mobile are translated from Canadian dollars to U.S. dollars at the balance sheet date. During the three months ended December 31, 2020, the Company added $2,820 in intangible assets related to the Amika Mobile asset purchase. The net impact of foreign currency exchange differences arising during the period related to goodwill and intangible assets was an increase of $375. The Company’s intangible assets consisted of the following:

 

 

As of December 31, 2020, future amortization expense is as follows:

 

 

Amortization expense was $182 for the three months ended December 31, 2020. Amortization expense was $75 for the three months ended December 31, 2019.

 

 

 

10.	PREPAID EXPENSES AND OTHER

 

Prepaid expenses and other current assets consisted of the following:

 

 

Deposits for inventory

 

Deposits for inventory consisted of cash payments to vendors for inventory to be delivered in the future.

 

Prepaid insurance

 

Prepaid insurance consisted of premiums paid for health, commercial and corporate insurance. These premiums are amortized on a straight-line basis over the term of the agreements.

 

Dues and subscriptions

 

Dues and subscriptions consist of payments made in advance for software subscriptions and trade and professional organizations. These payments are amortized on a straight-line basis over the term of the agreements.

 

Trade shows and travel

 

Trade shows and travel consists of payments made in advance for trade show events.

 

11.	ACCRUED LIABILITIES

 

Accrued liabilities consisted of the following:

 

 

Other liabilities-noncurrent consisted of the following: 

 

 

Payroll and related

 

Payroll and related consisted primarily of accrued vacation, bonus, sales commissions and benefits.

 

Deferred Revenue

 

Deferred revenue as of December 31, 2020 included prepayments from customers for services, including extended warranty, scheduled to be performed in the twelve months ended December 31, 2021.

 

Customer Deposits

 

Customer deposits represent amounts paid by customers as a down payment on hardware orders to be delivered during the next twelve months.

 

 

Accrued contract costs

 

Accrued contract costs consist of accrued expenses for contracting a third-party service provider to fulfill repair and maintenance obligations required under a contract with a foreign military for units sold in the year ended September 30, 2011. Payments to the service provider will be made annually upon completion of each year of service. A new contract was signed with the customer in May 2019 to continue repair and maintenance services through May 2024. These services are being recorded in cost of revenues to correspond with the revenues for these services.

 

Warranty Reserve

 

Changes in the warranty reserve and extended warranty were as follows:

 

 

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 Extended Warranty Revenue

 

Deferred extended warranty revenue consists of warranties purchased in excess of the Company’s standard warranty. Extended warranties typically range from one to two years.

 

Asset purchase holdback liability

 

In connection with the Amika Mobile asset purchase, the Company recorded a holdabck liability related to future adjustments to assets and liabilities and as security for potential indemnification claims. Adjustments and indemnification claims of up to CAD$1,000 (USD$785) will be deducted from the asset purchase holdback liability for up to three years from the closing date. The liability is recorded at fair value in the condensed consolidated balance sheet.

 

12.

DEBT

 

In connection with the acquisition of Genasys Spain the Company acquired certain debts of Genasys Spain. The carrying value of the acquired debt approximates fair value. The balances of the acquired debt consist of loans with governmental agencies as of December 31, 2020. Loans with governmental agencies represent interest free debt granted by ministries within Spain for the purpose of stimulating economic development and promoting research and development. Loans with governmental agencies as of December 31, 2020 are as follows:

 

 

(a)

This loan is secured by $295 of cash pledged as collateral by Genasys Spain, which is the current balance of the loan. This amount is included in restricted cash at December 31, 2020. The Company expects the Ministry of Economy and Competitiveness to declare the terms of the loan satisfied within fiscal 2021 and that the outstanding balance of the loan will be paid in full during fiscal 2021. Accordingly, this has been included in the current portion of notes payable as of December 31, 2020.

 

The following is a schedule of future annual payments as of December 31, 2020:

 

 

The current portion of debt is $314 and the noncurrent portion of debt is $18.

 

 

 

13.

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 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 operating 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 operating 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 operating 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 operating ROU asset. A 10% increase in the index would increase the total lease liability approximately $19. 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 $7,815 of operating lease liabilities, and approximately $5,824 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.

 

During the three months ended December 31, 2020, the Company added an additional operating ROU asset of $248 and operating lease liability of $248 for office space in connection with the Amika Mobile asset purchase. The tables below show the operating ROU assets and liabilities as of September 30, 2020 and the balances as of December 31, 2020, including the changes during the periods.

 

 

 

 

 

As of December 31, 2020, the Company’s operating leases have a weighted-average remaining lease term of 7.34 years and a weighted-average discount rate of 4.13%. The maturities of the operating lease liabilities are as follows:

 

 

For the three months ended December 31, 2020 and 2019, total lease expense under operating leases was approximately $236 and $225 respectively. The Company did not have any short-term lease expense during the three months ended December 31, 2020 and December 31, 2019.

 

14.	INCOME TAXES

 

For the three months ended December 31, 2020, the Company recorded income tax benefit of $5 reflecting an effective tax rate of 31.2%. For the three months ended December 31, 2019, the Company recorded an income tax expense of $172 reflecting an effective tax rate of 21.8%. The Company continues to maintain a partial valuation allowance against its deferred tax assets as the Company believes that the negative evidence that it will be able to recover these net deferred tax assets outweighs the positive evidence.

 

Accounting Standards Codification 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.

 

15.	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 based on meeting targeted objectives for orders received, revenue, operating income and operating cash flow. In the three months ended December 31, 2020, the Company recorded $459 of bonus expense. In the three months ended December 31, 2019, the Company recorded $408 of bonus expense.

 

Amika Mobile Asset Purchase

 

In connection with the Amika Mobile asset purchase, the Company recorded a holdback liability related to future adjustments to assets and liabilities and as security for potential indemnification claims. Adjustments and indemnification claims of up to CAD$1,000 (USD$785) will be deducted from the asset purchase holdback liability for up to three years from the closing date. The liability is recorded at fair value in the condensed consolidated balance sheet.

 

The Company also agreed to issue 191,267 shares of the Company’s common stock to the former owners of Amika Mobile on each of the first, second and third anniversaries of the closing date. The total number of shares of common stock the Company is obligated to issue is 573,801. The fair value of the Company’s common stock on the closing date was $5.98, resulting in the addition of $3,431 to additional paid-in-capital.

 

 

 

16. SHARE-BASED COMPENSATION

 

Stock Option Plans

 

At December 31, 2020, the Company had two equity incentive plans. The 2005 Equity Incentive Plan (“2005 Equity Plan”) was terminated with respect to new grants in March 2015, but remains in effect for grants issued prior to that time. The Amended and Restated 2015 Equity Incentive Plan (“2015 Equity Plan”) was approved by the Company’s Board of Directors on December 6, 2016 and by the Company’s stockholders on March 14, 2017. The 2015 Plan authorizes the issuance stock options, restricted stock, stock appreciation rights, restricted stock units and performance awards, to an aggregate of 5,000,000 new shares of common stock to employees, directors, advisors or consultants. At December 31, 2020, there were options and restricted stock units outstanding covering 115,000 and 2,942,018 shares of common stock under the 2005 Equity Plan and 2015 Equity Plan, respectively and 483,480 shares of common stock available for grant for a total of 3,540,498 currently available under the two equity plans.

 

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 215,000 stock options granted during the three months ended December 31, 2020. There were 1,133,727 stock options granted during fiscal 2020. The weighted average estimated fair value of employee stock options granted during the three months ended December 31, 2020 was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions (annualized percentages):

 

 

Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected term 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 term 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 pay a dividend in fiscal 2021 or in fiscal 2020.

 

As of December 31, 2020, there was approximately $1,067 of total unrecognized compensation costs related to outstanding employee stock options. This amount is expected to be recognized over a weighted average period of 2.6 years. To the extent the forfeiture rate is different from what the Company anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.

 

Performance-Based Stock Options

 

On August 1, 2016, the Company awarded a performance-based stock option (PVO) to purchase 750,000 shares of the Company’s common stock to a key executive, with a contractual term of seven years. At the grant date, there were 375,000 performance-based stock options assigned to performance criteria within each of fiscal 2019 and 2020. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2019 and 2020 including a minimum free cash flow margin and net revenue targets. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets.  

 

The Company determined that certain performance conditions related to the 2019 and 2020 performance criteria were achieved. 187,500 options related to the 2019 performance criteria vested and 375,000 options related to the 2020 performance criteria vested. The Company recorded a total of $459 in stock-based compensation expense for these options through September 30, 2020, in selling, general and administrative expenses in the consolidated statement of operations.

 

On October 4, 2019, the Company awarded a performance-based stock option (PVO) to purchase 800,000 shares of the Company’s common stock to a key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2022 and 2023 including a minimum free cash flow margin and net revenue targets. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets. The Company has not recorded stock-based compensation expense related to these options.

 

The Company did not grant any PVO’s during the three months ended December 31, 2020.

 

 

Restricted Stock Units

 

During fiscal 2018, the Board of Directors granted 93,330 restricted stock units (“RSUs”) to employees that will vest equally over three years on each of the first three anniversary dates of the grant. These were issued at a market value of $210, 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 $413, were expensed on a straight-line basis through the March 12, 2020 vest date. Also, during fiscal 2019, 99,300 RSUs were granted to employees that will vest equally over three years on each of the first three anniversary dates of the grant. These were issued at a market value of $248, which have and will be expensed on a straight-line basis over the three-year life of the grants. There were no RSUs granted during the three months ended December 31, 2020.

 

Compensation expense for RSUs was $138 for the three months ended December 31, 2020. Compensation expense for RSUs was $126 for the three months ended December 31, 2019.

 

A summary of the restricted stock units of the Company as of December 31, 2020 is presented below:

 

 

 

Stock Option Summary Information

 

A summary of the activity in options to purchase the capital stock of the Company as of December 31, 2020 is presented below:

 

 

Options outstanding are exercisable at prices ranging from $1.31 to $6.87 per share and expire over the period from 2020 to 2027 with an average life of 4.42 years. The aggregate intrinsic value of options outstanding and exercisable at December 31, 2020 was $9,993 and $6,670, 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 $6.52 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, 2020 was $113 and proceeds from these exercises was $54. The total intrinsic value of stock options exercised during the three months ended December 31, 2019 was $128 and proceeds from these exercises was $144.

 

 

The following table summarized information about stock options outstanding at December 31, 2020:

 

 

The Company recorded $44 and $32 of stock option compensation expense for employees, directors and consultants for the three months ended December 31, 2020, and 2019, respectively.

 

Share-Based Compensation

 

The Company recorded share-based compensation expense and classified it in the condensed consolidated statements of operations as follows:

 

 

 

17. STOCKHOLDERS’ EQUITY

 

Summary

 

The following table summarizes changes in the components of stockholders’ equity during the three months ended December 31, 2020 and the three months ended December 31, 2019 (amounts in thousands, except par value and share amounts):

 

 

 

 

 

Common Stock Activity

 

During the three months ended December 31, 2020, the Company issued 25,899 shares of common stock and received gross proceeds of $54 in connection with the exercise of stock options. During the three months ended December 31, 2019, the Company issued 83,343 shares of common stock and received gross proceeds of $144 in connection with the exercise of stock options.

 

In connection with the Amika Mobile asset purchase, the Company agreed to issue 191,267 shares of the Company’s common stock to the former owners of Amika Mobile on each of the first, second and third anniversaries of the closing date. The total number of shares of common stock the Company is obligated to issue is 573,801. The fair value of the Company’s common stock on the closing date was $5.98, resulting in the addition of $3,431 to additional paid-in-capital.

 

Share Buyback Program

 

In December 2018, the Board of Directors approved a new share buyback program beginning January 1, 2019 and expiring on December 31, 2020, under which the Company was authorized to repurchase up to $5 million of its outstanding common shares. In December 2020, the Board of Directors extended the buyback program until December 31, 2022. The previous program expired on December 31, 2018.

 

During the three months ended December 31, 2020 and 2019, no shares were repurchased by the Company.

 

Dividends

 

There were no dividends declared in the three months ended December 31, 2020 and 2019.

 

18. NET (LOSS) INCOME PER SHARE

 

The following table sets forth the computation of basic and diluted net income per share:

 

 

 

 

19. SEGMENT INFORMATION

 

The Company is engaged in the design, development and commercialization of directed and multidirectional sound technologies, voice broadcast products and location-based mass messaging solutions for emergency warning and workforce management. The Company operates in two business segments: Hardware and Software and its principle markets are North and South America, Europe, the 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, 2020:

 

 

As of December 31, 2020:

 

 

For the three months ended December 31, 2019:

 

 

As of September 30, 2020:

 

 

 

20. MAJOR CUSTOMERS, SUPPLIERS AND RELATED INFORMATION

 

For the three months ended December 31, 2020, revenues from one customer accounted for 52% of total revenues with no other single customer accounting for more than 10% of revenues. At December 31, 2020, accounts receivable from three customers accounted for 48%, 14% and 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 December 31, 2019, revenues from two customers accounted for 62% and 13% of total revenues with no other single customer accounting for more than 10% of revenues. At December 31, 2019, accounts receivable from two customers accounted for 66% and 10% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.

 

Revenue from customers in the United States was $5,712 for the three months ended December 31, 2020. Revenue from customers in the United States was $6,512 for the three months ended December 31, 2019. The following table summarizes revenues by geographic region. Revenues are attributed to countries based on customer’s delivery location.