Genasys Inc. - Quarter Report: 2020 June (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 June 30, 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 August 7, 2020 was 33,490,544.

 

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		June 30,
		2020				September 30,
		(Unaudited)				2019
ASSETS
Current assets:
Cash and cash equivalents		$	20,667,934			$	18,819,078
Short-term marketable securities			4,054,126				3,695,364
Restricted cash			270,604				263,136
Accounts receivable, net			6,378,357				3,644,059
Inventories, net			7,334,165				5,835,163
Prepaid expenses and other			1,052,750				1,781,837
Total current assets			39,757,936				34,038,637
Long-term marketable securities			3,336,654				1,384,819
Long-term restricted cash			395,321				434,704
Deferred tax assets, net			4,644,510				5,387,000
Property and equipment, net			1,984,667				2,269,506
Goodwill			2,371,190				2,305,750
Intangible assets, net			981,186				1,175,634
Operating lease right of use asset			5,428,168				-
Other assets			124,412				123,933
Total assets		$	59,024,044			$	47,119,983
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	2,907,077			$	859,530
Accrued liabilities			8,883,114				8,134,341
Notes payable, current portion			287,523				279,588
Operating lease liabilities, current portion			752,371				-
Total current liabilities			12,830,085				9,273,459
Notes payable, less current portion			16,919				32,903
Other liabilities, noncurrent			383,413				2,432,272
Operating lease liabilities, noncurrent			6,586,196				-
Total liabilities			19,816,613				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; 33,490,544 and 32,949,987 shares issued and outstanding, respectively			335				330
Additional paid-in capital			90,904,503				89,571,641
Accumulated deficit			(51,305,924	)			(53,731,903	)
Accumulated other comprehensive loss			(391,483	)			(458,719	)
Total stockholders' equity			39,207,431				35,381,349
Total liabilities and stockholders' equity		$	59,024,044			$	47,119,983

 

		Three months ended								Nine months ended
		June 30,								June 30,
		2020				2019				2020				2019
Revenues:
Product sales		$	10,932,719			$	8,037,460				26,494,138				26,726,151
Contract and other			1,038,377				826,266				2,535,433				2,506,825
Total revenues			11,971,096				8,863,726				29,029,571				29,232,976
Cost of revenues			5,499,914				4,261,733				13,946,392				14,351,217
Gross Profit			6,471,182				4,601,993				15,083,179				14,881,759
Operating expenses
Selling, general and administrative			3,330,365				2,712,846				8,884,230				7,939,232
Research and development			1,199,635				1,202,686				3,232,369				3,530,805
Total operating expenses			4,530,000				3,915,532				12,116,599				11,470,037
Income from operations			1,941,182				686,461				2,966,580				3,411,722
Other income			36,227				69,890				201,889				126,566
Income before income taxes			1,977,409				756,351				3,168,469				3,538,288
Income tax expense			473,332				118,310				742,490				675,457
Net income		$	1,504,077			$	638,041			$	2,425,979			$	2,862,831
Net income per common share:
Basic		$	0.05			$	0.02			$	0.07			$	0.09
Diluted		$	0.04			$	0.02			$	0.07			$	0.09
Weighted average common shares outstanding:
Basic			33,289,426				32,575,118				33,122,042				32,684,311
Diluted			34,280,915				33,372,777				33,878,243				33,341,057

 

		Three months ended								Nine months ended
		June 30,								June 30,
		2020				2019				2020				2019
Net income		$	1,504,077			$	638,041			$	2,425,979			$	2,862,831
Other comprehensive income
Unrealized gain (loss) on marketable securities			8,114				9,483				(3,064	)			19,102
Unrealized foreign currency gain (loss)			43,160				47,055				70,300				(85,990	)
Comprehensive income		$	1,555,351			$	694,579			$	2,493,215			$	2,795,943

 

		Nine months ended
		June 30,
		2020				2019
Operating Activities:
Net income		$	2,425,979			$	2,862,831
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			620,060				623,317
Warranty provision			2,396				62,689
Inventory obsolescence			168,262				121,035
Share-based compensation			775,642				563,386
Deferred income taxes			742,490				675,457
Amortization of operating lease right of use asset			445,692				-
Changes in operating assets and liabilities:
Accounts receivable, net			(2,721,719	)			(4,029,608	)
Inventories, net			(1,667,264	)			200,306
Prepaid expenses and other			731,501				2,447,870
Accounts payable			2,039,811				(2,267,016	)
Accrued and other liabilities			147,740				1,153,067
Net cash provided by operating activities			3,710,590				2,413,334
Investing Activities:
Purchases of marketable securities			(5,496,651	)			(3,290,667	)
Proceeds from maturities of marketable securities			3,182,989				3,624,338
Capital expenditures			(111,602	)			(303,912	)
Net cash (used in) provided by investing activities			(2,425,264	)			29,759
Financing Activities:
Proceeds from exercise of stock options			996,891				54,621
Repurchase of common stock			(398,256	)			(2,171,022	)
Shares retained for payment of taxes in connection with settlement of restricted stock units			(41,410	)			-
Payments on promissory notes			(16,700	)			(17,044	)
Net cash provided by (used in) financing activities			540,525				(2,133,445	)
Effect of foreign exchange rate on cash			(8,910	)			(21,443	)
Net increase in cash, cash equivalents, and restricted cash			1,816,941				288,205
Cash, cash equivalents and restricted cash, beginning of period			19,516,918				11,806,074
Cash, cash equivalents and restricted cash, end of period		$	21,333,859			$	12,094,279
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets:
Cash and cash equivalents		$	20,667,934			$	11,290,068
Restricted cash, current portion			270,604				369,551
Long-term restricted cash			395,321				434,660
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows		$	21,333,859			$	12,094,279

		Nine months ended June 30,
		2020				2019
Supplemental disclosures of cash flow information:
Interest paid		$	-			$	2,860
Noncash investing and financing activities:
Change in unrealized gain (loss) on marketable securities		$	(3,064	)		$	19,102
Initial measurement of operating lease ROU assets		$	5,823,972			$	-
Initial measurement of operating lease liabilities		$	7,814,701			$	-

 

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

 

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

General

 

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

 

Principles of Consolidation

 

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

 

Reclassifications

 

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

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

New pronouncements pending adoption

 

In June 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 May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 replaced most existing revenue recognition guidance in U.S. generally accepted accounting principles. In July 2015, the FASB deferred the effective date of the standard by an additional year; however, it provided companies the option to adopt one year earlier, commensurate with the original effective date. Accordingly, 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”).

 

 

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 was effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within that fiscal year. Accordingly, this was effective for the Company beginning October 1, 2019. The adoption of this ASU did not have an impact on the Company’s 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. 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, 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, which explicitly provides disclosure relief for interim periods during the year the standard is adopted.

 

The new guidance was effective for the Company beginning October 1, 2019. The Company adopted Topic 842 by applying the modified retrospective transition approach. Under this method, financial information related to periods prior to adoption will be as originally reported under the then-current standard (Topic 840, Leases). The Company elected the following practical expedients:

 

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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.

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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 facility lease. There was no other impact from the adoption of Topic 842. A portion of the existing leases are denominated in currencies 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, which may result in foreign exchange gains or losses. There was no cumulative effect adjustment to retained earnings as a result of the transition to Topic 842. See Note 12, Leases for further disclosures related to Topic 842.

 

4.	REVENUE RECOGNITION

 

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

 

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 18, Segment Information and Note 19, 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 liabilities as of June 30, 2020 and September 30, 2019, including the change between the periods. There were no contract assets as of June 30, 2020 and September 30, 2019. The current portion of contract liabilities and the non-current portion are included in “Accrued liabilities” and “Other liabilities, noncurrent”, respectively, on the accompanying Condensed Consolidated Balance Sheets. Refer to Note 10, Accrued Liabilities for additional details.

 

 

The Company’s contract 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 June 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $6,681,891. The Company expects to recognize revenue on approximately $6,298,478 or 94% 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.

 

5.	FAIR VALUE MEASUREMENTS

 

The Company’s financial instruments consist principally of cash equivalents, short and long-term marketable securities, accounts receivable, accounts payable and notes 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, 2020 or September 30, 2019. The Company believes that the recorded values of its other financial instruments approximate their current fair values because of their nature, respective relatively short maturity dates or durations and that interest rates approximate market rates.

 

 

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, 2020 and September 30, 2019.

 

 

 

 

 

 

6. INVENTORIES

 

Inventories consisted of the following:

 

 

 

 

7. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

 

Depreciation expense was $130,981 and $150,327 for the three months ended June 30, 2020 and 2019, respectively. Depreciation expense was $397,018 and $394,524 for the nine months ended June 30, 2020 and 2019, respectively.

 

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 three months ended June 30, 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 nine month period related to goodwill and intangible assets was an increase of $96,015. The Company’s intangible assets consisted of the following:

 

 

Amortization expense was $74,049 and $75,354 for the three months ended June 30, 2020 and 2019, respectively. Amortization expense was $223,042 and $228,793 for the nine months ended June 30, 2020 and 2019, respectively.

 

As of June 30, 2020, future amortization expense is as follows:

 

 

 

 

9. 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.

 

Prepaid Rent

 

Prepaid rent consists of payments made in advance for the Company’s facility lease.

 

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.

 

10. ACCRUED LIABILITIES AND OTHER LIABILITIES - NONCURRENT

 

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 June 30, 2020 included prepayments from customers for services, including extended warranty, scheduled to be performed in the twelve months ended June 30, 2021.

 

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 Rent

 

Deferred rent liability as of September 30, 2019 consists of the difference between the average rental amount charged to expense and amounts payable under the lease for the Company’s operating facility. Deferred rent also includes cash and leasehold incentives from the landlord in the aggregate amount of $1,990,729 as of September 30, 2019 to compensate for costs incurred by the Company to make the office space ready for operation (leasehold incentives). Prior to the adoption of Topic 842, leasehold incentives received from a landlord are deferred and recognized on a straight-line basis as a reduction to rent expense over the lease term. Upon adoption of Topic 842, the leasehold incentives were a reduction to the measurement of the operating lease ROU asset. Refer to Note 3, Recent Accounting Pronouncements and Note 12, Leases for further detail on the adoption of Topic 842.

 

Deferred Extended Warranty Revenue

 

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

 

11. DEBT

 

In connection with the acquisition of Genasys Spain the Company 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 June 30, 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 June 30, 2020 are as follows:

 

 

(a)

This loan is secured by $270,604 of cash pledged as collateral by Genasys Spain, which is the current balance of the loan. This amount is included in restricted cash at June 30, 2020. The Company expects the Ministry of Economy and Competitiveness to declare the terms of the loan satisfied within the next twelve months and that the outstanding balance of the loan will be paid in full during the next twelve months. Accordingly, this has been included in the current portion of notes payable as of June 30, 2020.

 

 

The following is a schedule of future annual payments as of June 30, 2020:

 

 

The current portion of debt is $287,523 and the noncurrent portion of debt is $16,919.

 

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 June 30, 2020, including the changes during the periods.

 

 

 

 

As of June 30, 2020, the Company’s operating leases have a weighted-average remaining lease term of 7.9 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 June 30, 2020 and 2019, total lease expense under operating leases was approximately $226,083 and $224,407 respectively. For the nine months ended June 30, 2020 and 2019, total lease expense under operating leases was approximately $674,108 and $663,500, respectively. The Company did not have any short-term lease expense during the three and nine months ended June 30, 2020.

 

13. INCOME TAXES

 

For the nine months ended June 30, 2020, the Company recorded income tax expense of $742,490 reflecting an effective tax rate of 22.8%. For the nine months ended June 30, 2019, the Company recorded an income tax expense of $675,457 reflecting an effective tax rate of 20.0%. 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.

 

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 based on meeting targeted objectives for orders received, revenue, operating income and operating cash flow. In the nine months ended June 30, 2020, the Company recorded $1,143,267 of bonus expense. In the nine months ended June 30, 2019, the Company recorded $902,274 of bonus expense. Bonus expense is recorded in accrued liabilities on the Company’s condensed consolidated balance sheet as of June 30, 2020 and September 30, 2019.

 

 

 

15. SHARE-BASED COMPENSATION

 

Stock Option Plans  

 

At June 30, 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 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, 2020, there were options and restricted stock units outstanding covering 191,000 and 2,842,444 shares of common stock under the 2005 Equity Plan and 2015 Equity Plan, respectively, and 604,230 shares of common stock available for grant for a total of 3,637,674 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 1,133,727 stock options granted during the nine months ended June 30, 2020. There were no stock options granted during the nine months ended June 30, 2019. The weighted average estimated fair value of employee stock options granted during the nine months ended June 30, 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 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 pay a dividend in fiscal 2019.

 

As of June 30, 2020, there was approximately $378,436 of total unrecognized compensation costs related to outstanding employee stock options. This amount is expected to be recognized over a weighted average period of 2.02 years. To the extent the forfeiture rate is different from what the Company anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.

 

Performance-Based Stock Options

 

On August 1, 2016, the Company awarded a performance-based stock option (PVO) to purchase 750,000 shares of the Company’s common stock to a key executive, with a contractual term of seven years. At the grant date, there were 375,000 performance-based stock options assigned to performance criteria within each of fiscal 2019 and 2020. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2019 and 2020 including a minimum free cash flow margin and net revenue targets. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets. As of September 30, 2019, 187,500 of the options related to the 2019 performance criteria vested. The Company recorded $151,181 in stock based compensation expense for these options. This agreement was modified in October 2019, and 93,750 of the unvested options initially allocated to the performance criteria for 2019 were assigned to fiscal 2020.

 

On October 4, 2019, the Company awarded a performance-based stock option (PVO) to purchase 800,000 shares of the Company’s common stock to a key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2022 and 2023 including a minimum free cash flow margin and net revenue targets. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets.

 

The Company determined that as of June 30, 2020, it is probable that certain performance conditions related to the 2020 performance criteria will be achieved. During the three and nine months ended June 30, 2020, the Company recorded $153,873 and $249,623 in stock based compensation expense related to performance-based stock options. The Company will continue to review these targets each quarter and will adjust the expected outcome as needed, recognizing compensation expense cumulatively in such period for the difference in expense.

 

 

Restricted Stock Units

 

During fiscal 2018, the Board of Directors granted 93,330 restricted stock units (“RSUs”) to employees that will vest equally over three years on each of the first three anniversary dates of the grant. These were issued at a market value of $210,176, which will be expensed on a straight line basis over the three-year life of the grants.

 

On February 7, 2019, the Board of Directors approved non-employee director compensation to include an annual grant of 30,000 RSUs to each of the Company’s five non-employee directors that will vest on the first anniversary of the grant date. These were issued at a market value of $412,500, which have been and were expensed on a straight-line basis through the March 12, 2020 vest date. Also, during fiscal 2019, 99,300 RSUs were granted to employees that will vest equally over three years on each of the first three anniversary dates of the grant. These were issued at a market value of $248,250, which will be expensed on a straight line basis over the three year life of the grants.

 

On March 10, 2020, each non-employee member of the Board of Directors received a grant of 30,000 RSUs that will vest on the first anniversary of the grant date. These were issued at a market value of $424,500, which have and will be expensed on a straight-line basis through the March 10, 2021 vest date. 81,270 RSUs were granted to employees during the first nine months of 2020 that will vest over three years on the anniversary date of the grant. These were issued at a market value of $257,626, which have and will be expensed on a straight-line basis over the three-year life of the grants.

 

During the nine months ended June 30, 2020, the Company retained 13,063 shares of common stock to satisfy tax withholding obligations upon the vesting of RSUs issued to employees. These shares were not acquired pursuant to any repurchase plan or program. During the nine months ended June 30, 2019, there were no shares retained to satisfy withholding obligations in connection with the vesting of RSUs issued to employees.

 

Compensation expense for RSUs was $136,415 for the three months ended June 30, 2020. Compensation expense for RSUs was $430,506 for the nine months ended June 30, 2020. 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. As of June 30, 2020, there was approximately $675,622 of total unrecognized compensation costs related to outstanding RSUs. This amount is expected to be recognized over a weighted average period of 1.31 years.

 

A summary of the restricted stock units of the Company as of June 30, 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 June 30, 2020 is presented below:

 

 

Options outstanding are exercisable at prices ranging from $1.31 to $3.40 and expire over the period from 2020 to 2026 with an average life of 4.5 years. The aggregate intrinsic value of options outstanding and exercisable at June 30, 2020 was $6,327,111 and $3,292,311, 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 $4.86 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, 2020 was $2,232,469 and proceeds from these exercises were $996,891. 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 at June 30, 2020:

 

 

The Company recorded $185,610 and $124,991 of stock option compensation expense for employees, directors and consultants for the three months ended June 30, 2020, and 2019, respectively. The Company recorded $345,136 and $218,915 of stock option compensation expense for employees, directors and consultants for the nine months ended June 30, 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:

 

 

 

 

16. STOCKHOLDERS’ EQUITY

 

Summary

 

The following tables summarize changes in the components of stockholders’ equity during the three and nine months ended June 30, 2020 and the three and nine months ended June 30, 2019:

 

 

 

 

Common Stock Activity

 

During the nine months ended June 30, 2020, the Company issued 512,019 shares of common stock and obtained gross proceeds of $996,891 in connection with the exercise of stock options. During the nine months ended June 30, 2019, the Company issued 35,282 shares of common stock and obtained gross proceeds of $54,621 in connection with the exercise of stock options. During the nine months ended June 30, 2020, the Company issued 185,043 shares of common stock in connection with the vesting of RSUs. During the nine months ended June 30, 2019, the Company issued 156,115 shares of common stock in connection with the vesting of RSUs.

 

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 was authorized to repurchase up to $5 million of its outstanding common shares.

 

During the nine months ended June 30, 2020, the Company repurchased 156,505 shares for $398,256. During the nine months ended June 30, 2019, 788,425 shares were repurchased for $2,171,022. All repurchased shares were retired.

 

Dividends

 

There were no dividends declared in the nine months ended June 30, 2020 and 2019.

 

17. NET INCOME PER SHARE

 

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

 

 

 

 

18. 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, 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:

 

 

 

 

 

19. MAJOR CUSTOMERS, SUPPLIERS AND RELATED INFORMATION

 

For the three months ended June 30, 2020, revenues from one customer accounted for 64% of total revenues with no other single customer accounting for more than 10% of revenues. For the nine months ended June 30, 2020, revenues from one customer accounted for 63% of total revenues with no other single customer accounting for more than 10% of revenues. As of June 30, 2020, accounts receivable from two customers accounted for 60% and 17% 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, 2019, revenues from one customer accounted for 30% of total revenues with no other single customer accounting for more than 10% of revenues. For the nine months ended June 30, 2019, revenues from two customers accounted for 43% and 11% of total revenues with no other single customer accounting for more than 10% of revenues. As of June 30, 2019, accounts receivable from three customers accounted for 30%, 14% and 11% 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.

 

 

 

20. SUBSEQUENT EVENT

 

On August 9, 2020, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) to acquire all of the assets of Amika Mobile Corporation (“Amika”). Amika is a leading provider of integrated emergency critical communications based in Ottawa, Canada. The Company intends to fund the proposed acquisition with available cash on hand and in common stock that will be issued ratably on the first, second and third anniversary of the closing date. The closing of the transaction is subject to satisfaction of customary closing conditions, including regulatory review. The Company is in the initial stages of determining the accounting treatment for the transaction, specifically related to the fair value of acquired intangible assets, liabilities, and the related tax impact.