Genasys Inc. - Quarter Report: 2023 March (Form 10-Q)

PART I. FINANCIAL INFORMATION

Genasys Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share amounts)

See accompanying notes

Genasys Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share and share amounts)

(Unaudited)

\

See accompanying notes

Genasys Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(Unaudited)

See accompanying notes

Genasys Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

See accompanying notes

Genasys Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(in thousands)

(Unaudited)

1. OPERATIONS

Genasys Inc. (the “Company”) is a global provider of critical communications software solutions and hardware systems designed to alert, inform, and protect communities and organizations. The Genasys Protect™ unified platform collects information on developing and active emergency situations from a wide variety of sensors and inputs and empowers governments, businesses, and organizations to deliver real-time, geo-targeted notifications and information to people in harm’s way before, during, and after public safety and enterprise threats.

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, 2022, included in the Company’s Annual Report on Form 10-K, as filed with the SEC on December 16, 2022. The accompanying condensed consolidated balance sheet as of September 30, 2022, has been derived from the audited consolidated balance sheet as of September 30, 2022, 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 eight wholly owned subsidiaries, Genasys II Spain, S.A.U. (“Genasys Spain”), Genasys Communications Canada ULC (“Genasys Canada”), Genasys Singapore PTE Ltd, Genasys Puerto Rico, LLC, Zonehaven LLC, and Genasys Inc. (branch) in the United Arab Emirates and two currently inactive subsidiaries, Genasys America de CV and LRAD International Corporation. The 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. As of March 31, 2023, the amount of cash and cash equivalents was $6,371. As of September 30, 2022, the amount of cash and cash equivalents was $12,736.

The Company considers any amounts pledged as collateral or otherwise restricted for use in current operations to be restricted cash. In addition, the Company excludes from cash and cash equivalents cash required to fund specific future contractual obligations related to business combinations. 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. As of March 31, 2023, the current portion of restricted cash was $739, and the noncurrent portion was $96. As of September 30, 2022, the current portion of restricted cash was $100, and the noncurrent portion was $823.

Reclassifications

Where necessary, certain 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 (ASC 326), Derivatives and Hedging (ASC 815) and Leases (ASC 842), which extends the effective date of ASC 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, the Company does not expect that the adoption of this standard will have a material effect on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (ASC 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU No. 2020-04 provides optional guidance, expedients and exceptions for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in this update apply to all entities, subject to meeting the criteria, which participate in contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU No. 2020-04 was subsequently amended by ASU No. 2021-01, Reference Rate Reform (ASC 848), Scope, which refines the scope of ASC 848 and permits optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships. The amendments of these updates were available to all entities as of March 12, 2020. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (ASC 848), Deferral of the Sunset Date of Topic 848, extending the relief offered in this series of ASUs through December 31, 2024. The Company intends to adopt this standard when LIBOR is discontinued. The Company does not expect that the adoption of this standard will have a material effect on the Company’s consolidated financial statements.

ASC 606, Revenue from Contracts with Customers (“ASC 606”), outlines a 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:

ASC 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, software 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 the 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 its 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 ASC 606 and, at times, recognizes revenue in advance of the time when contracts give the Company the right to invoice a customer. Sales commissions are considered incremental and recoverable costs of obtaining a contract with a customer. Subscription related commission costs are deferred and then amortized on a straight-line basis over the period of benefit. 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 reflects the balances of contract liabilities as of March 31, 2023, and September 30, 2022, including the change between the periods. There were no contract assets as of March 31, 2023, and September 30, 2022. The current portion of contract liabilities and the noncurrent portion are included in “Accrued liabilities” and “Other liabilities, noncurrent”, respectively, on the accompanying condensed consolidated balance sheets. Refer to Note 10, Accrued and Other Liabilities for additional details.

The Company’s contract liabilities were as follows:

Remaining performance obligations

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

As of March 31, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $3,666. The Company expects to recognize revenue on approximately $3,507 or 96% 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.

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:

The fair value of the Company’s cash equivalents and marketable securities were determined based on Level 1 and Level 2 inputs. The valuation techniques used to measure the fair value of the “Level 2” instruments were based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data. 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. The Company did not have any marketable securities in the Level 3 category as of March 31, 2023, or September 30, 2022. There have been no changes in Level 1, Level 2, and Level 3 and no changes in valuation techniques for financial instruments measured at fair value on a recurring basis for the periods ended March 31, 2023, and September 30, 2022.

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 March 31, 2023, and September 30, 2022. 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.

Instruments measured at fair value on a non-recurring basis

Nonfinancial assets: Nonfinancial assets such as goodwill, other intangible assets, long-lived assets held and used, and right-of-use (“ROU”) assets are measured at fair value when there is an indicator of impairment and recorded at fair value only when impairment is recognized or for a business combination. 

Goodwill and intangible assets are recognized at fair value during the period in which an acquisition is completed, from updated estimates during the measurement period, or when they are considered to be impaired. These non-recurring fair value measurements, primarily for intangible assets acquired, were based on Level 3 inputs. The Company estimates the fair value of these long-lived assets on a non-recurring basis based on a market valuation approach, engaging independent valuation experts to assist in the determination of fair value.

Holdback Liability: In connection with the Amika Mobile asset purchase, the Company recorded a holdback liability related to potential future adjustments to assets and liabilities, misrepresentations and indemnifications against third-party claims. Adjustments of up to CAD$1,000 (USD$739) will be deducted from the asset purchase holdback liability for up to three years from the closing date. The holdback liability was recorded at the present value which was the fair value at the acquisition date. The Company engaged independent valuation experts to assist in determining the present value of the holdback liability. The expected future payment was discounted using a rate representative of the Company’s payment risk and credit rating. Accretion is recorded in each subsequent reporting period based on the discount factor used to arrive at the original fair value. This change in fair value is recorded in the accompanying condensed consolidated statement of operations. The changes in the carrying amount of the holdback liability is as follows:

Inventories, net consisted of the following:

Property and equipment, net consisted of the following:

Depreciation and amortization expense for property and equipment was $113 and $102 for the three months ended March 31, 2023 and 2022, respectively. Depreciation and amortization expense for property and equipment was $224 and $199 for the six months ended March 31, 2023 and 2022, respectively.

Goodwill is attributable to the acquisitions of Genasys Spain and Zonehaven, and the Amika Mobile asset purchase and is due to combining the integrated emergency critical communications, mass messaging solutions, and software development capabilities with existing hardware 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. In the fourth quarter of fiscal 2022, in conjunction with the annual impairment assessment, the Company determined that the fair value of the software reporting unit was less than the carrying value. The Company engaged independent valuation experts to assist in determining the fair value of the software reporting unit and recorded a $13,162 goodwill impairment charge. As of March 31, 2023, and September 30, 2022, goodwill was $10,346 and $10,118 respectively. There were no additions or impairments to goodwill during the six months ended March 31, 2023.

The changes in the carrying amount of goodwill by segment for the six months ended March 31, 2023, were as follows:

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 $264.

The changes in the carrying amount of intangible assets by segment for the six months ended March 31, 2023, were as follows:

The Company’s consolidated intangible assets consisted of the following:

As of March 31, 2023, future amortization expense is as follows:

Amortization expense was $526 and $541 for the three months ended March 31, 2023 and 2022, respectively. Amortization expense was $1,058 and $1,083 for the six months ended March 31, 2023 and 2022, respectively.

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.

Dues and subscriptions

Dues and subscriptions consisted 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.

Prepaid commissions

Prepaid commissions represented the current portion of sales commissions paid in connection with obtaining a contract with a customer. These costs are deferred and are amortized on a straight-line basis over the period of benefit, which is typically between three and five years. Amortization of prepaid commissions is included in selling, general and administrative expenses in the accompanying condensed consolidated statement of operations.

Trade shows and travel

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

Canadian goods and services and harmonized sales tax receivable

The goods and services tax and harmonized sales tax (“GST/HST”) is a Canadian value-added tax that applies to many goods and services. Registrants may claim refundable tax credits for GST/HST incurred through filing periodic tax returns. This GST/HST receivable is a receivable from the Canadian Revenue Agency.

10. ACCRUED AND OTHER 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 March 31, 2023, included prepayments from customers for services, including extended warranty, scheduled to be performed in the twelve months ending March 31, 2024.

Customer deposits

Customer deposits represent amounts paid by customers as a down payment on hardware orders to be delivered in the twelve months ending March 31, 2024.

Accrued contract costs

Accrued contract costs consisted 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.

Asset purchase holdback liability

In connection with the Amika Mobile asset purchase, the Company recorded a holdback liability related to potential future adjustments to assets and liabilities, misrepresentations and indemnifications against third-party claims. Adjustments of up to CAD$1,000 (USD$739) 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.

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

11. DEBT

Revolving line of credit

On March 8, 2021, the Company entered into an agreement with MUFG Union Bank, N.A. for a $10 million revolving line of credit. Outstanding balances on the revolving line of credit bore interest at a per annum rate equal to the London Interbank Offered Rate (“LIBOR”) plus 2.25%. The agreement contained a provision for determining an alternative interest rate index in the event the LIBOR rate is no longer available. The agreement contained standard covenants, including affirmative financial covenants, such as the maintenance of a short-term liquidity ratio and a senior leverage ratio, in addition to negative covenants which limit the incurrence of additional indebtedness, loans and equity investments, disposition of assets, mergers and consolidations and other matters customarily restricted in such agreements. The maturity date of this revolving line of credit was March 31, 2023. As of March 31, 2023, and September 30, 2022, there were no borrowings on the revolving line of credit. The Company incurred and capitalized $38 of issuance costs related to this revolving line of credit. These issuance costs were recorded in prepaid expenses and other assets in the condensed consolidated balance sheet and were amortized on a straight-line basis over the term of the loan.

12. LEASES

The Company determines if an arrangement is a lease at inception. The guidance in ASC 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 is party to 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 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 ASC 842. The Company also elected the short-term lease exemption such that the 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.

The tables below show the operating lease ROU assets and liabilities as of September 30, 2022, and the balances as of March 31, 2023, including the changes during the periods.

As of March 31, 2023, the Company’s operating leases have a weighted-average remaining lease term of 5.3 years and a weighted-average discount rate of 4.15%. The maturities of the operating lease liabilities are as follows:

For the three months ended March 31, 2023 and 2022, total lease expense under operating leases was approximately $245 and $246, respectively. For the six months ended March 31, 2023 and 2022, total lease expense under operating leases was approximately $503 and $491, respectively. The Company recorded $4 in short-term lease expense during the three and six months ended March 31, 2023. The Company did not have any short-term lease expense during the three and six months ended March 31, 2022.

13. INCOME TAXES

For the six months ended March 31, 2023, the Company recorded discrete income tax expense of $8 related to a prior year foreign income tax expense true-up. For the six months ended March 31, 2023, the Company did not record an income tax benefit for the tax loss, as the benefits are not expected to be realized during the current fiscal year through ordinary income generated during the third and fourth quarters or in a future year through recognition of a deferred tax asset. For the six months ended March 31, 2022, the Company recorded an income tax benefit of $336 reflecting an effective tax rate of 28.6%.

The Company expects to utilize its deferred tax asset in the future, except for those related to federal R&D tax credit carryforwards and net operating loss carryforwards, R&D credits, and foreign tax credits related to Genasys Spain and Genasys Canada, and continues to maintain a partial allowance.

ASC 740, 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 the Company’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 six months ended March 31, 2023, the Company recorded $589 of bonus expense. In the six months ended March 31, 2022, the Company recorded $845 of bonus expense.

Amika Mobile asset purchase

In connection with the Amika Mobile asset purchase, the Company recorded a holdback liability related to potential future adjustments to assets and liabilities, misrepresentations, and indemnifications against third-party claims. Adjustments of up to CAD$1,000 (USD$739) 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 per share, resulting in the addition of $3,431 to additional paid-in-capital. During the year ended September 30, 2021, the Company accelerated the issuance of 365,109 of such shares of common stock to a former owner of the Amika Mobile assets. During the year ended September 30, 2022, the Company issued 69,564 shares to the former owners of the Amika Mobile assets. During the six months ended March 31, 2023, the Company issued 69,564 shares to the former owners of the Amika Mobile assets. There are 69,564 remaining shares of the Company’s common stock subject to issuance under this obligation.

15. SHARE-BASED COMPENSATION

Stock option plans

As of March 31, 2022, 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 adopted by the Company’s Board of Directors on December 6, 2016, and approved by the Company’s stockholders on March 14, 2017. The 2015 Equity Plan was amended by the Company’s Board of Directors on December 8, 2020, to increase the number of shares authorized for issuance from 5,000,000 to 10,000,000. On March 16, 2021, the Company’s stockholders approved the plan amendment. The 2015 Equity Plan authorizes the issuance of stock options, restricted stock, stock appreciation rights, restricted stock units (“RSUs”) and performance awards, to an aggregate of 10,000,000 new shares of common stock to employees, directors, advisors or consultants. As of March 31, 2023, there were options and restricted stock units outstanding covering 1,000 and 4,579,035 shares of common stock under the 2005 Equity Plan and the 2015 Equity Plan, respectively, and 2,861,077 shares of common stock available for grant, for a total of 7,441,112 shares of common stock authorized and unissued 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.

Share-based compensation is accounted for in accordance with ASC Topic 718: Compensation - Stock Compensation. Total compensation expense for all share-based awards is based on the estimated fair market value of the equity instrument issued on the grant date. For share-based awards that vest based solely on a service condition, compensation expense is recognized on a straight-line basis over the total requisite service period for the entire award. For share-based awards that vest based on a market condition, compensation expense is recognized on a straight-line basis over the requisite service period of each separately vesting tranche. For share-based awards that vest based on a performance condition, compensation expense is recognized for the number of awards that are expected to vest based on the probable outcome of the performance condition. Compensation cost for these awards will be adjusted to reflect the number of awards that ultimately vest.

There were 1,806,500 stock options granted during the six months ended March 31, 2023, of which 225,000 vest based on a market condition. There were 302,000 stock options granted during the six months ended March 31, 2022, none of which vest based on a market condition.

Stock options that do not contain market-based vesting conditions are valued using the Black-Scholes option pricing model. The weighted average estimated fair value of employee stock options granted, that vest without a market condition, during the six months ended March 31, 2023 and 2022, was calculated 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 has not paid a dividend in fiscal 2023 and did not pay a dividend in fiscal 2022.

For stock options that contain market-based vesting conditions, the fair value of these options was determined using a Monte Carlo valuation approach and calculated by an independent valuation specialist.

As of March 31, 2023, there was approximately $1,976 of total unrecognized compensation costs related to outstanding employee stock options. This amount is expected to be recognized over a weighted average period of 2.4 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 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. During the year ended September 30, 2022, the Company modified the performance criteria for these PVOs to exclude certain strategic growth initiatives that were not planned at the time of grant. The Company recorded $209 in stock-based compensation expense related to these options in the year ended September 30, 2022. The Company did not record compensation expense related to the 2023 performance-based stock options during the six months ended March 31, 2023.

On October 8, 2022, the Company awarded additional performance-based stock options to purchase 800,000 shares of the Company’s common stock to the same key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2025 and 2026 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 did not record compensation expense related to these options for the six months ended March 31, 2023.

On August 10, 2022, the Company granted PVOs to purchase up to 750,000 shares of the Company’s common stock to a key member of management, with a contractual term of seven years. During the three months ended March 31, 2023, these options were forfeited due to a voluntary termination of employment. The Company did not record compensation expense related to these options for the six months ended March 31, 2022.

On March 20, 2023, the Company granted PVOs to purchase up to 450,000 shares of the Company’s stock to a key member of management with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of the first three twelve-month periods following the employee’s start date, including targets related to growth in the institutional ownership of the Company’s common stock and growth in the trading volume of the Company’s common stock during such periods. Additionally, vesting is subject to the employee being employed by the Company on each of the first three anniversaries of the employee’s start date. 225,000 of these options contain a market-based vesting condition and accounting principles do not require the market condition to be achieved in order for compensation expense to be recognized. The Company recorded $0.4 of compensation expense related to these options during the three and six months ended March 31, 2023.

The Company did not grant any PVO’s during the six months ended March 31, 2022.

Restricted stock units

In fiscal 2020, 81,270 RSUs were granted to employees that vested over three years on the anniversary date of the grant. These were issued at a market value of $258 and have been expensed on a straight-line basis over the three-year life of the grants.

During fiscal 2021, 145,950 RSUs were granted to employees that will vest over three years on the anniversary date of the grant. These were issued at a market value of $989, which have and will be expensed on a straight-line basis over the three-year life of the grants.

On March 15, 2022, each non-employee member of the Board of Directors received a grant of 30,000 RSUs that vested on the first anniversary of the grant date. These were issued at a market value of $407, and expensed on a straight-line basis through the March 15, 2023, vest date. On November 1, 2021, 10,000 RSUs were granted to a non-employee advisor that vested on the first anniversary of the grant date. These were issued at a market value of $51, which were expensed on a straight-line basis though the November 1, 2022, vest date. On November 1, 2022, 10,000 RSUs were granted to a non-employee advisor that vest on the first anniversary of the grant date. These were issued at a market value of $29, which have and will be expensed on a straight-line basis though the November 1, 2023, vest date.

On March 14, 2023, 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 RSUs were granted at a market value of $417 and have and will be expensed on a straight-line basis through the March 14, 2024, vest date. On February 14, 2023, 145,600 RSUs were granted to employees that will vest over three years on the anniversary date of the grant. These RSUs were issued at a market value of $582, which have and will be expensed on a straight-line basis over the three-year life of the grants. On March 20, 2023, 20,000 RSUs were granted to an employee with immediate vesting. These were issued at a market value of $66 and were expensed immediately.

Compensation expense for RSUs was $350 and $548 for the three and six months ended March 31, 2023, respectively. Compensation expense for RSUs was $586 and $1,023 for the three and six months ended March 31, 2022, respectively. As of March 31, 2023, there was approximately $1,473 of total unrecognized compensation costs related to outstanding RSUs. This amount is expected to be recognized over a weighted average period of 1.8 years.

A summary of the Company’s RSUs as of March 31, 2023, is presented below:

Stock option summary information

A summary of the activity in options to purchase the capital stock of the Company as of March 31, 2023, is presented below:

Options outstanding are exercisable at prices ranging from $1.31 to $8.03 per share and expire over the period from 2023 to 2030 with an average life of 4.39 years. The aggregate intrinsic value of options outstanding and exercisable as of March 31, 2023, was $1,381 and $1,095, respectively. The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last day of trading for the quarter, which was $2.95 per share, and the exercise price multiplied by the number of applicable options. The total intrinsic value of stock options exercised during the six months ended March 31, 2023 was $147 and proceeds from these exercises was $86. The total intrinsic value of stock options exercised during the six months ended March 31, 2022 was $86 and proceeds from these exercises was $170.

The following table summarized information about stock options outstanding as of March 31, 2023:

The Company recorded $163 and $151 of stock option compensation expense for employees, directors and consultants for the three months ended March 31, 2023 and 2022, respectively. The Company recorded $385 and $272 of stock option compensation expense for employees, directors and consultants for the six months ended March 31, 2023 and 2022, 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 table summarizes changes in the components of stockholders’ equity during the six months ended March 31, 2023, and the six months ended March 31, 2022 (amounts in thousands, except par value and share amounts):

Common stock activity

During the six months ended March 31, 2023, the Company issued 69,679 shares of common stock and received gross proceeds of $86 in connection with the exercise of stock options, and the Company issued 233,812 shares of common stock in connection with the vesting of RSUs. During the six months ended March 31, 2022 the Company issued 70,000 shares of common stock and received gross proceeds of $170 in connection with the exercise of stock options, and the Company issued 243,998 shares of common stock in connection with the vesting of RSUs.

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 per share, resulting in the addition of $3,431 to additional paid-in-capital. During the year ended September 30, 2021, the Company accelerated the issuance of 365,109 of such shares of common stock to a former owner of the Amika Mobile assets. During the year ended September 30, 2022, the Company issued 69,564 shares to the former owners of the Amika Mobile assets. During the six months ended March 31, 2023, the Company issued 69,564 shares to the former owners of the Amika Mobile assets. There are 69,564 remaining shares of the Company’s common stock subject to issuance under this obligation.

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. In December 2022, the Board of Directors extended the Company’s share buyback program through December 31, 2024.

There were no shares repurchased during the six months ended March 31, 2023. During the six months ended March 31, 2022 259,310 shares were repurchased for $998. All repurchased shares have been retired as of March 31, 2023, and $3 million was available for share repurchase under the program.

Dividends

There were no dividends declared in the six months ended March 31, 2023 and 2022.

17. NET LOSS PER SHARE

The following table sets forth the computation of basic and diluted net loss 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 software for emergency warning and evacuation management. The Company operates in two business segments: Hardware and Software and its principal 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.

The following table presents the Company’s segment disclosures:

19. MAJOR CUSTOMERS, SUPPLIERS AND RELATED INFORMATION

For the three months ended March 31, 2023, revenues from two customers accounted for 54% and 12% of total revenues with no other single customer accounting for more than 10% of revenues. For the six months ended March 31, 2023, revenues from one customer accounted for 57% of total revenues with no other single customer accounting for more than 10% of revenues. As of March 31, 2023, accounts receivable from two customers accounted for 26% and 23% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.

For the three months ended March 31, 2022 revenues from two customers accounted for 63% and 13% of total revenues with no other single customer accounting for more than 10% of revenues. For the six months ended March 31, 2022, revenues from one customer accounted for 65% of total revenues with no other single customer accounting for more than 10% of revenues. As of March 31, 2022, accounts receivable from two customers accounted for 56% and 17% 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 $8,411 and $9,531 for the three months ended March 31, 2023 and 2022, respectively. Revenue from customers in the United States was $17,349 and $18,769 for the six months ended March 31, 2023 and 2022, respectively. Revenues are attributed to countries based on customers’ delivery location. The following table summarizes revenues by geographic region.

The following table summarizes long-lived assets by geographic region.

The discussion and analysis set forth below should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included under Item 1 of this Quarterly Report on Form 10-Q, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended September 30, 2022.

Forward Looking Statements

This report contains certain statements of a forward-looking nature relating to future events or future performance. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements but are not the only means of identifying forward-looking statements. Prospective investors are cautioned that such statements are only predictions and actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider various factors identified in this report and any matters set forth under Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K, which could cause actual results to differ materially from those indicated by such forward-looking statements.

For purposes of this Quarterly Report, the terms “we,” “us,” “our” “Genasys” and the “Company” refer to Genasys Inc. and its consolidated subsidiaries.

Overview

Genasys is a global provider of critical communications software solutions and hardware systems designed to alert, inform, and protect communities and organizations. The Genasys Protect™ unified platform collects information on developing and active emergency situations from a wide variety of sensors and inputs and empowers governments, businesses, and organizations to deliver real-time, geo-targeted notifications and information to people in harm’s way before, during, and after public safety and enterprise threats.

The Genasys Protect unified platform includes:

Software

GEM

Genasys Emergency Management (“GEM”) is Genasys’ software-as-a-service (“SaaS”) product platform that includes GEM Public Safety, GEM Enterprise, Zonehaven and NEWS.

GEM Public Safety is an interactive, cloud-based SaaS solution that enables State, Local and Education (“SLED”) customers to send critical information to at-risk individuals or groups when an emergency occurs. GEM acts as both a communications input and output, receiving information from state-of-the-art sensors and emergency services, and quickly relaying notifications, alerts, and instructions to at-risk populations and first responders. GEM customers can create and send critical, verified, and secure notifications and messages using emails, voice calls, text messages, panic buttons, desktop alerts, television, social media, and more. Additionally, Genasys is a certified provider of Integrated Public Alert and Warning System (“IPAWS”) notifications.

GEM Enterprise empowers businesses and organizations to send critical communications to at-risk employees, contractors, visitors, or groups based on geographic location or team status. Operated and controlled via a single dashboard that includes two-way polling, duress buttons, field check-ins, and recipient locations, GEM Enterprise integrates with data sources, including active directories, human resources, visitor management, and building control systems to find and deliver safety alerts and notifications to employees, staff, contractors, temporary workers, and visitors.

Zonehaven is a multipronged SaaS application that serves both first responders and the jurisdictions they protect. Emergency services agencies can prepare for natural or man-made disasters by developing evacuation plans that map routes, shelters, traffic control locations, and road closures using Zonehaven's extensive public safety resources and mapped zones. This information is easily shared with the public and reduces the time it takes to execute emergency evacuations and conduct orderly repopulations.

NEWS – Genasys' National Emergency Warning System (“NEWS”) provides multichannel public safety notifications and instructions to designated areas, groups, or agencies when a crisis occurs. Genasys partners with mobile telecom networks to deliver NEWS SMS and cell broadcast alerts and notifications that can be sent to anyone, anywhere, with no recipient opt-in, registration, or download required. NEWS can locate recipients and deliver messages in near real time, compared with other SMS alert providers that can take up to 15 minutes. Even with NEWS’ reach and scope, all data is anonymized, ensuring individuals stay safe and informed without sacrificing their privacy.

Hardware

IMNS – Genasys' Integrated Mass Notification System (“IMNS”) product line unites Genasys next generation mass notification speaker systems with GEM command-and-control software. Genasys' advanced mass notification systems feature the industry's highest Speech Transmission Index (“STI”), large directional and omni-directional broadcast coverage areas, and an array of options that enable continued operation when power and telecommunications infrastructure fail. Emergency alerts and information can be sent via individual, grouped or networked IMNS installations, text messages, emails, IPAWS, desktop alerts, television, voice calls, and social media. IMNS' layered redundancy helps to ensure the maximum number of people receive critical communications.

LRAD is the world’s leading Acoustic Hailing Device (“AHD”). Projecting alert tones and audible voice messages with exceptional vocal clarity in a 30° beam from close range to 5,500 meters. LRADs are used throughout the world in multiple applications and circumstances to safely hail, warn, inform, direct, prevent misunderstandings, determine intent, establish large safety zones, resolve uncertain situations, and save lives. LRAD voice and alert tone broadcasts cut through background noise and are clearly heard and understood over distance.

LRAD is the de facto standard of the global AHD market with more than 100 countries using our long-range communication systems in a range of diverse applications that include public safety, emergency warning, mass notification, defense, law enforcement, border and homeland security, critical infrastructure protection, wildlife preservation, and many more.

We continue to develop new critical communications innovations and believe we have established significant competitive advantages in our principal markets. 

Recent Developments

Business developments in the fiscal quarter ended March 31, 2023:

Revenues for the Company’s second quarter of fiscal 2023 were $11.2 million, a $2.0 million decrease from $13.2 million in the second quarter of fiscal 2022. Quarterly software revenue of $853 thousand, increased $180 thousand, year over year, offset by a decrease of $2.1 million in hardware revenue ($10.4 million), in the March ended quarter. The timing of budget cycles, government financial issues and military conflict in certain areas of the world, often delay hardware contract awards, resulting in uneven quarterly revenue. Gross profit decreased compared to the same quarter in the prior year, primarily as a result of higher component costs for LRADs delivered against legacy contracts and pricing. Operating expenses in the quarter ended March 31, 2023, increased 8.2% to $8.3 million, compared with $7.7 million in the same period in the prior year. The primary driver of the change is personnel hired in conjunction with our stated investment in building our software business. The Company had 201 employees as of March 31, 2023, as compared with 180 in the prior year period. We reported a net loss of $3.4 million for the second quarter of fiscal 2023, or $(0.09) per share, compared with a net loss of $492 thousand, or $(0.01) per share, for the same quarter in the prior year.

Business Outlook

Our products, systems, and solutions continue to gain worldwide awareness and recognition through our sales and marketing efforts, media exposure, product demonstrations, and word of mouth as a result of positive responses and increased acceptance. We believe we have a solid global brand, technology, and product foundation, which we continue to expand to serve new markets and customers for greater business growth. We believe we have strong market opportunities for our product offerings throughout the world in the defense, emergency warning, mass notification, critical event management, and law enforcement sectors as a result of increasing public safety, enterprise, government and organizational threats. Our products, systems, and solutions also have many applications within the fire rescue, maritime, asset protection, and wildlife preservation business segments.

Genasys has developed a global market and increased demand for LRADs and advanced mass notification speakers. We have a reputation for producing quality products that feature industry-leading broadcast area coverage, vocal intelligibility, and product reliability. We intend to continue building on our AHD market leadership position by offering enhanced voice broadcast systems and accessories for an expanding range of applications. In executing our strategy, we use direct sales to governments, militaries, large end-users, system integrators, and prime vendors. We have built a worldwide distribution channel consisting of partners and resellers that have significant expertise and experience selling integrated communication solutions into our various target markets. As our primary AHD sales opportunities are with domestic and international governments, military branches, and law enforcement agencies, we are subject to each customer’s unique budget cycle, which leads to long selling cycles and uneven revenue flow, complicating our product and financial planning.

The proliferation of natural and man-made disasters, emergency events, and civil unrest require technologically advanced, multi-channel solutions to deliver clear and timely critical communications to help keep people safe during crisis situations. Businesses are also incorporating critical communication and emergency management systems that locate and help safeguard employees when crises occur.

By providing the only SaaS platform that unifies sensors and inputs with multichannel, multiagency alerting and notifications, Genasys seeks to deliver reliable, fast, and intuitive solutions for creating and disseminating geolocation-targeted warnings, information, and instructions before, during, and after public safety and enterprise threats.

While the software and hardware mass notification markets are more mature with many established suppliers, we believe that our advanced technology and unified platform provides opportunities to succeed in the large and growing public safety, emergency warning, and critical communications markets.

In the second half of fiscal 2023, we intend to continue pursuing domestic and international business opportunities with the support of business development consultants, key representatives, and resellers. We plan to grow our revenues through increased direct sales to governments and agencies that desire to integrate our communication technologies into their homeland security and public safety systems. This includes building on fiscal 2022 domestic defense sales by pursuing further U.S. military opportunities. We also plan to pursue emergency warning, enterprise critical event management, government, law enforcement, fire rescue, homeland and international security, private and commercial security, border security, maritime security, and wildlife dispersion and preservation business opportunities. In addition to the matters above, we are authorized for the performance of services and provision of goods pursuant to Delaware General Corporation Law.