PART I
Forward Looking Statements
This Annual Report on Form 10-K contains forward-looking statements relating to future events or the future performance of our company. 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. Such statements are predictions and actual events or results may differ materially. In evaluating such statements, you should specifically consider various factors identified in this report, including the matters set forth below in “Item 1A. Risk Factors” of this 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 Annual Report, the terms “we,” “us,” “our” “Genasys” and the “Company” refer to LRAD Corporation d/b/a Genasys Inc (the “Company” or “Genasys”) and its consolidated subsidiaries.
Overview
On October 23, 2019, LRAD Corporation announced it was rebranding as Genasys Inc. Genasys is a global provider of critical communications solutions designed to help keep people safe. Our unified platform provides a multi-channel approach to deliver alerts, notifications, instructions and information before, during and after public safety threats, critical events and other crisis situations.
Our multi-channel approach includes:
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LRAD® (Long Range Acoustic Devices) that project sirens and audible voice messages with exceptional vocal clarity in a 30° beam from close range out to 5,500 meters;
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CCaaS (Critical Communications as a Service) software that is a reliable, fast and intuitive solution for sending SMS, text, email and social media messages to mobile devices in defined geographic areas, and;
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Integrated Solutions that span multiple hardware and software mobile notification channels so that information can be delivered to the people who need it. These solutions include LRAD systems that project sirens and audible voice messages 60° - 360° with industry-leading vocal clarity from close range to over 14 square kilometers from a single installation, and CCaaS software designed to deliver SMS, text, email, and social media messages to mobile devices in defined geographic areas. Our integrated solutions are compatible with the Federal Emergency Management Agency (“FEMA”) Integrated Public Alert & Warning System (“IPAWS”) and other major emergency warning protocols.
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We have a history of successfully delivering innovative systems and solutions, pioneering the acoustic hailing device (“AHD”) market with the introduction of our first LRAD AHD in 2003, creating the first multidirectional public safety mass notification systems that project sirens and audible voice messages with industry-leading vocal clarity and area coverage in 2012, and recently revolutionizing the mass notification industry with the only unified platform that combines audible, highly intelligible voice broadcast systems and digital, CCaaS software mobile mass messaging solutions.
The Company’s critical communication systems are being used in 72 countries throughout the world in diverse applications, including public safety, national emergency warning systems, mass notification, defense, law enforcement, critical infrastructure protection, and many more. We continue to develop new communication innovations and believe we have significant competitive advantages in our principal markets.
Technology and Products
Our LRAD systems are a technological breakthrough in broadcasting audible, highly intelligible voice messages and tones over long distances and high ambient noise using minimal power. By broadcasting audible voice messages with exceptional vocal clarity and only where needed, we offer novel sound applications that conventional bullhorns, loudspeakers, public address and emergency warning systems cannot achieve.
Our LRAD products were initially developed for the U.S. Navy to fill a capability gap identified after the October 2000 attack on the USS Cole. LRAD systems are deployed by the U.S. Army, Navy, Air Force, Marine Corps, National Guard and Coast Guard, as well as international military services, and maritime, public safety and commercial security organizations. We have redesigned and enhanced our LRAD AHDs with improved voice intelligibility, output and durability. The rugged construction of our systems enables us to meet stringent military specifications. Our LRAD AHDs are designed to enable users to safely hail and warn, inform and direct, prevent misunderstandings, determine intent, establish large safety zones, resolve uncertain situations, and save lives.
Our LRAD AHD product line provides a complete range of solutions from handheld, portable devices to permanently installed, remotely operated systems. We continue to add new models to meet specific customer requirements and to expand into new markets. We have also added various features and accessories, including wireless capability, record on-the-fly microphones, integrated and remote electronics packages, and amplifiers.
Building on the success of our LRAD AHDs, we designed and developed our multidirectional mass notification product line. Unlike most siren based installations, our public safety notification systems broadcast both emergency warning sirens and highly intelligible voice messages with uniform 60° - 360° coverage over local and wide areas. We believe our ability to shape the broadcast coverage area, our industry-leading speech intelligibility, and our multiple system activation and control options enable us to successfully compete in the large and growing mass notification market.
We continue to enhance our acoustic communication technologies and product lines to provide a complete range of systems and accessories. Our patented XL driver technology, which generates higher audio output in a smaller and lighter form factor, is being incorporated into our LRAD AHD and mass notifications systems. To date, we have incorporated our XL driver technology into the LRAD 450XL, LRAD 1950XL, LRAD 950RXL, LRAD DS-60XL, LRAD 360XL, and LRAD 360XL-MID. We are enhancing our system design and manufacturing capabilities to improve the durability and performance of our products. Our systems have been competitively selected over other commercially available systems by the U.S. Department of Defense and numerous international militaries.
Our product lines include the following:
LRAD Systems
Acoustic Hailing Devices (AHDs):
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LRAD 100X—a self-contained, battery powered, portable AHD designed for use in a variety of mass notification, law enforcement, and public safety applications—is ideally suited for shorter-range perimeter security and communication.
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LRAD 100X MAG-HS KIT—consists of an LRAD 100X with a high-strength magnetic mount, LRAD Wireless Kit for remote operation and other accessories that provide operators with the flexibility to use the system in a wide range of scenarios.
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LRAD 450XL—the loudest long range AHD for its size and weight—uses our patented technology to provide more output in a smaller form factor with the same high level of clarity and intelligibility consistent with all our LRAD systems. After extensive testing, in August 2019, the U.S. Army (“Army”) awarded the Company an order of $20.2 million for LRAD 450XL systems and accessories to meet the Army’s critical communications and scalable escalation of force requirements. The LRAD 450XL is designed to provide an effective communication solution for small vessels, military and law enforcement vehicles, and helicopters.
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LRAD 500RX—engineered and designed on a proprietary pan and tilt system to provide remotely controlled communication, security, and first response.
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LRAD 950RXL—selected for the U.S. Navy’s multi-year contract for Situational Awareness Systems on Military Sealift Command ships and other U.S. Navy vessels—combines the remotely operated pan and tilt system of the LRAD 500RX with our enhanced XL driver technology.
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LRAD 1000Xi—selected by the U.S. Navy as its AHD for larger vessels for shipboard defense—can be manually operated to provide long distance hailing and warning and highly intelligible voice communications. This system is available in both fully integrated and remotely operated electronics.
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LRAD 1950XL—our largest AHD that incorporates our patented XL driver technology features military-tested construction, low power requirements, and a rugged, easily transportable aluminum tripod for rapid deployment. Broadcasting highly intelligible voice communications that can be clearly heard and understood over distances of up to 5,000 meters, the LRAD 1950XL is designed primarily for defense, border, and critical infrastructure security applications.
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LRAD 2000X—designed to meet the requirements of larger security applications—is our largest AHD. Broadcasting highly intelligible voice communications over distances of up to 5,500 meters, the LRAD 2000X unit is designed primarily for perimeter and border security applications.
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We continue to augment our LRAD AHD product line by using our proprietary technology to develop louder, longer distance systems in smaller form factors, as well as incorporating customer and market-specific enhancements.
Public Safety Mass Notification (“PSMN”) Systems:
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LRAD DS-60X/DS-60XL—a mounted horn system for areas that require 60° - 360° mass notification coverage. The LRAD DS-60XL has the same form factor as the LRAD DS-60X, uses our patented XL driver technology, and has a 60°, 900-meter range. When configured in a 360° ring array, the broadcast coverage area extends to 2.5 square kilometers. Each LRAD DS-60XL horn in the ring array can be operated independently, providing customizable mass notification area coverage.
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LRAD 360XL—provides 360° coverage and is targeted for broad market applications including tsunami, hurricane, tornado, and severe weather warnings, government, campus, and industrial public address and emergency notification, and military base mass notification and public address. The LRAD 360XL also uses our patented XL driver technology. Available in several emitter configurations, the LRAD 360XL is powered and controlled by the Company’s Advanced Control Cabinet or Compact Control Cabinet. Using the Company’s CCaaS software, the Compact Control Cabinet provides flexible PSMN system command and control via TCP/IP, WiFi, Fiber, GPRS/GSM, or satellite.
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LRAD 360XL-MID—designed for urban areas, small campuses, industrial sites, and government & defense facilities, the LRAD 360XL-MID can be installed on existing infrastructure or mounted on a tripod.
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LRAD 360XL-MID Mobile Kit—comprised of two XL driver powered emitters, ruggedized carrying case power amplifier, hardened control module, all-weather push-to-talk mic, tripod, and other accessories. The kit provides a self-contained solution for operations requiring advanced mobile mass notification. Rapidly deployable, the LRAD 360XL-MID Mobile Kit is designed for defense, homeland security, law enforcement, and PSMN applications.
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LRAD 360XT—fully self-contained and self-powered, the LRAD 360XT mobile mass notification system delivers highly intelligible voice and emergency warning tone broadcasts with uniform 360° coverage over an 850-meter coverage radius from a rapidly deployable, telescoping 30-foot pneumatic mast. The LRAD 360XT is integrated and mounted on a ruggedized trailer featuring securely mounted, lockable electronics and equipment enclosures containing the amplifier modules and pneumatic systems.
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LRAD SoundSaber®-X—next generation LRAD SoundSaber mass notification line array speakers. The LRAD SoundSaber-X ("SS-X") features a new lightweight, rugged, and highly efficient driver technology designed to provide exceptional vocal intelligibility while utilizing 66% less power to generate 16dB more in audio output than the previous generation LRAD SS400. The LRAD SS-X is designed to alleviate reflection and echoing, to provide uniform acoustic coverage with wide audio dispersion along the short axis and narrow dispersion along the long axis, and ensure broadcasts are clearly heard and understood in high ambient noise environments. The thin form factor of the LRAD SS-X provides unobtrusive installation for many types of mass notification and public address applications.
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Our PSMN voice broadcast systems feature exceptional speech intelligibility and the largest area coverage. The system can be installed independently of existing infrastructure with battery operation, Internet Protocol or satellite connectivity and with AC/Solar power charging systems. The battery capacity follows industry guidelines. Solar power and satellite connectivity options designed to ensure system operation when existing power or communication infrastructure fail. Our voice broadcast systems also have battery backup designed to power 48 hours of continuous operation.
CCaaS (Critical Communications as a Service) Software:
Using our cloud-based mobile mass messaging software, we developed our proprietary CCaaS – Critical Communications as a Service – software that integrates geolocation-targeted mobile mass messaging with command and control functionality to activate and operate our PSMN voice broadcast systems. Our CCaaS software is designed to deliver multi-channel, geolocation-targeted alerts, warnings, notifications and information to only the individuals in or entering crisis affected areas.
Integrated Solutions:
By integrating our industry-leading LRAD products with our CCaaS software, we created the only platform that unifies highly intelligible voice broadcast systems and mobile mass messaging solutions for the public safety, emergency warning and mass notification markets. Our CCaaS software platform is designed to integrate with external inputs and sensors that provide platform operators the critical data they need to make informed decisions on when and where to deliver location-based audible and digital alerts and warnings.
We believe the integration of mass messaging solutions, our enhanced software capabilities, our highly intelligible LRAD voice broadcasting systems and our platform’s compatibility with major emergency warning protocols, including FEMA’s IPAWS, Wireless Emergency Alerts (“WEA”) and others, significantly augment our existing product offerings and provide us with substantial business growth opportunities in new markets.
Strategy
The proliferation of natural disasters, crisis situations and civil disturbances require technologically advanced, multi-channel solutions to deliver clear and timely critical communications to help make and keep the public safe during emergencies. Businesses are also incorporating communication systems that locate and help safeguard employees when critical events occur.
By providing the only unified platform that combines audible, highly intelligible voice broadcast systems and CCaaS software, Genasys seeks to deliver a reliable, fast and intuitive solution for sending location-based audible voice communications and geolocation-targeted messages and texts to mobile devices to help keep the public and employees safe.
Genasys has developed a global market and an increased demand for LRAD systems and revolutionary public safety notification solutions. We have a reputation for producing quality products that feature industry-leading broadcast area coverage, vocal intelligibility and geo-targeted mass messaging. While the mass notification market is more mature with many established manufacturers and suppliers, we believe that our advanced technology and unified platform provides opportunities to succeed in the large and growing public safety, emergency warning and mass notification markets. We also plan to expand and strengthen domestic and international sales channels by adding key mass notification partners, distributors, and dealers.
We plan to continue building on our AHD leadership position by offering enhanced directional and multidirectional voice broadcast systems and accessories for an expanding range of applications. In executing our strategy, we use direct sales to governments, militaries, large end-users, and system integrators. We have built a worldwide distribution channel consisting of partners and resellers that have significant expertise and experience selling integrated communication solutions into our various target markets. As our primary AHD sales opportunities are with domestic and international government, military and law enforcement agencies, we are subject to each customer’s unique budget cycle, which leads to long selling cycles and uneven revenue flow, complicating our product planning.
In fiscal 2020, we intend to continue to pursue 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 militaries and large commercial and defense-related companies that desire to integrate our communication technologies into their product offerings. This includes building on fiscal 2019 domestic defense sales by pursuing further U.S. military opportunities. We also plan to pursue mass notification, government, law enforcement, fire rescue, homeland and international security, private and commercial security, border security, maritime security, and wildlife preservation and control business opportunities.
Our research and development strategy is to continue innovating voice broadcast systems and accessories, and mobile alert solutions to meet the needs of our target markets. Our PSMN product line includes emitters and speaker arrays in different sizes, as well as various configurations of amplifiers, mounts, power sources, and software. We developed and patented our XL driver technology, which generates higher audio output in smaller, lighter form factors. We have incorporated our XL driver technology into the LRAD 450XL, LRAD 1950XL, LRAD 950RXL, LRAD DS-60XL, LRAD 360XL, and LRAD 360XL-MID. Our LRAD PSMN systems and CCaaS software represent more complex, integrated offerings. We are pursuing certain certifications, which are often required when bidding on government and mass notification opportunities. We intend to invest engineering resources to enhance our PSMN systems and CCaaS software to compete for larger mass notification business opportunities. We are also configuring alternative solutions to achieve lower price points to meet the needs of certain customers or applications. We also engage in ongoing value engineering to reduce the cost and simplify the manufacturing of our products.
We intend to continue operating with financial discipline in order to create value for our shareholders. We are focused on growing top line revenue by successfully entering new markets and expanding our market share in the global mass notification market, which we believe will translate into increased net profit growth.
Manufacturing and Suppliers
Manufacturing. We believe maintaining quality manufacturing capacity is essential to the performance of our products and the growth of our business. Our technologies are different from mass-produced designs, and our manufacturing and assembly involves unique processes and materials. We contract with third-party suppliers to produce various components and sub-assemblies. At the end of fiscal year 2018, the Company moved to a new facility with expanded engineering and manufacturing capacity to support current and expected business growth. In our facility, we complete the final assembly, test and ship our products. We have refined our internal processes to improve how we design, test, and qualify products. We continue to implement rigorous manufacturing and quality processes to track production and field failures. We also perform third-party testing and certification of our products to ensure that they meet rigorous military and commercial specifications. We implement design and component changes periodically to reduce our product costs and improve product reliability and manufacturability.
Suppliers. We minimize inventories and maximize the efficiency of our supply chain by having a large number of components and sub-assemblies produced by outside suppliers mostly located within 50 miles of our facility. The Company relies on one supplier for compression drivers for its LRAD products and is making efforts to obtain alternative suppliers to reduce such reliance. The Company’s ability to manufacture its LRAD products could be adversely affected if it were to lose this sole source supplier and was unable to find an alternative supplier. We also purchase several key components and sub-assemblies from foreign suppliers. Consequently, we are subject to the impact economic conditions can have on such suppliers and the fluctuations of foreign currency exchange rates, which could impact our lead times and product costs. We have developed strong relationships with a number of our key suppliers. If these suppliers should experience quality problems or part shortages, our production schedules could be significantly delayed or our costs significantly increased.
Sales and Marketing
We market and sell products and services through our sales force based in California, Colorado, Florida, Wisconsin, and Spain as well as through full-time business consultants in Texas, Germany and Thailand. Our corporate and administrative offices are located in San Diego, California.
We sell directly to governments, militaries, large end-users, and defense-related companies. We use independent representatives on a commission basis to assist in our direct sales efforts. We also use a channel distribution model, in which we sell our products directly to independent resellers and system integrators around the world, who then sell our products (or our products integrated with other systems) to end-user customers. We are focusing our internal business development resources on building relationships with defense integrators and other large direct customers. In addition, we utilize part-time consultants with expertise in various U.S. government and defense sectors to advise us on procedures and budgetary policies in an effort to be successful in these areas.
We have a global reputation for providing high quality, innovative voice broadcast systems and mobile alert solutions that have made Genasys and LRAD internationally recognized product brands. We actively promote our brands and products through our website, trade shows, and advertising. We intend to increase the use of our trademarks throughout our product distribution chain and believe growing brand awareness will assist in expanding our business. We believe our reputation for technological expertise, quality products, and strong service and support provide us competitive advantages.
Customer Concentration
For the fiscal year ended September 30, 2019, we had two customers accounting for 37% and 10% of revenues, with no other single customer accounting for more than 10% of revenues. For the fiscal year ended September 30, 2018, we had one customer accounting for 20% of revenues, with no other single customer accounting for more than 10% of revenues.
Our revenues to date have relied on a few major customers. The loss of any customer could have a materially adverse effect on our financial condition, results of operations and cash flows. We have made progress diversifying our revenues and expect to continue to do so in future periods.
Backlog
Our order backlog for products that are deliverable in the next 12 months was approximately $27,014,253 at September 30, 2019, compared to $23,646,910 at September 30, 2018. The amount of backlog at any point in time is dependent upon scheduled delivery dates to our customers and product lead times. Our backlog orders are supported by firm purchase orders.
Warranties
We generally warrant our products to be free from material and workmanship defects for a period up to one year from the date of purchase. The warranty is generally a limited warranty, and in some instances imposes certain shipping costs on the customer. We generally provide direct warranty service, but at times we may establish warranty service through third parties.
We also provide repair and maintenance agreements and extended warranty contracts at market rates, with terms ranging from one year to several years, as an additional source of revenue and to provide increased customer satisfaction.
Competition
Our technologies and products compete with those of other companies. Commercial and government audio industry markets are fragmented and include numerous manufacturers with audio products that vary widely in price, quality, and distribution channels. Present and potential competitors have, or may have, substantially greater resources to devote to product development. We believe we compete primarily on the originality of our products, the uniqueness of our technology and designs, and our responsiveness to customers and the ability to meet their needs. We believe the quality, durability, and superior performance of our products, which have been developed by incorporating feedback from our customers, and our desire to provide the highest quality products, also provide us competitive advantages.
Our LRAD AHD product line features the leading voice broadcast systems for military and commercial applications. Our AHD competitors include Ultra Electronics/USSI, IML Sound Commander, and others. We do not believe these competitors have achieved significant global market penetration in the AHD market to date. We believe our LRAD AHD product line has demonstrated acceptance, has performed extremely well in harsh environments, and can continue to compete on the basis of technical features, performance, ease of use, quality and cost. As we continue to grow this market, future competitors may enter, which could impact our competitiveness.
In the mature and established mass notification market, we compete against several domestic and international competitors, including Everbridge, OnSolve, Whelen Engineering Company Inc., Hoermann, and others. We believe our ability to offer a reliable, fast and intuitive solution for sending location-based SMS, text, email and social media messages to mobile devices in defined geographic areas and providing the only platform that unifies voice broadcast and digital, CCaaS software gives us significant competitive advantages against these established organizations. Further advantages include our ability to shape the broadcast coverage area from 60° - 360°, our industry-leading voice broadcast intelligibility, and our multiple system activation and control options, including satellite, TCP/IP, fiber, Wi-Fi, digital or analog radio, Ethernet or hard wire. We believe our platform’s ease of integration with external sensors and inputs, and compatibility with major emergency warning protocols also provide competitive advantages. We believe the domestic and international markets for public safety, emergency warning and mass notification are substantial and growing.
Seasonality
Because our sales are primarily to domestic and international government departments or agencies, our selling cycles tend to be long and difficult to forecast. We have not experienced any significant seasonality trends to date, but we may experience increased seasonality in the future.
Government Regulation
We are subject to a variety of government laws and regulations that apply to companies engaged in international operations, including, among others, the Foreign Corrupt Practices Act, U.S. Department of Commerce export controls, local government regulations and procurement policies and practices (including regulations relating to import-export control, investments, exchange controls and repatriation of earnings). We maintain controls and procedures to comply with laws and regulations associated with our international operations. If we are unable to remain compliant with such laws and regulations, our business may be adversely affected.
Our products are produced to comply with standard product safety requirements for sale in the U.S. and similar requirements for sale in Europe and Canada. We expect to meet the electrical and other regulatory requirements for electronic systems or components we sell throughout the world.
Financial Information about Segments and Geographic Areas
Financial information regarding our segments and the geographic areas in which we operate is contained in Note 17, Segment Information, and Note 18, Major Customers, Suppliers and Related Information to our consolidated financial statements.
Intellectual Property Rights and Proprietary Information
We operate in an industry where innovation, investment in new ideas, and protection of resulting intellectual property rights are important drivers of success. We rely on a variety of intellectual property protections for our products and technologies, including patent, trademark and trade secret laws, and contractual obligations. We pursue a policy of vigorously enforcing our intellectual property rights.
In addition to such factors as innovation, technological expertise, and experienced personnel, we believe strong product offerings that are continually upgraded and enhanced will keep us competitive, and we will seek patent protection on important technological improvements that we make. We have an ongoing policy of filing patent applications to seek protection for novel features of our products and technologies. Prior to the filing and granting of patents, our policy is to disclose key features to patent counsel and maintain these features as trade secrets prior to product introduction. Patent applications may not result in issued patents covering all-important claims and could be denied in their entirety. We also file for trade name and trademark protection when appropriate. We are the owner of federally registered trademarks, including LRAD®, LONG RANGE ACOUSTIC DEVICE®, LRAD-X®, LRAD-RX®, and SOUNDSABER®. Many of our registered trademarks have earned worldwide brand recognition.
Our policy is to enter into nondisclosure agreements with each employee and consultant or third party to whom any of our proprietary information is disclosed. These agreements prohibit the disclosure of confidential information to others, both during and subsequent to employment, or the duration of the working relationship. These agreements may not prevent disclosure of confidential information or provide adequate remedies for any breach.
Research and Development
The sound reproduction and software markets are subject to rapid changes in technology and design with frequent improvements and new product introductions, as well as customized solutions for specific customer applications. We believe our future success will depend on our ability to enhance and improve existing technologies and to introduce new technologies and products on a competitive basis that meet the needs of our customers. Accordingly, we are continuing to engage in significant research and new product development activities.
For the fiscal years ended September 30, 2019 and 2018, we spent approximately $4.5 million and $3.5 million, respectively, on company-sponsored research and development. Future levels of research and development expenditures will vary depending on the timing of further new product development and the availability of funds to carry on additional research and development on currently owned technologies or in other areas.
Executive Officers
The current executive officers of LRAD Corporation and their ages and business experience are set forth below.
Richard S. Danforth, age 60, was appointed Chief Executive Officer in August 2016. Mr. Danforth formed the strategic business consulting firm, RsD Aero, Ltd., in 2014, which provided consulting services for the Defense, Aerospace, Space and Transportation sectors, with an emphasis on M&A and Transatlantic trade. He served at DRS Technologies as Group President of DRS Integrated Defense Systems & Service (2013 – 2014); Chief Executive Officer, President and Board Member of DRS Defense Solutions (2008 – 2012); President, Command Control & Communication (2005 – 2008); President, Navy Electronics & Intelligence Systems (2004 – 2005); and Executive Vice President, Electronics Systems Group (2002 – 2004). He began his career at Raytheon in 1982 and held various manufacturing, quality assurance and program manager positions until 1996. Mr. Danforth was then appointed Vice President of Operations for Raytheon Aircraft Company (1996 – 2000). In 2000, he was named Senior Vice President of Raytheon Aircraft Company’s Commercial Aircraft Business division, where he led a staff of 370 sales, marketing and customer service personnel. Mr. Danforth holds a Bachelor of Science in Industrial Technology from the University of Massachusetts Lowell and a Masters in Engineering Management from Western New England College.
Dennis D. Klahn, age 61, was appointed Interim Chief Financial Officer in August 2017 and promoted to Chief Financial Officer in September 2017. Mr. Klahn has more than 30 years of accounting, finance and operations experience, which includes serving as Controller or CFO at publicly traded companies. He was most recently a Group Controller at Teledyne RD Instruments, a subsidiary of Teledyne Technologies Incorporated, between 2011 and August 2017. Prior to that role, he served as Controller or CFO at several companies including, ISE Corporation, Overland Storage, Inc., Anacomp, Inc., and International Lottery & Totalizator Systems, Inc. Mr. Klahn began his career as a Staff Accountant at Coopers & Lybrand after receiving his B.A. in Accounting from St. Ambrose University.
Executive officers serve at the discretion of the board of directors.
Employees
At September 30, 2019, we employed a total of 83 people. Of such employees, 23 were in research and development, 31 were in production, quality assurance and materials control, 13 were in general and administrative and 16 were in sales and marketing. We contract technical and production personnel from time to time on an as needed basis and use outside consultants for various services. In addition, we have an extensive worldwide network of independent representatives and resellers who actively market and sell our products. We have not experienced any work stoppages, are not a party to a collective bargaining agreement and we consider our relations with our employees to be favorable.
Available Information
Our shares of common stock trade on the NASDAQ Capital Market under the symbol “GNSS”. Our address is 16262 West Bernardo Drive, San Diego, California, 92127, our telephone number is 858-676-1112, and our website is located at www.genasys.com. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, reports filed by our directors, executive officers and certain significant shareholders pursuant to Section 16 of the Securities Exchange Act, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, as soon as reasonably practical after the reports are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). The information on our website is not incorporated by reference into this report nor is it part of this report.
An investment in our company involves a high degree of risk. In addition to the other information included in this report, you should carefully consider the following risk factors in evaluating an investment in our company. You should consider these matters in conjunction with the other information included or incorporated by reference in this report. Our results of operations or financial condition could be seriously harmed, and the trading price of our common stock may decline due to any of these or other risks.
General economic and political conditions may adversely affect our business, operating results and financial condition
Our operations and performance depend significantly on worldwide economic and political conditions and their impact on levels of capital investment and government spending. Global economic and political uncertainties and foreign currency rate fluctuations could adversely influence demand for our products leading to reduced levels of investments, reductions in government spending and budgets and changes in spending priorities and behavior.
We may need additional capital for growth.
We may need additional capital to support our growth. While we expect to generate these funds from operations, we may not be able to do so. Principal factors that could affect the availability of our internally generated funds include:
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failure of sales to government, military and commercial markets to meet planned projections;
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government spending levels impacting sales of our products;
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foreign currency fluctuations;
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working capital requirements to support business growth;
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our ability to control spending;
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our ability to integrate future acquisitions;
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management of new business opportunities;
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introduction of new competing technologies;
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product mix and effect on margins; and
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acceptance of our existing and future products in existing and new markets.
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Should we require additional funds, general market conditions or the then-current market price of our common stock may not support capital raising transactions and any such financing may require advance approval of our stockholders under the rules of the NASDAQ Stock Market. Our ability to obtain financing may be further constrained by prevailing economic conditions. We may be required to reduce costs, including the scaling back of research and development into new products, which could have a negative impact on our ability to compete and to innovate. If we raise additional funds by selling additional shares of our capital stock or securities convertible into or exercisable for common stock (assuming we are able to obtain additional financing), the ownership interest of our stockholders will be diluted, which could have a material negative impact on the market value of our common stock.
We have historically had a high concentration of revenues from a limited number of customers. We expect to continue to be dependent on a limited number of customers.
In fiscal year 2019, we had two customers that accounted for 37% and 10% of revenues, respectively, and no other customers accounted for more than 10% of revenues. Historically, our revenues have been dependent upon a limited number of customers and we expect that we will continue to have some significant customers in future years. We do not have long-term purchase commitments with these or other significant customers, and our customers have the right to cease doing business with us at any time. Military contracts that we have been awarded have terms of indefinite delivery/indefinite quantity during the term of the contract, so there are no guaranteed purchases under these contracts. No assurance can be given that these or other customers will continue to do business with us or that they will maintain their historical levels of business. If our relationship with any material customer were to cease, then our revenues would decline and negatively impact our results of operations. Any such decline could result in us increasing our accumulated deficit and a need to raise additional capital to fund our operations. If our expectations regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls.
Disruption and fluctuations in financial and currency markets could have a negative effect on our business.
Financial markets in the U.S., Europe and Asia have experienced extreme volatility and uncertainty in recent years. Governments have taken unprecedented actions intended to address these market conditions. It is difficult to assess the extent to which these conditions have impacted our business, and the affect this has had on certain of our customers and suppliers. These economic developments affect businesses such as ours in a number of ways. The tightening of credit in financial markets adversely affects the ability of commercial customers to finance purchases and operations and could result in a decrease in orders and spending for our products as well as create supplier disruptions. Reductions in tax revenues, rating downgrades and other economic developments could also reduce future government spending on our products. There can be no assurance that there will not be a further volatility and uncertainty in financial markets, which can then lead to challenges in the operation of our business. We are unable to predict the likely effects that negative economic conditions will have on our business and financial condition.
We purchase a number of key components and sub-assemblies from foreign suppliers. Consequently, we are subject to the impact economic conditions can have on such suppliers and fluctuations in foreign currency exchange rates. Increases in our cost of purchasing these items could negatively impact our financial results if we are not able to pass these increased costs on to our customers.
We have current government contracts and our future growth is dependent, in large part, on continued sales to U.S. and international governments and businesses that sell to governments.
In fiscal year 2019, direct and indirect sales to the U.S. government accounted for approximately 65% of our total net sales, compared to 49% of our total net sales in fiscal year 2018 and 15% in fiscal year 2017. Changes in defense spending could have an adverse effect on our current and future revenues. Sales of our products to U.S. government agencies and organizations are subject to the overall U.S. government budget and congressional appropriation decisions and processes which are driven by numerous factors, including geo-political events and macroeconomic conditions, and are beyond our control. Even awards granted may not result in orders due to spending constraints. Similar issues apply to sales to international governments. We have no assurance that military interest in communication devices to minimize unnecessary force will continue or will provide future growth opportunities for our business.
We must expand our customer base in order to grow our business.
To grow our business, in addition to continuing to obtain additional orders from our existing customers, we must develop relationships with new customers and obtain and fulfill orders from new customers. We are competing against a number of large competitors in the mass notification market, and we need to establish our product offerings as viable competitors in this market to allow us to win awards against these competitors, increase our customer base and gain market share. We cannot guarantee that we will be able to increase our customer base. Further, even if we do obtain new customers, we cannot guarantee that those customers will purchase from us enough quantities of our product or at product prices that will enable us to recover our costs in acquiring those customers and fulfilling those orders. Whether we will be able to sell more of our products will depend on a number of factors, including:
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our ability to design and manufacture reliable products that have the features that are required by our customers;
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our ability to expand relationships with existing customers and to develop relationships with new customers that will lead to additional orders for our products;
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our ability to develop and expand new markets for directed sound products, mobile mass messaging services and integrated solutions; and
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our ability to develop international product distribution directly or through strategic partners.
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We may not be able to successfully integrate acquisitions in the future, and we may not be able to realize anticipated cost savings, revenue enhancements, or other synergies from such acquisitions.
Our ability to successfully implement our business plan and achieve targeted financial results and other benefits including, among other things, greater market presence and development, and enhancements to our product portfolio and customer base, is dependent on our ability to successfully identify, consummate and integrate acquisitions. We may not realize the intended benefits of acquisitions as rapidly as, or to the extent, anticipated by our management. There can be no assurance that we will be able to successfully integrate acquired businesses, products or technologies without substantial expenses, delays or other operational or financial problems. Acquisitions involve a number of risks, some or all which could have a material adverse effect on our acquired businesses, products or technologies. Furthermore, there can be no assurance that any acquired business, product, or technology will be profitable or achieve anticipated revenues and income. Our failure to manage our acquisition and integration strategy successfully could have a material adverse effect on our business, results of operations and financial condition. The process of integrating an acquired business involves risks, including but not limited to:
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demands on management related to changes in the size and possible locations of our businesses and employees;
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diversion of management's attention from the management of daily operations;
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difficulties in the assimilation of different corporate cultures, employees and business practices;
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difficulties in conforming the acquired businesses’ accounting policies to ours;
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retaining the loyalty and business of the employees or customers of acquired businesses;
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retaining employees that may be vital to the integration of acquired businesses or to the future prospects of the combined businesses;
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difficulties and unanticipated expenses related to the integration of departments, information technology systems, including accounting systems, technologies, books and records, and procedures, and maintaining uniform standards, such as internal accounting controls, procedures, and policies;
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costs and expenses associated with any undisclosed or potential liabilities;
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the use of more cash or other financial resources on integration and implementation activities than we expect; and
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our ability to avoid labor disruptions in connection with any integration, particularly in connection with any headcount reduction.
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Failure to successfully integrate an acquired business in the future may result in reduced levels of anticipated revenue, earnings, or operating efficiency than might have been achieved if we had not acquired such businesses.
In addition, the acquisition of any future businesses could result in the incurrence of additional debt and related interest expense, contingent liabilities, and amortization expenses related to intangible assets, which could have a material adverse effect on our financial condition, operating results, and cash flow.
The growth of our product revenues is dependent on continued acceptance of our products by government, military and developing force protection and emergency response agencies. If these agencies do not purchase our products, our revenues will be adversely affected.
Although our products are designed for use by both government and commercial customers, the government market represents a significant revenue opportunity for our products. Revenues from government agencies, including military, force protection and emergency response agencies, fluctuate each year depending on available funding and demand from our government customers. While acceptance of our products has been increasing, there are many more prospective customers within this market that could provide future growth for us, as well as international government markets which often follow the lead of the U.S. Furthermore, the force protection and emergency response market is itself an emerging market that is changing rapidly. If our products are not widely accepted by the government, military and the developing force protection and emergency response markets, we may not be able to identify other markets, and we may fail to achieve our sales projections.
Perceptions that long-range hailing devices are unsafe or may be used in an abusive manner may hurt sales of our LRAD products, which could cause our revenues to decline.
Potential customers for our LRAD products, including government, military and force protection and emergency response agencies, may be influenced by claims or perceptions that long-range hailing devices are unsafe or may be used in an abusive manner. These claims or perceptions, while unsubstantiated, could reduce our product sales.
A significant portion of our revenue is derived from our core product category.
We are dependent on our core directional product category to generate our revenues. While we have expanded our product offering to include omnidirectional products, no assurance can be given that our core directional products will continue to have market acceptance or that they will maintain their historical levels of sales. The loss or reduction of sales of this product category could have a material adverse effect on our business, results of operations, financial condition and liquidity.
We may not be successful in penetrating the mass notification market.
The mass notification market is substantial in size and is projecting growth over the next five years to help provide public safety and communication during natural disasters and emergency situations. There are a number of large, credible companies already established in this market. We believe the clear, intelligible voice capability of our PSMN products, and our unique design and durability make our product offerings very competitive in this market. We have added selling resources to focus on this market and we have invested and plan to invest additional resources in tooling and software development to become successful in this market. However, we are competing in a market with established competitors that have greater resources and presence in this global market.
Our margins could be impacted as we expand into the mass notification market.
Our sales strategy for fiscal year 2020 and beyond is to increase our market share of the growing mass notification market with our LRAD voice broadcast systems, CCaaS software and integrated solutions. A number of large companies compete in this market and dominate the market share. We believe we have a strong product platform that can successfully compete against these larger players, but we expect to confront pricing pressures, given this highly competitive environment, which may negatively impact our overall margins.
We may incur significant and unpredictable warranty costs.
Our products are substantially different from proven, mass produced sound transducer designs and are often employed in harsh environments. We may incur substantial and unpredictable warranty costs from post-production product or component failures. We generally warrant our products to be free from defects in materials and workmanship for a period up to one year from the date of purchase. We also sell extended repair and maintenance contracts with terms ranging from one to several years, which provide repair and maintenance services after expiration of the original limited warranty. At September 30, 2019, we had a warranty reserve of $150,229. While our warranty experience with our LRAD product line has been favorable, as we build more complexity into the product, and as we expand our supplier base, issues could arise that could affect future warranty costs, which could adversely affect our financial position, results of operations and business prospects.
System disruptions and security threats to our computer networks, including breach of our or our customers’ confidential information, could have a material adverse effect on our business and our reputation.
Our computer systems as well as those of our service providers are vulnerable to interruption, malfunction or damage due to events beyond our control, including malicious human acts committed by foreign or domestic persons, natural disasters, and network and communications failures. We periodically perform vulnerability self-assessments and engage service providers to perform independent vulnerability assessments and penetration tests. However, despite network security measures, our servers and the servers at our service providers are potentially vulnerable to physical or electronic unauthorized access, computer hackers, computer viruses, malicious code, organized cyber attacks and other security problems and system disruptions. Increasing socioeconomic and political instability in some countries has heightened these risks. Despite the precautions we and our service providers have taken, our systems may still be vulnerable to these threats. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in operations.
Additionally, the confidential information that we collect subjects us to additional risks and costs that could harm our business and our reputation. We collect, retain and use personal information of our employees, including personally identifiable information, tax return information, financial data, bank account information and other data. Although we employ various network and business security measures to limit access to and use of such personal information, we cannot guarantee that a third party will not circumvent such security measures, resulting in the breach, loss or theft of the personal information of our employees. Possession and use of personal information in our operations also subjects us to legislative and regulatory burdens that could restrict our use of personal information and require notification of data breaches. A violation of any laws or regulations relating to the collection, retention or use of personal information could also result in the imposition of fines or lawsuits against us.
Sustained or repeated system failures or security breaches that interrupt our ability to process information in a timely manner or that result in a breach of proprietary or personal information could have a material adverse effect on our operations and our reputation. Although we maintain insurance in respect of these types of events, available insurance proceeds may not be adequate to compensate us for damages sustained due to these events.
We could incur additional charges for excess and obsolete inventory.
While we strive to effectively manage our inventory, rapidly changing technology, and uneven customer demand may result in short product cycles and the value of our inventory may be adversely affected by changes in technology that affect our ability to sell the products in our inventory. If we do not effectively forecast and manage our inventory, we may need to write off inventory as excess or obsolete, which in turn can adversely affect cost of sales and gross profit.
We have previously experienced, and may in the future experience, reductions in sales of older generation products as customers delay or defer purchases in anticipation of new product introductions. We have established reserves for slow moving or obsolete inventory of $530,583 at September 30, 2019. The reserves we have established for potential losses due to obsolete inventory may, however, prove to be inadequate and may give rise to additional charges for obsolete or excess inventory.
We do not have the ability to accurately predict future operating results. Our quarterly and annual revenues are likely to fluctuate significantly due to many factors, most of which are beyond our control and could result in our failure to achieve our revenue expectations.
We expect our proprietary acoustic products, software products and integrated solutions will be the source of substantially all our revenues for at least the near future. Revenues from these products and solutions are expected to vary significantly due to a number of factors, many of which are beyond our control. Any one or more of the factors listed below or other factors could cause us to fail to achieve our revenue expectations. These factors include:
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our ability to develop and supply sound reproduction components to customers, distributors or original equipment manufacturers (“OEMs”) or to license our technologies;
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market acceptance of and changes in demand for our products or products of our customers;
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gains or losses of significant customers, distributors or strategic relationships;
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unpredictable volume and timing of customer orders;
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delays in funding approval by U.S. and foreign government and military customers;
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the availability, pricing and timeliness of delivery of components for our products and OEM products;
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fluctuations in the availability of manufacturing capacity or manufacturing yields and related manufacturing costs;
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the timing of new technological advances, product announcements or introductions by us, by OEMs or licensees and by our competitors;
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production delays by customers, distributors, OEMs, or by us or our suppliers;
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increased competition in this market;
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the conditions of other industries, such as military and commercial industries, into which our technologies may be sold;
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general electronics industry conditions, including changes in demand and associated effects on inventory and inventory practices;
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general economic conditions that could affect the timing of customer orders and capital spending and result in order cancellations or rescheduling; and
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general political conditions in this country and in various other parts of the world that could affect spending for the products that we offer.
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Some or all of these factors could adversely affect demand for our products or technologies, and therefore adversely affect our future operating results.
Most of our operating expenses are relatively fixed in the short term. We may be unable to rapidly adjust spending to compensate for any unexpected sales shortfalls, which could harm our quarterly operating results. We do not have the ability to predict future operating results with any certainty.
Many potential competitors who have greater resources and experience than we do may develop products and technologies that make ours obsolete or inferior.
Technological competition from larger, more established electronic and loudspeaker manufacturers and software providers is expected to increase. Most of the companies with which we expect to compete have substantially greater capital resources, research and development staffs, marketing and distribution programs and facilities, and many of them have substantially greater experience in the production and marketing of products. In addition, one or more of our competitors may have developed or may succeed in developing technologies and products that are more effective than any of ours, rendering our technology and products obsolete or noncompetitive.
Adverse resolution of disputes, litigation and claims may harm our business, operating results or financial condition.
We may become a party to other litigation, disputes and claims in the normal course of our business. Litigation is by its nature uncertain and unpredictable and there can be no assurance that the ultimate resolution of such claims will not exceed the amounts accrued for such claims, if any. Litigation can be expensive, lengthy, and disruptive to normal business operations. An unfavorable resolution of a legal matter could have a material adverse effect on our business, operating results, or financial condition.
Our competitive position will be seriously damaged if we cannot protect intellectual property rights and trade secrets in our technology.
We rely on a combination of contracts, trademarks and trade secret laws to establish and protect our proprietary rights in our technology. However, we may not be able to prevent misappropriation of our intellectual property, and our competitors may be able to independently develop competing technologies, or the agreements we enter into may not be enforceable. A competitor may independently develop or patent technologies that are substantially equivalent to, or superior to, our technology. If this happens, our competitive position could be significantly harmed.
We may face personal injury and other liability claims that harm our reputation and adversely affect our operating results and financial condition.
While our products have been engineered to reduce the risk of damage to human hearing or human health, we could be exposed to claims of hearing damage if the product is not properly operated. A person injured in connection with the use of our products may bring legal action against us to recover damages on the basis of theories including personal injury, negligent design, dangerous product or inadequate warning. We may also be subject to lawsuits involving allegations of misuse of our products. Our product liability insurance coverage may be insufficient to pay all such claims. Product liability insurance may also become too costly for us or may become unavailable for us in the future. We may not have sufficient resources to satisfy any product liability claims not covered by insurance which would materially and adversely affect our operating results and financial condition. Significant litigation could also result in negative publicity and a diversion of management’s attention and resources.
Our international operations could be harmed by factors including political instability, natural disasters, fluctuations in currency exchange rates, and changes in regulations that govern international transactions.
We sell our products worldwide. In fiscal years 2019 and 2018, revenues outside of the U.S. accounted for approximately 30% and 44% of net revenues, respectively. The risks inherent in international trade may reduce our international sales and harm our business and the businesses of our customers and our suppliers. These risks include:
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changes in tariff regulations;
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political instability, war, terrorism and other political risks;
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foreign currency exchange rate fluctuations;
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establishing and maintaining relationships with local distributors and dealers;
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lengthy shipping times and accounts receivable payment cycles;
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import and export control and licensing requirements;
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compliance with a variety of U.S. laws, including the Foreign Corrupt Practices Act, by us or key subcontractors;
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compliance with a variety of foreign laws and regulations, including unexpected changes in taxation and regulatory requirements;
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greater difficulty in safeguarding intellectual property than in the U.S.; and
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difficulty in staffing and managing geographically diverse operations.
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These and other risks may preclude or curtail international sales or increase the relative price of our products compared to those manufactured in other countries, reducing the demand for our products. Failure to comply with U.S. and foreign governmental laws and regulations applicable to international business, such as the Foreign Corrupt Practices Act or U.S. export control regulations, could have an adverse impact on our business with the U.S. and foreign governments.
Current environmental laws, or laws enacted in the future, may harm our business.
Our operations are subject to environmental regulation in areas in which we conduct business. Our product design and procurement operations must comply with new and future requirements relating to the materials composition of our products, including restrictions on lead, cadmium and other substances. We do not expect that the impact of these environmental laws and other similar legislation adopted in the U.S. and other countries will have a substantial unfavorable impact on our business. However, the costs and timing of costs under environmental laws are difficult to predict.
Errors or defects contained in our products, failure to comply with applicable safety standards or a product recall could result in delayed shipments or rejection of our products, damage to our reputation and expose us to regulatory or other legal action.
Any defects or errors in the operation of our products may result in delays in their introduction. In addition, errors or defects may be uncovered after commercial shipments have begun, which could result in the rejection of our products by our customers, damage to our reputation, lost sales, diverted development resources and increased customer service and support costs and warranty claims, any of which could harm our business. Third parties could sustain injuries from our products, and we may be subject to claims or lawsuits resulting from such injuries. There is a risk that these claims or liabilities may exceed, or fall outside the scope of, our insurance coverage. We may also be unable to obtain adequate liability insurance in the future. Because we are a smaller company, a product recall would be particularly harmful to us because we have limited financial and administrative resources to effectively manage a product recall and it would detract management’s attention from implementing our core business strategies. A significant product defect or product recall could materially and adversely affect our brand image, causing a decline in our sales, and could reduce or deplete our financial resources.
Costs associated with our multi-year maintenance contract with a foreign military customer could be higher than expected.
We are obligated under a five-year repair and maintenance agreement with a foreign military. We have contracted with a third party service provider to administer the required services under the terms of the maintenance agreement. The revenue from the maintenance agreement with our customer is fixed and paid annually upon completion of each year through May 2024. It is possible that the cost to repair and maintain the products and the cost to contract with our third party service provider could exceed the revenue generated by the maintenance agreement.
We rely on outside manufacturers and suppliers to provide a large number of components and sub-assemblies incorporated in our products.
Our products have a large number of components and sub-assemblies produced by outside suppliers. In addition, for certain of these items, we qualify only a single source, which can magnify the risk of shortages and decrease our ability to negotiate with our suppliers on the basis of price. If shortages occur, or if we experience quality problems with suppliers, then our production schedules could be significantly delayed or costs significantly increased, which would have a material adverse effect on our business, liquidity, results of operation and financial position.
Although we assemble our products internally, we have some sub-assemblies and components produced by third party manufacturers. We may be required to outsource manufacturing if sales of our products increase significantly. We may be unable to obtain acceptable manufacturing sources on a timely basis. In addition, from time to time we may change manufacturers and any new manufacturer engaged by us may not perform as expected. An extended interruption in the supply of our products could result in a substantial loss of sales. Furthermore, any actual or perceived degradation of product quality as a result of our reliance on third party manufacturers may have an adverse effect on sales or result in increased warranty costs, product returns and buybacks. Failure to maintain quality manufacturing could reduce future revenues, adversely affecting our financial condition and results of operations.
We derive revenue from government contracts and subcontracts, which are often non-standard, may involve competitive bidding, may be subject to cancellation with or without penalty and may produce volatility in earnings and revenue.
Our sales to government customers have involved, and are expected in the future to involve, providing products and services under contracts or subcontracts with U.S. federal, state, local and foreign government agencies. Obtaining contracts and subcontracts from government agencies is challenging, and contracts often include provisions that are not standard in private commercial transactions. For example, government contracts may:
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include provisions that allow the government agency to terminate the contract without penalty under some circumstances;
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be subject to purchasing decisions of agencies that are subject to political influence;
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contain onerous procurement procedures; and
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be subject to cancellation if government funding becomes unavailable.
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Securing government contracts can be a protracted process involving competitive bidding. In many cases, unsuccessful bidders may challenge contract awards, which can lead to increased costs, delays and possible loss of the contract for the winning bidder.
Our success is dependent on the performance of our executive team, and the cooperation, performance and retention of our executive officers and key employees.
Our business and operations are substantially dependent on the performance of our current executive team including our Chief Executive Officer and our Chief Financial Officer. We do not maintain “key person” life insurance on any of our executive officers. The loss of one or several key employees could seriously harm our business. We cannot assure that employees will not leave and subsequently compete against us.
We are also dependent on our ability to retain and motivate high quality personnel, especially sales and skilled engineering personnel. Competition for such personnel is intense, and we may not be able to attract, assimilate or retain other highly qualified managerial, sales and technical personnel in the future. The inability to attract and retain the necessary managerial, sales and technical personnel could cause our business, operating results or financial condition to suffer.
Our disclosure controls and procedures may not prevent or detect all acts of fraud.
Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act is accumulated and communicated to management and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our management expects that our disclosure controls and procedures and internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within our company have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and we cannot assure that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.
Failure to maintain an effective system of internal control over financial reporting could harm stockholder and business confidence in our financial reporting, our ability to obtain financing and other aspects of our business.
Maintaining an effective system of internal control over financial reporting is necessary for us to provide reliable financial reports. Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated by the SEC require us to include in our Form 10-K a report by management regarding the effectiveness of our internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of our internal control over financial reporting as of the end of the respective fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. While our management has concluded that our internal control over financial reporting was effective as of September 30, 2019, it is possible that material weaknesses will be identified in the future. In addition, components of our internal control over financial reporting may require improvement from time to time. If management is unable to assert that our internal control over financial reporting is effective in any future period, investors may lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on the Company’s stock price.
Our common stock could be delisted from the Nasdaq Stock Market.
Nasdaq’s continued listing standards for our common stock require, among other things, that (i) we maintain a closing bid price for our common stock of at least $1.00, and (ii) we maintain: (A) stockholders’ equity of $2.5 million; (B) market value of listed securities of $35 million; or (C) net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years. Any failures to satisfy any continued listing requirements could lead to the receipt of a deficiency notice from Nasdaq and ultimately to a delisting from trading of our common stock. If our common stock were delisted from Nasdaq, among other things, this could result in a number of negative implications, including reduced liquidity in our common stock as a result of the loss of market efficiencies associated with Nasdaq and the loss of federal preemption of state securities laws as well as the potential loss of confidence by suppliers, customers and employees, institutional investor interest, fewer business development opportunities, greater difficulty in obtaining financing and breaches of certain contractual obligations.
Sales of common stock issuable on the exercise of outstanding options, may depress the price of our common stock.
As of September 30, 2019, we had outstanding options granted to our employees and directors to purchase 2,219,268 shares of our common stock and we had 274,849 restricted stock units outstanding. At September 30, 2019, the exercise prices for the options ranged from $1.31 to $3.17 per share. The issuance of shares of common stock upon the exercise of outstanding options and the release of outstanding restricted stock units could cause substantial dilution to holders of our common stock, and the sale of those shares in the market could cause the market price of our common stock to decline. The potential dilution from these shares could negatively affect the terms on which we could obtain equity financing.
We may issue preferred stock in the future, and the terms of the preferred stock may reduce the value of your common stock.
We are authorized to issue up to 5,000,000 shares of preferred stock in one or more series. Our board of directors may determine the terms of future preferred stock offerings without further action by our stockholders. If we issue preferred stock, it could affect the rights or reduce the value of our common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with or sell our assets to a third party. These terms may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions.
Our stock price is volatile and may continue to be volatile in the future.
The market price of our common stock has fluctuated significantly to date. In the future, the market price of our common stock could be subject to significant fluctuations due to general market conditions and in response to quarter-to-quarter variations in:
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our anticipated or actual operating results;
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developments concerning our sound reproduction technologies;
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technological innovations or setbacks by us or our competitors;
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announcements of merger or acquisition transactions;
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changes in personnel within our company; and
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other events or factors and general economic and market conditions.
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The stock market in recent years has experienced extreme price and volume fluctuations that have affected the market price of many technology companies, and that have often been unrelated or disproportionate to the operating performance of companies.
Changes in laws or regulations or the manner of their interpretation or enforcement could adversely impact our financial performance and restrict our ability to operate our business or execute our strategies.
New laws, regulations and standards, or changes in existing laws or regulations or the manner of their interpretation or enforcement, could increase our cost of doing business and restrict our ability to operate our business or execute our strategies. This includes, among other things, compliance costs and enforcement under the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank Act”), XBRL interactive SEC filings, new SEC regulations and NASDAQ Stock Market rules. For example, under Section 1502 of the Dodd-Frank Act, the SEC has adopted additional disclosure requirements related to the source of certain “conflict minerals” for issuers for which such “conflict minerals” are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that issuer. The metals covered by the rules include tin, tantalum, tungsten and gold, commonly referred to as “3TG.” Our suppliers may use some or all of these materials in their production processes. The rules require us to conduct a reasonable country of origin inquiry to determine if we know or have reason to believe any of the minerals used in the production process may have originated from the Democratic Republic of the Congo or an adjoining country. If we are not able to determine the minerals did not originate from a covered country or conclude that there is no reason to believe that the minerals used in the production process may have originated in a covered country, we would be required to perform supply chain due diligence on members of our supply chain. Global supply chains can have multiple layers, thus the costs of complying with these new requirements could be substantial. These new requirements may also reduce the number of suppliers who provide conflict free metals and may affect our ability to obtain products in sufficient quantities or at competitive prices. Compliance costs and the unavailability of raw materials could have a material adverse effect on our results of operations.
We continually evaluate and monitor developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
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Item 1B.
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Unresolved Staff Comments.
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None.
Our executive offices, sales, research and development and production facilities are located at 16262 West Bernardo Drive, San Diego, California. The lease of 54,766 square feet commenced July 1, 2018 and expires August 31, 2028. The aggregate monthly payments, with abatements, average $36,146 per month for the first fourteen months, and are $74,460, $76,694, $78,994, $81,364, $83,805, $86,319, $88,909, $91,576 and $94,324 per month for the second through tenth years of the lease, plus other certain costs and charges as specified in the lease agreement, including the Company’s proportionate share of the building operating expenses and real estate taxes.
|
Item 3.
|
Legal Proceedings
|
We may at times be involved in litigation in the ordinary course of business. We will also, from time to time, when appropriate in management’s estimation, record adequate reserves in our financial statements for pending litigation.
|
Item 4.
|
Mine Safety Disclosure
|
Not applicable.
PART II
|
Item 5.
|
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|
Market Information
Our common stock is traded and quoted on the NASDAQ Capital Market under the symbol “GNSS.” The market for our common stock has often been sporadic and limited.
The following table sets forth the high and low reported sales prices for our common stock for the fiscal years ended September 30, 2019 and 2018:
|
|
|
Sales Prices
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal Year Ending September 30, 2018
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
2.58
|
|
|
$
|
1.86
|
|
|
Second Quarter
|
|
$
|
2.55
|
|
|
$
|
1.94
|
|
|
Third Quarter
|
|
$
|
2.67
|
|
|
$
|
1.94
|
|
|
Fourth Quarter
|
|
$
|
3.58
|
|
|
$
|
2.52
|
|
|
Fiscal Year Ending September 30, 2019
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3.11
|
|
|
$
|
2.08
|
|
|
Second Quarter
|
|
$
|
2.89
|
|
|
$
|
2.14
|
|
|
Third Quarter
|
|
$
|
3.69
|
|
|
$
|
2.81
|
|
|
Fourth Quarter
|
|
$
|
4.24
|
|
|
$
|
3.02
|
|
The above quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions.
Holders
We had 32,978,330 shares issued and outstanding held by 1,024 holders of record of our common stock at November 30, 2019.
Dividends
There were no dividends declared and paid during the years ended September 30, 2019 and 2018. The declaration of future cash dividends, if any, will be at the discretion of the Board of Directors and will depend on the Company’s earnings, if any, capital requirements and financial position, general economic conditions and other pertinent conditions. It is our present intention not to pay any cash dividends in the near future.
Equity Compensation Plan Information
The information required by this item is incorporated by reference to the information set forth in Item 12 of this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
No securities were sold within the past three years that were not registered under the Securities Act and not previously reported.
Issuer Purchases of Equity Securities
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 is authorized to repurchase up to $5 million of its outstanding common shares exclusive of any fees, commissions or other expenses related to such repurchases. At September 30, 2019, $4.5 million was available for share repurchase under this program.
During the year ended September 30, 2019, 788,425 shares were repurchased for $2,171,022 under these programs. During the year ended September 30, 2018, 286,746 shares were repurchased for $725,445 under these programs. At September 30, 2019, all repurchased shares were retired.
|
Item 6.
|
Selected Financial Data
|
Information requested by this Item is not included as we are electing scaled disclosure requirements available to Smaller Reporting Companies.
|
Item 7.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
The discussion and analysis set forth below should be read in conjunction with the information presented in other sections of this Annual Report on Form 10-K, including “Item 1. Business,” “Item 1A. Risk Factors,” and “Item 8. Financial Statements and Supplementary Data.” This discussion contains forward-looking statements which are based on our current expectations and industry experience, as well as our perception of historical trends, current market conditions, current economic data, expected future developments and other factors that we believe are appropriate under the circumstances. These statements involve risks and uncertainties that could cause actual results to differ materially from those suggested in the forward-looking statements.
Overview
Genasys Inc. is a global provider of critical communications solutions to help keep people safe. Our unified platform provides a multi-channel approach to delivering alerts, notifications, instructions and information before, during and after crisis situations. We are a leading innovator and manufacturer of acoustic communication systems that project audible voice messages, tones, and warning sirens over distance. In addition, our proprietary software platform includes mobile mass messaging and integrated solutions for business and public safety. Our products, systems and solutions include:
|
|
•
|
LRAD (Long Range Acoustic Devices) that project sirens and audible voice messages with exceptional vocal clarity in a 30° beam from close range out to 5,500 meters;
|
|
|
•
|
CCaaS (Critical Communications as a Service) software that is a reliable, fast and intuitive software solution for sending SMS, text, email and social media messages to mobile devices in defined geographic areas and
|
|
|
•
|
Integrated Solutions that span multiple hardware and software mobile notification channels so that information is delivered to the people who need it. These solutions include LRAD systems that project sirens and audible voice messages 60° - 360° with industry-leading vocal clarity from close range to over 14 square kilometers from a single installation, and CCaaS software for sending SMS, text, email and social media messages to mobile devices in defined geographic areas. Our integrated solutions are compatible with the FEMA‘s IPAWS and other major emergency warning protocols.
|
We have sold our products, systems and solutions into 72 countries and pioneered a worldwide market for acoustic hailing devices and advanced mass notification solutions. We continue to develop new communication innovations and believe we have established significant competitive advantages in our principal markets.
Recent Developments
In the fiscal year ended September 30, 2019, we accomplished the following:
|
|
●
|
Announced $20.2 million in LRAD 450XL systems and accessories orders from the U.S. Army to meet its critical communications and scalable escalation of force requirements
|
|
|
●
|
Received $4.75 million follow-on AHD systems maintenance agreement from the Indian Navy
|
|
|
●
|
Announced $3.8 million in domestic and international defense and homeland security orders
|
|
|
●
|
Received $3.2 million in LRAD 100X MAG-HS kits order from the National Guard
|
|
|
●
|
Announced $1.2 million in international and domestic naval orders
|
● Received $1.1 million in a follow-on AHD order from the U.S. Air Force
|
|
●
|
Announced $1.1 million in mass notification orders from the U.S. Army and a Eurasian oil and gas company
|
|
|
●
|
Received $850,000 in international public safety notification and wildlife preservation orders
|
|
|
●
|
Received follow-on orders from the Canadian Army
|
|
|
●
|
Announced critical communications systems installations in the City of Mill Valley, CA
|
Business Outlook
Our product line-up continues to gain worldwide awareness and recognition through media exposure, trade shows, product demonstrations, and word of mouth as a result of positive responses and increased acceptance of our products. We believe we have a solid global brand, technology, and product foundation with our LRAD AHD and PSMN systems product lines, which we have expanded over the years to serve new markets and customers for greater business growth. We believe that we have strong market opportunities for our LRAD AHD and PSMN product offerings throughout the world in the homeland security and defense sectors as a result of increasing threats to government, commerce, law enforcement, borders, and critical infrastructure. Our directional and multidirectional product offerings also have many applications within the fire rescue, public safety, maritime, asset protection, and wildlife control and preservation business segments. We intend to expand our domestic and international mass notification business, particularly in the U.S., Middle East, Europe, and Asia where we believe there are greater market opportunities for our multidirectional PSMN systems and mass messaging solutions. In fiscal year 2019, we increased our global selling network, which consists of marketing and business development personnel, as well as relationships with key integrators and sales representatives within the U.S. and around the world. In addition, we utilize part-time consultants with expertise in various U.S. government and defense areas, to advise us on procedures and budgetary policies in an effort to be successful in these areas. However, we may continue to face challenges in fiscal 2020 due to budget uncertainties and continuing economic and geopolitical conditions in some international regions and the U.S. We anticipate continued U.S. Military spending uncertainty due to possible defense budget delays. We are pursuing large business opportunities, but it is difficult to anticipate how long it will take to close these opportunities, or if they will ultimately come to fruition. It is also difficult to determine whether our integrated solutions will be accepted in the mass notification market, which includes a number of competitors.
Our products have varying gross margins, and therefore product sales mix materially affects gross profit. In addition, the margins differ based on the channel of trade through which the products are sold. We implement product updates and changes, including raw material and component changes that may impact product costs. We also have increased competition in the mass notification market, where there are a number of established companies that we expect will create pricing pressure on our PSMN product line and mobile alert solutions. We do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.
During fiscal year 2020, we had approximately 16 full-time business development and marketing personnel at the Company, which includes four business consultants. In addition, we utilize various part-time sales consultants with experience and knowledge in various government and defense areas to assist with specific markets we are pursuing. We exhibit at domestic and international trade shows, attend industry events, and hold system demonstrations. Also, commission expense will fluctuate based on the level of commissionable sales incurred.
Research and development (“R&D”) expenses vary period to period due to the timing of projects, and the timing, extent and use of outside consulting, design and development firms. Our R&D expenses were primarily for in-house development; however, we continue to supplement our in-house development with third-party services, such as product testing and certification.
Critical Accounting Policies and Estimates
We have identified the policies below as critical to our business operations and to understanding our results of operations. Our accounting policies are more fully described in our consolidated financial statements and related notes located in “Item 8. Financial Statements and Supplementary Data.” The impact and any associated risks related to these policies on our business operations are discussed in “Item 1A. Risk Factors” and throughout “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” when such policies affect our reported and expected financial results.
The methods, estimates and judgments we use in applying our accounting policies, in conformity with generally accepted accounting principles in the U.S., have a significant impact on the results we report in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates affect the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition. On October 1, 2019, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and its amendments 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.
We derive our 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 our 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. Our customers do not have a right to return product unless the product is found defective and therefore our estimate for returns has historically been insignificant
Perpetual licensed software
The sale and/or license of software products is deemed to have occurred when a customer either has taken possession of or has the ability to take immediate possession of the software and the software key. Perpetual software licenses can include one-year maintenance and support services. In addition, the Company sells maintenance services on a stand-alone basis and is therefore capable of determining their fair value. On this basis, the amount of the embedded maintenance is separated from the fee for the perpetual license and is recognized on a straight-line basis over the period to which the maintenance relates.
Time-based licensed software
The time-based license agreements include the use of a software license for a fixed term, generally one-year, and maintenance and support services during the same period. The Company does not sell time-based licenses without maintenance and support services and therefore revenues for the entire arrangements are recognized on a straight-line basis over the term.
Warranty, maintenance and services
We offer 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 contracts are recognized on a straight-line basis over the warranty period and maintenance contracts are recognized based on time elapsed over the service period. Revenue from other services such as training or installation is recognized when the service is completed. Warranty, maintenance and services are classified as contract and other revenues.
Multiple element arrangements
The Company has entered into a number of multiple element arrangements, such as when selling 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 to customize the functionality of the software, the Company recognizes revenue from the software development services on a stage of completion basis, and the revenue from the software when the related development services have been completed.
We currently disaggregate revenue by reporting segment (LRAD and Genasys Spain) and geographically to depict the nature of revenue in a manner consistent with our business operations and to be consistent with other communications and public filings. Refer to Note 17, Segment Information and Note 18, Major Customers, Suppliers and Related Information for additional details of revenues by reporting segment and disaggregation of revenue.
Share-Based Compensation. We account for share-based compensation in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, “Compensation—Stock Compensation” (“ASC 718”) using the modified prospective method which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. ASC 718 requires the use of subjective assumptions, including expected stock price volatility and the estimated term of each award. We estimate the fair value of stock options granted using the Black-Scholes option-pricing model, which is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. This model also utilizes the fair value of our common stock and requires that, at the date of grant, we use the expected term of the share-based award, the expected volatility of the price of our common stock over the expected term, the risk free interest rate and the expected dividend yield of our common stock to determine the estimated fair value. We determine the amount of share-based compensation expense based on awards that we ultimately expect to vest, reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Allowance for doubtful accounts. Our products are sold to customers in many different markets and geographic locations. We estimate our bad debt reserve on a case-by-case basis due to a limited number of customers. We base these estimates on many factors including customer credit worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. Our judgments and estimates regarding collectability of accounts receivable have an impact on our financial statements.
Valuation of Inventory. Our inventory is comprised of raw materials, assemblies and finished products. We must periodically make judgments and estimates regarding the future utility and carrying value of our inventory. The carrying value of our inventory is periodically reviewed and impairments, if any, are recognized when the expected future benefit from our inventory is less than its carrying value.
Valuation of Intangible Assets. Intangible assets consist of technology, customer relationships, trade name portfolio and non-compete agreements acquired in the acquisition of Genasys, and patents and trademarks that are amortized over their estimated useful lives. We must make judgments and estimates regarding the future utility and carrying value of intangible assets. The carrying values of such assets are periodically reviewed and impairments, if any, are recognized when the expected future benefit to be derived from an individual intangible asset is less than its carrying value. This generally occurs when certain assets are no longer consistent with our business strategy and whose expected future value has decreased.
Accrued Expenses. We establish a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. This reserve requires us to make estimates regarding the amount and costs of warranty repairs we expect to make over a period of time. Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs, and anticipated rates of warranty claims. Warranty expense is recorded in cost of revenues. We evaluate the adequacy of this reserve each reporting period.
We use the recognition criteria of ASC 450-20, “Loss Contingencies” to estimate the amount of bonuses when it becomes probable a bonus liability will be incurred and we recognize expense ratably over the service period. We accrue bonus expense each quarter based on estimated year-end results, and then adjust the actual in the fourth quarter based on our final results compared to targets.
Deferred Tax Asset. We evaluate quarterly the realizability of the deferred tax assets and assess the need for a valuation allowance. We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Utilization of the net operating loss (“NOL”) carryforwards in future years could be substantially limited due to restrictions imposed under federal and state laws upon a change in ownership or control. Included in the NOL carryforwards are deductions from stock options that, if recognized, will be recorded as a credit to additional paid-in capital rather than through our results of operations. In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the ability to recover deferred tax assets. The Company will continue to evaluate the ability to realize its net deferred tax assets on an ongoing basis to identify whether any significant changes in circumstances or assumptions have occurred that could materially affect the ability to realize deferred tax assets and will adjust the valuation accordingly.
Recent Accounting Pronouncements
New pronouncements issued for future implementation are discussed in Note 3, Recent Accounting Pronouncements, to our consolidated financial statements.
Segment and Related Information
We are engaged in the design, development and commercialization of sound technologies, voice broadcast products and location-based mass messaging solutions for emergency warning and workforce management. The Company operates in two business segments: LRAD and Genasys Spain 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 eliminated in consolidation. Refer to Note 17, Segment Information, in our consolidated financial statements for further discussion.
Comparison of Results of Operations for Fiscal Years Ended September 30, 2019 and 2018
The following table provides for the periods indicated certain items of our consolidated statements of operations expressed in dollars and as a percentage of net sales. The financial information and discussion below should be read in conjunction with the consolidated financial statements and notes contained in this Annual Report.
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
Favorable (Unfavorable)
|
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
%
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
33,384,175
|
|
|
|
90.3
|
%
|
|
$
|
23,495,788
|
|
|
|
89.3
|
%
|
|
$
|
9,888,387
|
|
|
|
42.1
|
%
|
|
Contract and other
|
|
|
3,594,880
|
|
|
|
9.7
|
%
|
|
|
2,811,002
|
|
|
|
10.7
|
%
|
|
|
783,878
|
|
|
|
27.9
|
%
|
|
Total revenues
|
|
|
36,979,055
|
|
|
|
100.0
|
%
|
|
|
26,306,790
|
|
|
|
100.0
|
%
|
|
|
10,672,265
|
|
|
|
40.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
18,522,548
|
|
|
|
50.1
|
%
|
|
|
13,567,076
|
|
|
|
51.6
|
%
|
|
|
(4,955,472
|
)
|
|
|
(36.5
|
%)
|
|
Gross Profit
|
|
|
18,456,507
|
|
|
|
49.9
|
%
|
|
|
12,739,714
|
|
|
|
48.4
|
%
|
|
|
5,716,793
|
|
|
|
44.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
10,792,401
|
|
|
|
29.2
|
%
|
|
|
10,692,681
|
|
|
|
40.6
|
%
|
|
|
(99,720
|
)
|
|
|
(0.9%
|
)
|
|
Research and development
|
|
|
4,527,741
|
|
|
|
12.2
|
%
|
|
|
3,523,498
|
|
|
|
13.4
|
%
|
|
|
(1,004,243
|
)
|
|
|
(28.5%
|
)
|
|
Total operating expenses
|
|
|
15,320,142
|
|
|
|
41.4
|
%
|
|
|
14,216,179
|
|
|
|
54.0
|
%
|
|
|
(1,103,963
|
)
|
|
|
(7.8%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
3,136,365
|
|
|
|
8.5
|
%
|
|
|
(1,476,465
|
)
|
|
|
(5.6
|
%)
|
|
|
4,612,830
|
|
|
|
312.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and expense, net
|
|
|
220,827
|
|
|
|
0.6
|
%
|
|
|
107,023
|
|
|
|
0.4
|
%
|
|
|
113,804
|
|
|
|
106.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before income taxes
|
|
|
3,357,192
|
|
|
|
9.1
|
%
|
|
|
(1,369,442
|
)
|
|
|
(5.2%
|
)
|
|
|
4,726,634
|
|
|
|
345.2
|
%
|
|
Income tax expense
|
|
|
572,200
|
|
|
|
1.5
|
%
|
|
|
2,375,600
|
|
|
|
9.0
|
%
|
|
|
1,803,400
|
|
|
|
75.9
|
%
|
|
Net income (loss)
|
|
$
|
2,784,992
|
|
|
|
7.5
|
%
|
|
$
|
(3,745,042
|
)
|
|
|
(14.2%
|
)
|
|
$
|
6,530,034
|
|
|
|
174.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US v International Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Revenue
|
|
|
26,046,968
|
|
|
|
70.4
|
%
|
|
|
14,793,243
|
|
|
|
56.2
|
%
|
|
|
11,253,725
|
|
|
|
76.1
|
%
|
|
International Revenue
|
|
|
10,932,087
|
|
|
|
29.6
|
%
|
|
|
11,513,547
|
|
|
|
43.8
|
%
|
|
|
(581,460
|
)
|
|
|
(5.1%
|
)
|
|
Total
|
|
|
36,979,055
|
|
|
|
100.0
|
%
|
|
|
26,306,790
|
|
|
|
100.0
|
%
|
|
$
|
10,672,265
|
|
|
|
40.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LRAD
|
|
$
|
34,931,448
|
|
|
|
94.5
|
%
|
|
$
|
24,836,795
|
|
|
|
94.4
|
%
|
|
|
10,094,653
|
|
|
|
40.6
|
%
|
|
Genasys Spain
|
|
|
2,047,607
|
|
|
|
5.5
|
%
|
|
|
1,469,995
|
|
|
|
5.6
|
%
|
|
|
577,612
|
|
|
|
39.3
|
%
|
|
Total net sales
|
|
$
|
36,979,055
|
|
|
|
100.0
|
%
|
|
$
|
26,306,790
|
|
|
|
100.0
|
%
|
|
$
|
10,672,265
|
|
|
|
40.6
|
%
|
Revenues
Revenues increased $10,672,265, or 40.6%, in the fiscal year ended September 30, 2019. Higher backlog entering fiscal 2019, compared to the prior year and record orders in fiscal 2019 of $45.9 million contributed to higher revenue in fiscal 2019. The larger fiscal 2019 revenues were from both the LRAD AHD and PSMN products. PSMN revenue increased $969,349, or 13%, over fiscal year 2018 and LRAD AHD revenue increased $9,702,916, or 51.5%, over the prior year. Domestic revenues increased 76.1% over the prior year while international revenues decreased 5.1% over the prior year. We had aggregate deferred revenue of $5,571,613 and $736,054 for prepayments from customers in advance of product shipment at September 30, 2019 and 2018, respectively. The receipt of orders will often be uneven due to the timing of customer’s approval or budget cycles.
Gross Profit
Gross profit for the year ended September 30, 2019 grew $5,716,793, or 44.9% higher sales and, over fiscal year 2018, primarily due to increased revenue. Gross margin as a percentage of sales increased this year compared to the prior year primarily due to lower manufacturing overhead expenses as a percentage of sales.
Our products have varying gross margins, so product mix may affect gross profits. In addition, our margins vary based on the sales channels through which our products are sold in a given period. We continue to implement product updates and changes, including raw material and component changes that may impact product costs. With such product updates and changes we have limited warranty cost experience and estimated future warranty costs can impact our gross margins. We do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $99,720, or 0.9%. This increase is primarily due to Genasys selling general and administrative expenses totaling $462,770 in the first quarter of fiscal 2019 compared to zero in 2018. This was offset by decreases in 2019 for computer expenses, commission and bad debt expense.
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses for fiscal 2019 and 2018 of $665,295 and $479,165, respectively.
We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize potential opportunities. Commission expense will fluctuate based on the nature of our sales.
Research and Development Expenses
R&D expenses increased by $1,004,243, or 28.5%, primarily due to a $290,745 increase in salaries and benefits and $545,506 increase for software development, and product development and testing.
Included in R&D expenses for the year ended September 30, 2019 was $53,916 of non-cash share-based compensation expenses, compared to $84,320 for the year ended September 30, 2018.
Other Income
Other income increased by $113,804 primarily due to the $84,651 of interest income and a decrease of $20,949 in interest expense in fiscal 2019 compared to fiscal 2018.
Net Income (Loss)
The net income of $2,784,992 for fiscal 2019 was an improvement of $6,530,034 over the net loss in fiscal year 2018. Fiscal year 2019 had higher revenue, comparable selling, general and administrative expenses and decreased income tax provision compared to fiscal year 2018. In addition, we generated a greater operating loss in fiscal year 2018 due to additional investments in the business, including information technology, product development and selling and marketing, costs associated with the new facility and acquisition related expenses.
In the year ended September 30, 2019, we recorded an income tax provision of $572,200. In the year ended September 30, 2018, we recorded a $2,375,000 of tax expense due to a reduction of the deferred tax asset resulting from the change to the U.S. corporate income tax rate effective for the calendar year ended December 31, 2018.
Liquidity and Capital Resources
Cash, cash equivalents at September 30, 2019 was $18,819,078, compared to $11,063,091 at September 30, 2018. In addition, we have short-term marketable securities of $3,695,364 at September 30, 2019, compared to $3,592,175 at September 30, 2018 and long-term marketable securities of $1,384,819 and $1,200,541 at September 30, 2019 and 2018, respectively. We also have restricted cash of $697,840 at September 30, 2019 and $742,983 at September 30, 2018. Other than cash and expected future cash flows from operating activities in subsequent periods, we have no other unused sources of liquidity at this time.
Principal factors that could affect the availability of our internally generated funds include:
|
|
•
|
ability to meet sales projections;
|
|
|
•
|
government spending levels;
|
|
|
•
|
introduction of competing technologies;
|
|
|
•
|
product mix and effect on margins;
|
|
|
•
|
ability to reduce and manage inventory levels; and
|
|
|
•
|
product acceptance in new markets.
|
Principal factors that could affect our ability to obtain cash from external sources include:
|
|
•
|
volatility in the capital markets; and
|
|
|
•
|
market price and trading volume of our common stock.
|
Our Board of Directors approved a share buyback program under which the Company may utilize up to $4 million in cash to repurchase outstanding common shares using available cash and future cash flows from operations through December 31, 2018. In December 2018, the Board of Directors approved a new share buyback program beginning January 1, 2019, under which the Company was authorized to repurchase up to $5 million of its outstanding common shares. Based on our current cash position, our order backlog, and assuming the accuracy of our currently planned expenditures, we believe we have sufficient capital to fund planned levels of operations for at least the next twelve months. However, we operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that we may not be required to raise additional funds through the sale of equity or debt securities or from credit facilities. Additional capital, if needed, may not be available on satisfactory terms, if at all.
Cash Flows
Our cash flows from operating, investing and financing activities, as reflected in the consolidated statements of cash flows, are summarized in the table below:
|
|
|
Year ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
9,855,031
|
|
|
$
|
1,251,819
|
|
|
Investing activities
|
|
$
|
(610,286
|
)
|
|
$
|
(2,787,366
|
)
|
|
Financing activities
|
|
$
|
(1,484,753
|
)
|
|
$
|
596,894
|
|
Operating Activities
Net income of $2,784,992 for the fiscal year ended September 30, 2019, includes $2,333,851 of non-cash items including share-based compensation expense, deferred income taxes, depreciation and amortization, inventory obsolescence and a provision for warranty. Cash provided by operating activities reflected an $854,676 increase in accounts receivable resulting from higher current year fiscal fourth quarter shipments, a decrease of $2,211,695 in accounts payable and a $5,570,164 increase in accrued and other liabilities, which included customer deposits, deferred revenue, deferred rent and leasehold incentives. Cash provided by operating activities also reflects a decrease in inventory of $756,732 and a decrease of $1,475,663 for prepaid expenses and other, which includes deposits paid on inventory purchases, prepaid rent, and prepaid insurance.
Net loss of $3,745,042 for the fiscal year ended September 30, 2018, includes $3,780,973 of non-cash items including share-based compensation expense, deferred income taxes, depreciation and amortization, inventory obsolescence and a provision for warranty. Cash provided by operating activities reflected a $3,149,579 decrease in accounts receivable resulting from lower fiscal year 2018 fourth quarter shipments, an increase of $192,638 for higher accounts payable and a $1,541,865 increase in accrued and other liabilities, which included deferred rent and leasehold incentives, offset by an increase in inventory of $1,648,484 to support higher year-end 2018 backlog, an increase of $2,075,323 for prepaid expenses and other, primarily for deposits paid on inventory purchases to fulfill backlog and outstanding receivables for tenant improvements on the Company’s new operating facility.
We had accounts receivable of $3,644,059 and $2,785,997 at September 30, 2019 and 2018, respectively. Terms with individual customers vary greatly. We often offer net thirty-day terms to our customers. Our receivables can vary dramatically due to overall sales volume and quarterly variations in sales and timing of shipments to and receipts from large customers.
At September 30, 2019 and 2018, our working capital was $24,765,178 and $21,090,472, respectively. The increase in working capital was largely the result of net income generated from operations.
Investing Activities
In the fiscal year ended September 30, 2019, we used $4,495,228 of cash to purchase short and long-term marketable securities, compared to using $4,920,547 to purchase short and long-term marketable securities in the fiscal year ended September 30, 2018. Also, during fiscal year 2018, we used $2,431,795 to purchase Genasys Spain. In the fiscal year ended September 30, 2019, we had proceeds from maturities of available for sale marketable securities of $4,228,068 compared to $5,190,821 in fiscal year 2018.
We also used cash in investing activities primarily for the purchase of product tooling, computer equipment and leasehold improvements for the new larger operating facility. Cash used for capital expenditures was $343,123 and $625,845 in the fiscal years ended September 30, 2019 and 2018, respectively. In fiscal 2017, we began to expense patent and trademark costs as incurred. We anticipate additional expenditures for patents and capital expenditures in fiscal year 2020 as we continue to invest in new products and technologies.
Financing Activities
In the years ended September 30, 2019 and 2018, we received proceeds from the exercise of stock options of $703,313 and $2,434,888, respectively. 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, under which the Company was authorized to repurchase up to $5 million of its outstanding common shares. The previous program expired on December 31, 2018. During the year ended September 30, 2019, the Company repurchased 788,425 shares at an average price per share of $2.75 for a total cost of $2,171,022. During the year ended September 30, 2018, the Company repurchased 286,746 shares at an average price per share of $2.53 for a total cost of $725,445. At September 30, 2019, all repurchased shares were retired.
Commitments
We are committed for our facility lease through August 30, 2028, as more fully described in Note 13, Commitments and Contingencies, to our consolidated financial statements.
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. All of the Company’s key employees are entitled to participate in the bonus plan. During the years ended September 30, 2019 and 2018, the Company accrued $1,295,338 and $1,205,468 respectively, for bonuses, and related payroll tax expense in connection with the bonus plans. Bonus related expense is included in “Accrued liabilities” on the Consolidated Balance Sheet.
We are a party to an employment agreement with our chief executive officer that provides for severance benefits including twelve months’ salary and health benefits, a pro-rata share of his annual cash bonus for the fiscal year in which the termination occurs to which he would have become entitled had he remained employed through the end of such fiscal year, and vesting of a share of the stock options held by him that are subject to performance-based vesting. The agreement also has a change of control clause whereby the chief executive officer would be entitled to receive specified severance and equity vesting benefits if specified termination events occur. There are no other employment agreements with executive officers or other employees providing future benefits or severance arrangements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings or other relationships with unconsolidated entities or other persons.
|
Item 7A.
|
Quantitative and Qualitative Disclosures about Market Risk.
|
Information requested by this Item is not included as we are electing scaled disclosure requirements available to Smaller Reporting Companies.
|
Item 8.
|
Financial Statements and Supplementary Data.
|
The financial statements required by this item begin on page F-1 with the index to financial statements followed by the consolidated financial statements.
|
Item 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|
There have been no disagreements or any reportable events requiring disclosure under Item 304(b) of Regulation S-K.
|
Item 9A.
|
Controls and Procedures.
|
We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our Exchange Act Reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in our Exchange Act Reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019 and, based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at a reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2019 based on the guidelines established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles in the U.S. Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of September 30, 2019.
This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Pursuant to rules of the SEC, such attestation is not required for smaller reporting companies, which permit the Company to provide only management’s report in this Annual Report.
Changes in Internal Controls
There have been no changes in our internal control over financial reporting since June 30, 2019, in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.
|
Item 9B.
|
Other Information.
|
None
Notes to the Consolidated Financial Statements
1. OPERATIONS
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 that it was rebranding and began doing business as Genasys Inc.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
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 consolidated financial statements include the accounts of these subsidiaries after elimination of intercompany transactions and accounts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions (e.g., share-based compensation valuation, allowance for doubtful accounts, valuation of inventory and intangible assets, warranty reserve, accrued bonus and valuation allowance related to deferred tax assets) that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company sells its products to a large number of geographically diverse customers. The Company routinely assesses the financial strength of its customers. It is customary for the Company to require a deposit as collateral. At September 30, 2019, accounts receivable from two customers accounted for 33% and 11% of total accounts receivable with no other single customer accounting for more than 10% of the accounts receivable balance. At September 30, 2018, accounts receivable from two customers accounted for 12% and 11% of total accounts receivable with no other single customer accounting for more than 10% of the accounts receivable balance.
The Company maintains cash and cash equivalent bank deposit accounts which, at times, may exceed federally insured limits guaranteed by the Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses in such accounts. The Company limits its exposure to credit loss by depositing its cash with high credit quality financial institutions. The Company also invests cash in instruments that meet high credit quality standards, as specified in the Company’s policy guidelines such as money market funds, corporate bonds, municipal bonds and Certificates of Deposit. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument. It is generally the Company’s policy to invest in instruments that have a final maturity of no longer than three years, with a portfolio weighted average maturity of no longer than 18 months.
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. At September 30, 2019 and 2018, the amount of cash and cash equivalents was $18,819,078 and $11,063,091, respectively.
The Company considers any amounts pledged as collateral or otherwise restricted for use in current operations to be restricted cash. Restricted cash is classified as a current asset unless amounts are not expected to be released and available for use in operations within one year. At September 30, 2019 and 2018, the amount of restricted cash was $697,840 and $742,983, which is included in Restricted Cash and Long-term Restricted Cash.
MARKETABLE SECURITIES
The Company accounts for investments in debt instruments as available-for-sale. Management determines the appropriate classification of such securities at the time of purchase and re-evaluates such classification as of each balance sheet date. Marketable securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive loss. The realized gains and losses on marketable securities are determined using the specific identification method.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company carries its accounts receivable at their historical cost, less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts for estimated losses considering the following factors when determining if collection of a receivable is reasonably assured: customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. If the Company has no previous experience with the customer, the Company may obtain reports from various credit organizations to ensure that the customer has a history of paying its creditors. The Company may also request financial information to ensure that the customer has the means of making payment. If these factors do not indicate collection is reasonably assured, revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of cash. There was no deferred revenue at September 30, 2019 or 2018 as a result of collection issues. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. The Company determines allowances on a customer specific basis. At September 30, 2019 and 2018, the Company had an allowance for doubtful accounts of $126,593 and $150,000, respectively.
CONTRACT MANUFACTURERS
The Company employs contract manufacturers for production of certain components and sub-assemblies. The Company may provide parts and components to such parties from time to time, but recognizes no revenue or markup on such transactions. During fiscal years 2019 and 2018, the Company performed assembly of products in-house using components and sub-assemblies from a variety of contract manufacturers and suppliers.
INVENTORIES
Inventories are valued at the lower of cost or net realizable value. Cost is determined using a standard cost system whereby differences between the standard cost and purchase price are recorded as a purchase price variance in cost of revenues. Inventory is comprised of raw materials, assemblies and finished products intended for sale. The Company periodically makes judgments and estimates regarding the future utility and carrying value of inventory. The carrying value of inventory is periodically reviewed and impairments, if any, are recognized when the expected net realizable value is less than carrying value. The Company has inventory reserves for estimated obsolescence or unmarketable inventory, which is equal to the difference between the cost of inventory and the estimated market value, based upon assumptions about future demand and market conditions. The Company increased its inventory reserve by $133,532 during the year ended September 30, 2019 for parts and demo equipment that may not be utilized. The Company decreased its inventory reserve $21,481 during the year ended September 30, 2018 due to the disposal of obsolete inventory, net of additional excess and obsolescence reserves recorded.
EQUIPMENT AND DEPRECIATION
Equipment is stated at cost. Depreciation on machinery and equipment and office furniture and equipment is computed over the estimated useful lives of two to seven years using the straight-line method. Leasehold improvements are amortized over the life of the lease. Upon retirement or disposition of equipment, the related cost and accumulated depreciation is removed, and a gain or loss is recorded.
BUSINESS COMBINATIONS
The acquisition method of accounting for business combinations requires the Company to use significant estimates and assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which the Company may adjust the provisional amounts recognized for a business combination).
Under the acquisition method of accounting the Company recognizes separately from goodwill the identifiable assets acquired, the liabilities assumed generally at the acquisition date fair value. The Company measures goodwill as of the acquisition date as the excess of consideration transferred, which the Company also measures at fair value, over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed. Costs that the Company incurs to complete the business combination such as investment banking, legal and other professional fees are not considered part of consideration and the Company charges them to general and administrative expense as they are incurred.
Under the acquisition method of accounting for business combinations, if the Company identifies changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period and they relate to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement period adjustment and the Company records the offset to goodwill. The Company records all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense.
GOODWILL AND INTANGIBLE ASSETS
Identifiable intangible assets, which consist of technology, customer relationships, non-compete agreements, patents, tradenames and trademarks, are carried at cost less accumulated amortization. Intangible assets are amortized over their estimated useful lives, based on a number of assumptions including estimated periodic economic benefit and utilization. The estimated useful lives of identifiable intangible assets has been estimated to be between three and fifteen years. The carrying value of intangibles is periodically reviewed and impairments, if any, are recognized when the future undiscounted cash flows realized from the assets is less than its carrying value.
Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets acquired. The Company evaluates goodwill for impairment on an annual basis in our fiscal fourth quarter or more frequently if indicators of impairment exist that would more likely than not reduce the fair value of a single reporting unit below its carrying amount. The Company assesses qualitative factors in order to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative factors evaluated by the Company include: macro-economic conditions of the local business environment, overall financial performance, and other entity specific factors as deemed appropriate. If, through this qualitative assessment, the conclusion is made that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a two-step impairment test is performed. Management does not consider the value of goodwill to be impaired as of September 30, 2019. Refer to Note 8, Goodwill and Intangible Assets for more information.
LEASES
Through September 30, 2019, leases entered into are classified as either capital or operating leases. At the time a capital lease is entered into, an asset is recorded, together with its related long-term obligation to reflect the purchase and financing. At September 30, 2019 and 2018, the Company had no capital lease obligations.
Adoption of new accounting standard
The Company will adopt Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”) in the fiscal year beginning October 1, 2019. Refer to Note 3, Recent Accounting Pronouncements for more information.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of revenues. Shipping and handling costs invoiced to customers are included in revenue. Actual shipping and handling costs were $277,721 and $291,994 for the fiscal years ended September 30, 2019 and 2018, respectively. Actual revenues from shipping and handling were $277,888 and $169,184 for the fiscal years ended September 30, 2019 and 2018, respectively.
ADVERTISING
Advertising costs are charged to expense as incurred. The Company expensed $21,417 and $28,092 for the years ended September 30, 2019 and 2018, respectively, for advertising costs.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
WARRANTY RESERVES
The Company warrants its products to be free from defects in materials and workmanship for a period of one year from the date of purchase. The warranty is generally limited. The Company currently provides direct warranty service. Some agreements with OEM customers, from time to time, may require that certain quantities of product be made available for use as warranty replacements. International market warranties are generally similar to the U.S. market. The Company also sells extended warranty contracts and maintenance agreements.
The Company establishes a warranty reserve based on anticipated warranty claims at the time product revenues are 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. The warranty reserve was $150,229 and $99,216 at September 30, 2019 and 2018, respectively.
INCOME TAXES
The Company determines its income tax provision using the asset and liability method. Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. A valuation allowance is recorded by the Company to the extent it is more likely than not that some portion or all of the deferred tax asset will not be realized. Significant management judgment is required in assessing the ability to realize the Company’s deferred tax assets. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income and the tax rates in effect at that time. Additional information regarding income taxes appears in Note 12, Income Taxes.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles held for use are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of undiscounted expected future cash flows is less than the carrying amount of the asset, or if changes in facts and circumstances indicate this, an impairment loss is measured and recognized using the asset’s fair value. There was no impairment of long-lived assets for the year ended September 30, 2019. During the year ended September 30, 2018, the Company determined that certain patents were impaired. The impaired patents related to products no longer sold by the Company and totaled $11,133. Refer to Note 5, Fair Value Measurements and Note 8, Goodwill and Intangible Assets for information related to impairment of long-lived assets.
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: LRAD and Genasys Spain 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 eliminated in consolidation. Refer to Note 17, Segment Information, for additional information.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net (loss) income per share reflects the potential dilution of securities that could occur if outstanding securities convertible into common stock were exercised or converted. Refer to Note 16, Net Income (Loss) Per Share, for additional information.
FOREIGN CURRENCY TRANSLATION
The Company’s reporting currency is U.S. dollars. The functional currency of the Company is the U.S. dollar. The functional currency of Genasys Spain is the Euro. The Company translates the assets and liabilities of Genasys Spain at the exchange rates in effect on the balance sheet date. The Company translates the revenue, costs and expenses of Genasys Spain at the average rates of exchange in effect during the period. The Company includes translation gains and losses in the stockholders’ equity section of the Company’s balance sheets in accumulated other comprehensive income or loss. Transactions undertaken in other currencies, which have not been material, are translated using the exchange rate in effect as of the transaction date and any exchange gains and losses resulting from these transactions, are included in the statements of operations. The translation loss for the period was $233,718 resulting from transactions between LRAD and Genasys Spain, the timing of transactions in relation to changes in exchange rates and the decrease in the exchange rate between the Euro and the U.S. dollar. Transaction gains and losses were not significant for any period presented.
SHARE-BASED COMPENSATION
The Company recognized share-based compensation expense related to qualified and non-qualified stock options issued to employees and directors over the expected vesting term of the stock-based instrument based on the grant date fair value. Forfeitures are estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from those estimates or if the Company updates its estimated forfeiture rate. Refer to Note 14, Share-based Compensation, for additional information.
RECLASSIFICATIONS
Where necessary, the prior year’s information has been reclassified to conform to the fiscal year 2019 statement presentation. These reclassifications had no effect on previously reported results of operations or accumulated deficit.
SUBSEQUENT EVENTS
Management has evaluated events subsequent to September 30, 2019 through the date the accompanying consolidated financial statements were filed with the Securities and Exchange Commission and noted that there have been no events or transactions which would affect the Company’s consolidated financial statements for the year ended September 30, 2019.
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 (“Topic 326”), 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 is currently reviewing this standard to assess the impact on its consolidated financial statements and related disclosures.
In June 2018, the FASB issued ASU No. 2018-7, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-7”), which amends and expands Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The standard requires entities to measure nonemployee share-based payment transactions by estimating the fair value of the equity instrument it is obligated to issue, measure the equity-classified nonemployee share-based payment awards at the grant date, and consider the probability of satisfying performance conditions when accounting for nonemployee share based payment awards with such conditions. ASU 2018-7 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that fiscal year. Accordingly, this guidance was effective for the Company in the fiscal year beginning October 1, 2019. The Company does not anticipate that adoption will have a material impact on its consolidated financial statements and related disclosures.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within that fiscal year. Accordingly, this is effective for the Company in the fiscal year beginning October 1, 2019. The Company expects that the adoption of this ASU will not have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASC 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 ASC 842. ASC 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 Accounting Standards Updated No. 2018-11 (“ASU 2018-11”), which offers a practical expedient that allows entities the option to apply the provisions of ASC 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 Accounting Standards Update 2019-01 (“ASU 2019-01”), which explicitly provides disclosure relief for interim periods during the year the standard is adopted. Under the new guidance, companies are not required to disclose the effect of such adoption in interim periods on certain financial statement items for periods retrospectively adjusted.
The new guidance was effective for the Company beginning October 1, 2019. The Company adopted ASC 842 by applying 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 (ASC 840, Leases). The Company elected the following practical expedients:
|
|
●
|
The transitional practical expedients, which must be elected as a package and applied consistently to all leases. In electing this practical expedient package the Company is not required to:
|
|
|
o
|
reassess whether an existing or expired contract is or contains a lease
|
|
|
o
|
reassess the lease classification for any expired or existing leases and
|
|
|
o
|
reassess initial direct lease costs for all leases that commenced before the adoption
|
|
|
●
|
Short-term lease practical expedient in which the Company can elect not to apply the recognition requirements of ASC 842 to short-term leases.
|
The most significant impact on our financial statements will be the recognition of a Right of Use (“ROU”) asset and lease liability for our operating leases, primarily related to the Company’s facility lease described in Note 13, Commitments and Contingencies. In addition, a portion of our 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 future reporting periods, which may result in foreign exchange gains or losses. The Company does not believe ASC 842 will materially impact our consolidated results of operations or cash flows. As a result of adopting ASC 842 effective October 1, 2019, the Company recorded an initial measurement of approximately $7.8 million of operating lease liabilities, and approximately $5.8 million 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 ASC 842.
New pronouncements adopted
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, which amends Topic 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The provisions of this guidance are to be applied using a retrospective transition method to each period presented. ASU No. 2016-18 was effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company adopted ASU No. 2016-18 effective January 1, 2018. For the years ended September 30, 2019 and 2018, restricted cash balances are due to a security deposit for the Company’s new facility lease, as described in Note 13, Commitments and Contingencies, and restricted cash held as collateral for notes payable, as described in Note 11, Debt. The adoption did not have a material impact on the Company's consolidated financial position, results of operations and cash flows, other than the impact discussed above.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This guidance changes how companies account for certain aspects of share-based payments to employees. Among other things, under the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in-capital (“APIC”), but will instead record such items as income tax expense or benefit in the income statement, and APIC pools will be eliminated. Companies will apply this guidance prospectively. Another component of the new guidance allows companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards, whereby forfeitures can be estimated, as required today, or recognized when they occur. If elected, the change to recognize forfeitures when they occur needs to be adopted using a modified retrospective approach. The guidance was effective for the Company in the first quarter of fiscal 2018. The adoption of this standard resulted in the recognition of $1.1 million of gross deferred tax assets related to the historical excess tax benefits from stock based compensation that was not previously included in deferred tax assets and a corresponding increase in the Company’s valuation allowance.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles when it becomes effective. In July 2015, the FASB deferred the effective date of the standard by an additional year; however, it provided companies the option to adopt one year earlier, commensurate with the original effective date. Accordingly, the standard was effective for the Company in the fiscal year beginning October 1, 2018. Subsequently, the FASB 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. Refer to Note 4, Revenue Recognition, for further detail.
4. REVENUE RECOGNITION
The Company adopted ASU 2014-09 and its amendments on October 1, 2018, 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 our 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. Our customers do not have a right to return product unless the product is found defective and therefore our 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 (LRAD and Genasys Spain) and geographically to depict the nature of revenue in a manner consistent with our business operations and to be consistent with other communications and public filings. Refer to Note 17, Segment Information and Note 18, 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 gives us the right to invoice a customer. The Company may also receive consideration, per terms of a contract, from customers prior to transferring goods to the customer. The Company records customer deposits as a contract liability. Additionally, the Company may receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed. In such instances, a deferred revenue liability is recorded. The Company recognizes these contract liabilities as revenue after all revenue recognition criteria are met. The table below shows the balance of contract assets and liabilities as of September 30, 2019 and September 30, 2018, including the change between the periods. The current portion of contract liabilities and the non-current portion are included in “Accrued liabilities” and “Other liabilities, noncurrent”, respectively, on the accompanying Consolidated Balance Sheets. Refer to Note 10, Accrued Liabilities for additional details.
The Company’s contract assets are as follows:
|
|
|
Prepaid maintenance
|
|
|
|
|
agreement
|
|
|
Balance at September 30, 2018
|
|
$
|
93,750
|
|
|
New prepaid maintenance agreements
|
|
|
-
|
|
|
Recognition of expense as a result of performing services
|
|
|
(93,750
|
)
|
|
Balance at September 30, 2019
|
|
$
|
-
|
|
The Company’s contract liabilities are as follows:
|
|
|
Customer
deposits
|
|
|
Deferred
revenue
|
|
|
Total contract
liabilities
|
|
|
Balance at September 30, 2018
|
|
$
|
199,596
|
|
|
$
|
536,458
|
|
|
$
|
736,054
|
|
|
New performance obligations
|
|
|
7,241,768
|
|
|
|
1,627,331
|
|
|
|
8,869,099
|
|
|
Recognition of revenue as a result of satisfying performance obligations
|
|
|
(2,378,273
|
)
|
|
|
(1,083,261
|
)
|
|
|
(3,461,534
|
)
|
|
Effect of exchange rate on deferred revenue
|
|
|
-
|
|
|
|
(21,121
|
)
|
|
|
(21,121
|
)
|
|
Balance at September 30, 2019
|
|
$
|
5,063,091
|
|
|
$
|
1,059,407
|
|
|
$
|
6,122,498
|
|
|
Less: non-current portion
|
|
|
-
|
|
|
|
(550,885
|
)
|
|
|
(550,885
|
)
|
|
Current portion at September 30, 2019
|
|
$
|
5,063,091
|
|
|
$
|
508,522
|
|
|
$
|
5,571,613
|
|
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 September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $6,122,498. The Company expects to recognize revenue on approximately $5,571,613 or 91% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter.
Practical Expedients
In cases where 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 provided to the customer.
5. FAIR VALUE MEASUREMENTS
The Company’s financial instruments consist principally of cash equivalents, short and long-term marketable securities, accounts receivable and accounts payable. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:
|
|
Level1:
|
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 majority of the Company’s cash equivalents and marketable securities was determined based on “Level 1” inputs. The fair value of certain marketable securities, long-term debt, hedge fund investments, and derivative contracts were determined based on “Level 2” inputs. The valuation techniques used to measure the fair value of the “Level 2” instruments were valued based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data. The Company does not have any financial instruments measured at fair value on a recurring basis in the “Level 3” category.
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 years ended September 30, 2019 and 2018.
Instruments Measured at Fair Value on a Recurring Basis
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 September 30, 2019 and 2018.
|
|
|
September 30, 2019
|
|
|
|
|
Cost Basis
|
|
|
Unrealized
Gain
|
|
|
Fair Value
|
|
|
Cash
Equivalents
|
|
|
Short-term
Securities
|
|
|
Long-term
Securities
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
275,538
|
|
|
$
|
-
|
|
|
$
|
275,538
|
|
|
$
|
275,538
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
971,592
|
|
|
|
-
|
|
|
|
971,592
|
|
|
|
-
|
|
|
|
499,000
|
|
|
|
472,592
|
|
|
Municipal securities
|
|
|
240,463
|
|
|
|
205
|
|
|
|
240,668
|
|
|
|
-
|
|
|
|
80,336
|
|
|
|
160,332
|
|
|
Corporate bonds
|
|
|
3,856,766
|
|
|
|
11,157
|
|
|
|
3,867,923
|
|
|
|
-
|
|
|
|
3,116,028
|
|
|
|
751,895
|
|
|
Subtotal
|
|
|
5,068,821
|
|
|
|
11,362
|
|
|
|
5,080,183
|
|
|
|
-
|
|
|
|
3,695,364
|
|
|
|
1,384,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,344,359
|
|
|
$
|
11,362
|
|
|
$
|
5,355,721
|
|
|
$
|
275,538
|
|
|
$
|
3,695,364
|
|
|
$
|
1,384,819
|
|
|
|
|
September 30, 2018
|
|
|
|
|
Cost Basis
|
|
|
Unrealized
Gain
|
|
|
Fair Value
|
|
|
Cash
Equivalents
|
|
|
Short-term
Securities
|
|
|
Long-term
Securities
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
410,393
|
|
|
$
|
-
|
|
|
$
|
410,393
|
|
|
$
|
410,393
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
499,000
|
|
|
|
-
|
|
|
|
499,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
499,000
|
|
|
Corporate bonds
|
|
|
4,302,661
|
|
|
|
(8,945
|
)
|
|
|
4,293,716
|
|
|
|
-
|
|
|
|
3,592,175
|
|
|
|
701,541
|
|
|
Subtotal
|
|
|
4,801,661
|
|
|
|
(8,945
|
)
|
|
|
4,792,716
|
|
|
|
-
|
|
|
|
3,592,175
|
|
|
|
1,200,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,212,054
|
|
|
$
|
(8,945
|
)
|
|
$
|
5,203,109
|
|
|
$
|
410,393
|
|
|
$
|
3,592,175
|
|
|
$
|
1,200,541
|
|
Instruments Measured at Fair Value on a Non-Recurring Basis
Assets and liabilities that are measured at fair value on a non-recurring basis include intangible assets and goodwill, which are recognized at fair value during the period in which an acquisition is completed, from updated estimates and assumptions 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 unobservable inputs. In the event of an impairment, the Company determines the fair value of the goodwill and intangible assets using a discounted cash flow approach, which contains significant unobservable inputs and therefore is considered a Level 3 fair value measurement. The unobservable inputs in the analysis generally include future cash flow projections and a discount rate.
The following table presents categories of long-lived assets that were subject to non-recurring fair value measurements during the year ended September 30, 2019:
|
|
|
Fair Value Measurements at September 30, 2019
|
|
|
|
|
Carrying Value
|
|
|
Active Markets
for Identifiable
Assets
(Level 1)
|
|
|
Observable
Inputs
(Level 2)
|
|
|
Unobservable
Inputs
(Level 3)
|
|
|
Non-Cash
Impairment
Loss
|
|
|
Intangible assets from Genasys acquisition
|
|
$
|
1,142,814
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,142,814
|
|
|
$
|
-
|
|
|
Goodwill
|
|
$
|
2,305,750
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,305,750
|
|
|
$
|
-
|
|
|
Patents
|
|
$
|
32,820
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
32,820
|
|
|
$
|
-
|
|
The Company did not recognize non-recurring fair value adjustments related to the impairment of intangible assets for the year ended September 30, 2019. The $140,240 change in fair value of Goodwill from September 30, 2018 to September 30, 2019 is due to the change in foreign currency rates.
The following table presents categories of long-lived assets that were subject to non-recurring fair value measurements during the year ended September 30, 2018:
|
|
|
Fair Value Measurements at September 30, 2018
|
|
|
|
|
Carrying Value
|
|
|
Active Markets
for Identifiable
Assets
(Level 1)
|
|
|
Observable
Inputs
(Level 2)
|
|
|
Unobservable
Inputs
(Level 3)
|
|
|
Non-Cash
Impairment
Loss
|
|
|
Intangible assets from Genasys acquisition(a)
|
|
$
|
1,520,006
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,520,006
|
|
|
$
|
-
|
|
|
Goodwill from Genasys acquisition(b)
|
|
$
|
2,445,990
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,445,990
|
|
|
$
|
-
|
|
|
Patents(c)
|
|
$
|
37,340
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37,340
|
|
|
$
|
(11,133
|
)
|
|
|
(a)
|
Represents acquired intangible assets from the acquisition of Genasys Spain. There was no impairment related to these assets. Refer to Note 8, Goodwill and Intangible Assets, for more information.
|
|
|
(b)
|
Represents acquired goodwill from the acquisition of Genasys Spain. There was no impairment related to these assets. Refer to Note 8, Goodwill and Intangible Assets, for more information.
|
|
|
(c)
|
During the year ended September 30, 2018, the Company determined that certain patents were impaired. The impaired patents related to products no longer sold by the Company.
|
6. INVENTORIES
Inventories consisted of the following:
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Raw materials
|
|
$
|
5,060,331
|
|
|
$
|
4,487,273
|
|
|
Finished goods
|
|
|
998,607
|
|
|
|
1,768,544
|
|
|
Work in process
|
|
|
306,809
|
|
|
|
875,417
|
|
|
Inventories, gross
|
|
|
6,365,747
|
|
|
|
7,131,234
|
|
|
Reserve for obsolescence
|
|
|
(530,584
|
)
|
|
|
(397,051
|
)
|
|
Inventories, net
|
|
$
|
5,835,163
|
|
|
$
|
6,734,183
|
|
The Company relies on one supplier for compression drivers for its LRAD products and is making efforts to obtain alternative suppliers to reduce such reliance. The Company’s ability to manufacture its LRAD products could be adversely affected if it were to lose this sole source supplier and was unable to find an alternative supplier.
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Office furniture and equipment
|
|
$
|
1,332,443
|
|
|
$
|
1,326,784
|
|
|
Machinery and equipment
|
|
|
1,223,726
|
|
|
|
1,095,099
|
|
|
Leasehold improvements
|
|
|
2,019,794
|
|
|
|
-
|
|
|
Construction in progress
|
|
|
7,565
|
|
|
|
2,001,539
|
|
|
Property and equipment, gross
|
|
|
4,583,528
|
|
|
|
4,423,422
|
|
|
Accumulated depreciation
|
|
|
(2,314,022
|
)
|
|
|
(1,974,697
|
)
|
|
Property and equipment, net
|
|
$
|
2,269,506
|
|
|
$
|
2,448,725
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Depreciation expense
|
|
$
|
521,492
|
|
|
$
|
251,186
|
|
At September 30, 2018, construction in progress primarily included leasehold improvement costs incurred to renovate and prepare the Company’s new facility for its operations. Refer to Note 13, Commitments and Contingencies, for more information on the facility lease.
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 Company 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 year ended September 30, 2019. At September 30, 2019 and September 30, 2018, goodwill was $2,305,750 and $2,445,990, respectively.
During the year ended September 30, 2018, the Company determined that certain patents were impaired. These patents supported products that are no longer sold by the Company. The Company recorded a non-cash loss on the impairment of these patents of $11,133 for the year ended September 30, 2018. There was no impairment loss for the year ended September 30, 2019.
Intangible assets and goodwill related to Genasys Spain are translated from Euros to U.S. dollars at the balance sheet date. The net impact of foreign currency exchange differences arising during year ended September 30, 2019, related to goodwill and intangible assets was a reduction of $219,325.
The Company’s intangible assets consisted of the following:
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Technology
|
|
$
|
611,043
|
|
|
$
|
648,208
|
|
|
Customer relationships
|
|
|
584,477
|
|
|
|
620,026
|
|
|
Trade name portfolio
|
|
|
212,537
|
|
|
|
225,464
|
|
|
Non-compete agreements
|
|
|
230,248
|
|
|
|
244,252
|
|
|
Patents
|
|
|
72,126
|
|
|
|
72,126
|
|
|
|
|
|
1,710,431
|
|
|
|
1,810,076
|
|
|
Accumulated amortization
|
|
|
(534,797
|
)
|
|
|
(252,730
|
)
|
|
|
|
$
|
1,175,634
|
|
|
$
|
1,557,346
|
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Amortization Expense
|
|
$
|
303,397
|
|
|
$
|
231,901
|
|
Estimated amortization expense for the twelve months ending September 30,
|
2020
|
|
$
|
294,242
|
|
|
2021
|
|
|
239,586
|
|
|
2022
|
|
|
217,073
|
|
|
2023
|
|
|
186,683
|
|
|
2024
|
|
|
173,734
|
|
|
Thereafter
|
|
|
64,316
|
|
|
Total estimated amortization expense
|
|
$
|
1,175,634
|
|
9. PREPAID EXPENSES AND OTHER
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Deposits for inventory
|
|
$
|
1,064,640
|
|
|
$
|
1,366,069
|
|
|
Leashold improvement receivable
|
|
|
-
|
|
|
|
1,132,017
|
|
|
Prepaid insurance
|
|
|
194,285
|
|
|
|
162,822
|
|
|
Prepaid rent
|
|
|
87,782
|
|
|
|
-
|
|
|
Prepaid maintenance agreement
|
|
|
-
|
|
|
|
93,750
|
|
|
Dues and subscriptions
|
|
|
88,031
|
|
|
|
92,097
|
|
|
Other
|
|
|
347,099
|
|
|
|
244,646
|
|
|
|
|
$
|
1,781,837
|
|
|
$
|
3,091,401
|
|
Deposits for inventory
Deposits for inventory consisted of cash payments to vendors for inventory to be delivered in the future.
Leasehold improvement receivable
Leasehold improvement receivable represents amounts owed to the Company by the landlord for costs incurred to renovate and prepare the Company’s new facility for use. The lease provided an allowance for tenant improvements of $1,588,214. Refer to Note 13, Commitments and Contingencies, for additional information about this lease. As of September 30, 2019, the Company has received the full tenant improvement allowance.
Prepaid Rent
Prepaid rent consists of payments made in advance for the Company’s facility lease.
Prepaid Insurance
Prepaid insurance consisted of premiums paid for health, commercial and corporate insurance. These premiums are amortized on a straight-line basis over the term of the agreements.
Prepaid maintenance agreement
At March 31, 2011, prepaid expenses included $1,500,000 paid to a third party service provider in connection with the Company’s obligations under a sales contract to a foreign military service to provide repair and maintenance services over an eight year period for products sold thereunder. The total prepaid expense was amortized on a straight-line basis at an annual rate of $187,500 over the eight-year contract period to correspond with the revenues for these services, and was recognized as a component of cost of sales. The amortization of the prepaid maintenance agreement was completed during the period ended March 31, 2019. As of September 30, 2018, $93,750 of the total prepayment was classified as a current asset.
10. ACCRUED AND OTHER LIABILITIES
Accrued liabilities consisted of the following:
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Payroll and related
|
|
$
|
2,050,324
|
|
|
$
|
2,041,735
|
|
|
Deferred revenue
|
|
|
508,522
|
|
|
|
460,086
|
|
|
Customer deposits
|
|
|
5,063,091
|
|
|
|
199,596
|
|
|
Accrued contract costs
|
|
|
252,833
|
|
|
|
197,034
|
|
|
Severance
|
|
|
-
|
|
|
|
152,730
|
|
|
Warranty reserve
|
|
|
150,229
|
|
|
|
99,216
|
|
|
Deferred rent
|
|
|
109,342
|
|
|
|
49,467
|
|
|
Total
|
|
$
|
8,134,341
|
|
|
$
|
3,199,864
|
|
Other liabilities - noncurrent consisted of the following:
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Deferred rent
|
|
$
|
1,881,387
|
|
|
$
|
1,663,058
|
|
|
Deferred extended warranty revenue
|
|
|
550,885
|
|
|
|
76,372
|
|
|
Total
|
|
$
|
2,432,272
|
|
|
$
|
1,739,430
|
|
Payroll and related
Accrued payroll and related consisted primarily of accrued bonus, accrued vacation, accrued sales commissions and benefits at September 30, 2019 and 2018.
Deferred Revenue
Deferred revenue at September 30, 2019 included prepayments from customers for services, including extended warranty, scheduled to be performed in the year ended September 30, 2020.
Customer Deposits
Customer deposits represent amounts paid by customers as a down payment on hardware orders to be delivered during the year ended September 30, 2020.
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.
Severance
Severance liability at September 30, 2018 consisted of accrued payments to former employees of Genasys Spain that was paid during the year ended September 30, 2019.
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 ASC 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. Refer to Note 3, Recent Accounting Pronouncements for further detail on the adoption of ASC 842.
Warranty Reserve
Details of the estimated warranty reserve were as follows:
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Beginning balance
|
|
$
|
99,216
|
|
|
$
|
104,518
|
|
|
Warranty provision
|
|
|
85,078
|
|
|
|
6,093
|
|
|
Warranty settlements
|
|
|
(34,065
|
)
|
|
|
(11,395
|
)
|
|
Ending balance
|
|
$
|
150,229
|
|
|
$
|
99,216
|
|
The Company establishes a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs and anticipated rates of warranty claims. The Company evaluates the adequacy of the provision for warranty costs each reporting period and adjusts the accrued warranty liability to an amount equal to estimated warranty expense for products currently under warranty.
Deferred extended warranty revenue
Deferred extended warranty revenue consists of warranties purchased in excess of the Company’s standard warranty. Extended warranties typically range from one to two years.
11. DEBT
In connection with the acquisition of Genasys Spain the Company assumed certain debts of Genasys Spain. The balances of the acquired debt consist of loans with governmental agencies as of September 30, 2019. Loans with governmental agencies represent interest free loans granted by ministries within Spain for the purpose of stimulating economic development and promoting research and development. Loans with governmental agencies as of September 30, 2019 are as follows:
|
Agency
|
|
Due Date
|
|
|
Principal
|
|
|
Ministry of Economy and Competitiveness
|
|
February 2, 2022
|
|
|
|
49,355
|
|
|
Ministry of Economy and Competitiveness
|
|
February 2, 2024
|
|
|
|
263,136
|
(a)
|
|
|
|
|
|
|
$
|
312,491
|
|
|
|
(a)
|
This loan is secured by $263,136 of cash pledged as collateral by Genasys Spain, which is the current balance of the loan. This amount represents 66.6% of the original principal received. This amount is included in restricted cash at September 30, 2019. The Company expects the Ministry of Economy and Competitiveness to declare the terms of the loan satisfied within fiscal year 2020 and that the outstanding balance of the loan will be paid in full during fiscal year 2020. Accordingly, this has been included in the current portion of notes payable as of September 30, 2019.
|
The following is a schedule of future annual payments as of September 30, 2019:
|
2020
|
|
$
|
279,588
|
|
|
2021
|
|
|
16,452
|
|
|
2022
|
|
|
16,451
|
|
|
2023
|
|
|
-
|
|
|
Total
|
|
$
|
312,491
|
|
As of September 30, 2019, the current portion of debt is $279,588 and the noncurrent portion of debt is $32,903.
12. INCOME TAXES
Income taxes consisted of the following:
|
|
|
Years ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Current tax provision
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
2,200
|
|
|
|
1,600
|
|
|
Total current tax provision
|
|
|
2,200
|
|
|
|
1,600
|
|
|
Deferred provision
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
484,500
|
|
|
|
2,017,900
|
|
|
State
|
|
|
85,500
|
|
|
|
356,100
|
|
|
Total deferred provision
|
|
|
570,000
|
|
|
|
2,374,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
572,200
|
|
|
$
|
2,375,600
|
|
A reconciliation of income taxes at the federal statutory rate of 21% to the effective tax rate was as follows:
|
|
|
Years ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Income taxes computed at the federal statutory rate
|
|
$
|
715,000
|
|
|
$
|
(332,000
|
)
|
|
Change in valuation allowance
|
|
|
(5,000
|
)
|
|
|
2,711,000
|
|
|
Change in tax rate
|
|
|
-
|
|
|
|
6,754,000
|
|
|
Expired net operating loss carryforwards
|
|
|
-
|
|
|
|
441,000
|
|
|
Nondeductible compensation, interest expense and other
|
|
|
40,000
|
|
|
|
39,000
|
|
|
State income taxes, net of federal tax benefit
|
|
|
155,000
|
|
|
|
(41,000
|
)
|
|
Change in R&D credit carryover
|
|
|
(66,000
|
)
|
|
|
(133,000
|
)
|
|
Stock options and other prior year true-ups
|
|
|
(142,000
|
)
|
|
|
(499,000
|
)
|
|
Acquired deferred tax assets of Genasys Spain
|
|
|
(7,800
|
)
|
|
|
(6,564,400
|
)
|
|
Refundable Federal AMT Credit
|
|
|
28,000
|
|
|
|
-
|
|
|
State business credit utilization
|
|
|
(145,000
|
)
|
|
|
-
|
|
|
Provision for income taxes
|
|
$
|
572,200
|
|
|
$
|
2,375,600
|
|
The types of temporary differences between the tax basis of assets and liabilities and their approximate tax effects that give rise to a significant portion of the net deferred tax asset at September 30, 2019 and 2018 were as follows:
|
|
|
At September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
12,682,000
|
|
|
$
|
13,644,000
|
|
|
Research and development credit
|
|
|
5,856,000
|
|
|
|
5,805,000
|
|
|
Share-based compensation
|
|
|
506,000
|
|
|
|
532,000
|
|
|
Equipment
|
|
|
(78,000
|
)
|
|
|
(41,000
|
)
|
|
Patents
|
|
|
24,000
|
|
|
|
35,000
|
|
|
Accruals and other
|
|
|
1,222,000
|
|
|
|
818,000
|
|
|
State tax deduction
|
|
|
(6,000
|
)
|
|
|
(5,000
|
)
|
|
Federal AMT Credit
|
|
|
24,000
|
|
|
|
53,000
|
|
|
Allowances
|
|
|
169,000
|
|
|
|
133,000
|
|
|
Gross deferred tax asset
|
|
|
20,399,000
|
|
|
|
20,974,000
|
|
|
Less valuation allowance
|
|
|
(15,012,000
|
)
|
|
|
(15,017,000
|
)
|
|
Total deferred tax assets, net of valuation allowance
|
|
$
|
5,387,000
|
|
|
$
|
5,957,000
|
|
At September 30, 2019, the Company had net deferred tax assets of approximately $5,387,000. The deferred tax assets are primarily composed of federal and state NOL carryforwards and federal and state research and development (“R&D”) credit carryforwards. At September 30, 2019, the Company had federal NOL carryforwards of approximately $44,398,000, which expire from 2022 through 2037. The Company also has an estimated $2,257,000 and $794,000 of federal and state R&D tax credits, respectively, at September 30, 2019, a portion of which will begin to expire in the 2020 tax year.
The Company reviews its ability to realize its deferred tax assets on a quarterly basis. In doing so, management considers historical and projected taxable income of the Company, along with any tax planning strategies and any other positive or negative evidence. Realization is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards and other deferred assets. The Company has sustained profitability over seven of the ten most recent fiscal years. In the past few years, the Company has developed products and expanded its marketing efforts into the mass notification market, which is a very large and growing market. While the Company is still in the early stages of market penetration, it has increased its confidence in forecasted taxable income based on growth opportunities in this market. It has also increased its forecasted revenues and taxable income for its directional product opportunities, where it is a leading player in the world market. As a result, during the quarter ended September 30, 2015, the Company determined it was more likely than not that a portion of the deferred tax assets will be realized and, accordingly, released a portion of the valuation allowance. While the Company has cumulative income from 2017 to 2019, future profits are uncertain and a portion of the Company’s tax attributes may expire prior to utilization. The Company adjusted its deferred tax asset value in the quarter ended September 30, 2019 and continues to maintain a valuation allowance of $15,012,000. Since future financial results may differ from previous estimates, periodic adjustments to the Company’s valuation allowances may be necessary.
As of September 30, 2019, the Company had no unrecognized tax benefits. The Company’s practice is to recognize interest and/or penalties related to income tax matters in income tax expense.
The Company is subject to taxation in the U.S. and various state jurisdictions. All of the Company’s historical tax years are subject to examination by the Internal Revenue Service and various state jurisdictions due to the generation of NOL and credit carryforwards.
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. Subsequently, the SEC issued Staff Accounting Bulletin (“SAB”) 118, which allows for the recording of provisional amounts related to U.S. tax reform and subsequent adjustments related to U.S. tax reform during a measurement period not to exceed one year from the enactment date. Accordingly, the Company remeasured its net deferred tax assets on a provisional basis based on the rates at which they are expected to be realized in the future, which is generally 21% resulting in a decrease to our net deferred tax assets of $2,374,000 for the year ended September 30, 2018. As of September 30, 2019, the Company’s accounting for the applicable elements of the legislation is complete and there were no material changes to the provisional amounts previously recorded.
13. COMMITMENTS AND CONTINGENCIES
The Company leases office equipment and operating facilities. During the year ended September 30, 2019, these leases were categorized as operating leases. On October 1, 2019, the Company adopted ASC 842 which requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. Refer to Note 3, Recent Accounting Pronouncements for further detail on the adoption of ASC 842.
Facility Lease
On July 1, 2018, the Company entered into a lease for 54,766 square feet to replace the expired lease of the prior San Diego facility as the Company’s executive offices, research and development, assembly and operational facilities. The lease commenced July 1, 2018 and will expire August 30, 2028. The aggregate monthly payments, with abatements, averaged $36,146 per month for the first fourteen months, and are $74,460, $76,694, $78,994, $81,364, $83,805, $86,319, $88,909, $91,576 and $94,324 per month for the second through tenth years of the lease, plus certain other costs and charges as specified in the lease agreement, including the Company’s proportionate share of the building operating expenses and real estate taxes. The lease provided an allowance for tenant improvements of $1,588,214, which was classified as deferred rent on the Company’s consolidated balance sheet and is being amortized as an offset to rent expense with a corresponding charge to amortization expense on a straight-line basis over the term of the lease.
Total operating lease expense, including facilities and office equipment commitments, recorded by the Company for the years ended September 30, 2019 and 2018 was 1,050,784 and $956,535, respectively.
The obligations under all operating leases are as follows:
|
Years ending September 30,
|
|
|
|
|
|
2020
|
|
$
|
1,005,217
|
|
|
2021
|
|
|
1,032,090
|
|
|
2022
|
|
|
1,059,088
|
|
|
2023
|
|
|
1,011,894
|
|
|
2024
|
|
|
1,008,177
|
|
|
Thereafter
|
|
|
4,247,218
|
|
|
Total lease obligations
|
|
$
|
9,363,684
|
|
Employment Agreements
The Company entered into an employment agreement in August 2016 with its chief executive officer that provides for severance benefits including twelve months’ salary and health benefits, a pro-rata share of his annual cash bonus for the fiscal year in which the termination occurs to which he would have become entitled had he remained employed through the end of such fiscal year, and if his employment is terminated during fiscal year 2019 or later, vesting of a pro-rata share of the stock options held by him that are subject to performance-based vesting based on the extent to which the required performance criteria are achieved in the year of termination and on the portion of the year he was employed. The agreement also has a change of control clause whereby in the event of a specified termination event, the chief executive officer would be entitled to receive in a single lump sum (a) an amount equal to two times the sum of his base salary then in effect and his then target annual cash bonus, (b) a pro-rata share of his annual cash bonus for such year and (c) the cost of his and his dependents’ coverage under COBRA for an 18-month period. In addition, in such event, (i) all of the time-vesting stock options held will vest, unless the termination occurs within the first year of his employment, in which case only the number of options scheduled to vest on the first anniversary of his employment date will vest pro-rated for the period of time he was employed during such one-year period, (ii) 375,000 of the stock options held that are subject to performance-based vesting will vest and (iii) if employment is terminated during fiscal year 2019 or later, a pro-rata share of the stock options held that are subject to performance-based vesting will vest based on the extent to which the required performance criteria are achieved for the fiscal year in which the termination occurs and based on the period of time he was employed during such fiscal year prior to the termination.
There are no other employment agreements with executive officers or other employees providing future benefits or severance arrangements.
Bonus Plan
In fiscal 2019 and 2018, the Company had 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 fiscal year 2019, the company exceeded the minimum targeted level of orders received, revenues and cash provided by operating activities and has accrued $1,295,338 of expense. In fiscal year 2018, the company exceeded the minimum targeted level of orders received and revenues and accrued $1,205,099 of expense.
Employee Benefit—401K Plan
The Company has a defined contribution plan (401(k)) covering its employees. Matching contributions are made on behalf of all participants at the discretion of the board of directors. During the fiscal years ended September 30, 2019 and 2018, the Company made matching contributions of $220,234 and $130,511, respectively.
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 financial statements for pending litigation.
Guarantees and Indemnifications
The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with business partners, contractors, customers and landlords and (ii) its agreements with investors. Under these arrangements, the Company may indemnify other parties such as business partners, customers, underwriters, and investors for certain losses suffered, claims of intellectual property infringement, negligence and intentional acts in the performance of services, and violations of laws including certain violations of securities laws. The Company’s obligation to provide such indemnification in such circumstances would arise if, for example, a third party sued a customer for intellectual property infringement and the Company agreed to indemnify the customer against such claims. The Company is unable to estimate with any reasonable accuracy the liability that may be incurred pursuant to such indemnification obligations. Some of the factors that would affect this assessment include, but are not limited to, the nature of the claim asserted, the relative merits of the claim, the financial ability of the parties, the nature and amount of damages claimed, insurance coverage that the Company may have to cover such claims, and the willingness of the parties to reach settlement, if any. Because of the uncertainty surrounding these circumstances, the Company’s indemnification obligations could range from immaterial to having a material adverse impact on its financial position and its ability to continue in the ordinary course of business. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements in the past, and the Company had no liabilities recorded for these agreements as of September 30, 2019 and 2018.
Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. In addition, the Company executed indemnification agreements in June 2013 with the then current Directors and Officers of the Company, indemnifying them from any expenses arising out of any claims. All directors and officers have executed indemnification agreements. The term of the indemnification period is for the officer or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has a director and officers’ liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company does not believe that a material loss exposure related to these agreements is either probable or can be reasonably estimated. Accordingly, the Company has no liability recorded for these agreements as of September 30, 2019 and 2018.
14. SHARE-BASED COMPENSATION
Stock Option Plans
At September 30, 2019, the Company had two equity incentive plans. The 2005 Equity Incentive Plan (“2005 Equity Plan”) was terminated with respect to new grants in March 2015, but remains in effect for grants issued prior to that time. The Amended and Restated 2015 Equity Incentive Plan (“2015 Equity Plan”) was approved by the Company’s Board of Directors on December 6, 2016 and by the Company’s stockholders on March 14, 2017. The amendment to the Equity Incentive Plan, approved in 2015, authorizes for issuance as 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 September 30, 2019, there were options and restricted stock units outstanding covering 499,494 and 1,994,623 shares of common stock under the 2005 Equity Plan and 2015 Equity Plan, respectively, and 1,874,164 shares of common stock available for grant for a total of 4,368,281 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 no options granted during the year ended September 30, 2019. The weighted average estimated fair value of employee stock options granted during the year ended September 30, 2018 was calculated using the Black-Scholes option-pricing model with the following weighted average assumptions (annualized percentages):
|
|
|
2018
|
|
|
Volatility
|
|
|
45.4
|
%
|
|
Risk free interest rate
|
|
|
2.18
|
%
|
|
Forfeiture rate
|
|
|
10.0
|
%
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
Expected life in years
|
|
|
4.6
|
|
|
Weighted average FV
|
|
$
|
0.89
|
|
The Company did not pay a dividend in fiscal 2019 or in fiscal 2018. 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.
As of September 30, 2019, there was approximately $415,449 of total unrecognized compensation costs related to outstanding stock options and restricted stock units. This amount is expected to be recognized over a weighted average period of 1.3 years. To the extent the forfeiture rate is different from what the Company anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.
Performance-Based Stock Options
On August 1, 2016, the Company awarded a performance-based stock option (PVO) to purchase 750,000 shares of the Company’s common stock to a key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2019 and 2020 (375,000 shares for each year) including minimum free cash flow margin and net revenue targets at four different target levels for each of the years. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets.
The Company determined that as of September 30, 2019, it is probable that some of the performance conditions will be achieved and recorded $128,025 in share-based compensation expense related to these options for the year ended September 30, 2019. The Company will continue to review these targets each quarter and will adjust the expected outcome as needed, recognizing compensation expense cumulatively in such period for the difference in expense. The Company did not grant any PVOs in the year ended September 30, 2019.
Restricted Stock Units
On March 14, 2017, the Board of Directors approved a grant of 25,000 restricted stock units (“RSUs”) to each of the Company’s non-employee directors that vested on the first anniversary of the grant date. These were also issued at a market value of $197,500, which was expensed on a straight line basis through the March 14, 2018 vest date.
On March 20, 2018, the Board of Directors approved an additional grant of 25,000 RSUs to each of the Company’s non-employee directors that vested on the first anniversary of the grant date. These were issued at a market value of $278,750, which were expensed on a straight line basis through the March 20, 2019 vest date. Also, during fiscal 2018, 93,330 RSUs were granted to employees that will vest equally over three years on each of the first three anniversary dates of the grant. These were issued at a market value of $210,176, which will be expensed on a straight line basis over the three year life of the grants.
On February 7, 2019, the Board of Directors approved non-employee director compensation to include an annual grant of 30,000 RSUs to each of the Company’s five non-employee directors that will vest on the first anniversary of the grant date. These were issued at a market value of $412,500, which have been and will be expensed on a straight-line basis through the March 12, 2020 vest date. Also, during fiscal 2019, 99,300 RSUs were granted to employees that will vest equally over three years on each of the first three anniversary dates of the grant. These were issued at a market value of $248,250, which will be expensed on a straight line basis over the three year life of the grants.
Compensation expense for RSUs was $470,857 for the year ended September 30, 2019. Compensation expense for RSUs was $276,438 for the year ended September 30, 2018.
Restricted Stock Unit Summary Information
A summary of the activity of RSUs as of September 30, 2019 is presented below:
|
|
|
Number of
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
|
Outstanding September 30, 2018
|
|
|
218,330
|
|
|
$
|
2.24
|
|
|
Granted
|
|
|
249,300
|
|
|
$
|
2.65
|
|
|
Released
|
|
|
(156,115
|
)
|
|
$
|
2.23
|
|
|
Forfeited/cancelled
|
|
|
(36,666
|
)
|
|
$
|
2.39
|
|
|
Outstanding September 30, 2019
|
|
|
274,849
|
|
|
$
|
2.59
|
|
Stock Option Summary Information
A summary of the activity in options to purchase the capital stock of the Company as of September 30, 2019 is presented below:
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Outstanding September 30, 2018
|
|
|
3,394,858
|
|
|
$
|
2.18
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
Forfeited/expired
|
|
|
(769,439
|
)
|
|
$
|
2.99
|
|
|
Exercised
|
|
|
(406,151
|
)
|
|
$
|
1.86
|
|
|
Outstanding September 30, 2019
|
|
|
2,219,268
|
|
|
$
|
1.94
|
|
|
Exerciseable September 30, 2019
|
|
|
1,405,578
|
|
|
$
|
1.93
|
|
The aggregate intrinsic value for options outstanding and options exercisable at September 30, 2019 was $3,107,958 and $1,985,062, respectively. The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last day of trading during the year, which was $3.35 per share, and the exercise price multiplied by the number of applicable options. The total intrinsic value of stock options exercised during the year ended September 30, 2019 was $638,140 and proceeds from these exercises was $756,513. The total intrinsic value of stock options exercised during the year ended September 30, 2018 was $752,729 and cash received from these exercises was $2,434,888. The Company recognized $638,140 and $752,729 as a tax benefit in the income tax provision for the years ended September 30, 2019 and 2018, respectively.
The following table summarizes information about stock options outstanding at September 30, 2019:
Range of
Exercise Prices
|
|
|
Number Outstanding
|
|
|
|
Weighted Average Remaining
Contractural Life
|
|
|
|
Weighted Average
Exercise
Price
|
|
|
|
Number
Exercisable
|
|
|
|
Weighted
Avrage
Exercise
Price
|
|
|
$1.31
|
-
|
$1.76
|
|
|
637,876
|
|
|
|
3.25
|
|
|
$
|
1.65
|
|
|
|
576,155
|
|
|
$
|
1.64
|
|
|
$1.86
|
-
|
$1.86
|
|
|
160,142
|
|
|
|
3.21
|
|
|
$
|
1.86
|
|
|
|
160,142
|
|
|
$
|
1.86
|
|
|
$1.99
|
-
|
$1.99
|
|
|
1,125,000
|
|
|
|
3.84
|
|
|
$
|
1.99
|
|
|
|
375,000
|
|
|
$
|
1.99
|
|
|
$2.02
|
-
|
$1.99
|
|
|
296,250
|
|
|
|
2.07
|
|
|
$
|
2.49
|
|
|
|
294,281
|
|
|
$
|
2.50
|
|
|
|
|
|
|
|
2,219,268
|
|
|
|
3.39
|
|
|
$
|
1.95
|
|
|
|
1,405,578
|
|
|
$
|
1.94
|
|
The Company recorded $264,146 and $308,435 of stock option compensation expense for employees, directors and consultants for the years ended September 30, 2019, and 2018, respectively.
The amounts of share-based compensation expense for restricted stock units and stock options are classified in the Consolidated Statements of Operations as follows:
|
|
|
Year ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Cost of revenues
|
|
$
|
15,792
|
|
|
$
|
21,388
|
|
|
Selling, general, and administrative
|
|
|
665,295
|
|
|
|
479,165
|
|
|
Research and development
|
|
|
53,916
|
|
|
|
84,320
|
|
|
|
|
$
|
735,003
|
|
|
$
|
584,873
|
|
15. STOCKHOLDERS’ EQUITY
Common Stock Activity
During the year ended September 30, 2019, the Company issued 406,151 shares of common stock and obtained gross proceeds of $756,513 in connection with the exercise of stock options. During the year ended September 30, 2018, the Company issued 1,179,456 shares of common stock and obtained gross proceeds of $2,434,887 in connection with the exercise of stock options. During the year ended September 30, 2019, the Company issued 156,115 of shares of common stock upon full vesting of RSUs. During the year ended September 30, 2018, the Company issued 125,000 of shares of common stock upon full vesting of RSUs.
Preferred Stock
The Company is authorized under its certificate of incorporation and bylaws to issue 5,000,000 shares of preferred stock, $0.00001 par value, without any further action by the stockholders. The board of directors has the authority to divide any and all shares of preferred stock into series and to fix and determine the relative rights and preferences of the preferred stock, such as the designation of series and the number of shares constituting such series, dividend rights, redemption and sinking fund provisions, liquidation and dissolution preferences, conversion or exchange rights and voting rights, if any. Issuance of preferred stock by the board of directors could result in such shares having dividend and or liquidation preferences senior to the rights of the holders of common stock and could dilute the voting rights of the holders of common stock.
No shares of preferred stock were outstanding during the fiscal years ended September 30, 2019 or 2018.
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, under which the Company was authorized to repurchase up to $5 million of its outstanding common shares. The previous program expired on December 31, 2018.
During the year ended September 30, 2019, 788,425 shares were repurchased for $2,171,022. During the year ended September 30, 2018, 286,746 shares were repurchased for $725,445. At September 30, 2019, all repurchased shares were retired.
16. NET INCOME (LOSS) PER SHARE
Basic earnings per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period increased to include the number of dilutive potential common shares outstanding during the period. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method, which assumes that the proceeds from the exercise of the outstanding options are used to repurchase common stock at market value. Under the treasury stock method, an increase in the fair market value of the Company’s common stock can result in a greater dilutive effect from potentially dilutive securities. If the Company has losses for the period, the inclusion of potential common stock instruments outstanding would be anti-dilutive. In addition, under the treasury stock method, the inclusion of stock options with an exercise price greater than the per-share market value would be antidilutive. Potential common shares that would be antidilutive are excluded from the calculation of diluted income per share.
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
Year ended
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Net income (loss)
|
|
$
|
2,784,992
|
|
|
$
|
(3,745,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
$
|
0.09
|
|
|
$
|
(0.12
|
)
|
|
Diluted income (loss) per share
|
|
$
|
0.08
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
32,689,028
|
|
|
|
32,492,645
|
|
|
Assumed exercise of dilutive options
|
|
|
708,067
|
|
|
|
-
|
|
|
Weighted average shares outstanding - diluted
|
|
|
33,397,095
|
|
|
|
32,492,645
|
|
|
|
|
|
|
|
|
|
|
|
|
Potentially diluted securities outstanding at period end excluded from diluted computation as the inclusion would have been antidilutive:
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
573,750
|
|
|
|
3,394,858
|
|
|
RSU
|
|
|
-
|
|
|
|
218,330
|
|
|
Total
|
|
|
573,750
|
|
|
|
3,613,188
|
|
17. 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: LRAD and Genasys Spain and its principle markets are North and South America, Europe, Middle East and Asia. As reviewed by the Company’s chief operating decision maker, the Company evaluates the performance of each segment based on sales and operating income. Cash and cash equivalents, marketable securities, accounts receivable, inventory, property and equipment, deferred tax assets, goodwill and intangible assets are primary assets identified by segment. The accounting policies for segment reporting are the same for the Company as a whole and transactions between the two operating segments are not material.
The following table presents the Company’s segment disclosures:
For the year ended September 30, 2019:
|
|
|
Revenue from
External Customers
|
|
|
Intercompany
Revenues
|
|
|
Operating
Income
|
|
|
Depreciation and amortization expense
|
|
|
Interest
Expense
|
|
|
Income Tax
Expense
|
|
|
LRAD
|
|
$
|
34,931,448
|
|
|
$
|
-
|
|
|
$
|
3,097,498
|
|
|
$
|
517,081
|
|
|
$
|
-
|
|
|
$
|
572,200
|
|
|
Genasys Spain
|
|
|
2,047,607
|
|
|
|
907,785
|
|
|
|
38,867
|
|
|
|
307,808
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
36,979,055
|
|
|
$
|
907,785
|
|
|
$
|
3,136,365
|
|
|
$
|
824,889
|
|
|
$
|
-
|
|
|
$
|
572,200
|
|
|
|
|
|
Long-lived assets
|
|
|
Total Assets
|
|
|
LRAD
|
|
|
$
|
2,283,344
|
|
|
$
|
42,470,356
|
|
|
Genasys Spain
|
|
|
$
|
3,467,546
|
|
|
$
|
4,649,627
|
|
|
|
|
|
$
|
5,750,890
|
|
|
$
|
47,119,983
|
|
For the year ended September 30, 2018:
|
|
|
Revenue from
External Customers
|
|
|
Intercompany
Revenues
|
|
|
Operating
Income (loss)
|
|
|
Depreciation and amortization expense
|
|
|
Interest
Expense
|
|
|
Income Tax
Expense
|
|
|
LRAD
|
|
$
|
24,836,795
|
|
|
$
|
-
|
|
|
$
|
(1,387,902
|
)
|
|
$
|
254,618
|
|
|
$
|
-
|
|
|
$
|
2,375,000
|
|
|
Genasys Spain
|
|
|
1,469,995
|
|
|
|
313,110
|
|
|
|
(88,563
|
)
|
|
|
228,469
|
|
|
|
20,949
|
|
|
|
-
|
|
|
|
|
$
|
26,306,790
|
|
|
$
|
313,110
|
|
|
$
|
(1,476,465
|
)
|
|
$
|
483,087
|
|
|
$
|
20,949
|
|
|
$
|
2,375,000
|
|
|
|
|
Long-lived assets
|
|
|
Total Assets
|
|
|
LRAD
|
|
$
|
2,478,144
|
|
|
$
|
36,770,872
|
|
|
Genasys Spain
|
|
|
3,973,917
|
|
|
|
5,089,925
|
|
|
|
|
$
|
6,452,061
|
|
|
$
|
41,860,797
|
|
18. MAJOR CUSTOMERS, SUPPLIERS AND RELATED INFORMATION
Major Customers
For the fiscal year ended September 30, 2019, revenues from two customers accounted for 37% and 10% of total revenues with no other single customer accounting for more than 10% of total revenues. For the fiscal year ended September 30, 2018, revenues from one customer accounted for 20% of total revenues with no other single customer accounting for more than 10% of total revenues.
The following table summarizes revenues by geographic region. Revenues are attributed to countries based on customer’s delivery location.
|
|
|
Years ended September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Americas
|
|
$
|
27,981,225
|
|
|
$
|
16,488,624
|
|
|
Europe, Middle East, and Africa
|
|
|
2,420,106
|
|
|
|
3,238,533
|
|
|
Asia Pacific
|
|
|
6,577,724
|
|
|
|
6,579,633
|
|
|
|
|
$
|
36,979,055
|
|
|
$
|
26,306,790
|
|
Suppliers
The Company has a large number of components and sub-assemblies produced by outside suppliers, some of which are sourced from a single supplier, which can magnify the risk of shortages and decrease the Company’s ability to negotiate with suppliers on the basis of price. In particular, the Company depends on one supplier of compression drivers for its LRAD products. If supplier shortages occur, or quality problems arise, then production schedules could be significantly delayed or costs significantly increased, which could in turn have a material adverse effect on the Company’s financial condition, results of operation and cash flows.