Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The discussion and analysis set forth below should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included under Item 1 of this Quarterly Report on Form 10-Q, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended September 30, 2020.
Forward Looking Statements
This report contains certain statements of a forward-looking nature relating to future events or future performance. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the only means of identifying forward-looking statements. Prospective investors are cautioned that such statements are only predictions and actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider various factors identified in this report and any matters set forth under Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K, which could cause actual results to differ materially from those indicated by such forward-looking statements.
Overview
Genasys Inc. is a global provider of critical communications hardware and software solutions designed to help keep people safe. Our unified platform encompasses a multi-channel approach to deliver alerts, notifications, instructions and information before, during and after public safety and enterprise threats, critical events and other crisis situations.
Our multi-channel approach includes:
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LRAD® (Long Range Acoustic Device®), the world’s leading Acoustic Hailing Device (“AHD”), projects sirens and audible voice messages with exceptional vocal clarity in a 30° beam from close range to 5,500 meters.
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•
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GEM™ (Genasys Emergency Management) is our unified software platform for cloud, on-premise or hybrid operations that supports 2-way communications and seamlessly integrates with physical systems to initiate life-safety actions in defined geographic areas. GEM receives and manages simultaneous inputs from panic buttons, government agency or weather alert feeds, sensor events from digital thermometers, access control, fire panels, camera systems, and more. Using the information derived from the inputs, GEM delivers alerts and notifications on multiple channels, including SMS, MMS, desktop, laptop, tablet and smartphone pop-ups, social media, VoIP, callouts, public address, overhead displays, digital signs, tickers, RSS feeds and email on any platform.
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•
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Integrated Mass Notification Solutions span multiple hardware and software notification channels to reach at risk individuals and populations. These solutions include Genasys voice arrays, which project sirens and audible voice messages 60° - 360° with industry-leading vocal clarity from close range to more than 14 square kilometers, and GEM software designed to deliver SMS, text, email and social media alerts to people at risk 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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The Company’s critical communication systems are being used in 72 countries throughout the world in a range of diverse applications, including public safety, emergency warning, mass notification, defense, law enforcement, critical event management, and many more. We continue to develop new communication innovations and believe we have significant competitive advantages in our principal markets.
LRAD systems represent 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 systems 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. The LRAD product line is comprised of a full range of AHDs and communication solutions - from portable devices to permanently installed, remotely operated systems. We continue to expand into new markets and add new models and features to meet customer requirements.
Building on the success of our LRAD systems, we designed and developed our multidirectional Genasys mass notification product line. Unlike siren-only installations, our public safety mass notification (“PSMN”) hardware 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.
GEM is our cloud, on-premise or hybrid based software notification platform that enables emergency personnel, first responders, municipalities, companies, educational institutions and government agencies to send public safety warnings and notifications to the mobile devices and desktop computers of individuals or populations in specific geographic areas with reliability, speed and ease. Alerts and notifications can be sent from a desktop or our mobile applications.
Genasys offers the only unified critical communications platform that provides multi-modal, geo-targeted mobile device alerts and speaker arrays that deliver audible messages with industry-leading vocal clarity and area coverage. Our user-friendly software interface and mobile application manages and delivers notifications and information to people at risk, before, during and after crisis situations.
Business developments in the fiscal quarter ended December 31, 2020:
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Closed Amika Mobile asset purchase and rebranded its business as Genasys Communications Canada
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•
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Announced $7.7 million in U.S. defense orders
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•
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Awarded U.S. Navy SBIR program research and development project
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•
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Received $1.6 million in international law enforcement, homeland security and mass notifications orders
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•
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Recognized in Gartner 2020 Market Guide for Emergency/Mass Notification Services Solutions
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Revenues for the Company’s first quarter of fiscal 2020, were $8.0 million, a decrease from $8.8 million in the first quarter of fiscal 2019. LRAD AHD revenues decreased $680 thousand and integrated mass notification solutions decreased $293 thousand, while software revenue increased $219 thousand, compared to the first quarter of the prior year. The timing of budget cycles, government financial issues and military conflict in certain areas of the world, often delay contract awards, resulting in uneven quarterly revenues. Gross profit decreased compared to the same quarter in the prior year as a result of lower sales, higher software engineering expenses and additional engineering charges resulting from a more precise process to allocate engineering expenses to cost of sales. Operating expenses increased 12.6% from $3.9 million to $4.4 million in the quarter ended December 31, 2020, as compared to the same period a year ago. We reported a net loss of $619 thousand for the first quarter of fiscal 2021, or a loss of $0.02 per share, compared to net income of $620 thousand, or income of $0.02 per share, for the same quarter in the prior year.
Overall Business Outlook
Our product line-up continues to gain worldwide awareness and recognition through media exposure, 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 systems and integrated solutions, 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 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.
The proliferation of natural disasters, crisis situations and civil unrest 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 mass messaging software, Genasys seeks to deliver reliable, fast and intuitive solutions 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 for LRAD systems and advanced emergency warning notification solutions. We have a reputation for producing quality products that feature industry-leading 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 multi-channel 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 by opening sales offices in key regions and adding strategic 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 2021, 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 2020 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. In addition to the matters above, we are authorized for the performance of services and provision of goods pursuant to the Delaware General Corporation Law.
In March 2020, the World Health Organization ("WHO") classified the COVID-19 outbreak as a pandemic. While the impact of the COVID-19 pandemic did not have a material adverse effect on our financial position or results of operations for the three months ended December 31, 2020, we have been monitoring the developments and assessing areas where there is potential for our business to be impacted. A significant portion of our sales force is working remotely, which could, among other things, negatively impact our ability to engage in sales-related initiatives, or efficiently conduct day-to-day operations. Other businesses and governments with which we engage are likely operating under similar restrictions and experiencing disruptions, which may create obstacles in the coordination of business activities, including the negotiation and fulfillment of orders. Disruptions in the supply chain could negatively impact our ability to source materials or manufacture and distribute products. While we do not currently anticipate a material reduction in demand for our commercialized products, we could experience a decrease in new orders, which could negatively impact our revenues and reduce our liquidity and cash flows. Growth in revenue could also be impeded by these factors. The financial markets have been subject to significant volatility that could impact our ability to enter into, modify, and negotiate favorable terms and conditions relative to equity and debt financing activities. We have $19.6 million in cash and cash equivalents as of December 31, 2020, which we believe provides sufficient capital to fund our operations for at least the next twelve months and withstand the potential near-term consequences of the pandemic, although liquidity constraints and access to capital markets could adversely impact our liquidity and warrant changes to our investment strategy. While we have not yet experienced a material impact, the full magnitude of the pandemic cannot be measured at this time, and therefore, any of the aforementioned circumstances, as well as other factors, may cause our results of operations to vary substantially from year to year and quarter to quarter.
Based on various standards published to date, we believe the work our associates perform is critical, essential and life sustaining. We are taking a variety of measures to promote the safety and security of our employees while ensuring the availability and functionality of our critical infrastructure. We are following Center for Disease Control guidelines to reduce the transmission of COVID-19, such as the imposition of travel restrictions, cancellation of events, the promotion of social distancing, the adoption of work-from-home arrangements, and limiting access to our facilities. Some or all of these policies and initiatives could impact our operations. In addition, the following events related to the COVID-19 pandemic could result in lost or delayed revenue to the Company: limitations on the ability of our suppliers to meet delivery requirements and commitments; limitations on the ability of our employees to perform their work due to illness caused by the pandemic, or local, state or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver our products to customers; unforeseen deviations from customers or foreign governments restricting the ability to do business; and, limitations on the ability of our customers to pay us on a timely basis, if at all.
A large number of components and sub-assemblies produced by outside suppliers within our supply chain are produced within 50 miles of our facility. We source a small amount of component parts from suppliers in China. It is also likely that some of our suppliers source parts in China. We are in contact with those suppliers and evaluating what impact, if any, may result from COVID-19.
Critical Accounting Policies
We have identified a number of accounting policies as critical to our business operations and the understanding of our results of operations. These are described in our consolidated financial statements located in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, 2020. The impact and any associated risks related to these policies on our business operations is discussed below and throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results.
The methods, estimates and judgments we use in applying our accounting policies, in conformity with U.S. generally accepted accounting principles, have a significant impact on the results we report in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The estimates affect the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Comparison of Results of Operations for the Three Months Ended December 31, 2020 and 2019 (in thousands)
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Three Months Ended
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December 31, 2020
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December 31, 2019
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% of
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% of
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Total
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Total
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Fav(Unfav)
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Amount
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Revenue
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Amount
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Revenue
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Amount
|
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%
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Revenues:
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|
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Product sales
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$
|
6,950
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86.6
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%
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$
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8,008
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|
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91.2
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%
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$
|
(1,058
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)
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(13.2%
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)
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Contract and other
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1,078
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13.4
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%
|
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|
774
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|
|
|
8.8
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%
|
|
|
304
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|
|
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39.3
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%
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Total revenues
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8,028
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|
|
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100.0
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%
|
|
|
8,782
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|
|
|
100.0
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%
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(754
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)
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|
(8.6%
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)
|
|
|
|
|
|
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|
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|
|
|
|
|
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|
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|
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Cost of revenues
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4,324
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53.9
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%
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4,180
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47.6
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%
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(144
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)
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(3.4%
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)
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Gross Profit
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3,704
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46.1
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%
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|
4,602
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52.4
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%
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|
(898
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)
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(19.5%
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)
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|
|
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|
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Operating expenses
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Selling, general and administrative
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3,331
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41.5
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%
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2,822
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32.1
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%
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|
(509
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)
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(18.0%
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)
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Research and development
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1,066
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13.3
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%
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|
1,084
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|
|
|
12.3
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%
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|
18
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|
|
|
1.7
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%
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Total operating expenses
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|
4,397
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|
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|
54.8
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%
|
|
|
3,906
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|
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|
44.5
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%
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|
(491
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)
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(12.6%
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)
|
|
|
|
|
|
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|
|
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|
|
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|
|
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|
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(Loss) income from operations
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(693
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)
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(8.6%
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)
|
|
|
696
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|
|
|
7.9
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%
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|
(1,389
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)
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|
(199.6%
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)
|
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|
|
|
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|
|
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|
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|
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|
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Other income
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69
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|
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0.9
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%
|
|
|
96
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|
|
|
1.1
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%
|
|
|
(27
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)
|
|
|
(28.1%
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(Loss) income before income taxes
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(624
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)
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|
(7.8%
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)
|
|
|
792
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|
|
|
9.0
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%
|
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|
(1,416
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)
|
|
|
(178.8%
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)
|
Income tax (benefit) expense
|
|
|
(5
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)
|
|
|
(0.1%
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)
|
|
|
172
|
|
|
|
2.0
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%
|
|
|
177
|
|
|
|
102.9
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%
|
Net (loss) income
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|
$
|
(619
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)
|
|
|
(7.7%
|
)
|
|
$
|
620
|
|
|
|
7.1
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%
|
|
$
|
(1,239
|
)
|
|
|
(199.8%
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Hardware
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|
$
|
7,389
|
|
|
|
92.0
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%
|
|
$
|
8,362
|
|
|
|
95.2
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%
|
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|
(973
|
)
|
|
|
(11.6%
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)
|
Software
|
|
|
639
|
|
|
|
8.0
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%
|
|
|
420
|
|
|
|
4.8
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%
|
|
|
219
|
|
|
|
52.1
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%
|
Total net revenue
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|
$
|
8,028
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|
|
|
100.0
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%
|
|
$
|
8,782
|
|
|
|
100.0
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%
|
|
$
|
(754
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)
|
|
|
(8.6%
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)
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The tables above set forth for the periods indicated certain items of our condensed consolidated statements of operations expressed in dollars and as a percentage of net revenues. The financial information and the discussion below should be read in conjunction with the condensed consolidated financial statements and notes contained in this report.
Revenues
Revenues decreased $754 or 8.6%, compared to the same quarter in the prior year. LRAD AHD revenues decreased $680 and integrated mass notification solutions decreased $293, while software revenue increased $219, compared to the prior year quarter. Lower revenue in the first quarter of fiscal 2021 was largely due to the delay of a ready-to-ship order because the customer-required payment was not received prior to the quarter end. This shipment subsequently was shipped early in the fiscal second quarter. Software revenue was higher primarily due to increased professional services performed on recent orders. The receipt of orders is often uneven due to the timing of government budgets or approvals. At December 31, 2020, we had aggregate deferred revenue of $851 for extended warranty obligations and software support agreements.
Gross Profit
The decrease in gross profit compared to the same period in the prior year was primarily due to lower hardware revenue, an 86% increase in software engineering personnel over last year and additional engineering charges resulting from a more precise process to charge engineering expenses to cost of sales in the current fiscal year. Higher software expenses were due primarily to the recent addition of Amika Mobile (through our Canadian subsidiary Genasys Communications Canada), and additional employees to support the Australia, EU and enterprise software initiatives.
As our products have varying gross margins, 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. We have limited warranty cost experience with product updates and changes 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 $509, or 18.0%, over the prior year quarter. The increase was largely due to a 50% increase in sales and marketing personnel over the prior year to support future revenue growth opportunities.
We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three-months ended December 31, 2020 and 2019 of $171 and $143, 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, including the June 2022 European Union Mandate for Public Warning Systems and the new enterprise software services from our recent business combination. Commission expenses will fluctuate based on the nature of our sales.
Research and Development Expenses
Research and development expenses increased $18, essentially unchanged compared to the same quarter in the prior year.
Included in research and development expenses for the three months ended December 31, 2020 and 2019, was $6 and $11, respectively, of non-cash share-based compensation costs.
Research and development costs vary period to period due to the timing of projects, and the timing and extent of using outside consulting, design and development firms. We continually improve our product offerings, and we expect to continue to expand our product line with new products, customizations and enhancements. Based on current plans, we may expend additional resources on research and development in the current year compared to the prior year.
Net Loss/Income
Net loss in the first quarter of fiscal year 2021 was $619, a decrease of $1,239, compared to net income in the first quarter of fiscal year 2020. The decrease was primarily due to the lower revenue and increased operating expenses resulting from additional engineering, sales and marketing employees.
Liquidity and Capital Resources
Cash and cash equivalents at December 31, 2020 was $19,584, down $3,735 compared to $23,319 at September 30, 2020, primarily due to the Amika Mobile asset purchase. We had short-term marketable securities of $5,517 at December 31, 2020, compared to $4,265 at September 30, 2020. We had long-term marketable securities of $2,419 at December 31, 2020, compared to $3,805 at September 30, 2020. Other than cash and cash equivalents, short and long-term marketable securities, other working capital and expected future cash flows from operating activities in subsequent periods, we have no unused sources of liquidity at this time.
Principal factors that could affect our liquidity include:
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ability to meet sales projections;
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•
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government spending levels;
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•
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introduction of competing technologies;
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•
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product mix and effect on margins;
|
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•
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ability to reduce current inventory levels;
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•
|
product acceptance in new markets;
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•
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value of shares repurchased; and
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•
|
value of dividends declared.
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Principal factors that could affect our ability to obtain cash from external sources include:
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•
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volatility in the capital markets; and
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•
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market price and trading volume of our common stock.
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Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the twelve-month period subsequent to the issuance of the interim financial information. However, we operate in a rapidly evolving and unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that we may not be required to raise additional funds through the sale of equity or debt securities or from credit facilities. Additional capital, if needed, may not be available on satisfactory terms, or at all.
Cash Flows
Our cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows, are summarized in the table below:
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|
Three months ended
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
1,272
|
|
|
$
|
(1,781
|
)
|
Investing activities
|
|
|
(4,264
|
)
|
|
|
(137
|
)
|
Financing activities
|
|
|
54
|
|
|
|
144
|
|
Operating Activities
Net loss of $619 for the three months ended December 31, 2020 was increased by $667 of net non-cash items that included depreciation and amortization, share-based compensation, operating ROU asset amortization, warranty provision, inventory obsolescence, and both realized and unrealized loss on a foreign currency forward contract. Cash used by operating activities in the quarter reflected an increase in inventory of $1,114 due to a fiscal first quarter customer order that was not shipped until the fiscal second quarter, and a net decrease of $314 in accrued and other liabilities primarily for payment of incentive compensation earned in fiscal year 2020, offset by increased customer deposits. Cash provided by operating activities included a decrease in accounts receivable of $2,300 due to lower fiscal first quarter revenue compared to shipments in the fourth quarter of fiscal year 2020, lower prepaid expenses and other of $120, and an increase in accounts payable of $232.
Net income of $620 for the three months ended December 31, 2019 was increased by $759 of non-cash items that included a reduction to deferred income taxes, share-based compensation, depreciation and amortization, warranty provision and inventory obsolescence. Cash used by operating activities in the quarter reflected an increase in accounts receivable of $2,286 due to higher sales with net credit terms in the quarter compared to the fourth quarter of fiscal 2019, a decrease in payroll and related of $1,008, primarily for payment of incentive compensation earned in fiscal 2019, and lower accrued and other liabilities of $907, largely due to a decrease in customer deposits resulting from shipments in the quarter and an increase of $321 in inventory to support the backlog. Cash provided by operating activities included a decrease in prepaid expenses and other of $761, and an increase in accounts payable of $604.
We had accounts receivable of $3,159 at December 31, 2020, compared to $5,442 at September 30, 2020. Terms with individual customers vary greatly. We regularly provide thirty-day terms to our customers if credit is approved. Our receivables can vary dramatically due to overall sales volume, quarterly variations in sales, timing of shipments to and receipts from large customers, payment terms, and the timing of contract payments.
At December 31, 2020 and September 30, 2020, our working capital was $25,603 and $29,796 respectively. The decrease in working capital was primarily due to the use of cash to complete the Amika Mobile asset purchase in the first quarter of fiscal year 2021.
Investing Activities
Our net cash used in investing activities was $4,264 for the three months ended December 31, 2020, compared to cash used in investing activities of $137 for the three months ended December 31, 2019. In the first quarter of fiscal 2021, $4,367 was used for the Amika Mobile asset purchase. In addition, we decreased our holdings of short and long-term marketable securities by $132, compared to an increase of $51 in the three months ended December 31, 2019. Cash used in investing activities for the purchase of property and equipment was $29 and $86 for the three months ended December 31, 2020 and 2019, respectively. We anticipate some additional expenditures for tooling and equipment during the balance of fiscal year 2021.
Financing Activities
In the three months ended December 31, 2020, proceeds from the exercise of stock options provided $54 of cash, compared to proceeds from stock options of $144 for the three months ended December 31, 2019.
In December 2018, the Board of Directors approved a share buyback program beginning January 1, 2019, under which the Company was authorized to repurchase up to $5 million of its outstanding common shares. During the quarters ended December 31, 2020 and 2019 no shares were repurchased. At December 31, 2020, all repurchased shares were retired and $4.1 million was available for share repurchase under this program. In December 2020, the board extended this program’s expiration date to December 31, 2022.
Recent Accounting Pronouncements
New pronouncements issued for future implementation are discussed in Note 3, Recent Accounting Pronouncements, to our condensed consolidated financial statements.