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EX-21.1 - EXHIBIT 21.1 - Genasys Inc.ex_216276.htm
EX-4.1 - EXHIBIT 4.1 - Genasys Inc.ex_216642.htm
 

 



 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended September 30, 2020

 

Commission File Number 0-24248

 

logo.jpg

 


GENASYS INC.

(Exact name of registrant as specified in its charter)


 

DELAWARE

87-0361799

(State or other jurisdiction of

Incorporation or organization)

(I.R.S. Employer

Identification No.)

   

16262 West Bernardo Drive,

San Diego, California

92127

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (858) 676-1112

 


SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.00001 par value per share

GNSS

NASDAQ Capital Market

 

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☐    No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ☐    No  ☒

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer ☐

 

Accelerated filer                    ☐

Non-accelerated filer ☒

 

Smaller reporting company   ☒

Emerging growth company   ☐

 

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

 

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

 

 

 

The aggregate market value of the voting common stock held by nonaffiliates of the registrant as of March 31, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter) was $79,088,779 based upon the closing price of the shares on the NASDAQ Capital Market on that date. This calculation does not reflect a determination that such persons are affiliates for any other purpose.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

 

33,567,443 shares of common stock, par value $0.00001 per share, as of December 7, 2020.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement filed with the Commission pursuant to Regulation 14A in connection with the registrant’s 2020 Annual Meeting of Stockholders, to be filed subsequent to the date of this report, are incorporated by reference into Part III of this report. The definitive proxy statement will be filed with the Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended September 30, 2020.

 



 

 

 

 

 

TABLE OF CONTENTS

 

 

 

Page 

PART I

ITEM 1.

Business

1

ITEM 1A.

Risk Factors

9

ITEM 1B.

Unresolved Staff Comments

18

ITEM 2.

Properties

18

ITEM 3.

Legal Proceedings

18

ITEM 4.

Mine Safety Disclosures

18

 

PART II

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

19

ITEM 6.

Selected Financial Data

20

ITEM 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk

28

ITEM 8.

Financial Statements and Supplementary Data

28

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

28

ITEM 9A.

Controls and Procedures

28

ITEM 9B.

Other Information

29

 

PART III

ITEM 10.

Directors, Executive Officers and Corporate Governance

30

ITEM 11.

Executive Compensation

30

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

30

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

30

ITEM 14.

Principal Accounting Fees and Services

30

 

PART IV

ITEM 15.

Exhibits, Financial Statement Schedules

31

 

Consolidated Financial Statements

F-1

 

Signatures

S-1

 

 

 

 
 

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 Genasys Inc. and its consolidated subsidiaries.

 

 

Item 1.

Business. 

 

Overview 

 

On October 23, 2019, LRAD Corporation announced its rebranding as Genasys Inc. to better reflect the Company’s business of providing 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 threats, critical events and other crisis situations.

 

Our multi-channel approach includes:

 

 

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;

 

 

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;

 

 

Integrated Mass Notification Solutions span multiple hardware and software notification channels to reach the people at risk. 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.

 

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.

 

1

 

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 or on-premise or hybrid based software notification platform that enables emergency personnel, first responders, municipalities, companies and 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.

 

Technology and Products 

 

Our 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.

 

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. 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 product line provides a complete range of solutions from 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 Genasys multidirectional mass notification product line. Unlike most sirens, 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 Genasys mass notifications systems. To date, we have incorporated our XL driver technology into the LRAD 450XL, LRAD 1950XL, LRAD 950RXL, Genasys DS-60XL, Genasys 360XL, and Genasys 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 

 

 

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. 

 

 

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. In 2018, the U.S. Army National Guard selected the LRAD 100X MAG_HS Kit to replace technologically outdated bullhorns and speakers.

 

 

LRAD 450XL—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. The LRAD 450XL is designed to provide an effective communication solution for small vessels, military and law enforcement vehicles, and helicopters. In 2019, after extensive testing, the U.S. Army (“Army”) awarded the Company a $20.2 million LRAD 450XL systems and accessories order to meet the Army’s critical communications and scalable escalation of force requirements. Follow-on orders totaling $14.5 million were received from the Army in the fiscal year ended September 30, 2020.

     
  LRAD 500X-RE—is our mid-sized AHD for applications ranging from fixed security installations to vehicles and vessels. The LRAD 500X-RE provides law enforcement, homeland security, and defense personnel unparalleled long-range communication. The U.S. Navy and U.S. Army have deployed LRAD 500X-RE systems to meet critical communications and scalable escalation of force requirements.

 

2

 

 

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 Company’s remotely operated pan and tilt system with our enhanced XL driver technology.

 

 

LRAD 1000Xi—selected by the U.S. Navy in 2020 to replace legacy LRADs on 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. 

 

 

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 out to 5,000 meters, the LRAD 1950XL is designed primarily for defense, border, and critical infrastructure security applications.

 

 

LRAD 2000X—designed to meet the requirements of larger security applications—is our largest AHD. Broadcasting highly intelligible voice communications over distances out to 5,500 meters, the LRAD 2000X unit is designed primarily for perimeter and border security applications.

 

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. 

 

PSMN Hardware Systems:

 

 

Genasys DS-60X/DS-60XL—a mounted horn system for areas that require 60° - 360° mass notification coverage. The Genasys DS-60XL 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 Genasys DS-60XL horn in the ring array can be operated independently, providing customizable mass notification area coverage.

 

 

Genasys 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 Genasys 360XL also uses our patented XL driver technology and is available in several emitter configurations. The Company’s Command and Control software, the Compact Control Cabinet provides flexible PSMN system command and control via TCP/IP, WiFi, Fiber, GPRS/GSM, or satellite.

 

 

Genasys 360XL-MID—designed for urban areas, small campuses, industrial sites, and government & defense facilities, the Genasys 360XL-MID can be installed on existing infrastructure or mounted on a tripod.

 

 

Genasys 360XL-MID Mobile Kit—self-contained solution for operations requiring advanced mobile mass notification. The kit contains XL driver technology emitters, a power amplifier in a ruggedized carrying case, hardened control module, all-weather push-to-talk mic, tripod, and other accessories. Rapidly deployable, the Genasys 360XL-MID Mobile Kit is designed for defense, homeland security, law enforcement, and mass notification applications.

 

 

Genasys 360XT—fully self-contained and self-powered, the Genasys 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 Genasys 360XT is integrated and mounted on a ruggedized trailer that features securely mounted, lockable electronics and equipment enclosures containing the amplifier modules and pneumatic systems. 

 

 

Genasys SoundSaber®-X—next generation Genasys SoundSaber mass notification line array speakers. The Genasys SoundSaber-X ("Genasys 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 16 dB more than the previous generation Genasys SS400. The Genasys 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 Genasys SS-X provides unobtrusive installation for many types of mass notification and public address applications. 

 

3

 

Our Genasys voice arrays feature industry-leading speech and intelligibility and area coverage. Systems can be installed independent of existing infrastructure with battery operation, Internet Protocol or satellite connectivity and with AC/Solar power charging systems. The battery capacity follows industry guidelines. Our solar power and satellite connectivity are designed to ensure system operation when existing power or communication infrastructure fails. Our voice arrays also have battery backup designed to power 48 hours of continuous operation.

 

Genasys Emergency Management (GEM) Software:

 

Our unified software platform for cloud, on-premises or hybrid operations, supports 2-way communications and is designed to seamlessly integrate with physical systems to initiate life-safety actions. 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.

 

Integrated Mass Notification Solutions:

 

By integrating our industry-leading voice broadcast products with GEM 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 GEM software platform is designed to integrate with external inputs and sensors that provide platform operators the critical data needed 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 Genasys voice arrays 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.

 

COVID 19 

 

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 year ended September 30, 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 $23.3 million in cash and cash equivalents as of September 30, 2020, which we believe provides sufficient capital to fund our operations for at least the next twelve months and withstand the anticipated 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.

 

4

 

 Strategy 

 

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, which we continue to expand to serve new markets and customers for greater business growth.  We believe we have strong market opportunities for our product offerings throughout the world in the defense, public safety, emergency warning, mass notification, critical event management and law enforcement sectors as a result of increasing threats to government, commerce, law enforcement, homeland security 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 disturbances require technologically advanced, multi-channel solutions to deliver clear and timely critical communications to help keep the public safe during emergencies and crisis situations. Businesses are also incorporating communication systems that locate and help safeguard employees when critical events occur.

 

By providing the only unified platform that combines highly intelligible voice broadcast systems and alerting 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 help keep the public and employees safe.

 

Genasys has developed a global market and an increased demand for LRAD AHD systems and advanced mass 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, system integrators and prime vendors. We have built a worldwide distribution channel consisting of partners and resellers that have significant expertise and experience selling integrated communication solutions into our various target markets. As our primary AHD sales opportunities are with domestic and international governments, military 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 the pursuit of 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 governments that desire to integrate our communication technologies into their homeland security and public safety systems. This includes building on fiscal 2020 domestic defense sales by pursuing further U.S. military opportunities. We also plan to pursue emergency warning, enterprise and critical event management, 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 emergency warning, enterprise and critical event management software solutions to meet the needs of our target markets. Our Genasys PSMN voice broadcast 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, Genasys DS-60XL, Genasys 360XL and Genasys 360XL-MID.

 

Our Genasys PSMN systems and GEM 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 software solutions to compete for larger emergency warning and PSMN 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 also plan to pursue mass notification, emergency warning, critical event management, government, law enforcement, fire rescue, homeland and international security, private and commercial security, border security, maritime security, and wildlife preservation and control business initiatives and opportunities.

 

5

 

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. The Company moved to a new facility with expanded engineering and manufacturing capacity in 2018 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 working to obtain alternative suppliers to reduce such reliance. The Company’s ability to manufacture its 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, Missouri, Wisconsin, Canada, Singapore and Spain, as well as through full-time business consultants in Texas and Germany. Our corporate and administrative offices are located in San Diego, California. 

 

We sell directly to governments, militaries, large end-users, and commercial 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 government and other large direct customers. In addition, we utilize part-time consultants with expertise in various 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, 2020, we had one customer accounting for 63% of revenues, with no other single customer accounting for more than 10% of revenues. 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.

 

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 $16.6 million at September 30, 2020, compared to $27.0 million at September 30, 2019. 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. 

 

6

 

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 and mass notification markets are fragmented and include numerous manufacturers with 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, reliability 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 product line includes the leading long-range voice broadcast systems for military and other 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 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 and desktop devices and providing the only platform that unifies broadcast hardware systems and mass notification software solutions 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 area coverage 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. 

 

7

 

Financial Information about Segments and Geographic Areas 

 

Financial information regarding our segments and the geographic areas in which we operate is contained in Note 18, Segment Information, and Note 19, 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, 2020 and 2019, we spent approximately $4.6 million and $4.5 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 Genasys Inc. and their ages and business experience are set forth below. 

 

Richard S. Danforth, age 61, 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.

 

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Dennis D. Klahn, age 62, 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 is a certified public accountant in Illinois and 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. 

 

Human Capital 

 

At September 30, 2020, we employed a total of 105 people. We had 99 full-time employees of which 57 were located in the United States and 42 were located in Spain. Our full-time employees include, 41 in engineering, 24 in production, quality assurance and materials control, 13 in general and administrative and 21 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 and are not a party to a collective bargaining agreement.

 

We are dedicated to preserving operational excellence and remaining an employer of choice. We provide and maintain a work environment that is designed to attract, develop and retain top talent through offering our employees an engaging work experience that contributes to their career development. We recognize that our success is based on the collective talents and dedication of those we employ and we are highly invested in their success.

 

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.

 

Item 1A.

Risk Factors.

 

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.

 

Risks Related to Our Business and Industry

 

Global economic conditions related to the COVID_19 pandemic may negatively impact our financial conditions and results of operations.

 

We are monitoring the impact of the COVID-19 pandemic, which has caused a significant uncertainty and disruption to global financial markets and supply chains, beginning in early calendar year 2020. The significance of the operational and financial impact of the COVID-19 pandemic will depend on how long and widespread the uncertainty and disruption continues. The extent to which the COVID-19 pandemic impacts our financial conditions and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the outbreak and the actions being taken to contain and treat it. Uncertainty around the duration and broader impact of the COVID-19 pandemic and therefore, the effects it will have on our financial results and operations. If economic or market conditions in key global markets deteriorate, we may experience material adverse effects on our business, financial condition and results from operations.

 

Factors deriving from the domestic and international response to the COVID-19 pandemic that may negatively impact sales and gross margin in the future include but are not limited to: limitations on the ability of our suppliers to meet delivery requirements and commitments; limitations on the ability of 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 products to customers; limitations on the ability of our customers to conduct their business and purchase our products and services; and limitations on the ability of our customers to pay us on a timely basis.

 

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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:

 

 

failure of sales to government, military and commercial markets to meet planned projections;

 

 

government spending levels impacting sales of our products;

 

 

political uncertainty;

 

 

foreign currency fluctuations;

 

 

working capital requirements to support business growth;

 

 

our ability to control spending;

 

 

our ability to integrate future acquisitions;

 

 

management of new business opportunities;

 

 

introduction of new competing technologies;

 

 

product mix and effect on margins;

 

 

acceptance of our existing and future products in existing and new markets; and

 

 

impact of COVID-19 on global market conditions.

 

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 2020, we had one customer that accounted for 63% 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. Any tightening of credit in financial markets may adversely affect 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.

 

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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 2020, direct and indirect sales to the U.S. government accounted for approximately 64% of our total net sales, compared to 65% of our total net sales in fiscal year 2019 and 49% in fiscal year 2018. 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:

 

 

our ability to design and manufacture reliable products that have the features that are required by our customers;

 

 

the global economy;

 

 

our ability to expand relationships with existing customers and to develop relationships with new customers that will lead to additional orders for our products;

 

 

our ability to develop and expand new markets for directed sound products, mobile mass messaging services and integrated solutions; and

 

 

our ability to develop international product distribution directly or through strategic partners.

 

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.

 

On January 18, 2018, we acquired all of the issued and outstanding shares of capital stock of Genasys Holding S.L. (“Genasys Spain”) and on October 2, 2020, we acquired substantially all of the assets and business of Amika Mobile Corporation (“Amika Mobile”). 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, including Genasys Spain and Amika Mobile, as well as other businesses we may acquire in the future. We may not realize the intended benefits of the Genasys Spain or Amika Mobile acquisitions or the acquisition of other businesses in the future as rapidly as, or to the extent, anticipated by our management. There can be no assurance that we will be able to successfully integrate the Genasys Spain or Amika Mobile businesses or any other acquired businesses, products or technologies without substantial expenses, delays or other operational or financial problems. Acquisitions, including our acquisition of Genasys Spain and Amika Mobile, 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 the Genasys Spain and Amika Mobile businesses or any other 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:

 

 

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;

 

 

difficulties in the assimilation of different corporate cultures, employees and business practices;

 

 

difficulties in conforming the acquired businesses’ accounting policies to ours;

 

 

retaining the loyalty and business of the employees or customers of acquired businesses;

 

 

retaining employees that may be vital to the integration of acquired businesses or to the future prospects of the combined businesses;

 

 

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;

 

 

costs and expenses associated with any undisclosed or potential liabilities;

 

 

the use of more cash or other financial resources on integration and implementation activities than we expect; and

 

 

our ability to avoid labor disruptions in connection with any integration, particularly in connection with any headcount reduction.

 

Failure to successfully integrate Genasys Spain, Amika Mobile or any other 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 Genasys Spain, Amika Mobile and any future businesses could result in the incurrence of additional debt and related interest expense, contingent liabilities, and amortization expenses related to intangible assets, as well as the issuance of our common stock, 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 products, which could cause our revenues to decline.

 

Potential customers for our 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 Genasys 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.

 

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Our margins could be impacted as we expand into the mass notification market.

 

Our sales strategy for fiscal year 2021 and beyond is to increase our market share of the growing public safety mass notification market with our LRAD and Genasys broadcast systems, GEM 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, 2020, we had a warranty reserve of $0.1 million. While our warranty experience with our 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 cyberattacks 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. 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 $0.6 million at September 30, 2020. 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.

 

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.

 

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Adverse resolution of disputes, litigation and claims may harm our business, operating results or financial condition.

 

We may become a party to 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 2020 and 2019, revenues outside of the U.S. accounted for approximately 24% and 30% 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:

 

 

changes in tariff regulations;

 

 

political instability, war, terrorism and other political risks;

 

 

foreign currency exchange rate fluctuations;

 

 

establishing and maintaining relationships with local distributors and dealers;

 

 

lengthy shipping times and accounts receivable payment cycles;

 

 

import and export control and licensing requirements, particularly in connection with sales and licensing to foreign governments and other customers;

 

 

compliance with a variety of U.S. laws, including the Foreign Corrupt Practices Act, by us or key subcontractors;

 

 

compliance with a variety of foreign laws and regulations, including unexpected changes in taxation and regulatory requirements;

 

 

greater difficulty in safeguarding our technology, proprietary data and intellectual property in international jurisdictions than in the U.S.; and

 

 

difficulty in staffing and managing geographically diverse operations.

 

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.

 

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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:

 

 

include provisions that allow the government agency to terminate the contract without penalty under some circumstances;

 

 

be subject to purchasing decisions of agencies that are subject to political influence;

 

 

contain onerous procurement procedures; and

 

 

be subject to cancellation if government funding becomes unavailable.

 

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.

 

15

 

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.

 

Risks Related to Our Financial Statements and Operating Results

 

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:

 

 

our ability to develop and supply sound reproduction components to customers, distributors or original equipment manufacturers (“OEMs”) or to license our technologies;

 

 

market acceptance of and changes in demand for our products or products of our customers;

 

 

gains or losses of significant customers, distributors or strategic relationships;

 

 

unpredictable volume and timing of customer orders;

 

 

delays in funding approval by U.S. and foreign government and military customers;

 

 

the availability, pricing and timeliness of delivery of components for our products and OEM products;

 

 

fluctuations in the availability of manufacturing capacity or manufacturing yields and related manufacturing costs;

 

 

the timing of new technological advances, product announcements or introductions by us, by OEMs or licensees and by our competitors;

 

 

production delays by customers, distributors, OEMs, or by us or our suppliers;

 

 

increased competition in this market;

 

 

the conditions of other industries, such as military and commercial industries, into which our technologies may be sold;

 

 

general electronics industry conditions, including changes in demand and associated effects on inventory and inventory practices;

 

 

general economic conditions that could affect the timing of customer orders and capital spending and result in order cancellations or rescheduling; and

 

 

general political conditions in this country and in various other parts of the world that could affect spending for the products that we offer.

 

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.

 

16

 

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.

 

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, 2020, 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.

 

Risks Related to Our Capital Stock

 

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.

 

17

 

Sales of common stock issuable on the exercise of outstanding options, may depress the price of our common stock.

 

As of September 30, 2020, we had outstanding options granted to our employees and directors to purchase 2,659,305 shares of our common stock and we had 303,014 restricted stock units outstanding. At September 30, 2020, the exercise prices for the options ranged from $1.31 to $3.40 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:

 

 

our anticipated or actual operating results;

 

 

developments concerning our sound reproduction technologies;

 

 

technological innovations or setbacks by us or our competitors;

 

 

announcements of merger or acquisition transactions;

 

 

changes in personnel within our company; and

 

 

other events or factors and general economic and market conditions.

 

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.

 

Item 1B.

Unresolved Staff Comments.

 

None.

 

Item 2.

Properties

 

Our executive offices, sales, research and development and production facilities are located at 16262 West Bernardo Drive, San Diego, California. The lease of 55,766 square feet commenced July 1, 2018 and expires August 31, 2028. The aggregate monthly payments, with abatements, are $77 thousand, $79 thousand, $81 thousand, $84 thousand, $86 thousand, $89 thousand, $92 thousand and $94 thousand per month for the third 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.

 

18

 

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, 2020 and 2019:

 

   

Sales Prices

 
   

High

   

Low

 

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  

Fiscal Year Ending September 30, 2020

               

First Quarter

  $ 3.84     $ 3.00  

Second Quarter

  $ 3.92     $ 2.01  

Third Quarter

  $ 6.10     $ 3.17  

Fourth Quarter

  $ 6.31     $ 3.90  

 

The above quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions.

 

Holders

 

We had 33,567,443 shares issued and outstanding held by 1,017 holders of record of our common stock at November 30, 2020.

 

Dividends

 

There were no dividends declared and paid during the years ended September 30, 2020 and 2019. 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

 

In December 2018, the Board of Directors approved a 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, 2020, $4.1 million was available for share repurchase under this program.

 

During the fiscal year ended September 30, 2020, 156,505 shares were repurchased for $0.4 million under this program. During the fiscal year ended September 30, 2019, 788,425 shares were repurchased for $2.2 million under the Company’s share repurchase programs. At September 30, 2020, all repurchased shares were retired.

 

19

 

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 Device®), the world’s leading Acoustic Hailing device projects sirens and audible voice messages with exceptional vocal clarity in a 30° beam from close range to 5,500 meters;

 

 

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, and;

 

 

Integrated Mass Notification Solutions span multiple hardware and software notification channels to reach people at risk. These solutions include Genasys PSMN systems, 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 for sending SMS, text, email and social media alerts to people at risk in defined geographic areas. Our integrated solutions are compatible with the FEMA‘s IPAWS and other major emergency warning protocols.

 

Our critical communications 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 established significant competitive advantages in our principal markets. 

 

Recent Developments 

 

In the fiscal year ended September 30, 2020, we accomplished the following: 

 

 

Awarded multi-year contracts from mobile network operators to power the delivery of emergency alerts in Australia

 

 

Received $14.5 million in LRAD 450XL systems and accessories orders from the U.S. Army to meet its critical communications and scalable escalation of force requirements

 

 

Announced the acquisition of enterprise software provider, Amika Mobile

 

 

Awarded $4.3 million U.S. Navy IDIQ contract

 

 

Received $4.2 million in international border, homeland security and critical infrastructure protection orders

     
  Announced $1.5 million in international naval and port security orders

 

20

 

 

Awarded $1.4 million in PSMN systems orders for Newport Beach and Laguna Beach, California

 

 

Received $1.4 million in orders for U.S. military and government agencies

 

 

Announced $1.2 million in defense and mass notification orders

 

 

Became an official IPAWS-OPEN software service provider

 

 

Partnered with Esri to enhance our unified critical communications platform

 

 

LRAD systems deployed by domestic and international public safety and law enforcement agencies for COVID-19 responses and crowd communications

 

 

Donated software service to help unify The Salvation Army Western Territory’s COVID-19 and disaster responses

 

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 Genasys PSMN hardware and GEM software 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 systems throughout the world in the law enforcement, defense and homeland security sectors as a result of increasing threats to government, commerce, 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 Genasys PSMN systems and advanced mass messaging solutions. In fiscal year 2020, we increased our global sales 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. Additionally, we utilize part-time consultants with expertise in various 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 2021 due to budget uncertainties and continuing economic, geopolitical and pandemic conditions in international regions and in the United States. 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 software and 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 hardware product line and mass messaging software 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 21 full-time business development and marketing personnel, which includes four business consultants. In addition, we utilized various part-time sales consultants with experience and knowledge in various government and defense sectors to assist with specific markets we are pursuing. Due to the COVID-19 pandemic, most domestic and international trade shows were either canceled or postponed until 2021. While the calendar 2021 outlook for in-person trade shows and industry gatherings is uncertain, we are planning to attend these events virtually and when possible, in-person. Commission expense will continue to 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. 

 

21

 

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, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and its amendments. We adopted the new standard using the full retrospective approach.

 

Topic 606 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized:

 

 

1.

Identify the contract(s) with customers

 

2.

Identify the performance obligations

 

3.

Determine the transaction price

 

4.

Allocate the transaction price to the performance obligations

 

5.

Recognize revenue when the performance obligations have been satisfied

 

   Topic 606 requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services.

 

We derive our revenue from the sale of products and services to customers, contracts, license fees, other services and freight. The Company sells its products and services 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.

 

22

 

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 (Hardware and Software) 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 18, Segment Information and Note 19, 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 Spain, 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.

 

Derivatives. We use derivative financial instruments to manage risk related to changes in foreign currency exchange rates. We do not hold derivative financial instruments of a speculative nature or for trading purposes. We record all derivatives on the consolidated balance sheet at fair value using available market information and other observable data. See Note 5, Fair Value Measurements for further discussion.

 

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.

 

23

 

We use the recognition criteria of ASC 450-20, “Loss Contingencies” to estimate the bonus amount 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: Hardware and Software and its principle markets are North and South America, Europe, Middle East and Asia. As reviewed by the Company’s chief operating decision maker, the Company evaluates the performance of each segment based on sales and operating income. Cash and cash equivalents, marketable securities, accounts receivable, inventory, property and equipment, deferred tax assets, goodwill and intangible assets are primary assets identified by segment. The accounting policies for segment reporting are the same for the Company as a whole and transactions between the two operating segments are eliminated in consolidation. Refer to Note 18, Segment Information, in our consolidated financial statements for further discussion.

 

24

 

Comparison of Results of Operations for Fiscal Years Ended September 30, 2020 and 2019

 

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, 2020

   

September 30, 2019

                 
   

(in thousands)

                 
           

% of Total

           

% of Total

   

Favorable (Unfavorable)

 
   

Amount

   

Revenue

   

Amount

   

Revenue

   

Amount

   

%

 

Revenues:

                                               

Product sales

  $ 39,509       91.9 %   $ 33,384       90.3 %   $ 6,125       18.3 %

Contract and other

    3,501       8.1 %     3,595       9.7 %     (94 )     (2.6 %)

Total revenues

    43,010       100.0 %     36,979       100.0 %     6,031       16.3 %
                                                 

Cost of revenues

    20,371       47.4 %     18,523       50.1 %     (1,848 )     (10.0 %)

Gross Profit

    22,639       52.6 %     18,456       49.9 %     4,183       22.7 %
                                                 

Operating expenses

                                               

Selling, general and administrative

    12,044       28.0 %     10,792       29.2 %     (1,252 )     (11.6 %)

Research and development

    4,554       10.6 %     4,528       12.2 %     (26 )     (0.6 %)

Total operating expenses

    16,598       38.6 %     15,320       41.4 %     (1,278 )     (8.3 %)
                                                 

Income from operations

    6,041       14.0 %     3,136       8.5 %     2,905       92.6 %
                                                 

Other income

    127       0.3 %     221       0.6 %     (94 )     (42.5 %)
                                                 

Income before income taxes

    6,168       14.3 %     3,357       9.1 %     2,811       83.7 %

Income tax (benefit) expense

    (5,706 )     (13.3 %)     572       1.5 %     6,278       1,097.6 %

Net income

  $ 11,874       27.6 %   $ 2,785       7.5 %   $ 9,089       326.4 %
                                                 

Net revenue

                                               

Hardware

  $ 41,412       96.3 %   $ 34,931       94.5 %   $ 6,481       18.6 %

Software

    1,598       3.7 %     2,048       5.5 %     (450 )     (22.0 %)

Total net revenue

  $ 43,010       100.0 %   $ 36,979       100.0 %   $ 6,031       16.3 %
                                                 

US v International revenue

                                               

US revenue

  $ 32,765       76.2 %   $ 26,047       70.4 %   $ 6,718       25.8 %

International revenue

    10,245       23.8 %     10,932       29.6 %     (687 )     (6.3 %)

Total net revenue

  $ 43,010       100.0 %   $ 36,979       100.0 %   $ 6,031       16.3 %

 

Revenues

 

Revenues increased $6.0 million, or 16.3%, in the fiscal year ended September 30, 2020. Higher backlog entering fiscal 2020, compared to the prior year and fiscal 2020 orders of $36.0 million contributed to higher revenue in fiscal 2020. LRAD AHD product revenue increased $9.2 million or 32.1% due to significant U.S. Army orders in backlog at the start of the fiscal year. Genasys PSMN product revenue decreased $3.2 million or 37.3% compared to fiscal year 2019. Domestic revenues increased 25.8% over the prior year while international revenues decreased 6.3% over the prior year. We had aggregate deferred revenue and prepayments from customers in advance of product shipment of $4.4 million and $5.6 million at September 30, 2020 and 2019, respectively. The receipt of orders will often be uneven due to the timing of customers’ approval or budget cycles.

 

Gross Profit

 

Gross profit for the year ended September 30, 2020 grew $4.2 million, or 22.7%, over fiscal year 2019, primarily due to increased revenue. Gross margin as a percentage of sales increased this year compared to the prior year primarily due to higher sales and manufacturing overhead expenses were lower as a percentage of sales.

 

25

 

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 $1.3 million, or 11.6%. The increase was primarily due to increases in employee related expenses of $1.1 million, sales and marketing expenses of $0.2 million and professional services of $0.4 million primarily offset by decreases in travel related expenses of $0.3 million.

 

We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses for fiscal 2020 and 2019 of $0.9 million and $0.7 million, 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 $26 thousand, or 0.6%, primarily due to employee related expenses offset by allocation of engineering expenses to cost of revenues.

 

Included in R&D expenses for the year ended September 30, 2020 was $20 thousand of non-cash share-based compensation expenses, compared to $54 thousand for the year ended September 30, 2019.

 

Other Income

 

Other income decreased by $94 thousand primarily due to a $76 thousand unrealized loss on a foreign currency forward contract.

 

Net Income

 

The net income of $11.9 million for fiscal 2020 was an improvement of $9.1 million over the net income in fiscal year 2019. Fiscal year 2020 had higher revenue and gross profit offset by smaller increase in operating expenses. Income tax expense increased $0.9 million due to higher net income, offset by a non-cash benefit of $7.1 million during the quarter ended September 30, 2020, which resulted from the release of a portion of the valuation allowance against deferred assets. Management assessed the Company’s historical and projected taxable income, along with any tax planning strategies and other positive or negative evidence, and determined it was more likely than not that a portion of the deferred tax assets will be realized. For additional details, refer to Note 13, Income Taxes, in our consolidated financial statements.

 

Liquidity and Capital Resources

 

Cash and cash equivalents at September 30, 2020 was $23.3 million, compared to $18.8 million at September 30, 2019. In addition, we had $4.3 million in short-term marketable securities at September 30, 2020, compared to $3.7 million at September 30, 2019 and long-term marketable securities of $3.8 million and $1.4 million at September 30, 2020 and 2019, respectively. We also had restricted cash of $0.7 million at each of September 30, 2020 and 2019. 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.

 

26

 

In December 2018, the Board of Directors approved a share buyback program beginning January 1, 2019, under which the Company is 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:

 

   

Twelve Months Ended

 
   

September 30, 2020

   

September 30, 2019

 
   

(in thousands)

 

Cash provided by (used in):

               

Operating activities

  $ 6,918     $ 9,855  

Investing activities

    (3,135 )     (610 )

Financing activities

    679       (1,485 )

 

Operating Activities

 

Net income of $11.9 million for the fiscal year ended September 30, 2020 included $2.8 million of non-cash items including share-based compensation expense, deferred income taxes, operating right of use lease amortization, unrealized loss on a foreign currency forward contract, depreciation and amortization, inventory obsolescence and a provision for warranty. Cash provided by operating activities reflected a $0.5 million increase in accounts payable and a $0.9 million decrease in prepaid expenses and other, which includes deposits paid on inventory purchases, prepaid rent and prepaid insurance, offset by a $1.8 million increase in accounts receivable that resulted from higher current year fiscal fourth quarter shipments, a $0.5 million increase in inventory and a $1.2 million decrease in accrued and other liabilities, which included customer deposits, accrued payroll, deferred revenue, and operating lease liabilities.

 

Net income of $2.8 million for the fiscal year ended September 30, 2019, included $2.3 million 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 $0.9 million increase in accounts receivable that resulted from higher current year fiscal fourth quarter shipments, a decrease of $2.2 million in accounts payable and a $5.6 million increase in accrued and other liabilities, which included customer deposits, deferred revenue, deferred rent and leasehold incentives. Cash provided by operating activities also reflected a decrease in inventory of $0.8 million and a decrease of $1.4 million for prepaid expenses and other, which included deposits paid on inventory purchases, prepaid rent, and prepaid insurance.

 

We had accounts receivable of $5.4 million and $3.6 million at September 30, 2020 and 2019, 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, 2020 and 2019, our working capital was $29.8 million and $24.8 million, 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, 2020, we used $8.1 million of cash to purchase short and long-term marketable securities, compared to using $4.5 million to purchase short and long-term marketable securities in the fiscal year ended September 30, 2019. In the fiscal year ended September 30, 2020, we had proceeds from maturities of available for sale marketable securities of $5.1 million compared to $4.2 million in fiscal year 2019.

 

We also used cash in investing activities primarily for the purchase of product tooling, computer equipment and leasehold improvements for our operating facility. Cash used for capital expenditures was $0.1 million and $0.3 million in the fiscal years ended September 30, 2020 and 2019, 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 2021 as we continue to invest in new products and technologies.

 

27

 

Financing Activities

 

In the years ended September 30, 2020 and 2019, we received proceeds from the exercise of stock options of $1.1 million and $0.7 million, respectively.

 

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 fiscal year ended September 30, 2020, the Company repurchased 156,505 shares at an average price per share of $2.54 for a total cost of $0.4 million. During the fiscal 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 $2.2 million. As of September 30, 2020, all repurchased shares were retired.

 

Commitments

 

We are committed for our facility lease through August 30, 2028, as more fully described in Note 12, Leases, in 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, 2020 and 2019, the Company accrued $1.6 million and $1.3 million 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.

 

28

 

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, 2020 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, 2020 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, 2020.

 

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, 2020, 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

 

29

 

PART III

 

Certain information required by this Part III is omitted from this report and is incorporated by reference to our Definitive Proxy Statement to be filed with the SEC in connection with the Annual Meeting of Stockholders to be held in 2021 (the “Proxy Statement”).

 

Item 10.

Directors, Executive Officers and Corporate Governance.

 

The information with respect to our executive officers is set forth in the section entitled “Executive Officers” in Part I of this Annual Report on Form 10-K. The information required by this item with respect to our directors and corporate governance matters is incorporated by reference to the information under the captions “Election of Directors”, “Board and Committee Matters and Corporate Governance Matters” and "Delinquent Section 16(a) Reports" contained in Proxy Statement.

 

Item 11.

Executive Compensation.

 

The information required by this item is incorporated by reference to the information in the Proxy Statement under the caption “Executive Compensation.”

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The information required by this item is incorporated by reference to the information in the Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

 

The information required by this item is incorporated by reference to the information in the Proxy Statement under the captions “Certain Transactions” and “Independence of the Board of Directors.”

 

Item 14.

Principal Accounting Fees and Services.

 

The information required by this item is incorporated by reference to the Proxy Statement, under the heading “Principal Accountant Fees and Services.”

 

30

 

PART IV

 

Item 15.

Exhibits, Financial Statement Schedules.

 

Index to Consolidated Financial Statements

 

The financial statements required by this item are submitted in a separate section beginning on page F-1 of this annual report.

 

Financial Statement Schedules:

 

None.

 

Exhibits:

 

The following exhibits are incorporated by reference or filed as part of this report.  

 

3.

Articles of Incorporation and Bylaws

 

 

3.1

Certificate of Incorporation dated March 1, 1992. Incorporated by reference to Exhibit 2.1 on Form 10-SB effective August 1, 1994.

 

 

3.1.1

Amendment to Certificate of Incorporation dated March 24, 1997 and filed with Delaware on April 22, 1997. Incorporated by reference to Exhibit 3.1.1 on Form 10-QSB for the quarter ended March 31, 1997, dated May 13, 1997.

 

 

3.1.2

Certificate of Amendment to Certificate of Incorporation filed with Delaware on September 26, 2002. Incorporated by reference to Exhibit 3.1.6 on Form 10-K for the year ended September 30, 2002, dated December 23, 2002.

 

 

3.1.3

Amendment to Certificate of Incorporation dated March 24, 2010. Incorporated by reference to Exhibit 3.1 on Form 8-K dated March 31, 2010.

 

 

3.1.4

Amendment to Certificate of Incorporation dated January 6, 2020. Incorporated by reference to Exhibit 3.1 on Form 8-K dated January 13, 2020.

 

 

3.2

Restated Bylaws. Incorporated by reference to Exhibit 3.1 on Form 10-Q for the quarter ended March 31, 2006, dated May 10, 2006.

 

 

4.

Instruments Defining the Rights of Securities Holders

 

 

4.1

Description of the Securities of the Registrant*

 

 

10.

Material Contracts

 

 

10.1

American Technology Corporation 2005 Equity Incentive Plan (as Amended March 15, 2007). Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 14, 2007.+

 

 

10.2

Form of Stock Option Agreement under the 2005 Equity Incentive Plan for grants on or after August 5, 2005. Incorporated by reference to Exhibit 10.11 on Form 10-Q for the quarter ended June 30, 2005 dated August 9, 2005.+

 

 

10.3

Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.1 on Form 8-K filed June 27, 2013.

 

 

10.4

LRAD Corporation Amended and Restated 2015 Equity Incentive Plan. Incorporated by reference to Exhibit 10.1 on Form 8-K filed March 16, 2017.+

 

 

10.5

Form of Stock Award Agreement under the Amended and Restated 2015 Equity Incentive Plan. Incorporated by reference to Exhibit 10.2 on Form 8-K filed March 24, 2015.+

 

 

10.6

Form of Restricted Stock Unit Award Agreement For Non-Employee Directors under the Amended and Restated 2015 Equity Incentive Plan. Incorporated by reference to Exhibit 10.2 on Form 8-K filed March 16, 2017.+

 

 

10.7

Form of Restricted Stock Unit Award Agreement For Employees under the Amended and Restated 2015 Equity Incentive Plan. Incorporated by reference to Exhibit 10.8 on Form 10-K for the year ended September 30, 2018, dated December 21,2018.+

 

 

10.8

Employment Agreement, dated August 1, 2016, by and among LRAD Corporation and Richard Danforth. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. Incorporated by reference to Exhibit 10.1 on Form 8-K filed August 3, 2016.+

 

 

10.9

Employment Offer Letter, dated September 18, 2017, between LRAD Corporation and Dennis Klahn. Incorporated by reference to Exhibit 10.1 on Form 8-K filed on September 21, 2017.+

 

31

 

21.

Subsidiaries of the Registrant

 

 

21.1

Subsidiaries of the Registrant.*

 

 

23.

Consents of Experts and Counsel

 

 

23.1

Consent of Baker Tilly US, LLP.*

 

 

24.

Power of Attorney

 

 

24.1

Power of Attorney. Included on signature page.*

 

 

31.

Certifications

 

 

31.1

Certification of Richard S. Danforth, Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

31.2

Certification of Dennis D. Klahn, Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

32.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Richard S. Danforth, Principal Executive Officer, and Dennis D. Klahn, Principal Financial Officer.*

 

 

99.

Additional Exhibits

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 


*

Filed herewith.

+

Management contract or compensatory plan or arrangement.

 

32

 

 

Genasys Inc. 

Index to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm

F-1

Consolidated Balance Sheets as of September 30, 2020 and 2019

F-2

Consolidated Statements of Operations for the Years Ended September 30, 2020 and 2019

F-3

Consolidated Statements of Comprehensive Loss for the Years Ended September 30, 2020 and 2019

F-3

Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2020 and 2019

F-4

Consolidated Statements of Cash Flows for the Years Ended September 30, 2020 and 2019

F-5

Notes to the Consolidated Financial Statements

F-7 – F-29

 

F-i

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Genasys Inc.:

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Genasys Inc. (the Company) as of September 30, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Change in Accounting Principle

 

As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for leases in fiscal year 2020 due to the adoption of Accounting Standards Codification Topic 842, Leases.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ BAKER TILLY US, LLP

 

We have served as the Company's auditor since 2007.

 

 

 

San Diego, California

December 9, 2020

 

F-1

 

 

 

Genasys Inc. 

Consolidated Balance Sheets

(in thousands, except par value and share amounts)

 

   

September 30,

 
   

2020

   

2019

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 23,319     $ 18,819  

Short-term marketable securities

    4,265       3,695  

Restricted cash

    282       263  

Accounts receivable, net

    5,442       3,644  

Inventories, net

    5,949       5,835  

Prepaid expenses and other

    6,065       1,782  

Total current assets

    45,322       34,038  
                 

Long-term marketable securities

    3,805       1,385  

Long-term restricted cash

    395       435  

Deferred tax assets, net

    11,095       5,387  

Property and equipment, net

    1,930       2,269  

Goodwill

    2,472       2,306  

Intangible assets, net

    943       1,176  

Operating lease right of use asset

    5,285       -  

Other assets

    125       124  

Total assets

  $ 71,372     $ 47,120  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Accounts payable

  $ 1,370     $ 860  

Accrued liabilities

    13,085       8,134  

Notes payable, current portion

    300       280  

Operating lease liabilities, current portion

    771       -  

Total current liabilities

    15,526       9,274  
                 

Notes payable, less current portion

    18       33  

Other liabilities, noncurrent

    293       2,432  

Operating lease liabilities, noncurrent

    6,395       -  

Total liabilities

    22,232       11,739  
                 

Stockholders' equity:

               

Preferred stock, $0.00001 par value; 5,000,000 shares authorized; none issued and outstanding

    -       -  

Common stock, $0.00001 par value; 50,000,000 shares authorized; 33,561,544 and 32,949,987 shares issued and outstanding, respectively

    -       -  

Additional paid-in capital

    91,248       89,572  

Accumulated deficit

    (41,858 )     (53,732 )

Accumulated other comprehensive loss

    (250 )     (459 )

Total stockholders' equity

    49,140       35,381  

Total liabilities and stockholders' equity

  $ 71,372     $ 47,120  

 

See accompanying notes

 

F-2

 

 

 

Genasys Inc. 

Consolidated Statements of Operations

(in thousands, except per share amounts)

 

   

Years Ended September 30,

 
   

2020

   

2019

 

Revenues:

               

Product sales

    39,509       33,384  

Contract and other

    3,501       3,595  

Total revenues

    43,010       36,979  

Cost of revenues

    20,371       18,523  
                 

Gross Profit

    22,639       18,456  
                 

Operating expenses

               

Selling, general and administrative

    12,044       10,792  

Research and development

    4,554       4,528  

Total operating expenses

    16,598       15,320  
                 

Income from operations

    6,041       3,136  
                 

Other income

    127       221  
                 

Income before income taxes

    6,168       3,357  

Income tax (benefit) expense

    (5,706 )     572  

Net income

  $ 11,874     $ 2,785  
                 

Net income per common share:

               

Basic

  $ 0.36     $ 0.09  

Diluted

  $ 0.35     $ 0.08  

Weighted average common shares outstanding:

               

Basic

    33,220,915       32,689,028  

Diluted

    34,092,328       33,397,095  

 

 

 

Genasys Inc. 

Consolidated Statements of Comprehensive Income

(in thousands)

 

   

Years Ended September 30,

 
   

2020

   

2019

 

Net income

  $ 11,874     $ 2,785  

Other comprehensive income

               

Unrealized gain (loss) on marketable securities

    (4 )     20  

Unrealized foreign currency gain (loss)

    213       (234 )

Comprehensive income

  $ 12,083     $ 2,571  

 

See accompanying notes

 

F-3

 

 

Genasys Inc. 

Consolidated Statements of Stockholders’ Equity

(in thousands, except par value and share amounts)

 

                                   

Accumulated

         
                   

Additional

           

Other

   

Total

 
   

Common Stock

   

Paid-in

   

Accumulated

   

Comprehensive

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

Deficit

   

Loss

   

Equity

 

Balance at September 30, 2018

    33,176,146     $ 332     $ 90,251     $ (56,517 )   $ (246 )   $ 33,488  
                                                 

Share-based compensation expense

    -       -       735       -       -       735  

Issuance of common stock upon exercise of stock options, net

    406,151       4       757       -       -       757  

Issuance of common stock upon vesting of restricted stock units

    156,115       2       -       -       -       -  

Stock buyback

    (788,425 )     (8 )     (2,171 )     -       -       (2,171 )

Other comprehensive loss

    -       -       -       -       (213 )     (213 )

Net income

    -       -       -       2,785       -       2,785  

Balance at September 30, 2019

    32,949,987     $ 330     $ 89,572     $ (53,732 )   $ (459 )   $ 35,381  
                                                 

Share-based compensation expense

    -       -       980       -       -       980  

Issuance of common stock upon exercise of stock options, net

    583,019       6       1,136       -       -       1,136  

Issuance of common stock upon vesting of restricted stock units

    198,106       2       -       -       -       -  

Shares retained for payment of taxes in connection with net share settlement of restricted stock units

    (13,063 )     -       (42 )     -       -       (42 )

Stock buyback

    (156,505 )     (2 )     (398 )     -       -       (398 )

Other comprehensive income

    -       -       -       -       209       209  

Net income

    -       -       -       11,874       -       11,874  

Balance at September 30, 2020

    33,561,544     $ 336     $ 91,248     $ (41,858 )   $ (250 )   $ 49,140  

 

See accompanying notes

 

F-4

 

 

 

Genasys Inc. 

Consolidated Statements of Cash Flows

(in thousands)

 

   

Years Ended September 30,

 
   

2020

   

2019

 

Operating Activities:

               

Net income

  $ 11,874     $ 2,785  
                 

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    800       825  

Provision for doubtful accounts

    4       (23 )

Warranty provision

    16       85  

Inventory obsolescence

    407       128  

Unrealized loss on foreign currency forward contract

    76       -  

Share-based compensation

    980       735  

Deferred income taxes

    (5,708 )     570  

Amortization of operating lease right of use asset

    599       -  

Changes in operating assets and liabilities:

               

Accounts receivable, net

    (1,775 )     (855 )

Inventories, net

    (521 )     771  

Prepaid expenses and other

    927       1,359  

Accounts payable

    477       (2,095 )

Accrued and other liabilities

    (1,238 )     5,570  

Net cash provided by operating activities

    6,918       9,855  
                 

Investing Activities:

               

Purchases of marketable securities

    (8,056 )     (4,495 )

Proceeds from maturities of marketable securities

    5,061       4,228  

Capital expenditures

    (140 )     (343 )

Net cash used in investing activities

    (3,135 )     (610 )
                 

Financing Activities:

               

Proceeds from exercise of stock options

    1,136       703  

Repurchase of common stock

    (398 )     (2,171 )

Shares retained for payment of taxes in connection with settlement of restricted stock units

    (42 )     -  

Payments on promissory notes

    (17 )     (17 )

Net cash provided by (used in) financing activities

    679       (1,485 )

Effect of foreign exchange rate on cash

    17       (49 )

Net increase in cash, cash equivalents and restricted cash

    4,479       7,711  

Cash, cash equivalents and restricted cash, beginning of period

    19,517       11,806  

Cash, cash equivalents and restricted cash, end of period

  $ 23,996     $ 19,517  
                 

Reconciliation of cash, cash equivalents and restricted cash to the consolidated

               

balance sheets:

               

Cash and cash equivalents

  $ 23,319     $ 18,819  

Restricted cash, current portion

    282       263  

Long-term restricted cash

    395       435  

Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows

  $ 23,996     $ 19,517  

 

See accompanying notes

 

F-5

 

Genasys Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

   

Years Ended September 30,

 
   

2020

   

2019

 

Supplemental disclosures of cash flow information:

               

Interest paid

  $ -     $ 3  
                 

Noncash investing and financing activities:

               

Change in unrealized gain (loss) on marketable securities

  $ (4 )   $ 20  

Initial measurement of operating lease ROU assets

  $ 5,824     $ -  

Initial measurement of operating lease liabilities

  $ 7,815     $ -  

 

F-6

 

Genasys Inc.

Notes to the Consolidated Financial Statements

(in thousands, except per share and share amounts)

 

 

1. OPERATIONS

 

Genasys Inc. (formerly LRAD® Corporation), a Delaware corporation (the “Company”), is engaged in the design, development and commercialization of directed and multidirectional sound technologies, voice broadcast products, and location-based mass messaging solutions for emergency warning and workforce management. The principal markets for the Company’s proprietary sound reproduction technologies, voice broadcast products and mass messaging solutions are in North and South America, Europe, Middle East and Asia.

 

 

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

PRINCIPLES OF CONSOLIDATION

 

The Company has five wholly owned subsidiaries, Genasys II Spain, S.A.U (“Genasys Spain”), Genasys Communications Canada ULC, Genasys Singapore PTE Ltd 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, 2020, accounts receivable from two customers accounted for 36% and 24% of total accounts receivable with no other single customer accounting for more than 10% of the accounts receivable balance. 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.

 

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, 2020 and 2019, the amount of cash and cash equivalents was $23,319 and $18,819.

 

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, 2020 and 2019, the amount of restricted cash was $677 and $698, 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 income. The realized gains and losses on marketable securities are determined using the specific identification method.

 

F-7

 

ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

The Company carries accounts receivable at historical cost, less an allowance for doubtful accounts. On a periodic basis, the Company evaluates 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 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, 2020 or 2019 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, 2020 and 2019, the Company had an allowance for doubtful accounts of $130 and $127, 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 2020 and 2019, 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 $37 during the year ended September 30, 2020 for parts and demo equipment that may not be utilized. The Company also increased its inventory reserve by $134 during the year ended September 30, 2019 for parts and demo equipment that may not be utilized.

 

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.

 

F-8

 

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, 2020. Refer to Note 8, Goodwill and Intangible Assets for more information.

 

LEASES

 

The Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases (“Topic 842”) in the fiscal year beginning October 1, 2019. In accordance with the guidance in Topic 842, the Company recognizes lease liabilities and corresponding right-of-use-assets for all leases with terms of greater than 12 months. Leases with a term of 12 months or less will be accounted for in a manner similar to the guidance for operating leases prior to the adoption of Topic 842. Refer to Note 3, Recent Accounting Pronouncements and Note 12, Leases 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 $259 and $278 for the fiscal years ended September 30, 2020 and 2019, respectively. Actual revenues from shipping and handling were $241 and $279 for the fiscal years ended September 30, 2020 and 2019, respectively.

 

ADVERTISING

 

Advertising costs are charged to expense as incurred and were $263 and $157 for the years ended September 30, 2020 and 2019, respectively.

 

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 $126 and $150 at September 30, 2020 and 2019, 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 13, Income Taxes.

 

F-9

 

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 years ended September 30, 2020 and September 30, 2019. Refer to Note 8, Goodwill and Intangible Assets for information related to 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: Hardware and Software and its principle markets are North and South America, Europe, Middle East and Asia. As reviewed by the Company’s chief operating decision maker, the Company evaluates the performance of each segment based on sales and operating income. Cash and cash equivalents, marketable securities, accounts receivable, inventory, property and equipment, deferred tax assets, goodwill and intangible assets are primary assets identified by segment. The accounting policies for segment reporting are the same for the Company as a whole and transactions between the two operating segments are eliminated in consolidation. Refer to Note 18, Segment Information, for additional information.

 

NET INCOME PER SHARE

 

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net 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 17, Net Income Per Share, for additional information.

 

DERIVATIVES 

 

The Company uses derivative financial instruments to manage its risk related to changes in foreign currency exchange rates and interest rates. The Company does not hold derivative financial instruments of a speculative nature or for trading purposes. The Company records all derivatives on the Consolidated Balance Sheet at fair value using available market information and other observable data. See Note 5, Fair Value Measurements, 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 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 gain for the period was $213 resulting from transactions between Genasys U.S. and Genasys Spain, the timing of transactions in relation to changes in exchange rates and the increase in the exchange rate between the Euro and the U.S. dollar.

 

SHARE-BASED COMPENSATION

 

The Company recognized share-based compensation expense related to qualified and non-qualified stock options issued to employees, directors and consultants 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 15, Share-based Compensation, for additional information.

 

RECLASSIFICATIONS

 

Where necessary, the prior year’s information has been reclassified to conform to the fiscal year 2020 statement presentation. These reclassifications had no effect on previously reported results of operations or accumulated deficit.

 

F-10

 

SUBSEQUENT EVENTS

 

Management evaluates events subsequent to September 30, 2020 through the date the accompanying consolidated financial statements are filed with the Securities and Exchange Commission. Refer to Note 20, Subsequent Events for further information.

 

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

 

New pronouncements pending adoption

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance by requiring recognition of credit losses when it is probable that a loss has been incurred. The new standard requires the establishment of an allowance for estimated credit losses on financial assets including trade and other receivables at each reporting date. The new standard will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842), which extends the effective date of Topic 326 for certain companies until fiscal years beginning after December 15, 2022. The new standard will be effective for the Company in the first quarter of fiscal year beginning October 1, 2023, and early adoption is permitted. The Company has not completed its review of the impact of this standard on its consolidated financial statements. However, based on the Company’s history of immaterial credit losses from trade receivables, management does not expect that the adoption of this standard will have a material effect on the Company’s consolidated financial statements.

 

In August 2018the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which improves fair value disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements and adding relevant disclosure requirements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted, and an entity can choose to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The Company has not completed its review of the impact of this standard on its consolidated financial statements.

 

New pronouncements adopted

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 replaced most existing revenue recognition guidance in U.S. generally accepted accounting principles. In July 2015, the FASB deferred the effective date of the standard by an additional year; however, it provided companies the option to adopt one year earlier, commensurate with the original effective date. Accordingly, the standard was effective for the Company in the fiscal year beginning October 1, 2018. Subsequently the FASB has issued additional guidance (ASU Nos, 2015-14; 2016-08; 2016-10; 2016-12; 2016-13; 2016-20). The adoption of this guidance by the Company, effective October 1, 2018, did not have a material impact on the Company’s consolidated financial statements (see Note 4, Revenue Recognition, for further detail). ASU No. 2014-09 and its amendments form Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”).

 

In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this update also require certain disclosures about stranded tax effects. The guidance was effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including interim periods within that fiscal year. Accordingly, this was effective for the Company beginning October 1, 2019. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.

 

In February 2016, the Company adopted Topic 842, which issued new guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. Leases with a term of 12 months or less will be accounted for in a manner similar to the guidance for operating leases prior to the adoption of Topic 842. Topic 842 requires entities to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available. In July 2018, the FASB issued ASU No. 2018-11, which offers a practical expedient that allows entities the option to apply the provisions of Topic 842 by recognizing a cumulative effect adjustment at the effective date of adoption without adjusting the prior comparative periods presented. In March 2019, the FASB issued ASU 2019-01, which explicitly provides disclosure relief for interim periods during the year the standard is adopted.

 

F-11

 

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

 

 

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 Topic 842 to short-term leases.

 

As a result of adopting Topic 842 effective October 1, 2019, the Company recorded an initial measurement of $7,815 of operating lease liabilities and $5,824 of corresponding operating Right of Use (“ROU”) assets, net of tenant improvement allowances and deferred rent, primarily related to the Company’s facility lease. There was no other impact from the adoption of Topic 842. A portion of the existing leases are denominated in currencies other than the U.S. dollar. As a result, the associated lease liabilities will be remeasured using the current exchange rate in the applicable reporting periods, which may result in foreign exchange gains or losses. There was no cumulative effect adjustment to retained earnings as a result of the transition to Topic 842. See Note 12, Leases for further disclosures related to Topic 842.

 

 

4. REVENUE RECOGNITION

 

The Company adopted ASU 2014-09 and its amendments on October 1, 2018. We adopted the new standard using the full retrospective approach.

 

Topic 606 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized:

 

 

1.

Identify the contract(s) with customers

 

2.

Identify the performance obligations

 

3.

Determine the transaction price

 

4.

Allocate the transaction price to the performance obligations

 

5.

Recognize revenue when the performance obligations have been satisfied

 

   Topic 606 requires revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services.

 

The Company derives its revenue from the sale of products to customers, contracts, license fees, other services and freight. The Company sells its products through its direct sales force and through authorized resellers and system integrators. The Company recognizes revenue for goods including software when all the significant risks and rewards have been transferred to the customer, no continuing managerial involvement usually associated with ownership of the goods is retained, no effective control over the goods sold is retained, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transactions will flow to the Company and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Software license revenue, maintenance and/or software development service fees may be bundled in one arrangement or may be sold separately.

 

Product Revenue

 

Product revenue is recognized as a distinct single performance obligation when products are tendered to a carrier for delivery, which represents the point in time that 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.

 

F-12

 

Time-based licensed software

 

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

 

Warranty, maintenance and services

 

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

 

Multiple element arrangements

 

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

 

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

 

The Company disaggregates revenue by reporting segment (Hardware and Software) and geographically to depict the nature of revenue in a manner consistent with our business operations and to be consistent with other communications and public filings. Refer to Note 18, Segment Information and Note 19, Major Customers, Suppliers and Related Information for additional details of revenues by reporting segment and disaggregation of revenue.

 

Contract Assets and Liabilities

 

The Company enters into contracts to sell products and provide services and recognizes contract assets and liabilities that arise from these transactions. The Company recognizes revenue and corresponding accounts receivable according to ASC 606 and, at times, recognizes revenue in advance of the time when contracts 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 reflects the balance of contract liabilities as of September 30, 2020 and September 30, 2019, including the change between the periods. There were no contract assets as of September 30, 2020 and September 30, 2019. The current portion of contract liabilities and the non-current portion are included in “Accrued liabilities” and “Other liabilities, noncurrent”, respectively, on the accompanying Consolidated Balance Sheets. Refer to Note 10, Accrued Liabilities for additional details.

 

F-13

 

The Company’s contract liabilities are as follows:

 

   

Customer

deposits

   

Deferred

revenue

   

Total contract

liabilities

 

Balance at September 30, 2019

  $ 5,063     $ 1,060     $ 6,123  

New performance obligations

    7,089       962       8,051  

Recognition of revenue as a result of satisfying performance obligations

    (8,469 )     (1,022 )     (9,491 )

Effect of exchange rate on deferred revenue

    -       24       24  

Balance at September 30, 2020

  $ 3,683     $ 1,024     $ 4,707  

Less: non-current portion

    -       (293 )     (293 )

Current portion at September 30, 2020

  $ 3,683     $ 731     $ 4,414  

 

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, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $4,707. The Company expects to recognize revenue on approximately $4,414 or 94% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter.

 

Practical Expedients 

 

In cases where the Company is responsible for shipping after the customer has obtained control of the goods, the Company has elected to treat these activities as fulfillment activities rather than as a separate performance obligation. Additionally, the Company has elected to capitalize the cost to obtain a contract only if the period of amortization would be longer than one year. The Company only gives consideration to whether a customer agreement has a financing component if the period of time between transfer of goods and services and customer payment is greater than one year. The Company also utilizes the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value 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, foreign currency forward contract and accounts payable. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

 

 

Level 1:

Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

 

 

Level 2:

Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.

 

 

Level 3:

Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

 

The fair value of the 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, 2020 and 2019.

 

F-14

 

Instruments Measured at Fair Value on a Recurring Basis

 

Cash equivalents and marketable securities: The following tables present the Company’s cash equivalents and marketable securities’ costs, gross unrealized gains and losses, and fair value by major security type recorded as cash equivalents or short-term or long-term marketable securities as of September 30, 2020 and 2019. Unrealized gains and losses from the remeasurement of marketable securities are recorded in accumulated other comprehensive income (loss) until recognized in earnings upon the sale or maturity of the security.

 

   

September 30, 2020

 
   

Cost Basis

   

Unrealized

Gain

   

Fair Value

   

Cash

Equivalents

   

Short-term

Securities

   

Long-term

Securities

 

Level 1:

                                               

Money Market Funds

  $ 365     $ -     $ 365     $ 365     $ -     $ -  
                                                 

Level 2:

                                               

Certificates of deposit

    1,195       -       1,195       -       -       1,195  

Municipal securities

    3,777       4       3,781       -       2,432       1,350  

Corporate bonds

    3,091       3       3,094       -       1,833       1,260  

Subtotal

    8,063       7       8,070       -       4,265       3,805  
                                                 

Total

  $ 8,428     $ 7     $ 8,435     $ 365     $ 4,265     $ 3,805  

 

 

   

September 30, 2019

 
   

Cost Basis

   

Unrealized

Gain

   

Fair Value

   

Cash

Equivalents

   

Short-term

Securities

   

Long-term

Securities

 

Level 1:

                                               

Money Market Funds

  $ 276     $ -     $ 276     $ 276     $ -     $ -  
                                                 

Level 2:

                                               

Certificates of deposit

    972       -       972       -       499       473  

Municipal securities

    240       -       240       -       80       160  

Corporate bonds

    3,857       11       3,868       -       3,116       752  

Subtotal

    5,069       11       5,080       -       3,695       1,385  
                                                 

Total

  $ 5,345     $ 11     $ 5,356     $ 276     $ 3,695     $ 1,385  

 

Foreign currency forward contract: In August 2020, the Company entered into a foreign currency forward contract as an economic hedge against exposure to changes in the Canadian dollar in connection with the acquisition of Amika Mobile Corporation (“Amika Mobile”). The notional value of the foreign currency forward contract was CAD$6,955 with a maturity date in October 2020. The foreign currency forward contract is classified under Level 2 of the fair value hierarchy. The valuation techniques used to measure the fair value were based on quoted market prices. The foreign currency forward contract asset is recorded in prepaid expenses and the related liability is recorded in accrued liabilities in the Consolidated Balance Sheet as of September 30, 2020. Unrealized gains or losses from the remeasurement of the foreign currency forward contract are recorded in earnings in other income (expense) as this was not designated as a cash flow hedge. On October 1, 2020, the foreign currency forward contract was settled for CAD$6,955 ($5,281), resulting in a realized loss of $48 thousand on the contract. There were no forward contracts during the year ended September 30, 2019. The following table summarizes the foreign currency forward contract asset and liability as of September 30, 2020:

 

Derivatives not designated as hedging instruments

 

Asset

position

   

Unrealized

loss

   

Liability

Position

 

Foreign currency forward contract

  $ 5,205     $ (76 )   $ 5,281  

 

F-15

 

 

6. INVENTORIES

 

Inventories consisted of the following:

 

   

September 30,

 
   

2020

   

2019

 

Raw materials

  $ 5,220     $ 5,060  

Finished goods

    841       999  

Work in process

    456       307  

Inventories, gross

    6,517       6,366  

Reserve for obsolescence

    (568 )     (531 )

Inventories, net

  $ 5,949     $ 5,835  

 

 

 

7. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following: 

 

   

September 30,

 
   

2020

   

2019

 

Office furniture and equipment

  $ 1,181     $ 1,498  

Machinery and equipment

    1,184       1,224