Equibles

10-Q

Genasys Inc. (GNSS)

10-Q 2023-08-10 For: 2023-06-30
View Original
Added on April 06, 2026

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION ****

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 000-24248

gnss20230630_10qimg001.jpg

GENASYS INC.

(Exact name of registrant as specified in its charter)

Delaware 87-0361799
(State or other jurisdiction of<br><br> <br>incorporation or organization) (I.R.S. Employer<br><br> <br>Identification Number)
16262 West Bernardo Drive**, San Diego,**<br><br> <br>California 92127
(Address of principal executive offices) (Zip Code)

(858) 676-1112

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which securities are registered
Common stock, $0.00001 par value per share GNSS NASDAQ Capital Market

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

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

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

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐

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

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

The number of shares of Common Stock, $0.00001 par value, outstanding on August 7, 2023 was 37,181,071.

PART I. FINANCIAL INFORMATION

Item 1.         Financial Statements

Genasys Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share amounts)

**** **** ****
September 30,
2022
ASSETS
Current assets:
Cash and cash equivalents 2,971 $ 12,736
Short-term marketable securities 3,549 6,397
Restricted cash 755 100
Accounts receivable, net of allowance for doubtful accounts of 181 10,353 6,744
Inventories, net 7,950 6,008
Prepaid expenses and other 1,683 3,577
Total current assets 27,261 35,562
Long-term marketable securities 392 781
Long-term restricted cash 96 823
Deferred tax assets, net 7,399 7,373
Property and equipment, net 1,666 1,757
Goodwill 10,348 10,118
Intangible assets, net 8,958 10,505
Operating lease right of use assets 4,094 4,541
Other assets 547 394
Total assets 60,761 $ 71,854
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 3,324 $ 2,334
Accrued liabilities 8,182 12,083
Operating lease liabilities, current portion 998 948
Total current liabilities 12,504 15,365
Other liabilities, noncurrent 116 907
Operating lease liabilities, noncurrent 4,551 5,189
Total liabilities 17,171 21,461
Stockholders' equity:
Preferred stock, 0.00001 par value; 5,000,000 shares authorized; none issued and outstanding - -
Common stock, 0.00001 par value; 100,000,000 shares authorized; 37,181,071 and 36,611,240 shares issued and outstanding, respectively - -
Additional paid-in capital 110,013 108,551
Accumulated deficit (65,999 ) (57,366 )
Accumulated other comprehensive loss (424 ) (792 )
Total stockholders' equity 43,590 50,393
Total liabilities and stockholders' equity 60,761 $ 71,854

All values are in US Dollars.

See accompanying notes

1

Genasys Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share and share amounts)

(Unaudited)

Three months ended Nine months ended
June 30, June 30,
2023 2022 2023 2022
Revenues:
Product sales $ 12,593 $ 12,904 $ 31,651 $ 34,328
Contract and other 1,669 1,248 4,311 3,669
Total revenues 14,262 14,152 35,962 37,997
Cost of revenues 7,567 7,289 19,510 18,654
Gross profit 6,695 6,863 16,452 19,343
Operating expenses
Selling, general and administrative 6,004 5,785 18,443 16,794
Research and development 2,141 1,707 6,357 5,314
Total operating expenses 8,145 7,492 24,800 22,108
Loss from operations (1,450 ) (629 ) (8,348 ) (2,765 )
Other income (expense), net 1 9 (4 ) 12
Loss before income taxes (1,449 ) (620 ) (8,352 ) (2,753 )
Income tax benefit (26 ) (31 ) (18 ) (367 )
Net loss $ (1,423 ) $ (589 ) $ (8,334 ) $ (2,386 )
Net loss per common share - basic and diluted $ (0.04 ) $ (0.02 ) $ (0.23 ) $ (0.07 )
Weighted average common shares outstanding:
Basic and diluted 37,053,196 36,566,900 36,855,014 36,459,179

See accompanying notes

2

Genasys Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(Unaudited)

Three months ended Nine months ended
June 30, June 30,
2023 2022 2023 2022
Net loss $ (1,423 ) $ (589 ) $ (8,334 ) $ (2,386 )
Unrealized gain (loss) on marketable securities 21 (12 ) 71 (81 )
Unrealized foreign currency (loss) gain - (440 ) 297 (457 )
Comprehensive loss $ (1,402 ) $ (1,041 ) $ (7,966 ) $ (2,924 )

See accompanying notes

3

Genasys Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

Nine Months Ended
June 30,
2023 2022
Operating Activities:
Net loss $ (8,334 ) $ (2,386 )
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,918 1,920
Amortization of debt issuance costs 8 14
Warranty provision 54 38
Inventory obsolescence 184 174
Stock-based compensation 1,329 1,650
Deferred income taxes (26 ) (369 )
Amortization of operating lease right of use asset 577 543
Accretion of acquisition holdback liability 36 36
Changes in operating assets and liabilities:
Accounts receivable, net (3,570 ) 1,964
Inventories, net (2,127 ) (2,563 )
Prepaid expenses and other 1,755 1,049
Accounts payable 955 371
Accrued and other liabilities (5,581 ) (3,012 )
Net cash used in operating activities (12,822 ) (571 )
Investing Activities:
Purchases of marketable securities (3,641 ) (5,287 )
Proceeds from maturities of marketable securities 6,949 5,492
Capital expenditures (229 ) (191 )
Net cash provided by investing activities 3,079 14
Financing Activities:
Proceeds from exercise of stock options 87 253
Repurchase of common stock - (998 )
Shares retained for payment of taxes in connection with settlement of restricted stock units (45 ) (70 )
Shares retained for payment of taxes in connection with the exercise of stock options (207 ) -
Payments on promissory notes - (277 )
Net cash used in financing activities (165 ) (1,092 )
Effect of foreign exchange rate on cash 71 (85 )
Net decrease in cash, cash equivalents, and restricted cash (9,837 ) (1,734 )
Cash, cash equivalents and restricted cash, beginning of period 13,659 14,528
Cash, cash equivalents and restricted cash, end of period $ 3,822 $ 12,794
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets:
--- --- --- --- ---
Cash and cash equivalents $ 2,971 $ 11,723
Restricted cash, current portion 755 100
Long-term restricted cash 96 971
Total cash, cash equivalents and restricted cash shown in the consolidated statement of cash flows $ 3,822 $ 12,794

See accompanying notes

4

Genasys Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(in thousands)

(Unaudited)

Nine Months Ended
June 30,
2023 2022
Noncash investing and financing activities:
Change in unrealized loss on marketable securities $ 71 $ (81 )
Obligation to issue common stock in connection with the Amika Mobile asset purchase $ (416 ) $ (832 )
Initial measurement of operating lease right of use assets $ 79 $ 7
Initial measurement of operating lease liabilities $ 79 $ 7
Shares surrendered from stock option exercises $ 300 $ -

5

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

1. OPERATIONS

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

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

General

The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the accompanying financial statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the footnotes. The condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended September 30, 2022, included in the Company’s Annual Report on Form 10-K, as filed with the SEC on December 16, 2022. The accompanying condensed consolidated balance sheet as of September 30, 2022, has been derived from the audited consolidated balance sheet as of September 30, 2022, contained in the above referenced Form 10-K. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

Principles of consolidation

The Company has eight wholly owned subsidiaries, Genasys II Spain, S.A.U. (“Genasys Spain”), Genasys Communications Canada ULC (“Genasys Canada”), Genasys Singapore PTE Ltd, Genasys Puerto Rico, LLC, Zonehaven LLC, and Genasys Inc. (branch) in the United Arab Emirates and two currently inactive subsidiaries, Genasys America de CV and LRAD International Corporation. The consolidated financial statements include the accounts of these subsidiaries after elimination of intercompany transactions and accounts.

Cash, cash equivalents and restricted cash

The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. As of June 30, 2023, the amount of cash and cash equivalents was $2,971. As of September 30, 2022, the amount of cash and cash equivalents was $12,736.

The Company considers any amounts pledged as collateral or otherwise restricted for use in current operations to be restricted cash. In addition, the Company excludes from cash and cash equivalents cash required to fund specific future contractual obligations related to business combinations. Restricted cash is classified as a current asset unless amounts are not expected to be released and available for use in operations within one year. As of June 30, 2023, the current portion of restricted cash was $755, and the noncurrent portion was $96. As of September 30, 2022, the current portion of restricted cash was $100, and the noncurrent portion was $823.

Reclassifications

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

3. RECENT ACCOUNTING PRONOUNCEMENTS

New pronouncements pending adoption

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

6

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

4. REVENUE RECOGNITION

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

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
--- ---

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

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

Product revenue

Product revenue is recognized as a distinct single performance obligation when products are tendered to a carrier for delivery, which represents the point in time that the Company’s customer obtains control of the products. A smaller portion of product revenue is recognized when the customer receives delivery of the products. A portion of products are sold through resellers and system integrators based on firm commitments from an end user, and as a result, resellers and system integrators carry little or no inventory. The Company’s customers do not have a right to return product unless the product is found defective and therefore the Company’s estimate for returns has historically been insignificant.

Perpetual licensed software

The sale and/or license of software products is deemed to have occurred when a customer either has taken possession of, or has the ability to take immediate possession of, the software and the software key. Perpetual software licenses can include one-year maintenance and support services. In addition, the Company sells maintenance services on a stand-alone basis and is therefore capable of determining their fair value. On this basis, the amount of the embedded maintenance is separated from the fee for the perpetual license and is recognized on a straight-line basis over the period to which the maintenance relates.

Time-based licensed software

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

Warranty, maintenance, and services

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

Multiple element arrangements

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

7

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

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

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

Contract assets and liabilities

The Company enters into contracts to sell products and provide services and recognizes contract assets and liabilities that arise from these transactions. The Company recognizes revenue and corresponding accounts receivable according to ASC 606 and, at times, recognizes revenue in advance of the time when contracts give the Company the right to invoice a customer. Sales commissions are considered incremental and recoverable costs of obtaining a contract with a customer. Subscription related commission costs are deferred and then amortized on a straight-line basis over the period of benefit. The Company may also receive consideration, per terms of a contract, from customers prior to transferring goods to the customer. The Company records customer deposits as a contract liability. Additionally, the Company may receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed. In such instances, a deferred revenue liability is recorded. The Company recognizes these contract liabilities as revenue after all revenue recognition criteria are met. The table below reflects the balances of contract liabilities as of June 30, 2023, and September 30, 2022, including the change between the periods. There were no contract assets as of June 30, 2023, and September 30, 2022. The current portion of contract liabilities and the noncurrent portion are included in “Accrued liabilities” and “Other liabilities, noncurrent”, respectively, on the accompanying condensed consolidated balance sheets. Refer to Note 10, Accrued and Other Liabilities for additional details.

The Company’s contract liabilities were as follows:

Customer deposits Deferred revenue Total contract liabilities
Balance as of September 30, 2022 $ 4,724 $ 2,054 $ 6,778
New performance obligations 8,606 2,414 11,020
Recognition of revenue as a result of satisfying performance obligations (11,375 ) (2,289 ) (13,664 )
Effect of exchange rate on deferred revenue 2 31 33
Balance as of June 30, 2023 $ 1,957 $ 2,210 $ 4,167
Less: non-current portion - (116 ) (116 )
Current portion as of June 30, 2023 $ 1,957 $ 2,094 $ 4,051

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 June 30, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was approximately $4,167. The Company expects to recognize revenue on approximately $4,051 or 97% of the remaining performance obligations over the next 12 months, and the remainder is expected to be recognized thereafter.

Practical expedients

In cases where the Company is responsible for shipping after the customer has obtained control of the goods, the Company has elected to treat these activities as fulfillment activities rather than as a separate performance obligation. Additionally, the Company has elected to capitalize the cost to obtain a contract only if the period of amortization would be longer than one year. The Company only gives consideration to whether a customer agreement has a financing component if the period of time between transfer of goods and services and customer payment is greater than one year. The Company also utilizes the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value the Company is providing to the customer.

8

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

5. FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist principally of cash equivalents, restricted cash, short and long-term marketable securities, accounts receivable, and accounts payable. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

Level 1: Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.
--- ---
Level 3: Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
--- ---

The fair value of the Company’s cash equivalents and marketable securities were determined based on Level 1 and Level 2 inputs. The valuation techniques used to measure the fair value of the “Level 2” instruments were based on quoted market prices or model-driven valuations using significant inputs derived from or corroborated by observable market data. The Company believes that the recorded values of its other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations. The Company did not have any marketable securities in the Level 3 category as of June 30, 2023, or September 30, 2022. There have been no changes in Level 1, Level 2, and Level 3 and no changes in valuation techniques for financial instruments measured at fair value on a recurring basis for the periods ended June 30, 2023, and September 30, 2022.

Instruments measured at fair value on a recurring basis

Cash equivalents and marketable securities: The following tables present the Company’s cash equivalents and marketable securities’ costs, gross unrealized gains and losses, and fair value by major security type recorded as cash equivalents or short-term or long-term marketable securities as of June 30, 2023, and September 30, 2022. Unrealized gains and losses from the remeasurement of marketable securities are recorded in accumulated other comprehensive income (loss) until recognized in earnings upon the sale or maturity of the security.

June 30, 2023
Cost Basis Unrealized<br><br> <br>Loss Fair Value Cash<br><br> <br>Equivalents Short-term<br><br> <br>Securities Long-term<br><br> <br>Securities
Level 1:
Money market funds $ 795 $ - $ 795 $ 795 $ - $ -
Level 2:
Certificates of deposit 302 - 302 - - 302
Municipal securities 2,747 (12 ) 2,735 - 2,645 90
Corporate bonds 911 (7 ) 904 - 904 -
Subtotal 3,960 (19 ) 3,941 - 3,549 392
Total $ 4,755 $ (19 ) $ 4,736 $ 795 $ 3,549 $ 392

9

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

September 30, 2022
Cost Basis Unrealized Loss Fair Value Cash Equivalents Short-term Securities Long-term Securities
Level 1:
Money market funds $ 1,316 $ - $ 1,316 $ 1,316 $ - $ -
Level 2:
Certificates of deposit 800 - 800 - 498 302
Municipal securities 4,066 (65 ) 4,001 - 3,772 229
Corporate bonds 2,402 (25 ) 2,377 - 2,127 250
Subtotal 7,268 (90 ) 7,178 - 6,397 781
Total $ 8,584 $ (90 ) $ 8,494 $ 1,316 $ 6,397 $ 781

Instruments measured at fair value on a non-recurring basis

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

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

Holdback Liability: In connection with the Amika Mobile asset purchase, the Company recorded a holdback liability related to potential future adjustments to assets and liabilities, misrepresentations and indemnifications against third-party claims. Adjustments of up to CAD$1,000 (USD$755) will be deducted from the asset purchase holdback liability for up to three years from the closing date. The holdback liability was recorded at the present value which was the fair value at the acquisition date. The Company engaged independent valuation experts to assist in determining the present value of the holdback liability. The expected future payment was discounted using a rate representative of the Company’s payment risk and credit rating. Accretion is recorded in each subsequent reporting period based on the discount factor used to arrive at the original fair value. This change in fair value is recorded in the accompanying condensed consolidated statement of operations. The changes in the carrying amount of the holdback liability is as follows:

Balance as of September 30, 2022 $ 680
Accretion 36
Currency translation 26
Balance as of June 30, 2023 $ 742

6. INVENTORIES, NET

Inventories, net consisted of the following:

June 30, September 30,
2023 2022
Raw materials $ 6,387 $ 5,277
Finished goods 894 844
Work in process 1,449 744
Inventories, gross 8,730 6,865
Reserve for obsolescence (780 ) (857 )
Inventories, net $ 7,950 $ 6,008

10

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

7. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following:

June 30, September 30,
2023 2022
Office furniture and equipment $ 1,594 $ 1,432
Machinery and equipment 1,441 1,391
Leasehold improvements 2,302 2,172
Construction in progress - 104
Property and equipment, gross 5,337 5,099
Accumulated depreciation (3,671 ) (3,342 )
Property and equipment, net $ 1,666 $ 1,757

Depreciation and amortization expense for property and equipment was $111 and $101 for the three months ended June 30, 2023 and 2022, respectively. Depreciation and amortization expense for property and equipment was $335 and $299 for the nine months ended June 30, 2023 and 2022, respectively.

8. GOODWILL AND INTANGIBLE ASSETS

Goodwill is attributable to the acquisitions of Genasys Spain and Zonehaven, and the Amika Mobile asset purchase and is due to combining the integrated emergency critical communications, mass messaging solutions, and software development capabilities with existing hardware products for enhanced offerings and the skill level of the acquired workforces. The Company periodically reviews goodwill for impairment in accordance with relevant accounting standards. In the fourth quarter of fiscal 2022, in conjunction with the annual impairment assessment, the Company determined that the fair value of the software reporting unit was less than the carrying value. The Company engaged independent valuation experts to assist in determining the fair value of the software reporting unit and recorded a $13,162 goodwill impairment charge. As of June 30, 2023, and September 30, 2022, goodwill was $10,348 and $10,118 respectively. There were no additions or impairments to goodwill during the nine months ended June 30, 2023.

The changes in the carrying amount of goodwill by segment for the nine months ended June 30, 2023, were as follows:

Hardware Software Total
Balance as of September 30, 2022 $ - $ 10,118 $ 10,118
Currency translation - 230 230
Balance as of June 30, 2023 $ - $ 10,348 $ 10,348

The changes in the carrying amount of intangible assets by segment for the nine months ended June 30, 2023, were as follows:

Hardware Software Total
Balance as of September 30, 2022 $ 21 $ 10,484 $ 10,505
Amortization (3 ) (1,580 ) (1,583 )
Currency translation - 36 36
Balance as of June 30, 2023 $ 18 $ 8,940 $ 8,958

Intangible assets and goodwill related to Genasys Spain are translated from Euros to U.S. dollars at the balance sheet date. The net impact of foreign currency exchange differences arising during the period related to goodwill and intangible assets was an increase of $266.

11

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

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

June 30, September 30,
2023 2022
Technology $ 11,947 $ 11,886
Customer relationships 1,807 1,715
Trade name portfolio 611 590
Non-compete agreements 229 206
Patents 72 72
14,666 14,469
Accumulated amortization (5,708 ) (3,964 )
$ 8,958 $ 10,505

As of June 30, 2023, future amortization expense is as follows:

Fiscal year ending September 30,
2023 (remaining three months) $ 525
2024 2,099
2025 1,979
2026 1,842
2027 1,669
Thereafter 844
Total estimated amortization expense $ 8,958

Amortization expense was $525 and $537 for the three months ended June 30, 2023 and 2022, respectively. Amortization expense was $1,583 and $1,621 for the nine months ended June 30, 2023 and 2022, respectively.

9. PREPAID EXPENSES AND OTHER

Prepaid expenses and other current assets consisted of the following:

June 30, September 30,
2023 2022
Deposits for inventory $ 284 $ 461
Prepaid insurance 285 360
Dues and subscriptions 234 182
Prepaid commissions 406 228
Trade shows and travel 73 471
Canadian goods and services and harmonized sales tax receivable 148 1,631
Other 253 244
$ 1,683 $ 3,577

Deposits for inventory

Deposits for inventory consisted of cash payments to vendors for inventory to be delivered in the future.

Prepaid insurance

Prepaid insurance consisted of premiums paid for health, commercial and corporate insurance. These premiums are amortized on a straight-line basis over the term of the agreements.

Dues and subscriptions

Dues and subscriptions consisted of payments made in advance for software subscriptions and trade and professional organizations. These payments are amortized on a straight-line basis over the term of the agreements.

Prepaid commissions

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

12

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

Trade shows and travel

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

Canadian goods and services and harmonized sales tax receivable

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

10. ACCRUED AND OTHER LIABILITIES

Accrued liabilities consisted of the following:

June 30, September 30,
2023 2022
Payroll and related $ 2,539 $ 3,003
Deferred revenue 2,094 1,827
Customer deposits 1,957 4,724
Accrued contract costs 672 809
Warranty reserve 153 159
Canadian goods and services and harmonized sales tax payable - 1,556
Asset purchase holdback liability 742 -
Other 25 5
Total $ 8,182 $ 12,083

Other liabilities-noncurrent consisted of the following:

June 30, September 30,
2023 2022
Deferred revenue $ 116 $ 227
Asset purchase holdback liability - 680
Total $ 116 $ 907

Payroll and related

Payroll and related consisted primarily of accrued vacation, bonus, sales commissions and benefits.

Deferred revenue

Deferred revenue as of June 30, 2023, included prepayments from customers for services, including extended warranty, scheduled to be performed in the twelve months ending June 30, 2024.

Customer deposits

Customer deposits represent amounts paid by customers as a down payment on hardware orders to be delivered in the twelve months ending June 30, 2024.

Accrued contract costs

Accrued contract costs consisted of accrued expenses for contracting a third-party service provider to fulfill repair and maintenance obligations required under a contract with a foreign military for units sold in the year ended September 30, 2011. Payments to the service provider will be made annually upon completion of each year of service. A new contract was signed with the customer in May 2019 to continue repair and maintenance services through May 2024. These services are being recorded in cost of revenues to correspond with the revenues for these services.

Asset purchase holdback liability

In connection with the Amika Mobile asset purchase, the Company recorded a holdback liability related to potential future adjustments to assets and liabilities, misrepresentations and indemnifications against third-party claims. Adjustments of up to CAD$1,000 (USD$755) will be deducted from the asset purchase holdback liability for up to three years from the closing date. The liability is recorded at fair value in the condensed consolidated balance sheet.

13

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

Warranty reserve

Changes in the warranty reserve and extended warranty were as follows:

June 30, September 30,
2023 2022
Beginning balance $ 159 $ 146
Warranty provision 57 86
Warranty settlements (63 ) (73 )
Ending balance $ 153 $ 159

The Company establishes a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs and anticipated rates of warranty claims. The Company evaluates the adequacy of the provision for warranty costs each reporting period and adjusts the accrued warranty liability to an amount equal to estimated warranty expense for products currently under warranty.

Deferred extended warranty revenue

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

11. DEBT

Revolving line of credit

On March 8, 2021, the Company entered into an agreement with MUFG Union Bank, N.A. for a $10 million revolving line of credit. Outstanding balances on the revolving line of credit bore interest at a per annum rate equal to the London Interbank Offered Rate (“LIBOR”) plus 2.25%. The agreement contained a provision for determining an alternative interest rate index in the event the LIBOR rate is no longer available. The agreement contained standard covenants, including affirmative financial covenants, such as the maintenance of a short-term liquidity ratio and a senior leverage ratio, in addition to negative covenants which limit the incurrence of additional indebtedness, loans and equity investments, disposition of assets, mergers and consolidations and other matters customarily restricted in such agreements. The maturity date of this revolving line of credit was March 31, 2023. The Company did not renew the revolving line of credit and there were no borrowings on the revolving line of credit. The Company incurred and capitalized $38 of issuance costs related to this revolving line of credit. These issuance costs were recorded in prepaid expenses and other assets in the condensed consolidated balance sheet and were amortized on a straight-line basis over the term of the loan.

12. LEASES

The Company determines if an arrangement is a lease at inception. The guidance in ASC 842 defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Operating lease ROU assets and lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. The Company’s leases do not provide an implicit rate. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Additionally, the portfolio approach is used in determining the discount rate used to present value lease payments. The ROU asset includes any lease payments made and excludes lease incentives and initial direct costs incurred.

The Company is party to operating leases for office and production facilities and equipment under agreements that expire at various dates through 2028. The Company elected the package of practical expedients permitted under the lease standard. In electing the practical expedient package, the Company is not required to reassess whether an existing or expired contract is or contains a lease, reassess the lease classification for expired or existing leases nor reassess the initial direct costs for leases that commenced before the adoption of ASC 842. The Company also elected the short-term lease exemption such that the lease standard was applied to leases greater than one year in duration. Leases with an initial term of twelve months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

14

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

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

Operating lease<br><br> <br>ROU assets
Operating lease ROU assets as of September 30, 2022 $ 4,541
Additional operating lease ROU assets 79
Less amortization of operating lease ROU assets (577 )
Effect of exchange rate on operating lease ROU assets 51
Operating lease ROU assets as of June 30, 2023 $ 4,094
Operating lease<br><br> <br>liabilities
--- --- --- ---
Operating lease liabilities as of September 30, 2022 $ 6,137
Additional operating lease liabilities 79
Less lease principal payments on operating lease liabilities (719 )
Effect of exchange rate on operating lease liabilities 52
Operating lease liabilities as of June 30, 2023 5,549
Less non-current portion (4,551 )
Current portion as of June 30, 2023 $ 998

As of June 30, 2023, the Company’s operating leases have a weighted-average remaining lease term of 5.0 years and a weighted-average discount rate of 4.15%. The maturities of the operating lease liabilities are as follows:

Fiscal year ending September 30,
2023 (remaining three months) $ 301
2024 1,210
2025 1,185
2026 1,198
2027 1,220
Thereafter 1,046
Total undiscounted operating lease payments 6,160
Less: imputed interest (611 )
Present value of operating lease liabilities $ 5,549

For the three months ended June 30, 2023 and 2022, total lease expense under operating leases was approximately $250 and $245, respectively. For the nine months ended June 30, 2023 and 2022, total lease expense under operating leases was approximately $753 and $735, respectively. The Company recorded $9 in short-term lease expense during the three and nine months ended June 30, 2023. The Company did not have any short-term lease expense during the three and nine months ended June 30, 2022.

13. INCOME TAXES

For the nine months ended June 30, 2023, the Company recorded an income tax benefit of $18 related to a prior year foreign income tax expense true-up. For the nine months ended June 30, 2023, the Company did not record an income tax benefit for the tax loss, as the benefits are not expected to be realized during the current fiscal year through ordinary income generated during the third and fourth quarters or in a future year through recognition of a deferred tax asset. For the nine months ended June 30, 2022, the Company recorded an income tax benefit of $367 reflecting an effective tax rate of 28.6%.

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

ASC 740, Income Taxes, requires the Company to recognize in its consolidated financial statements uncertainties in tax positions taken that may not be sustained upon examination by the taxing authorities. If interest or penalties are assessed, the Company would recognize these charges as income tax expense. The Company has not recorded any income tax expense or benefit for uncertain tax positions.

15

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

14. COMMITMENTS AND CONTINGENCIES

Litigation

The Company may at times be involved in litigation in the ordinary course of business. The Company will, from time to time, when appropriate in the Company’s estimation, record adequate reserves in the Company’s consolidated financial statements for pending litigation. Currently, there are no pending material legal proceedings to which the Company is a party or to which any of its property is subject.

Bonus plan

The Company has a bonus plan for employees, in accordance with their terms of employment, whereby they can earn a percentage of their salary based on meeting targeted objectives for orders received, revenue, operating income and operating cash flow. In the nine months ended June 30, 2023, the Company recorded $762 of bonus expense. In the nine months ended June 30, 2022, the Company recorded $1,483 of bonus expense.

Amika Mobile asset purchase

In connection with the Amika Mobile asset purchase, the Company recorded a holdback liability related to potential future adjustments to assets and liabilities, misrepresentations, and indemnifications against third-party claims. Adjustments of up to CAD$1,000 (USD$755) will be deducted from the asset purchase holdback liability for up to three years from the closing date. The liability is recorded at fair value in the condensed consolidated balance sheet.

The Company also agreed to issue 191,267 shares of the Company’s common stock to the former owners of Amika Mobile on each of the first, second and third anniversaries of the closing date. The total number of shares of common stock the Company is obligated to issue is 573,801. The fair value of the Company’s common stock on the closing date was $5.98 per share, resulting in the addition of $3,431 to additional paid-in-capital. During the year ended September 30, 2021, the Company accelerated the issuance of 365,109 of such shares of common stock to a former owner of the Amika Mobile assets. During the year ended September 30, 2022, the Company issued 69,564 shares to the former owners of the Amika Mobile assets. During the nine months ended June 30, 2023, the Company issued 69,564 shares to the former owners of the Amika Mobile assets. There are 69,564 remaining shares of the Company’s common stock subject to issuance under this obligation.

15. SHARE-BASED COMPENSATION

Stock option plans

The Amended and Restated 2015 Equity Incentive Plan (“2015 Equity Plan”) was adopted by the Company’s Board of Directors on December 6, 2016, and approved by the Company’s stockholders on March 14, 2017. The 2015 Equity Plan was amended by the Company’s Board of Directors on December 8, 2020, to increase the number of shares authorized for issuance from 5,000,000 to 10,000,000. On March 16, 2021, the Company’s stockholders approved the plan amendment. The 2015 Equity Plan authorizes the issuance of stock options, restricted stock, stock appreciation rights, restricted stock units (“RSUs”) and performance awards, to an aggregate of 10,000,000 new shares of common stock to employees, directors, advisors or consultants. As of June 30, 2023, there were options and restricted stock units outstanding covering 3,673,201 shares of common stock under the 2015 Equity Plan, respectively, and 2,821,827 shares of common stock available for grant, for a total of 6,495,028 shares of common stock authorized and unissued under the two equity plans.

Share-based compensation

The Company’s employee stock options have various restrictions that reduce option value, including vesting provisions and restrictions on transfer and hedging, among others, and are often exercised prior to their contractual maturity.

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

16

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

There were 1,849,500 stock options granted during the nine months ended June 30, 2023, of which 225,000 vest based on a market condition. There were 322,000 stock options granted during the nine months ended June 30, 2022, none of which vest based on a market condition.

Stock options that do not contain market-based vesting conditions are valued using the Black-Scholes option pricing model. The weighted average estimated fair value of employee stock options granted, that vest without a market condition, during the nine months ended June 30, 2023 and 2022, was calculated with the following weighted average assumptions (annualized percentages):

Nine months ended
June 30,
2023 2022
Volatility 52.1 % 48.1 %
Risk-free interest rate 4.0 % 1.5 %
Dividend yield 0.0 % 0.0 %
Expected term in years 5.8 6.8

Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected term of the options. The risk-free interest rate is based on rates published by the Federal Reserve Board. The contractual term of the options was seven years. The expected term is based on observed and expected time to post-vesting exercise. The expected forfeiture rate is based on past experience and employee retention data. Forfeitures are estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from those estimates. Such revision adjustments to expense will be recorded as a cumulative adjustment in the period in which the estimate is changed. The Company has not paid a dividend in fiscal 2023 and did not pay a dividend in fiscal 2022.

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

As of June 30, 2023, there was approximately $1,804 of total unrecognized compensation costs related to outstanding employee stock options. This amount is expected to be recognized over a weighted average period of 2.2 years. To the extent the forfeiture rate is different from what the Company anticipated, stock-based compensation related to these awards will be different from the Company’s expectations.

Performance-based stock options

On October 4, 2019, the Company awarded a performance-based stock option (PVO) to purchase 800,000 shares of the Company’s common stock to a key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2022 and 2023 including a minimum free cash flow margin and net revenue targets. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets. During the year ended September 30, 2022, the Company modified the performance criteria for these PVOs to exclude certain strategic growth initiatives that were not planned at the time of grant. The Company recorded $209 in stock-based compensation expense related to these options in the year ended September 30, 2022. The Company did not record compensation expense related to the 2023 performance-based stock options during the nine months ended June 30, 2023.

On October 8, 2022, the Company awarded additional performance-based stock options to purchase 800,000 shares of the Company’s common stock to the same key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2025 and 2026 including a minimum free cash flow margin and net revenue targets. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets. The Company did not record compensation expense related to these options for the nine months ended June 30, 2023.

On August 10, 2022, the Company granted PVOs to purchase up to 750,000 shares of the Company’s common stock to a key member of management, with a contractual term of seven years. During the three months ended June 30, 2023, these options were forfeited due to a voluntary termination of employment. The Company did not record compensation expense related to these options for the nine months ended June 30, 2022.

On March 20, 2023, the Company granted PVOs to purchase up to 450,000 shares of the Company’s stock to a key member of management with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of the first three twelve-month periods following the employee’s start date, including targets related to growth in the institutional ownership of the Company’s common stock and growth in the trading volume of the Company’s common stock during such periods. Additionally, vesting is subject to the employee being employed by the Company on each of the first three anniversaries of the employee’s start date. 225,000 of these options contain a market-based vesting condition and accounting principles do not require the market condition to be achieved in order for compensation expense to be recognized. The Company recorded $3 of compensation expense related to these options during the three months ended June 30, 2021 and $4 of compensation expense during the nine months ended June 30, 2023.

17

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

The Company did not grant any PVOs during the nine months ended June 30, 2022.

Restricted stock units

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

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

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

On March 14, 2023, each non-employee member of the Board of Directors received a grant of 30,000 RSUs that will vest on the first anniversary of the grant date. These RSUs were granted at a market value of $417 and have and will be expensed on a straight-line basis through the March 14, 2024, vest date. On February 14, 2023, 145,600 RSUs were granted to employees that will vest over three years on the anniversary date of the grant. These RSUs were issued at a market value of $582, which have and will be expensed on a straight-line basis over the three-year life of the grants. On March 20, 2023, 20,000 RSUs were granted to an employee with immediate vesting. These were issued at a market value of $66 and were expensed immediately.

Compensation expense for RSUs was $211 and $759 for the three and nine months ended June 30, 2023, respectively. Compensation expense for RSUs was $193 and $1,216 for the three and nine months ended June 30, 2022, respectively. As of June 30, 2023, there was approximately $1,204 of total unrecognized compensation costs related to outstanding RSUs. This amount is expected to be recognized over a weighted average period of 1.6 years.

A summary of the Company’s RSUs as of June 30, 2023, is presented below:

Number of Shares Weighted<br><br> <br>Average Grant<br><br> <br>Date Fair Value
Outstanding September 30, 2022 342,841 $ 4.11
Granted 295,600 $ 3.63
Released (253,012 ) $ 3.73
Forfeited/cancelled - $ -
Outstanding June 30, 2023 385,429 $ 3.99

Stock option summary information

A summary of the activity in options to purchase the capital stock of the Company as of June 30, 2023, is presented below:

Number of Shares Weighted<br><br> <br>Average<br><br> <br>Exercise Price
Outstanding September 30, 2022 3,940,899 $ 3.31
Granted 1,849,500 $ 2.93
Forfeited/expired (1,480,362 ) $ 3.98
Exercised (1,022,265 ) $ 1.96
Outstanding June 30, 2023 3,287,772 $ 3.21
Exerciseable June 30, 2023 817,726 $ 3.41

Options outstanding are exercisable at prices ranging from $1.51 to $8.03 per share and expire over the period from 2023 to 2030 with an average life of 5.16 years. The aggregate intrinsic value of options outstanding and exercisable as of June 30, 2023, was $138. The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last day of trading for the quarter, which was $2.60 per share, and the exercise price multiplied by the number of applicable options. The total intrinsic value of stock options exercised during the nine months ended June 30, 2023 was $762 and proceeds from these exercises was $87. The total intrinsic value of stock options exercised during the nine months ended June 30, 2022 was $191 and proceeds from these exercises was $253.

18

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

The following table summarized information about stock options outstanding as of June 30, 2023:

Range of Weighted<br><br> <br>Average<br><br> <br>Remaining Contractual Weighted<br><br> <br>Average<br><br> <br>Exercise Number Weighted<br><br> <br>Average<br><br> <br>Exercise
Exercise Prices Term Price Exercisable Price
$1.51 - 2.64 189,157 1.88 $ 1.88 159,157 $ 1.73
$2.69 - 2.69 1,100,000 6.27 $ 2.69 - $ -
$3.09 - 3.39 1,160,388 4.93 $ 3.33 192,138 $ 3.39
$3.40 - 8.03 838,227 4.76 $ 4.04 466,431 $ 3.99
3,287,772 5.16 $ 3.21 817,726 $ 3.41

All values are in US Dollars.

The Company recorded $181 and $162 of stock option compensation expense for employees, directors and consultants for the three months ended June 30, 2023 and 2022, respectively. The Company recorded $566 and $434 of stock option compensation expense for employees, directors and consultants for the nine months ended June 30, 2023 and 2022, respectively.

Share-based compensation

The Company recorded share-based compensation expense and classified it in the condensed consolidated statements of operations as follows:

Three Months Ended Nine Months Ended
June 30, June 30,
2023 2022 2023 2022
Cost of revenues $ 19 $ 10 $ 80 $ 53
Selling, general and administrative 351 327 1,171 1,544
Research and development 26 18 78 53
$ 396 $ 355 $ 1,329 $ 1,650

19

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

16. STOCKHOLDERS’ EQUITY

Summary

The following table summarizes changes in the components of stockholders’ equity during the nine months ended June 30, 2023, and the nine months ended June 30, 2022 (amounts in thousands, except par value and share amounts):

**** **** **** **** **** **** **** **** **** **** **** **** Accumulated **** **** ****
Common Stock Additional **** **** **** Other Total
Shares Par Value Amount Paid-in<br><br> <br>Capital Accumulated Deficit Comprehensive Loss Stockholders' Equity
Balance as of September 30, 2022 36,611,240 $ 366 $ 108,551 $ (57,366 ) $ (792 ) $ 50,393
Share-based compensation expense - - 420 - - 420
Issuance of common stock upon exercise of stock options, net 20,000 - 32 - - 32
Issuance of common stock upon vesting of restricted stock units 12,667 - - - - -
Release of obligation to issue commons stock 69,564 1 - - -
Accumulated other comprehensive income - - - - 266 266
Net loss - - - (3,507 ) (3,507 )
Balance as of December 31, 2022 36,713,471 367 $ 109,003 $ (60,873 ) $ (526 ) $ 47,604
Share-based compensation expense - - 513 - - 513
Issuance of common stock upon exercise of stock options, net 33,765 1 54 - - 54
Issuance of common stock upon cashless exercise of stock options, net 15,914 - - - - -
Issuance of common stock upon vesting of restricted stock units 232,761 2 (2 ) - - (2 )
Shares retained for payment of taxes in connection with net share settlement of restricted stock units (11,616 ) - (45 ) - - (45 )
Accumulated other comprehensive income - - - - 81 81
Net loss - - - (3,403 ) - (3,403 )
Balance as of March 31, 2023 36,984,295 $ 370 $ 109,523 $ (64,276 ) $ (445 ) $ 44,802
Share-based compensation expense - - 396 - - 396
Issuance of common stock upon exercise of stock options, net 1,000 - 1 - - 1
Issuance of common stock upon cashless exercise of stock options, net 372,286 4 - - - -
Issuance of common stock upon vesting of restricted stock units 7,584 - - - - -
Retirement of common stock (109,488 ) (1 ) 300 (300 ) -
Shares retained for payment of taxes in connection with net share settlement upon exercise of stock options (74,606 ) (1 ) (207 ) - - (207 )
Accumulated other comprehensive income - - - - 21 21
Net loss - - - (1,423 ) - (1,423 )
Balance as of June 30, 2023 37,181,071 $ 372 $ 110,013 $ (65,999 ) $ (424 ) $ 43,590

20

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

**** **** **** **** **** **** **** **** **** **** **** **** Accumulated **** **** ****
Common Stock Additional **** **** **** Other Total
Shares Par Value Amount Paid-in<br><br> <br>Capital Accumulated Deficit Comprehensive Loss Stockholders' Equity
Balance as of September 30, 2021 36,403,833 $ 364 $ 107,110 $ (41,154 ) $ 2 $ 65,958
Share-based compensation expense - - 558 - - 558
Issuance of common stock upon exercise of stock options, net 15,000 - 46 - - 46
Stock buyback (116,868 ) (1 ) (441 ) - - (441 )
Release of obligation to issue commons stock 69,564 - - - - -
Accumulated other comprehensive loss - - - - (85 ) (85 )
Net loss - - - (1,305 ) - (1,305 )
Balance as of December 31, 2021 36,371,529 363 $ 107,273 $ (42,459 ) $ (83 ) $ 64,731
Share-based compensation expense - - 737 - - 737
Issuance of common stock upon exercise of stock options, net 55,000 1 124 - - 124
Issuance of common stock upon vesting of restricted stock units 262,342 2 - - - -
Shares retained for payment of taxes in connection with net share settlement of restricted stock units (18,344 ) - (70 ) - - (70 )
Stock buyback (142,442 ) (1 ) (557 ) - - (557 )
Accumulated other comprehensive loss - - - - (1 ) (1 )
Net loss - - - (492 ) - (492 )
Balance as of March 31, 2022 36,528,085 365 $ 107,507 $ (42,951 ) $ (84 ) $ 64,472
Share-based compensation expense - - $ 355 - - 355
Issuance of common stock upon exercise of stock options, net 60,000 1 83 - - 83
Issuance of common stock upon vesting of restricted stock units 7,920 - - - - -
Accumulated other comprehensive loss - - - - (452 ) (452 )
Net loss - - - (589 ) - (589 )
Balance as of June 30, 2022 36,596,005 $ 366 $ 107,945 $ (43,540 ) $ (536 ) $ 63,869

Common stock activity

During the nine months ended June 30, 2023, the Company issued 258,871 shares of common stock and received gross proceeds of $87 in connection with the exercise of stock options, and the Company issued 253,012 shares of common stock in connection with the vesting of RSUs. During the three months ended June 30, 2023, an employee exercised 786,747 stock options in a net share settlement transaction. 565,214 shares were used as consideration for the exercise of these options and 74,606 shares were retained for taxes associated with this option exercise, resulting in 146,927 shares being issued to the employee. Also, during the three months ended June 30, 2023, an employee used 109,488 shares of common stock as consideration for the exercise of 150,753 incentive stock options. All shares of common stock surrendered for options exercises have been retired. During the nine months ended June 30, 2022, the Company issued 130,000 shares of common stock and received gross proceeds of $253 in connection with the exercise of stock options, and the Company issued 251,918 shares of common stock in connection with the vesting of RSUs.

In connection with the Amika Mobile asset purchase, the Company agreed to issue 191,267 shares of the Company’s common stock to the former owners of Amika Mobile on each of the first, second and third anniversaries of the closing date. The total number of shares of common stock the Company is obligated to issue is 573,801. The fair value of the Company’s common stock on the closing date was $5.98 per share, resulting in the addition of $3,431 to additional paid-in-capital. During the year ended September 30, 2021, the Company accelerated the issuance of 365,109 of such shares of common stock to a former owner of the Amika Mobile assets. During the year ended September 30, 2022, the Company issued 69,564 shares to the former owners of the Amika Mobile assets. During the nine months ended June 30, 2023, the Company issued 69,564 shares to the former owners of the Amika Mobile assets. There are 69,564 remaining shares of the Company’s common stock subject to issuance under this obligation.

Share buyback program

In December 2018, the Board of Directors approved a new share buyback program beginning January 1, 2019, and expiring on December 31, 2020, under which the Company was authorized to repurchase up to $5 million of its outstanding common shares. In December 2020, the Board of Directors extended the buyback program until December 31, 2022. In December 2022, the Board of Directors extended the Company’s share buyback program through December 31, 2024.

21

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

There were no shares repurchased during the nine months ended June 30, 2023. During the nine months ended June 30, 2022, 259,310 shares were repurchased for $998. All repurchased shares have been retired as of June 30, 2023, and $3 million was available for share repurchase under the program.

Dividends

There were no dividends declared in the nine months ended June 30, 2023 and 2022.

17. NET LOSS PER SHARE

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

Three months ended Nine months ended
June 30, June 30,
2023 2022 2023 2022
Net loss $ (1,423 ) $ (589 ) $ (8,334 ) $ (2,386 )
Basic and diluted loss per share $ (0.04 ) $ (0.02 ) $ (0.23 ) $ (0.07 )
Weighted average shares outstanding - basic 37,053,196 36,566,900 36,855,014 36,459,179
Assumed exercise of dilutive options - - - -
Weighted average shares outstanding - diluted 37,053,196 36,566,900 36,855,014 36,459,179
Potentially dilutive securities outstanding at period end excluded from diluted computation as the inclusion would have been antidilutive:
Options 3,287,772 2,927,384 3,287,772 2,927,384
RSU 385,429 139,128 385,429 374,341
Obligation to issue common stock 69,564 374,341 69,564 139,128
Total 3,742,765 3,440,853 3,742,765 3,440,853

18. SEGMENT INFORMATION

The Company is engaged in the design, development and commercialization of directed and multidirectional sound technologies, voice broadcast products, and location-based mass messaging software for emergency warning and evacuation management. The Company operates in two business segments: Hardware and Software and its principal markets are North and South America, Europe, the Middle East, and Asia. As reviewed by the Company’s chief operating decision maker, the Company evaluates the performance of each segment based on revenue 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.

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Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

The following table presents the Company’s segment disclosures:

Three months ended Nine months ended
June 30, June 30,
2023 2022 2023 2022
Revenue from external customers
Hardware $ 13,324 $ 13,419 $ 33,269 $ 36,041
Software 938 733 2,693 1,956
$ 14,262 $ 14,152 $ 35,962 $ 37,997
Intersegment revenues
Hardware $ - $ - $ - $ -
Software 1,423 860 4,005 2,354
$ 1,423 $ 860 $ 4,005 $ 2,354
Segment operating loss
Hardware $ 2,302 $ 2,495 $ 2,661 $ 6,204
Software (3,752 ) (3,124 ) (11,009 ) (8,969 )
$ (1,450 ) $ (629 ) $ (8,348 ) $ (2,765 )
Other expenses:
Depreciation and amortization expense
Hardware $ 97 $ 95 $ 297 $ 285
Software 539 543 1,621 1,635
$ 636 $ 638 $ 1,918 $ 1,920
Income tax expense (benefit)
Hardware $ - $ (13 ) $ 8 $ 1,053
Software (26 ) (18 ) (26 ) (1,420 )
$ (26 ) $ (31 ) $ (18 ) $ (367 )
June 30, September 30,
--- --- --- --- ---
2023 2022
Long-lived assets
Hardware $ 1,529 $ 1,677
Software 9,095 10,585
$ 10,624 $ 12,262
Total assets
Hardware $ 38,920 $ 47,237
Software 21,841 24,617
$ 60,761 $ 71,854

19. MAJOR CUSTOMERS, SUPPLIERS AND RELATED INFORMATION

For the three months ended June 30, 2023, revenues from one customer accounted for 68% of total revenues with no other single customer accounting for more than 10% of revenues. For the nine months ended June 30, 2023, revenues from one customer accounted for 61% of total revenues with no other single customer accounting for more than 10% of revenues. As of June 30, 2023, accounts receivable from two customers accounted for 69% and 11% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.

For the three months ended June 30, 2022, revenues from one customer accounted for 77% of total revenues with no other single customer accounting for more than 10% of revenues. For the nine months ended June 30, 2022, revenues from one customer accounted for 70% of total revenues with no other single customer accounting for more than 10% of revenues. As of June 30, 2022, accounts receivable from two customers accounted for 61% and 19% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.

23

Genasys Inc.

Notes to the Condensed Consolidated Financial Statements

(in thousands, except per share and share amounts)

(Unaudited)

Revenue from customers in the United States was $12,177 and $12,631 for the three months ended June 30, 2023 and 2022, respectively. Revenue from customers in the United States was $29,526 and $31,466 for the nine months ended June 30, 2023 and 2022, respectively. The following table summarizes revenues by geographic region. Revenues are attributed to countries based on customers’ delivery location.

Three months ended June 30, Nine months ended June 30,
2023 2022 2023 2022
Americas $ 13,189 $ 12,674 $ 32,371 $ 32,205
Asia Pacific 491 514 1,795 2,969
Europe, Middle East and Africa 582 964 1,796 2,823
Total Revenues $ 14,262 $ 14,152 $ 35,962 $ 37,997

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

March 31, September 30,
2023 2022
United States $ 10,207 $ 11,800
Americas (excluding the United States) 10 16
Asia Pacific - -
Europe, Middle East and Africa 407 446
$ 10,624 $ 12,262

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Item 2.          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 accompanying unaudited condensed consolidated financial statements and the related notes included under Item 1 of this Quarterly Report on Form 10-Q, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended September 30, 2022.

Forward Looking Statements

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

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

Overview

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

The Genasys Protect platform includes:

Software

GEM

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

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

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

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

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

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Hardware

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

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

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

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

Recent Developments

Business developments in the fiscal quarter ended June 30, 2023:

• Genasys Protect app launched and made available for download from the App Store and Google Play
• Santa Cruz and San Benito counties selected Genasys to power public safety alerts and notifications, expanding Genasys Protect coverage in California to 32 counties and 18.4 million residents
--- ---
• Large outdoor entertainment destination ordered Genasys integrated mass notification systems to provide venue tourists and visitors emergency warnings and public safety alerts during critical events
--- ---
• U.S. Army placed $10.7 million follow-on AHD program of record order
--- ---

Revenues for the Company’s third quarter of fiscal 2023 were $14.3 million, a $0.1 million increase from $14.2 million in the third quarter of fiscal 2022. Quarterly software revenue of $938 thousand, increased $205 thousand, year over year, offset by a decrease of $0.1 million in hardware revenue ($13.3 million), in the June ended quarter. The timing of budget cycles, government financial issues and military conflict in certain areas of the world, often delay hardware contract awards, resulting in uneven quarterly revenue. Gross profit decreased compared to the same quarter in the prior year, primarily as a result of higher component costs for LRADs delivered against legacy contracts and pricing. Operating expenses in the quarter ended June 30, 2023, increased 8.7% to $8.1 million, compared with $7.5 million in the same period in the prior year. The primary driver of the change is personnel hired in conjunction with our stated investment in building our software business. The Company had 201 employees as of June 30, 2023, as compared with 180 in the prior year period. We reported a net loss of $1.4 million for the third quarter of fiscal 2023, or $(0.04) per share, compared with a net loss of $589 thousand, or $(0.02) per share, for the same quarter in the prior year.

Business Outlook

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

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

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

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

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

In the remainder of fiscal 2023 and into fiscal 2024, we intend to continue pursuing domestic and international business opportunities with the support of business development consultants, key representatives, and resellers. We plan to grow our revenues through increased direct sales to governments and agencies that desire to integrate our communication technologies into their homeland security and public safety systems. This includes building on domestic defense sales by pursuing further U.S. military opportunities. We also plan to pursue emergency warning, enterprise critical event management, government, law enforcement, fire rescue, homeland and international security, private and commercial security, border security, maritime security, and wildlife dispersion and preservation business opportunities. In addition to the matters above, we are authorized for the performance of services and provision of goods pursuant to Delaware General Corporation Law.

Our research and development strategy involves incorporating further innovations and capabilities into our Genasys Protect platform, systems, and solutions to meet the needs of our target markets.

Our GEM, Zonehaven, and NEWS software solutions are complex offerings that we intend to message more succinctly with improved and expanded marketing. We are pursuing certain certifications, which are often required when bidding on government and mass notification opportunities. We continue to invest engineering resources to enhance our Genasys Protect software solutions to compete for larger emergency warning and critical communications 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.

A large number of components and sub-assemblies manufactured by outside suppliers within our supply chain are produced within 50 miles of our facility. We do not source component parts from suppliers in China. It is likely that some of our suppliers source parts or raw materials in China. The aftermath of the COVID-19 pandemic continues to impact worldwide supply chains and the ability to obtain sufficient amounts of component parts, including semiconductor chips and integrated circuits, resins, coating and other equipment and components. Negative impacts on our supply chain could have material effects on our business. We communicate with our suppliers regarding measures to mitigate ongoing worldwide supply chain issues.

We have been affected by price increases from our suppliers and logistics as well as other inflationary factors such as increased salary, labor, and overhead costs. We regularly review and adjust the sales price of our finished goods to offset these inflationary factors. Sustained or increased inflation in the future may affect our ability to achieve certain expectations in gross margin and operating expenses. If we are unable to offset the negative impacts of inflation with increased prices, our future results could be materially affected.

Critical Accounting Policies

We have identified a number of accounting policies as critical to our business operations and the understanding of our results of operations. These are described in our consolidated financial statements located in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, 2022. The impact and any associated risks related to these policies on our business operations is discussed below and throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results.

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The methods, estimates and judgments we use in applying our accounting policies, in conformity with U.S. generally accepted accounting principles, have a significant impact on the results we report in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The estimates affect the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

Comparison of Results of Operations for the Three Months Ended June 30, 2023 and 2022 (in thousands)

Three Months Ended **** **** **** **** **** ****
June 30, 2023 June 30, 2022 **** **** **** **** **** ****
**** **** **** % of **** **** **** % of **** **** **** **** **** ****
**** **** **** Total **** **** **** Total Fav(Unfav)
Amount Revenue Amount Revenue Amount %
Revenues:
Product revenue $ 12,593 88.3 % $ 12,904 91.2 % $ (311 ) (2.4 %)
Contract and other 1,669 11.7 % 1,248 8.8 % 421 33.7 %
Total revenues 14,262 100.0 % 14,152 100.0 % 110 0.8 %
Cost of revenues 7,567 53.1 % 7,289 51.5 % (278 ) (3.8 %)
Gross Profit 6,695 46.9 % 6,863 48.5 % (168 ) (2.4 %)
Operating expenses
Selling, general and administrative 6,004 42.1 % 5,785 40.9 % (219 ) (3.8 %)
Research and development 2,141 15.0 % 1,707 12.1 % (434 ) (25.4 %)
Total operating expenses 8,145 57.1 % 7,492 52.9 % (653 ) (8.7 %)
Loss from operations (1,450 ) (10.2 %) (629 ) (4.4 %) (821 ) 130.5 %
Other income, net 1 0.0 % 9 0.1 % (8 ) (88.9 %)
Loss before income taxes (1,449 ) (10.2 %) (620 ) (4.4 %) (829 ) 133.7 %
Income tax benefit (26 ) (0.2 %) (31 ) (0.2 %) (5 ) 16.1 %
Net loss $ (1,423 ) (10.0 %) $ (589 ) (4.2 %) $ (834 ) 141.6 %
Net revenue
Hardware $ 13,324 93.4 % $ 13,419 94.8 % $ (95 ) (0.7 %)
Software 938 6.6 % 733 5.2 % 205 28.0 %
Total net revenue $ 14,262 100.0 % $ 14,152 100.0 % $ 110 0.8 %

The table above sets forth for the periods indicated, certain items of our condensed consolidated statements of operations expressed in dollars and as a percentage of net revenues. The financial information and the discussion below should be read in conjunction with the condensed consolidated financial statements and notes contained in this report.

Revenues

Revenues were $110 higher compared with the same quarter in the prior year. Software revenue increased $205, partially offset by a $95 decrease in hardware revenue, compared with the prior fiscal year quarter. Lower hardware revenue in the third quarter of fiscal 2023 was largely due to the lower backlog at the start of this fiscal year compared with the prior fiscal year backlog. The higher software revenue was primarily due to a 47% increase in recurring revenue, partially offset by lower professional services performed in the current quarter. The receipt of orders is often uneven due to the timing of budget cycles, government financial issues and military conflict. As of June 30, 2023, we had aggregate deferred revenue of $2,210 for extended warranty obligations and software support agreements.

Gross Profit

Gross profit was slightly lower compared with the same period in the prior year due to higher component costs. Gross profit as a percentage of sales also was slightly lower compared with the prior year period.

As our products have varying gross margins, product mix may affect gross profits. In addition, our margins vary based on the sales channels through which our products are sold in a given period. We continue to implement product updates and changes, including raw material and component changes, that may impact product costs. We have limited warranty cost experience with product updates and changes and estimated future warranty costs can impact our gross margins. We do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $219 over the prior year quarter. The increase was largely due to a $407 increase in employee-related costs which included non-cash share-based compensation, partially offset by a $114 decrease in marketing and travel related expenses. There were 76 and 64 employees as of June 30, 2023 and 2022, respectively.

We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three months ended June 30, 2023 and 2022 of $351 and $327, 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 expenses will fluctuate based on the nature of our sales.

Research and Development Expenses

Research and development expenses increased $434 in the fiscal third quarter primarily due to a $440 increase in employee-related costs which includes non-cash share-based compensation. There were 97 and 87 employees as of June 30, 2023 and 2022 respectively.

Included in research and development expenses for the three months ended June 30, 2023 and 2022, was $26 and $18, respectively, of non-cash share-based compensation costs.

Research and development costs vary period to period due to the timing of projects, and the timing and extent of using outside consulting, design, and development firms. We seek to continually improve our product offerings, and we expect to continue to expand our product line with new products, customizations, and enhancements. Based on current plans, we may expend additional resources on research and development in the current year compared to the prior year.

Net Loss

Net loss in the third quarter of fiscal year 2023 was $1,423, compared with a net loss of $589 in the third quarter of fiscal year 2022. The increase in net loss was primarily attributable to the increased cost of sales due to higher component costs, plus higher operating expenses, which resulted from hiring additional engineering, sales, and marketing employees.

Comparison of Results of Operations for the Nine Months Ended June 30, 2023 and 2022 (in thousands)

Nine Months Ended **** **** **** **** **** ****
June 30, 2023 June 30, 2022 **** **** **** **** **** ****
**** **** **** % of **** **** **** % of **** **** **** **** **** ****
**** **** **** Total **** **** **** Total Fav(Unfav)
Amount Revenue Amount Revenue Amount %
Revenues:
Product revenue $ 31,651 88.0 % $ 34,328 90.3 % $ (2,677 ) (7.8 %)
Contract and other 4,311 12.0 % 3,669 9.7 % 642 17.5 %
Total revenues 35,962 100.0 % 37,997 100.0 % (2,035 ) (5.4 %)
Cost of revenues 19,510 54.3 % 18,654 49.1 % (856 ) (4.6 %)
Gross Profit 16,452 45.7 % 19,343 50.9 % (2,891 ) (14.9 %)
Operating expenses
Selling, general and administrative 18,443 51.3 % 16,794 44.2 % (1,649 ) (9.8 %)
Research and development 6,357 17.7 % 5,314 14.0 % (1,043 ) (19.6 %)
Total operating expenses 24,800 69.0 % 22,108 58.2 % (2,692 ) (12.2 %)
Loss from operations (8,348 ) (23.2 %) (2,765 ) (7.3 %) (5,583 ) 201.9 %
Other(expense) income, net (4 ) (0.0 %) 12 0.0 % (16 ) (133.3 %)
Loss before income taxes (8,352 ) (23.2 %) (2,753 ) (7.2 %) (5,599 ) 203.4 %
Income tax benefit (18 ) (0.1 %) (367 ) (1.0 %) (349 ) 95.1 %
Net loss $ (8,334 ) (23.2 %) $ (2,386 ) (6.3 %) $ (5,948 ) 249.3 %
Net revenue
Hardware $ 33,269 92.5 % $ 36,041 94.9 % (2,772 ) (7.7 %)
Software 2,693 7.5 % 1,956 5.1 % 737 37.7 %
Total net revenue $ 35,962 100.0 % $ 37,997 100.0 % $ (2,035 ) (5.4 %)

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The table above sets forth for the periods indicated, certain items of our condensed consolidated statements of operations expressed in dollars and as a percentage of net revenues. The financial information and the discussion below should be read in conjunction with the condensed consolidated financial statements and notes contained in this report.

Revenues

Revenues decreased $2,035 for the nine months ended June 30, 2023, compared with the same prior year period, primarily due to the lower backlog as of September 30, 2022, compared with September 30, 2021. Hardware revenue decreased $2,772, partially offset by the $737 increase in software revenue. The receipt of orders will often be uneven due to the timing of approvals or budgets. As of June 30, 2023, we had aggregate current deferred revenue of $2,210 for extended warranty obligations and software support agreements.

Gross Profit

The decrease in gross profit in the nine months ended June 30, 2023 was primarily due to lower revenue and the higher cost of components this fiscal year compared with the prior year period and a better mix of revenue in the prior year period.

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 $1,649 in the nine months ended June 30, 2023, compared with the prior year period. The increase in selling, general and administrative expenses was largely due to a $1,342 increase in employee compensation related costs which includes non-cash stock based compensation, a $507 increase in professional services expenses, and a $256 decrease in commission expense.

We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the nine months ended June 30, 2023 and 2022 of $1,171 and $1,544, 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 expenses will fluctuate based on the nature of our sales.

Research and Development Expenses

Research and development expenses increased $1,043, primarily due to increased employee-related costs which included non-cash share-based compensation.

We incurred non-cash share-based compensation expenses allocated to research and development in the nine months ended June 30, 2023 and 2022 of $78 and $53, respectively.

Research and development costs vary period to period due to the timing of projects, amount of support provided on customer projects, and the timing and use of outside consulting, design, and development firms. We continually improve our product offerings, and we expect to continue to expand our product line with new products, customizations, and enhancements. Based on current plans, we may expend additional resources on research and development in the current year compared to the prior year.

Net Loss

Net loss for the first nine months of fiscal 2023 was $8,334, compared with the prior year period net loss of $2,386. The increase in net loss was primarily attributable to lower revenue, the increased cost of sales due to higher component costs, and higher operating expenses, which resulted from hiring additional software engineering, sales, and marketing employees.

Other Metrics

We monitor a number of financial and operating metrics, including adjusted EBITDA, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. Our business metrics may be calculated in a manner different than similar other business metrics used by other companies.

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Adjusted EBITDA

Adjusted EBITDA represents our net income before other income, net income tax expense (benefit), depreciation and amortization expense, and stock-based compensation. We do not consider these items to be indicative of our core operating performance. The items that are non-cash include depreciation and amortization expense and stock-based compensation. Adjusted EBITDA is a measure used by management to understand and evaluate our core operating performance and trends, and to generate future operating plans, make strategic decisions regarding allocation of capital, and invest in initiatives focused on cultivating new markets for our solutions. In particular, the exclusion of certain expenses in calculating adjusted EBITDA facilitates comparisons of our operating performance on a period-to-period basis. Adjusted EBITDA is not a measure calculated in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). We believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Nevertheless, use of adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (1) although depreciation and amortization are non-cash charges, the intangible assets that are amortized and property and equipment that is depreciated, will need to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacement or for new capital expenditure requirements; (2) adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (3) adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (4) adjusted EBITDA does not reflect tax payments or receipts that may represent a reduction or increase in cash available to us; and (5) other companies, including companies in our industry, may calculate adjusted EBITDA or similarly titled measures differently, which reduces the usefulness of the metric as a comparative measure. Because of these and other limitations, you should consider adjusted EBITDA alongside our other U.S. GAAP-based financial performance measures, net income and our other U.S. GAAP financial results.

The following table presents a reconciliation of adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for each of the periods indicated (in thousands):

Three months ended Nine months ended
June 30, June 30,
2023 2022 2023 2022
Net loss $ (1,423 ) $ (589 ) (8,334 ) (2,386 )
Other income (expense), net (1 ) (9 ) 4 (12 )
Income tax expense (benefit) (26 ) (31 ) (18 ) (367 )
Depreciation and amortization 636 638 1,918 1,920
Stock-based compensation 396 355 1,329 1,650
Adjusted EBITDA $ (418 ) $ 364 $ (5,101 ) $ 805

Segment Results

Segment results include net revenue and operating income by segment. Corporate expense including various administrative expenses and costs of a publicly traded company are included in the Hardware segment as per historical financial reporting.

Comparison of Segment Adjusted EBITDA for the Three Months Ended June 30, 2023 and 2022 (in thousands)

Software Hardware
Three months ended **** **** **** **** Three months ended **** **** **** ****
June 30, Fav (Unfav) June 30, Fav (Unfav)
2023 2022 % 2023 2022 %
Revenue $ 938 $ 733 28.0 % $ 13,324 $ 13,419 ) (0.7 %)
Operating (loss) Income (3,752 ) (3,124 ) ) 20.1 % 2,302 2,495 ) (7.7 %)
Reconciliation of GAAP to Non-GAAP
Depreciation and amortization 539 543 ) (0.7 %) 97 95 2.1 %
Stock-based compensation 99 46 115.2 % 297 309 ) (3.9 %)
Adjusted EBITDA $ (3,114 ) $ (2,535 ) ) 22.8 % $ 2,696 $ 2,899 ) (7.0 %)

All values are in US Dollars.

Software Segment

Software segment revenue increased 28% over the prior fiscal year quarter. This primarily reflects a 47% increase in recurring revenue, partially offset by a 24% decrease in professional services, compared with the prior fiscal year period.

Operating loss increased $628 in the third fiscal quarter due to increases in payroll and related costs from increased hiring to support software development and sales.

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Hardware Segment

Hardware segment revenue decreased $95 compared with the prior fiscal year period. The decrease was due to the lower backlog at the start of this fiscal year compared with the prior fiscal year beginning backlog.

Operating income decreased $193 in the fiscal 2023 third quarter compared with the same quarter in the prior year due to lower revenue and gross profit resulting from higher cost of components, and higher professional services expense, compensation expense, and sales and marketing expenses, partially offset by lower commission expense.

Comparison of Segment Adjusted EBITDA for the Nine Months Ended June 30, 2023 and 2022 (in thousands)

Software Hardware
Nine months ended **** **** **** **** **** **** Nine months ended **** **** **** **** ****
June 30, Fav (Unfav) June 30, Fav (Unfav)
2023 2022 % $ 2023 **** 2022 %
Revenue $ 2,693 $ 1,956 $ 737 37.7 % $ 33,269 $ 36,041 $ (2,772 ) (7.7 %)
Operating (loss) Income (11,009 ) (8,969 ) (2,040 ) 22.7 % 2,661 6,204 (3,543 ) (57.1 %)
Reconciliation of GAAP to Non-GAAP
Depreciation and amortization 1,622 1,635 (13 ) (0.8 %) 296 285 11 3.9 %
Stock-based compensation 321 171 150 87.7 % 1,008 1,479 (471 ) (31.8 %)
Adjusted EBITDA $ (9,066 ) $ (7,163 ) $ (1,903 ) 26.6 % $ 3,965 $ 7,968 $ (4,003 ) (50.2 %)

Software Segment

Software segment revenue increased 38% over the prior fiscal year. This primarily reflects a 44% increase in recurring revenue compared with the first nine months of fiscal 2022.

Operating loss increased $2,040, compared with the prior fiscal year period due to increases in payroll and related costs from increased hiring to support software development and sales and higher professional services expense.

Hardware Segment

Hardware segment revenue decreased $2,772, compared with the prior year period. The decrease was largely due to the lower backlog at the start of this fiscal year compared with the prior fiscal year beginning backlog.

Operating income decreased $3,543, compared with the prior fiscal year due to lower revenue and lower gross profit from higher cost of components, partially offset by lower commission expense.

Liquidity and Capital Resources

Cash and cash equivalents as of June 30, 2023, was $2,971, compared with $12,736 as of September 30, 2022. We had short-term marketable securities of $3,549 as of June 30, 2023, compared with $6,397 as of September 30, 2022. We had long-term marketable securities of $392 as of June 30, 2023, compared with $781 as of September 30, 2022. Other than cash and cash equivalents, short and long-term marketable securities, other working capital, and expected future cash flows from operating activities in subsequent periods, we have no unused sources of liquidity at this time.

We continue to manage all aspects of our business including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, and developing new opportunities for growth.

Principal factors that could affect our liquidity include:

• ability to meet revenue projections;
• government spending levels;
--- ---
• introduction of competing technologies;
--- ---
• product mix and effect on margins;
--- ---
• ability to reduce current inventory levels;
--- ---
• product acceptance in new markets;
--- ---
• value of shares repurchased;
--- ---
• value of dividends declared;
--- ---
• supply chain disruptions;
--- ---
• inflation;
--- ---

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• conflict between Russia and Ukraine;

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.
--- ---

Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the twelve-month period subsequent to the issuance of the interim financial information. However, we operate in a rapidly evolving and unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that we may not be required to raise additional funds through the sale of equity or debt securities or from credit facilities. Additional capital, if needed, may not be available on satisfactory terms, or at all.

Cash Flows

Our cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows, are summarized in the table below:

Nine months ended
June 30, 2023 June 30, 2022
Cash provided by (used in):
Operating activities $ (12,822 ) $ (571 )
Investing activities 3,079 14
Financing activities (165 ) (1,092 )

Operating Activities

Net loss of $8,334 for the nine months ended June 30, 2023 was decreased by $4,080 of non-cash items that included share-based compensation, warranty provision, depreciation and amortization, amortization of operating lease ROU assets, accretion of acquisition holdback liability, and inventory obsolescence. Cash used by operating activities in the current year reflected an increase in inventory of $2,127 and accounts receivable of $3,570, and a decrease in accrued and other liabilities of $5,581, comprised of a decrease in the balances of customer deposits received, payment of the Canadian GST/HST, and payment of incentive compensation earned in fiscal year 2022. This was offset by a $1,755 decrease in prepaid expenses and a $955 increase in accounts payable.

Net loss of $2,386 for the nine months ended June 30, 2022 was decreased by $4,006 of non-cash items that included share-based compensation, depreciation and amortization, amortization of operating lease ROU assets, an increase to deferred income taxes, warranty provision and inventory obsolescence. Cash used by operating activities in the current year reflected an increase in inventory of $2,563, and a decrease in accrued liabilities and other of $3,012, comprised of a decrease in the balances of customer deposits received, and payment of incentive compensation earned in fiscal year 2021. This was offset by a $1,964 decrease in accounts receivable, a $1,049 decrease in prepaid expenses, and a $371 increase in accounts payable.

We had accounts receivable of $10,353 as of June 30, 2023, compared with $6,744 as of September 30, 2022. Terms with individual customers vary greatly. We regularly provide thirty-day terms to our customers if credit is approved. Our receivables can vary dramatically due to overall sales volume, quarterly variations in sales, timing of shipments to and receipts from large customers, payment terms, and the timing of contract payments.

As of June 30, 2023, and September 30, 2022, our working capital was $14,757 and $20,197, respectively. The decrease in working capital was primarily due to the net loss this period and decrease in prepaid expenses and accrued liabilities.

Investing Activities

Our net cash provided by investing activities was $3,079 for the nine months ended June 30, 2023, compared with net cash provided by investing activities of $14 for the nine months ended June 30, 2022. In the first nine months of fiscal 2023, our holdings in short and long-term marketable securities decreased by $3,308, compared with a decrease of $205 for the nine months ended June 30, 2022.  Cash used in investing activities for the purchase of property and equipment was $229 and $191 for the nine months ended June 30, 2023 and 2022, respectively. We anticipate additional expenditures for tooling and equipment during the balance of fiscal year 2023.

Financing Activities

In the nine months ended June 30, 2023, we used $165 for financing activities, compared with $1,092 used in financing activities for the nine months ended June 30, 2022. In the first nine months of fiscal 2023, we received $87 from the exercise of stock options and used $45 to settle statutory tax withholding requirements upon vesting of restricted stock units and used $207 to settle statutory tax withholding requirements upon the exercise of stock options. In the first nine months of fiscal 2022 we received $253 from the exercise of stock options and used $998 to repurchase shares of our common stock, $70 to settle statutory tax withholding requirements upon vesting of restricted stock units, and $277 in the repayment of promissory notes upon the certification of completed projects by government agencies in Spain.

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In December 2018, the Board of Directors approved a new share buyback program beginning January 1, 2019, and expiring on December 31, 2020, under which the Company was authorized to repurchase up to $5 million of its outstanding common shares. In December 2020, the Board of Directors extended the buyback program until December 31, 2022. In December 2022, the Board of Directors extended the Company’s share buyback program through December 31, 2024.

There were no shares repurchased during the nine months ended June 30, 2023. During the nine months ended June 30, 2022, 259,310 shares were purchased for $998. All repurchased shares have been retired and as of June 30, 2023, and $3.0 million was available for share repurchase under this program.

Recent Accounting Pronouncements

New pronouncements issued for future implementation are discussed in Note 3, Recent Accounting Pronouncements, to our condensed consolidated financial statements.

Item 3.         Quantitative and Qualitative Disclosures about Market Risk.

Foreign Currency Risk

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. The transactions of our Spanish subsidiary are denominated primarily in Euros and the transactions of our Canadian subsidiary are denominated primarily in Canadian dollars, which is a natural hedge against foreign currency fluctuations. All other revenue with customers and all arrangements with third-party manufacturers, with one exception, provide for pricing and payment in U.S. dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the U.S. dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the U.S. dollar relative to other currencies could result in our suppliers raising their prices to continue doing business with us. Fluctuations in currency exchange rates could affect our business in the future.

Item 4.         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.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of our disclosure controls and procedures as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2023.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our fiscal quarter ended June 30, 2023, 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.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II. OTHER INFORMATION

Item 1.         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 consolidated financial statements for pending litigation. Currently, there are no pending material legal proceedings to which the Company is a party or to which any of its property is subject.

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Item 1A.         Risk Factors.

There have been no material changes to the risk factors described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, filed with the SEC on December 16, 2022.

Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.         Defaults Upon Senior Securities.

None.

Item 4.         Mine Safety Disclosures.

Not Applicable.

Item 5.         Other Information.

Rule 10b5-1 Trading Plans

During the three months ended June 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act or any “non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of Regulation S-K.

Item 6.         Exhibits.

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.*
101.INS Inline XBRL Instance Document*
101.SCH Inline XBRL Taxonomy Extension Schema Document*
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104 Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

*         Filed concurrently herewith.

35

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

GENASYS INC.
Date: August 10, 2023 By: /s/    Dennis D. Klahn
Dennis D. Klahn, Chief Financial Officer
(Principal Financial Officer)

36

Exhibit 31.1

CERTIFICATIONS

I, Richard S. Danforth, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Genasys Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
--- ---
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
--- ---
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
--- ---
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
--- ---
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and
--- ---
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s independent registered public accounting firm and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
--- ---
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
--- ---
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
--- ---
Date: August 10, 2023
---
/s/ Richard S. Danforth
Richard S. Danforth
(Principal Executive Officer)

Exhibit 31.2

CERTIFICATIONS

I, Dennis D. Klahn, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Genasys Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
--- ---
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
--- ---
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
--- ---
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
--- ---
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
--- ---
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
--- ---
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and
--- ---
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s independent registered public accounting firm and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
--- ---
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
--- ---
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
--- ---
Date: August 10, 2023
---
/s/ Dennis D. Klahn
Dennis D. Klahn
(Principal Financial Officer)

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his or her capacity as an officer of Genasys Inc. (the “Company”), that, to his or her knowledge, the Quarterly Report of the Company on Form 10-Q for the quarter ended June 30, 2023 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of the Company as of the dates and for the periods presented in the financial statements included in such report.

Dated: August 10, 2023
/s/ Richard S. Danforth
Richard S. Danforth
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Dennis D. Klahn
---
Dennis D. Klahn
Chief Financial Officer
(Principal Financial Officer)

The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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