Genasys Inc.: Form 10-Q for the period ended Jun 30, 2024

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, 2023.

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

We are a global provider of Protective Communications solutions, including our Genasys Protect software platform and LRAD® Long Range Acoustic Devices. Our unified software platform receives information from a wide variety of sensors and IoT inputs to collect real-time information on developing and active emergency situations. Genasys’ customers use this information to create and disseminate alerts, warnings, notifications, and instructions through multiple channels before, during, and after public safety and enterprise threats, critical events, and other crisis situations.

Genasys Protect provides a comprehensive portfolio of Protective Communications software and hardware systems serving federal governments and agencies, state and local governmental agencies, and education (“SLED”); and enterprise organizations in sectors including but not limited to oil and gas, utilities, manufacturing, automotive, and healthcare. Genasys Protect solutions have a diverse range of applications, including emergency warning and mass notification for public safety; critical event management for enterprise companies; de-escalation for defense and law enforcement; critical infrastructure protection; and automated detection of real-time threats such as active shooters and severe weather.

Genasys’ LRAD systems broadcast audible directed voice messages with exceptional clarity from close range out to 5,500 meters. We have a history of successfully delivering innovative systems and solutions in mission critical situations, pioneering the acoustic hailing device (“AHD”) market with the introduction of our first LRAD AHD in 2002 and creating the first multi-directional, voice-based public safety mass notification systems in 2012. Building on our proven, best in class solutions and systems, we offer the first and only unified, end-to-end Protective Communications platform – Genasys Protect.

The platform includes:

Software Products

Genasys Protect

The Complete Protective Communications Platform

Genasys Protect combines the most comprehensive suite of solutions that facilitate preparedness, responsiveness, and analytics to keep people, operations and assets protected against the impacts of natural disasters, terrorism, violent civil unrest, and other dangerous situations, as well as power failures, facility shutdowns, and other non-emergency operational disruptions.

1. Proven Technology: Genasys solutions have been on the front lines for more than 40 years, providing precision-targeted communications designed to ensure the right people get the right message - right away.

2. Modular Suite: Built on open standards, Genasys software and hardware systems are designed to easily integrate, whether using the full Genasys suite or complementing the notification platforms customers already have in place.

3. Predictive Simulation: Genasys Protect is designed to assist customers test response plans preemptively with advanced simulation of evacuation-level events, including fires and floods, and their impact on infrastructure, including traffic patterns and perimeter establishment.

4. Unified Viewpoint: One common safety operating picture provides real-time visibility into our customers’ people, assets, and environment by combining first-party data from asset / people-management platforms and IoT sensors with vetted third-party data sources, including the Federal Emergency Management Agency (“FEMA”), National Oceanic and Atmospheric Administration, Department of Homeland Security, and more.

5. Unmatched Precision: Customized zone mapping enables targeting of mass notifications at the street level, making it easier to sequence response areas from most to least critical.

6. Multi-channel: Genasys Protect is designed to empower customers to saturate their notification area by simultaneously alerting people across SMS, voice calls, social media, TV, radio, digital signage, and outdoor acoustic devices to ensure the maximum number of people receive critical notifications.

7. Network Effect: Implementation in neighboring municipalities as well as across public and private-sector organizations within the same municipality extends coverage and provides greater precision when notifying people of threats.

Genasys ALERT

ALERT is an interactive, cloud-based Software as a Service (SaaS) solution that enables SLED and enterprise customers to send critical information to at-risk individuals or groups when an emergency occurs. ALERT 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. ALERT communications to the public can be enhanced via Genasys ACOUSTICS, while ALERT communications among first responders and emergency personnel can be augmented and accelerated with Genasys CONNECT (formerly Evertel). ALERT customers can create and send critical, verified, and secure notifications and messages that are geographically specific and targeted using emails, voice calls, text messages, panic buttons, desktop alerts, TV, social media, and more. Additionally, Genasys is a certified provider of Integrated Public Alert and Warning Systems (“IPAWS”) notifications. IPAWS is the federal public notification platform for the United States, which ALERT customers can use to deliver critical communications in multiple languages to specific populations.

ALERT sends targeted messages based on geographic location, permitting relevant information and instructions to be sent to the appropriate populations. Emergency managers can prepare for natural or man-made disasters by developing evacuation plans that map routes, shelters, traffic control locations, and road closures using ALERT’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. Auto-Discovery, an innovative feature of the platform, locates and connects with anyone on a wired or wireless network in a fixed area with no opt-in required. When discovered, ALERT anonymizes all recipient information and data. When an emergency occurs, these tools allow at-risk groups or individuals to be notified as quickly as possible without sacrificing their privacy.

In addition to disseminating alerts and notifications, ALERT uses two-way communication tools, including polls and check-ins to receive feedback from targeted populations and first responders. With direct feedback, operators can survey the safety and status of at-risk individuals, learn of developments, update notifications and/or instructions in response to new information, and more.

Similarly, enterprise customers are able 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, ALERT integrates with various data sources, including sensors, emergency services, active directories, human resources, visitor management, and building control systems to find and deliver safety alerts and notifications to residents, employees, staff, contractors, temporary workers, and visitors.

Genasys EVAC

EVAC empowers responding agencies to react swiftly, make collaborative decisions, and communicate event status in real-time to other agencies, businesses, and the public. EVAC determines and communicates the proper scope of a response or evacuation by replacing guesswork with data-driven intelligence. EVAC enhances safety levels for first responders, communities, and large campuses by providing:

• intelligent zones to improve evacuation planning and communication. EVAC users can build, edit, and act upon geographical location data, including shelters, facilities, and traffic;
• modeling behaviors to plan for effective responses and/or evacuation scenarios covering emergencies that include wildfires, floods, active shooters, hurricanes, and more;
• actionable communication through the Genasys Protect mobile app to keep people informed before, during, and after a critical event;
• a common operating picture across agencies to reduce response times by 90%; and
• targeted alerting across multiple channels, including voice-based mass notification speaker system for timely, efficient evacuation and public safety notifications.

Genasys CONNECT

CONNECT is a leading cross-agency collaboration platform that streamlines and secures team and one-on-one communications for first responders and public safety agencies. With real-time intelligence sharing that exceeds regulatory privacy requirements for public agencies, CONNECT’s instant communication platform empowers first responders and public safety personnel to collaborate and share information in a single space with text, videos, images, and audio from any location. CONNECT provides a secure space where professionals can exchange information, make decisions, and collaborate with trust in data security. Record retention policies drive compliance that allows agencies and personnel to communicate in confidence.

Enabling public safety professionals to collaborate with other agencies throughout their region, state and country, CONNECT provides real-time interoperability to address critical events and crisis situations more quickly through coordinated efforts. Compliant with all federal and state-level legal requirements for public safety communications, CONNECT data is protected and secured through high-level data encryption within a secure, U.S. based, government-only cloud environment.

Hardware

Genasys ACOUSTICS

ACOUSTICS unites Genasys’ next generation of mass notification speaker systems with Genasys Protect command-and-control software. Most legacy mass notification systems are sirens with limited, if any, voice broadcast capability. ACOUSTICS systems feature the mass notification industry's highest Speech Transmission Index, large directional and omni-directional broadcast coverage areas, and an array of options including solar power, battery backup, and satellite connectivity that facilitate continual ACOUSTICS operation when power and telecommunications infrastructure goes down.

ACOUSTICS gives operators the ability to send critical alerts and notifications from emergency operations centers, and authorized computers or smart phones. Emergency alerts and information can be sent via individual, grouped, or networked ACOUSTICS installations, text messages, emails, IPAWS, desktop alerts, TV, voice calls, and social media. Genasys Protect’s layered redundancy helps to ensure the maximum number of people receive Protective Communications and critical notifications.

LRAD

LRAD is the world’s leading acoustic hailing device (AHD), with the ability to project audible alert tones and voice messages with exceptional clarity in a 30° beam from close range out to 5,500 meters. LRAD systems are used throughout the world in multiple applications and circumstances to safely hail, warn, inform, direct, determine intent, establish large safety zones, de-escalate uncertain situations, alleviate the use of force, and save lives. LRADs have been deployed in numerous defense, law enforcement, public safety, maritime, oil & gas and critical infrastructure security installations, and applications where clear and intelligible voice communications are essential.

Several LRAD models are available in varying audio outputs, communication coverage areas, sizes, and functionalities. Several options and accessories (power pack, searchlights, mounts, and more) are also available to enhance LRAD capabilities.

All LRAD systems are defined by unparalleled audio output and clarity. LRAD systems use Genasys' proprietary XL driver technology, which generates higher audio output in smaller, lighter form factors. The technology also helps ensure voice messages and alert tones cut through background noise and are clearly heard and understood. These competitive advantages, and constant innovation, have made LRAD the de facto standard of the global AHD industry.

Recent Developments

Business developments since September 30, 2023:

• Awarded critical infrastructure project to engineer, procure and build a Genasys Protect for 37 dams in Puerto Rico
• Expanded Board of Directors to include Bill Dodd, retiring California State Senator, Craig Fugate, former Administrator of the Federal Emergency Management Agency, and Mark Culhane, who served as the Chief Financial Officer of numerous public and private companies
• Awarded LRAD systems order from Damen Schelde Naval Shipbuilding B.V. (Damen) for the German Navy’s new F-126 frigates, the largest shipbuilding project in the history of the German Navy
• Received $2.7 million LRAD systems contract from U.S. Navy as part of the Navy’s ongoing replacement of first generation LRADs on surface vessels
• Entered into $15 million two-year term loan agreement (the “Term Loan”)
• Partnered with 8 other companies in Project AWARE - a European Union-funded project to extend reception and processing of emergency warning messages from the Galileo Emergency Warning Satellite Service to display panels, indoor warning systems, and ACOUSTICS devices
• Expanded Genasys EVAC coverage to include all of Los Angeles County, CA under a five-year contract
• Awarded $2.7 million in initial and follow-on orders under a multi-phase program to deploy LRADs on naval ships and shore installations of a Middle Eastern country
• Partnered with Ladris Technologies, Inc., an artificial intelligence provider, to deliver comprehensive disaster evacuation modeling solutions across North America and Europe
• Received $1.0 million contract from the U.S. Army for Common Remotely Operated Weapon Station (“CROWS”) LRAD integration prototypes
• Completed acquisition of Evertel Technologies, subsequently rebranded as Genasys CONNECT
• Closed $11.5 million underwritten public offering of common stock

Revenues for the Company’s third quarter of fiscal 2024, were $7,167, a decrease from $14,262 in the third quarter of fiscal 2023. Software revenue of $2,059 increased $1,121 over the prior year quarter, offset by a decrease of $8,216 in hardware revenue. Third quarter hardware revenue in the prior year included $8,612 from a U.S. Army program of record. Deliveries against this program of record were completed in the fourth quarter of fiscal 2023. Gross profit decreased, compared to the same quarter in the prior year, as a result of lower hardware revenue and reduced overhead absorption, partially offset by an increased higher margin software revenue in this year’s quarter. Operating expenses in the quarter ended June 30, 2024, increased to $9,145, compared with $8,145 in the same period in the prior year. We reported a net loss of $6,682 for the third quarter of fiscal 2024, or $(0.15) per share, compared with a net loss of $1,423, or $(0.04) per share, for the same quarter in the prior year.

In the last six years, the Company has recognized revenue under a $110,000 U.S. Army program of record for Long Range Acoustic Devices. Final deliveries under this program occurred in the fourth quarter of fiscal year 2023. A new, larger multiyear program was approved by Congress in late March 2024, as part of this year’s Defense budget. Due to the timing of the budget passage, and common hurdles in the initial procurement and purchase order process, revenues are not anticipated to begin until after the current fiscal year. Historically, hardware revenue has been characterized by large and inconsistent orders that in aggregate have been a generator of cash for the Company. We continue to be optimistic about our future with the fully funded award of a contract of up to $75,000 to engineer, procure and build an Early Warning System (EWS) for Puerto Rico. We anticipate a majority of revenue from this contract will be realized in our fiscal years 2025 and 2026. In addition, we continue to invest in our Genasys Protect software platform with a significant win this year in Los Angeles County, in addition to wins in other counties in California, Colorado, Utah, and Oregon. The early-stage Software segment continues to generate operating losses; however, revenue continues to grow year over year and segment operating loss has improved incrementally from 2023. With the delay in hardware orders and continued investment in software, the Company’s operating activities have used $21,012 of cash in the first nine months of this fiscal year. To address the ongoing cash needs, the Company completed a follow-on equity offering for $11.5 million in October of 2023, and signed a $15,000, two-year senior secured Term Loan agreement in May. This capital activity is expected to enable the Company to continue operations and return to expected growth in annual revenue and generation of cash from operations through the emergency notification system for Puerto Rico and the new CROWS program for the U.S. Department of Defense.

Business Outlook

Our products, systems, and solutions continue to gain worldwide awareness and recognition through increased marketing efforts, 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, public safety, emergency warning, mass notification, critical event management, enterprise safety, and law enforcement sectors as a result of increasing threats to government, commerce, law enforcement, homeland security, and critical infrastructure. 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 an increased demand for LRADs and advanced mass notification speakers. We have a reputation for producing quality products that feature industry-leading broadcast area coverage, voice 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 planning.

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

By providing the only SaaS platform that unifies sensors and IoT inputs with multi-channel, multi-agency 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 manufacturers and suppliers, we believe that our advanced technology and unified platform provide opportunities to succeed in the large and growing public safety, emergency warning, and critical communications markets.

We intend to continue pursuing domestic and international business opportunities with the support of 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 continuing to pursue further U.S. military opportunities. We also plan to pursue domestic and international emergency warning, enterprise and critical event management, government, law enforcement, fire rescue, homeland and international security, private and commercial security, border security, maritime security, critical infrastructure protection, and wildlife 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 to meet the needs of our target markets.

Our Genasys Protect software solutions are more complex offerings. We are pursuing certain certifications, which are often required when bidding on government and mass notification opportunities. We intend to invest engineering resources to enhance our ALERT, EVAC, and CONNECT 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 LRAD and ACOUSTICS 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 in China. Negative impacts on our supply chain could have a material adverse effect on our business.

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. Although we do not believe that inflation has had a material impact on our financial results through June 30, 2024, sustained or increased inflation in the future may have a negative effect on 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, 2023. The impact and any associated risks related to these policies on our business operations is discussed below and throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results.

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

The following critical accounting policy was not included 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, 2023.

Business Combinations

We apply the provisions of ASC Topic 805*, Business Combinations,* in accounting for our acquisitions. The acquired assets and assumed liabilities are recorded at their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of net identifiable assets. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the date of acquisition, as well as any contingent consideration, our estimates are inherently uncertain and subject to refinement. During the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill. Upon conclusion of the measurement period, or the final determination of values for assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments will be recorded in our consolidated statements of operations.

Accounting for business combinations requires significant judgment, estimates and assumptions at the acquisition date. In developing estimates of fair values at the acquisition date, we utilize a variety of factors including market data, independent experts, historical and future expected cash flows, growth rates and discount rates. The subjective nature of our assumptions increases the risk associated with estimates surrounding the projected performance of the acquired entity.

Comparison of Results of Operations for the Three Months Ended June 30, 2024 and 2023 (in thousands)

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 $7,095, or 50%, compared with the third fiscal quarter of the prior year. Hardware revenue decreased $8,216, partially offset by software revenue, which increased $1,121, compared with the prior year quarter. The lower hardware revenue in the third quarter of fiscal 2024 was largely due to the lower backlog at the start of the fiscal year compared with the prior year amount. Third quarter hardware revenue in the prior year included $8,612 from a U.S. Army program of record. Deliveries against this program of record were completed in the fourth quarter of fiscal 2023. A new, similar sized program has been included as part of the Department of Defense fiscal year 2024 authorization. The higher software revenue was primarily due to a 138% increase in recurring revenue. The receipt of orders is often uneven due to the timing of budget cycles, government financial issues and military conflict. As of June 30, 2024, we had aggregate deferred revenue of $343 for extended warranty obligations and software support agreements.

Gross Profit

Gross profit decreased $2,911, or 44%, compared with the same quarter in the prior year. The decrease in gross profit was due to lower hardware revenue and related reduced overhead absorption, partially offset by higher margin software in the current year’s third quarter. Gross profit as a percentage of sales was higher compared with the prior year period primarily due to a better mix of revenue as higher margin software was 29% of total revenue in the third quarter of fiscal 2024.

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

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $645, or 11%, over the prior year quarter. The increase was largely due to $753 of higher professional services expense, and an increase of $95 of amortization expense from the Evertel acquisition, offset by a $108 decrease in non-cash share-based compensation expense.

We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three months ended June 30, 2024 and 2023 of $243 and $351, 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 $355, or 17%, in the fiscal third quarter due to an increase in engineers over the prior year period, including the addition of Evertel software development activities.

Included in research and development expenses for the three months ended June 30, 2024 and 2023, were $29 and $26, 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 fiscal year compared to the prior fiscal year.

Other (Expense) Income , Net

Other expense, net was $1,363 in the third quarter this fiscal year, compared to other income, net of $1 in the prior fiscal year quarter. The expense in the current fiscal period was primarily due to $1,121 of professional expenses related to the $15,000 secured Term Loan agreement, $197 of interest expense from the Term Loan and $103 from the net change in fair value of the Term Loan and related warrants, partially offset by $52 of interest income.

Net Loss

Net loss in the third quarter of fiscal year 2024 was $6,682, compared with a net loss of $1,423 in the third quarter of fiscal year 2023. The increase in net loss was primarily due to the lower revenue in the current year fiscal third quarter. The income tax benefit in the current year period is primarily due to a prior year foreign income tax true-up.

Comparison of Results of Operations for the Nine Months Ended June 30, 2024 and 2023 (in thousands)

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 $18,695, or 52%, for the nine months ended June 30, 2024, compared with the same prior year period, primarily due to the lower backlog as of September 30, 2023, compared with September 30, 2022. Hardware revenue decreased $21,216, partially offset by the $2,521 increase in software revenue. Nine months year to date hardware revenue in the prior year included $19,712 from a U.S. Army program of record. Deliveries against this program of record were completed in the fourth quarter of fiscal 2023. A new, similar sized program has been included as part of the Department of Defense fiscal year 2024 authorization. The higher software revenue was primarily due to a 117% increase in recurring revenue, partially offset by lower professional services performed in the current year nine-month period. The receipt of orders will often be uneven due to the timing of approvals or budgets. As of June 30, 2024, we had aggregate deferred revenue of $343 for extended warranty obligations and software support agreements.

Gross Profit

The $9,012 decrease in gross profit in the nine months ended June 30, 2024, was primarily due to the lower hardware revenue and related reduced overhead absorption, partially offset by higher margin software revenue compared to 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 $1,363 in the nine months ended June 30, 2024, compared with the prior year period. The increase in selling, general and administrative expenses was largely due to an $819 increase in professional services expenses, a $307 increase in commission expense, and an additional $284 of amortization expenses for the Evertel acquisition, partially offset by a $100 decrease in non-cash share-based compensation expense, compared with the prior year to date period.

We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the nine months ended June 30, 2024 and 2023 of $1,071 and $1,171, 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 $861, primarily due to increased compensation-related costs associated with an increase in engineers compared with the prior year period, including the addition of Evertel software development activities.

We incurred non-cash share-based compensation expenses allocated to research and development in the nine months ended June 30, 2024 and 2023 of $129 and $78, 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.

Other Expenses, Net

Other expense, net was $1,236 for the nine months ended June 30, 2024, compared to $4 in the prior fiscal year period. The expense in the current fiscal period was primarily due to $1,121 of professional expenses related to the $15,000 secured Term Loan agreement, $197 of interest expense from the Term Loan, and $103 from the net change in fair value of the Term Loan and related warrants, partially offset by $166 of interest income.

Net Loss

Net loss for the first nine months of fiscal 2024 was $20,344, compared with the prior year period net loss of $8,334. The increase in net loss was primarily attributable to the lower revenue and higher operating expenses in the current year.

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.

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):

Segment Results

Segment results include net sales and operating income by segment. Corporate expenses, 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, 2024 and 2023 (in thousands)

Software Segment

Software segment revenue increased 1,121, or 120%, over the prior fiscal year. This primarily reflects a 138% increase in recurring revenue compared with the prior fiscal year.

Operating loss decreased $311 in the fiscal third quarter of the current year due to increased gross profit generated from higher revenue offset by increased operating expenses, including amortization expense, from the Evertel acquisition.

Hardware Segment

Hardware segment revenue decreased $8,216, or 62%, over the prior year. The decrease was largely due to the lower backlog at the start of this fiscal year compared with the prior year amount. Fiscal third quarter hardware revenue in the prior year included $8,612 from a U.S. Army program of record. Deliveries against this program of record were completed in the fourth quarter of fiscal 2023. A new, similar sized program has been included as part of the Department of Defense fiscal year 2024 authorization.

Operating income decreased $4,222 in the current fiscal year period due to the lower revenue and resultant gross profit and increased professional services expenses.

Comparison of Segment Adjusted EBITDA for the Nine Months Ended June 30, 2024 and 2023 (in thousands)

Software Segment

Software segment revenue increased 94% over the prior fiscal year nine-month period. This primarily reflects a 117% increase in recurring revenue compared with the first nine months of the prior fiscal year. Excluding revenue from this year’s acquisition of Evertel, recurring revenue increased 85% over the same prior year nine-month period.

Operating loss increased $769 in the nine-month period of this fiscal year due to increases from the addition of Evertel operating expenses, including amortization expense and higher commission expense from increased revenues.

Hardware Segment

Hardware segment revenue decreased $21,216, or 64%, over the prior year. The decrease was largely due to the lower backlog at the start of this fiscal year compared with the prior year amount. Nine months year to date hardware revenue in the prior year included $19,712 from a U.S. Army program of record. Deliveries against this program of record were completed in the fourth quarter of fiscal 2023. A new, similar sized program has been included as part of the Department of Defense fiscal year 2024 authorization.

Operating income decreased $10,467 compared with the prior fiscal year due to lower revenue and resulting lower gross profit and increased professional services expense.

Liquidity and Capital Resources

Cash and cash equivalents as of June 30, 2024 were $8,672, compared with $8,665 as of September 30, 2023. We had short-term marketable securities of $4,046 as of June 30, 2024, compared with $1,481 as of September 30, 2023.Other than cash and cash equivalents, short 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 the availability of our internally generated funds include:

• ability to meet sales projections;
• government spending levels;
• introduction of competing technologies;
• product mix and effect on margins;
• release of bid bond associated with Puerto Rico award;
• ability to reduce and manage current inventory levels; and
• product acceptance in new markets;

Principal factors that could affect our ability to obtain cash from external sources include:

• volatility in the capital markets; and
• market price and trading volume of our common stock.

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:

Operating Activities

Net loss of $20,344 for the nine months ended June 30, 2024 was decreased by $3,713 of non-cash items that included depreciation and amortization, share-based compensation, warranty provision, change in fair value of warrants and Term Loan, amortization of operating lease ROU assets, accretion of acquisition related liabilities and inventory obsolescence. Cash used by operating activities in the current year reflected an increase in prepaids and other assets of $3,996, an increase in inventory of $952, and a decrease in accrued liabilities of $641. This was offset by an increase in accounts payable of $1,776 and a decrease in accounts receivable of $434.

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.

We had accounts receivable of $5,661 as of June 30, 2024, compared with $5,952 as of September 30, 2023. 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, 2024 and September 30, 2023, our working capital was $19,350 and $13,949, respectively. The increase in working capital was primarily due to cash raised through financing activities, offset by Evertel acquisition-related expenses, acquired liabilities and the fiscal year to date net loss.

Investing Activities

Our net cash used in investing activities was $4,389 for the nine months ended June 30, 2024, compared with net cash provided by investing activities of $3,079 for the nine months ended June 30, 2023. In the first nine months of fiscal 2024, we increased our holdings in marketable securities by $2,556, compared with a decrease of $3,308 for the nine months ended June 30, 2023. Cash used in investing activities for acquisition of Evertel was $908 and cash used to pay the Amika holdback liability was $764. The Company also used $161 and $229 for the purchase of property and equipment during the nine months ended June 30, 2024, and 2023, respectively. We anticipate additional expenditures for tooling and equipment during the balance of fiscal year 2024.

Financing Activities

In the nine months ended June 30, 2024, we received $23,916 through financing activities, compared with $165 used by financing activities for the nine months ended June 30, 2023. In the first nine months of fiscal 2024, we received $13,698 in net proceeds from the Term Loan, and $10,449 in net proceeds from an offering of the Company’s common stock and used $12 to settle statutory tax withholding requirements upon vesting of restricted stock units and 219 used to pay contingent consideration. 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 December 2018, the Board of Directors approved a share buyback program beginning January 1, 2019 and expiring on December 31, 2020, under which the Company was authorized to repurchase up to $5,000 of its outstanding common shares. In December 2022, the Board of Directors extended the Company’s share buyback program through December 31, 2024. The previous program expired on December 31, 2018.

There were no shares repurchased during the nine months ended June 30, 2024 and June 30, 2023. All repurchased shares have been retired and as of June 30, 2024 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.

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 sales to 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.

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, 2024.

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, 2024, 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.

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, 2023, filed with the SEC on December 7, 2023.