Business Context and Reporting Period
LRAD Corporation (the filing issuer; the request identifies Genasys Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2014, its fiscal third quarter, and the nine months then ended. The company designs and sells directed-acoustic products for security, defense, public safety, mass notification, and commercial applications.
Financial Performance
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Nine months ended June 30, 2014 | Nine months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $8.00 million | $2.16 million | $17.21 million | $8.33 million |
| Gross profit / margin | $5.05 million / 63.1% | $0.92 million / 42.4% | $9.72 million / 56.5% | $3.76 million / 45.2% |
| Operating income (loss) | $1.94 million | $(1.12) million | $2.59 million | $(1.69) million |
| Net income (loss) | $1.94 million | $(1.11) million | $2.60 million | $(1.67) million |
| Diluted earnings (loss) per share | $0.06 | $(0.03) | $0.08 | $(0.05) |
- For the quarter, revenue rose 271% year over year; nine-month revenue rose 107%. Product sales drove most of the increase.
- Nine-month operating cash flow was $5.93 million, compared with $1.23 million a year earlier. Investing activities used $0.25 million and financing activities used $0.28 million.
- Cash was $21.20 million at June 30, 2014, up from $15.81 million at September 30, 2013. Working capital was $26.57 million. The company reported no debt and no unused external liquidity sources.
- Total assets were $31.39 million and total liabilities were $3.82 million. Current liabilities were $3.66 million; the filing reports no borrowings.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue growth reflected international orders, including approximately $4 million for Middle East perimeter and border security, $760,000 for Northern African internal security and police, and $763,000 for bird mitigation for an international mining customer.
- Quarterly gross margin increased to 63.1% from 42.4%, attributed to higher volume, fixed-overhead absorption, and sales-channel mix. Management cautioned that product and channel mix, product changes, and warranty estimates can make margins variable.
- Quarterly operating expenses increased 53%, primarily from sales commissions, accrued employee bonuses, and costs of additional business-development staff; lower prior-year legal expenses partly offset the increase.
- Accrued liabilities increased to $3.01 million from $1.05 million, including $1.02 million of bonus and related payroll accruals. Customer prepayments deferred as revenue rose to $594,173 from $18,532.
- Accounts receivable declined to $3.75 million from $4.96 million, while inventory increased to $4.73 million from $4.59 million.
Outlook, Risks, and Unusual Items
- No specific revenue or earnings guidance was provided. Management expected uneven quarterly revenue, said research and development spending should remain comparable to the prior year for the rest of fiscal 2014, and believed available capital was sufficient for at least 12 months under planned spending and operations.
- Management cited international economic and geopolitical conditions, uncertain U.S. defense budgets, sales timing, product acceptance, competition, product mix and margins, and inventory levels as risks. Large opportunities may take time to close or may not be realized.
- Customer concentration was significant: one customer generated 50% of quarterly revenue and 23% of nine-month revenue. Two customers represented 53% and 16% of accounts receivable at quarter-end.
- The company repurchased 256,082 shares for $476,494 during the nine months under a buyback authorization of up to $4 million, which expired December 31, 2014. It reported plans to continue repurchases through that date.
- Approximately $20.7 million of cash and cash equivalents exceeded applicable insured limits; the company reported no losses in these accounts. It reported no pending material litigation.
- The company was evaluating new revenue-recognition guidance, effective for it beginning in fiscal 2018, and had not selected a transition method or determined the impact.
Important Facts for Investors to Verify
- Confirm issuer identity and corporate-name continuity: this filing is under LRAD Corporation, while the request names Genasys Inc.
- Assess whether the large international orders and elevated margins are repeatable, given management’s warning about uneven revenue and variable margins.
- Monitor reliance on major customers, collection of concentrated receivables, and conversion of the $594,173 in customer prepayments into shipments and recognized revenue.
- Review cash generation quality, particularly the effects of accrued liabilities and bonus accruals, and confirm liquidity against planned spending and continued share repurchases.
- Check the status and expected financial-reporting impact of adoption of ASU 2014-09.