Genasys Inc. (NASDAQ: GNSS) — Form 10-Q Summary
Business context and reporting period
Genasys designs and sells directed and multidirectional sound systems, voice-broadcast products, and software for emergency alerts and workforce communications. This unaudited filing covers the three and nine months ended June 30, 2020, the third quarter and first nine months of fiscal 2020. The company was formerly LRAD Corporation and rebranded in October 2019.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Nine months ended June 30, 2020 | Nine months ended June 30, 2019 |
|---|---|---|---|---|
| Revenue | $11.97 million | $8.86 million | $29.03 million | $29.23 million |
| Gross profit / margin | $6.47 million / 54.1% | $4.60 million / 51.9% | $15.08 million / 52.0% | $14.88 million / 50.9% |
| Operating income / margin | $1.94 million / 16.2% | $0.69 million / 7.7% | $2.97 million / 10.2% | $3.41 million / 11.7% |
| Net income / diluted EPS | $1.50 million / $0.04 | $0.64 million / $0.02 | $2.43 million / $0.07 | $2.86 million / $0.09 |
- Quarterly revenue rose 35.1% year over year, mainly from product deliveries against backlog. Hardware revenue was $11.60 million; software revenue was $0.37 million. Management reported LRAD AHD revenue of $10.46 million, up $5.59 million, while PSMN systems revenue of $1.51 million declined $2.48 million.
- Nine-month revenue was down 0.7%. Hardware revenue increased 0.8% to $27.83 million, while software revenue fell 26.4% to $1.20 million.
- Operating cash flow for the nine months was $3.71 million, versus $2.41 million in the prior-year period. Investing activities used $2.43 million and financing activities provided $0.54 million. Capital expenditures were $0.11 million. The filing does not present a separate free-cash-flow measure.
- At June 30, cash and cash equivalents were $20.67 million; short- and long-term marketable securities totaled $7.39 million, and restricted cash was $0.67 million. Working capital was $26.93 million. Current assets were $39.76 million against current liabilities of $12.83 million.
- Total liabilities were $19.82 million, including $0.30 million of interest-free acquired Spanish government loans and $7.34 million of operating lease liabilities. The company reported $39.21 million of stockholders’ equity. Cash, cash equivalents, and restricted cash totaled $21.33 million at period end.
Material changes versus prior comparable periods
- Quarterly gross margin improved by 2.2 percentage points, and operating margin improved by 8.5 points, reflecting higher revenue and better absorption of fixed operating costs. SG&A rose $0.62 million, primarily due to compensation and professional services.
- For the nine-month period, gross margin rose 1.1 points, but operating income declined 13.0% and net income declined 15.3%, mainly because operating expenses increased 5.6%, particularly SG&A.
- Receivables rose to $6.38 million from $3.64 million at September 30, 2019, and inventory rose to $7.33 million from $5.84 million. Management attributed the working-capital use to higher quarterly credit sales and inventory held to support backlog; increased accounts payable partially offset the cash use.
- Adoption of lease accounting in October 2019 added operating lease right-of-use assets and liabilities. The filing reports no material impact on operating results from adoption.
Outlook, commentary, risks and unusual items
- Management provided no numeric revenue or earnings guidance. It said current cash and planned operations should fund the business for at least 12 months after issuance of the financial statements, while noting that changing conditions could require additional financing.
- Management cited uneven government procurement budgets and approval cycles, product mix and channel effects on margins, and plans for further sales, marketing, and product-development spending. It expects to pursue opportunities including the European Union public-warning mandate scheduled for June 2022.
- Management said COVID-19 had not materially affected the quarter’s financial position or results, but warned that remote work, supply-chain disruption, delivery constraints, customer purchasing or payment difficulties, and market volatility could affect future orders, revenue, liquidity, and margins. The company sources most components and subassemblies from vendors near its facility and a small number from China.
- Customer concentration increased: one customer represented 64% of quarterly revenue and 63% of nine-month revenue. Two customers represented 60% and 17% of period-end receivables.
- During the quarter, the company announced $14.5 million in U.S. Army follow-on orders, received a $4.3 million U.S. Navy IDIQ contract, and announced $3.9 million in international security-related orders. These announcements are not necessarily equivalent to revenue recognized in the period.
- After quarter end, on August 9, 2020, Genasys agreed to acquire the assets of Amika Mobile Corporation. The proposed consideration is available cash and common stock issued ratably on the first, second, and third anniversaries of closing. Closing is subject to customary conditions, including regulatory review; final accounting was still being assessed.
- The filing reports no pending material legal proceedings. The company repurchased $0.40 million of shares during the nine months, but none during the June quarter.
Important facts for investors to verify
- Whether announced military and international orders convert to deliveries and recognized revenue, and how the backlog affects upcoming quarters.
- The outlook for the highly concentrated customer relationships and collection of receivables, given the large customer shares of revenue and accounts receivable.
- Any subsequent developments, closing conditions, funding mix, dilution, and purchase-accounting impact for the proposed Amika acquisition.
- COVID-19 effects on customer budgets and payments, supplier availability, fulfillment, and the company’s stated liquidity assumptions.
- Changes in gross margin from product mix, channel mix, engineering-cost allocation, and warranty estimates; management cautions that historical margins may not indicate future margins.