Business context and reporting period
This is LRAD Corporation’s unaudited Form 10-Q for the quarter and six months ended March 31, 2018 (fiscal Q2 2018). The filing is under the name LRAD Corporation; it reports the January 18, 2018 acquisition of Genasys Holdings, S.L., a Spain-based location-based mass-messaging software provider. Genasys results are consolidated from the acquisition date.
Financial performance
| Metric | Three months ended March 31, 2018 | Prior-year quarter | Six months ended March 31, 2018 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $7.87 million | $5.74 million | $15.50 million | $8.68 million |
| Gross profit / margin | $4.04 million / 51.3% | $2.93 million / 51.1% | $7.99 million / 51.6% | $4.16 million / 47.9% |
| Operating income (loss) | $0.60 million | $0.44 million | $1.60 million | ($0.89 million) |
| Net income (loss) | $0.46 million | $0.30 million | ($1.22 million) | ($0.51 million) |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $2.90 million | $1.06 million |
Quarterly revenue rose 37%, with AHD sales up 97% and Genasys contributing $0.41 million; mass-notification system revenue fell 85%. For the six-month period, revenue increased 79%, with AHD sales up 104% and mass-notification sales up 10%. Quarterly operating expenses increased 37%, principally from acquired Genasys costs, acquisition costs, and higher staffing and incentive expenses.
Financial position and liquidity
- At March 31, 2018, cash and cash equivalents were $12.73 million; marketable securities totaled $5.05 million. Restricted cash was $0.47 million.
- Working capital was $22.97 million, down from $25.41 million at September 30, 2017. The company reported $40.89 million in total assets and $6.47 million in liabilities.
- Debt assumed with Genasys totaled $1.17 million: $0.90 million current and $0.27 million long-term. Some revolving facilities mature in the quarter ending June 30, 2018. Cash pledged against debt was $0.43 million.
- Six-month investing cash outflow was $2.34 million, including $2.25 million for the Genasys acquisition, net of acquired cash and restricted cash. Financing cash outflow was approximately $0.17 million.
- Management said available capital and expected operating cash flows were sufficient for the 12 months after issuance, but noted additional financing might be needed if operating conditions or cash flows change. The company reported no unused external liquidity sources at that time.
Material changes, outlook, and risks
- The Genasys acquisition had preliminary consideration of $3.01 million, including an escrow liability, and approximately $1.52 million of debt was assumed. The purchase-price allocation was preliminary; working-capital and other adjustments remained open. Goodwill was $2.60 million and was not expected to be tax-deductible.
- Six-month net loss includes a $2.47 million discrete, noncash tax charge from remeasuring deferred tax assets after the U.S. federal corporate tax rate reduction. The company also reported $2.87 million of income-tax expense for the six-month period; absent this tax impact, operating performance was profitable.
- Management described opportunities in defense, public safety, and international mass notification, and cited several AHD orders announced or received during the quarter. It gave no quantified revenue or earnings guidance.
- Management cautioned that order timing and quarterly revenue are uneven and can be affected by customer budget cycles, contract-award delays, geopolitical conditions, and military conflicts. It also cited competition and uncertainty around acceptance of its multidirectional products, product mix and margins, inventory levels, and the timing of large opportunities.
- Three customers represented 69% of quarterly revenue; one customer accounted for 56% of accounts receivable at quarter-end. The filing reported no pending material legal proceedings.
- The company stated it was not a timely filer because required Genasys acquisition financial statements and pro forma information had not been filed with an amended Form 8-K. It said an audit was planned and it intended to file the amendment. Management nevertheless concluded disclosure controls were effective as of March 31, 2018.
Most important facts for investors to verify
- Progress and final accounting for the Genasys acquisition, including working-capital adjustments, assumed debt, and the required amended Form 8-K and audited pre-acquisition statements.
- Whether AHD growth can continue and mass-notification revenue recover, given the significant product-line divergence and order-timing volatility.
- Customer concentration, especially the customer representing 56% of receivables, and subsequent collections.
- Debt maturities and repayments, restricted cash availability, and whether management’s 12-month liquidity assessment remains valid.
- The final tax-reform measurement and recoverability of deferred tax assets, for which the company maintained a partial valuation allowance.