Business context and reporting period
This summary covers LRAD Corporation’s unaudited Form 10-Q for the quarter and nine months ended June 30, 2011. The filing describes a company developing and selling directed-sound products for military, government, maritime, security, and commercial markets. The filing identifies the registrant as LRAD Corporation, not Genasys Inc.; investors should verify the company and filing identity.
Financial results and liquidity
| Metric | Three months ended June 30, 2011 | Nine months ended June 30, 2011 |
|---|---|---|
| Revenue | $2.38 million | $20.09 million |
| Gross profit / margin | $0.90 million / 38.0% | $12.77 million / 63.5% |
| Operating income (loss) | $(0.73) million | $4.64 million |
| Net income (loss) | $(0.68) million | $4.67 million |
| Net income (loss) per diluted share | $(0.02) | $0.15 |
- For the nine months, continuing-operations operating cash flow was $3.10 million; total operating cash flow, including discontinued operations, was $3.22 million. Investing used $42,406, and financing provided $4.46 million, primarily from warrant exercises.
- At June 30, cash and cash equivalents were $13.06 million, with a further $606,250 in restricted cash. Total current assets were $19.75 million and current liabilities $1.93 million. Total liabilities were $2.21 million; the balance sheet does not show a separate borrowings balance.
- Cash increased from $5.42 million at September 30, 2010. The company reported a $17.79 million excess of current assets over current liabilities, excluding discontinued operations.
Material changes versus prior periods
- Quarterly revenue fell 18.7% year over year, and gross margin declined to 38.0% from 50.3%. Management attributed the revenue decrease mainly to a 73% decline in U.S. Military orders; lower revenue reduced fixed-cost absorption, while amortization of prepaid services for a foreign military contract also weighed on margin. The quarter moved from $20,420 of operating income and $67,727 of net income to operating and net losses.
- Nine-month revenue rose 75.0% year over year, and gross margin improved to 63.5% from 55.1%. The increase primarily reflected shipment of $12.1 million of LRAD systems to a foreign military customer in the prior quarter. Operating income increased to $4.64 million from $1.46 million, and net income rose to $4.67 million from $2.05 million.
- Nine-month SG&A increased 92.1%, substantially due to sales commissions tied to the foreign military sale, higher bonuses, and added business-development staffing. Other income was lower year over year because the prior period included a $747,819 unrealized derivative gain.
- Warrant exercises generated $4.35 million in cash. The company issued replacement warrants covering 1,627,945 shares at $2.67 per share, exercisable from August 2011 through February 2016.
Outlook, risks, and unusual items
- Management anticipated strong fiscal 2011 growth over fiscal 2010, while cautioning that quarterly revenue would remain uneven. It said current cash and planned operations should fund operations for the next 12 months, but additional financing could be needed if conditions or cash flows change.
- Risks cited include uncertainty and delays in U.S. government and defense spending, international economic and credit conditions, competition, product acceptance, sales mix and margins, inventory levels, and reliance on large or concentrated customer orders. One customer accounted for 60% of nine-month revenue.
- A foreign military sales contract carries eight years of repair and maintenance service. The company paid $1.5 million in prepaid service costs, amortized at $187,500 annually, and pledged $606,250 as collateral for a bank guarantee supporting the warranty; the guarantee is to be renewed annually for seven additional years.
- Management recorded a $20,660 patent impairment for the nine months. The company maintained a full valuation allowance against deferred tax assets and recorded $73,983 of tax provision. It reported no pending material litigation and concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm that this LRAD Corporation filing is the intended filing for the requested Genasys Inc. summary.
- Assess the durability and timing of large military orders, including the concentration of revenue in one customer and the sharp quarterly decline in U.S. Military orders.
- Verify cash conversion and working-capital demands, including restricted cash, prepaid service obligations, inventory growth, and the reported increase in receivable days to approximately 85.
- Review potential dilution and warrant-related obligations, including the replacement warrants and the registration-rights agreement’s liquidated-damages provisions.
- Compare actual fiscal 2011 results with management’s growth outlook; the filing provides no quantified revenue or earnings guidance.