Genasys Inc. (formerly LRAD Corporation) — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019; this is an annual report, not a standalone fourth-quarter filing. LRAD announced its rebrand to Genasys Inc. on October 23, 2019. The filing was signed December 9, 2019.
Business context
Genasys provides critical-communications products and services, including LRAD acoustic hailing and public-safety notification systems, CCaaS mobile alert software, and integrated solutions. Products were deployed in 72 countries. The company operates through LRAD and Genasys Spain segments and sells substantially to government, military, public-safety, and commercial customers.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $36.98 million | $26.31 million |
| Gross profit / margin | $18.46 million / 49.9% | $12.74 million / 48.4% |
| Operating income (loss) | $3.14 million | ($1.48 million) |
| Net income (loss) | $2.78 million; $0.09 basic EPS, $0.08 diluted EPS | ($3.75 million); ($0.12) per share |
| Operating cash flow | $9.86 million | $1.25 million |
- Revenue rose 40.6%, primarily on higher LRAD acoustic-hailing-device sales; management reported AHD revenue up 51.5% and public-safety mass-notification revenue up 13%.
- U.S. revenue increased 76.1% to $26.05 million, while international revenue declined 5.1% to $10.93 million. Direct and indirect U.S. government sales represented approximately 65% of total sales, versus 49% in FY2018.
- Gross margin improved 1.5 percentage points, which management attributed primarily to lower manufacturing overhead as a share of sales. Research and development expense rose 28.5% to $4.53 million.
- FY2019 income tax expense was $572,200, compared with $2.38 million in FY2018. The prior-year charge included the reduction in deferred tax assets following the U.S. corporate tax-rate change.
- Cash and cash equivalents were $18.82 million; short- and long-term marketable securities totaled $5.08 million; restricted cash was $0.70 million. Working capital was $24.77 million, up from $21.09 million.
- Notes payable totaled $312,491, including $279,588 current. No material conventional funded debt was reported. Operating lease obligations under the facility and other leases totaled $9.36 million at year-end; upon adopting ASC 842 on October 1, 2019, the company recorded approximately $7.8 million of lease liabilities and $5.8 million of right-of-use assets.
- Operating cash flow benefited from a $5.67 million increase in accrued and other liabilities, including customer deposits and deferred revenue. Customer deposits and deferred revenue totaled $5.57 million current at year-end.
Material changes and notable items
- Backlog deliverable within 12 months rose to approximately $27.01 million from $23.65 million. FY2019 orders reached a reported record $45.9 million.
- Customer concentration increased: two customers accounted for 37% and 10% of FY2019 revenue, compared with one customer at 20% in FY2018. Two customers also represented 44% of year-end receivables.
- The company repurchased 788,425 shares for $2.17 million in FY2019; $4.5 million remained available under the $5 million repurchase program at year-end. No dividends were paid.
- FY2019 included $20.2 million of U.S. Army LRAD 450XL orders, among other disclosed defense, homeland-security, naval, and public-safety orders. Orders and backlog are not equivalent to recognized revenue.
- Management reported no goodwill impairment in FY2019. The inventory obsolescence reserve was $530,584, and the warranty reserve was $150,229.
Outlook, risks, and contingencies
- Management planned to pursue additional U.S. and international military, homeland-security, public-safety, and mass-notification opportunities in FY2020, and to invest in product development, certifications, and sales channels. It gave no specific revenue or earnings guidance.
- Management cautioned that government budget uncertainty, long and uneven sales cycles, geopolitical and economic conditions, and the timing or success of large opportunities could affect FY2020 results. It also noted that competitive pricing and product/channel mix could pressure margins; historical margins should not be relied on as a forecast.
- Customer and government-spending concentration is material, and government awards may not produce guaranteed purchases. A single supplier provides compression drivers used in LRAD products; disruption or inability to qualify an alternative could affect production.
- The company said it believed available capital and expected operating cash flows were sufficient for at least the next 12 months, but noted that additional financing might be needed and might not be available on acceptable terms.
- A five-year maintenance agreement with a foreign military customer runs through May 2024. The company warned that service and repair costs could exceed the fixed revenue from the agreement. It also disclosed ordinary-course litigation and indemnification obligations, with no related liabilities recorded at year-end.
- Management concluded disclosure controls and internal control over financial reporting were effective as of September 30, 2019. The independent auditor issued an unqualified opinion on the financial statements; it did not provide an audit opinion on internal controls.
Important facts for investors to verify
- Whether the sizable backlog, customer deposits, and announced military orders convert to shipments and revenue on schedule, and how much revenue depends on the two largest customers.
- Whether FY2019 operating cash flow is repeatable, given its contribution from increased accrued liabilities and customer prepayments.
- Whether U.S. government spending concentration, international revenue trends, and competitive pricing affect future sales and gross margins.
- Whether the company can reduce single-supplier exposure and manage inventory obsolescence, warranty costs, and the foreign-military maintenance contract economically.
- The balance-sheet and expense effects of the new lease standard, including the long-term facility commitment.