Business context and reporting period
LRAD Corporation’s Form 10-Q covers the quarter and nine months ended June 30, 2018 (fiscal Q3 and year-to-date). The company develops acoustic warning and broadcast hardware; in January 2018 it acquired Genasys, a Spain-based location-based mass-messaging software provider. Genasys results are consolidated from January 18, 2018. The filing identifies the registrant as LRAD Corporation.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $7.51 million | $4.13 million | $23.01 million | $12.81 million |
| Gross profit (margin) | $3.70 million (49.2%) | $1.71 million (41.4%) | $11.69 million (50.8%) | $5.87 million (45.8%) |
| Operating income (loss) | $(178,000) | $(997,000) | $1.42 million | $(1.89) million |
| Net income (loss) | $(80,000) | $(528,000) | $(1.30) million | $(1.04) million |
| Operating cash flow | Not provided separately | Not provided separately | $2.15 million | $991,000 |
- Quarterly revenue rose 82%, driven by higher acoustic hailing device and mass-notification system sales and the addition of Genasys. Year-to-date revenue rose 80%. Q3 Genasys external-customer revenue was $502,000; nine-month revenue was $916,000.
- Operating expenses rose 43% in Q3 to $3.88 million, reflecting Genasys expenses, acquisition costs, staffing and other operating costs. The quarter’s smaller net loss also reflects higher gross profit.
- Year-to-date net loss included $2.79 million of income tax expense, including a $2.503 million discrete charge from remeasuring deferred tax assets after the U.S. tax-rate change. The quarter recorded a $74,000 tax benefit.
- At June 30, cash and cash equivalents were $12.03 million; marketable securities totaled $4.93 million and restricted cash totaled $444,000. Working capital was $23.07 million, compared with $25.41 million at September 30, 2017.
- Notes payable were $740,000, principally debt assumed with Genasys; $533,000 was current. The company had pledged $444,000 of cash as debt collateral.
- For the nine months, investing cash use was $2.29 million, including $2.25 million net cash paid for the Genasys acquisition. Financing cash use was $196,000, after debt repayments and share repurchases, partly offset by $1.03 million of stock-option exercise proceeds.
Material changes and unusual items
- Genasys was acquired for $3.01 million of consideration, and the preliminary purchase-price allocation included $1.85 million of identifiable intangible assets and $2.60 million of goodwill. The allocation remained subject to revision. Genasys contributed a reported operating loss of $90,000 through June 30.
- Year-to-date results improved to operating income from an operating loss, but net loss increased year over year, primarily because of the tax-reform-related deferred-tax remeasurement.
- The company repurchased and retired 211,326 shares for approximately $500,000 during the nine months. Approximately $3.4 million remained available under the buyback authorization at June 30.
- Three customers represented 36% of Q3 revenue; three represented 44% of nine-month revenue. Three customers accounted for 40% of accounts receivable at June 30. Receivables were $6.58 million, or approximately 80 days of revenue, versus 70 days at September 30, 2017.
Outlook, risks and contingencies
Management gave no specific numerical revenue or earnings guidance. It said available capital, planned expenditures and the current operating level were expected to fund operations for the 12 months following issuance, while cautioning that changed cash-flow needs could require additional financing, which might not be available on acceptable terms. Management cited opportunities to expand international mass-notification sales and integrate Genasys software with LRAD products, but noted uneven contract timing, economic and geopolitical challenges, uncertain government-spending priorities, and competition in the mass-notification market. It also cautioned that product mix, sales channels, product changes and warranty experience can affect margins.
The company reported no pending material litigation. It stated that it had not filed the required amendment to its January 2018 acquisition Form 8-K because Genasys historical financial statements were not yet prepared to required accounting and audit standards; it intended to complete the audit and file the amendment. The filing also marked “No” for having filed all required Exchange Act reports during the preceding 12 months and said the company was not deemed a timely filer. Management nevertheless concluded disclosure controls were effective at the reasonable-assurance level as of June 30, 2018.
Important facts for investors to verify
- Whether the Genasys audit and required amended acquisition Form 8-K were completed, and whether the preliminary purchase-price allocation changed.
- How much of the year-to-date tax charge was nonrecurring, and the recoverability of deferred tax assets given the valuation allowance.
- Whether elevated receivables and customer concentration translate into timely collections and sustainable operating cash flow.
- Genasys debt repayment terms and the release timing of cash pledged as collateral.
- Whether management’s 12-month liquidity assessment remains valid as contract awards, spending plans and acquisition integration evolve.