Saturday, November 8, 2014

LRAD ( Nasdaq - LRAD ) -- Sounds Great

LRAD (LRAD $2.75) is a leading manufacturer of long range accoustic devices used in military and public safety applications.  The company's high tech bullhorns deliver focused beams of sound over distances up to three miles.  That allows military and public safety personnel to provide specific messages instead of warning blasts or garbled instructions.  The genesis of the technology was the near sinking of the USS Cole, a Navy vessel that Arab terrorists damaged in 1997.  LRAD was recruited by the Pentagon to develop a system that could talk over all the noise ships make on the water.  The terrorists attacking the USS Cole were able to plausibly pretend they didn't understand the Navy's order to stop.  With LRAD's technology, that excuse no longer works.  Sound is focused in a narrow beam.  Machines can be made larger or smaller, depending how much range is desired.  Operation is simple.  Turn it on - point - adjust the volume - start talking.  The components are solid state.  Reliability is high.

Military business drove sales in the company's early years.  The U.S. Navy was an especially big customer.  The Coast Guard and Army adopted the technology, as well.  Civilian demand expanded as time went on.  Police departments and other public safety groups used the systems to deliver verbal messages.  But a new application also emerged -- pure noise.  Police began using the systems for crowd control.  In the 1950s they used water hoses.  In the 1960s it was tear gas.  In the 1980s rubber bullets became popular.  LRAD's technology offered a less dangerous and more reliable solution.  Ear splitting noise makes crowds disperse, without injuries.  Demonstrations in Ferguson, Missouri were broken up with the company's systems.  They weren't used in Hong Kong.  But the local police had them ready.

Applications are proliferating.  Commercial customers employ the systems to guard facility perimeters.  Those often are integrated with motion detectors.  Portable machines can be loaded on helicopters so authorities can instruct people where to go during floods, fires, and other calamities.  A new line, the "sound barrier," is built into limousines used by diplomats in foreign countries.  When locals surround the car and beat on the windows, a blast of sound sends them running.  There are no casualties on either side.

Foreign sales have propelled growth since the Republicans gained control of the House of Representatives in 2010.  Congress has been unable to pass a budget since that time.  Funding has been sustained exclusively under continuing resolutions.  LRAD has been able to sell systems under previously established programs.  But no additional programs have been possible without new budget authority.  Foreign navies, coast guards, and police have adopted the technology, though.  And that trend remains in an early stage of development.  The recent Republican capture of the Senate means a budget could be passed in 2015.  Several programs are in development.  Continuing resolutions meant continuing R&D.  Those include outfitting drones with LRAD systems, among a variety of other things.  Orders promise to accelerate next year if the military budget expands, the LRAD systems are included, and President Obama doesn't veto everything.

The mass notification market promises even greater long term potential.  Approximately $6 billion per year is spent around the world on public loudspeaker systems.  Authorities rely on them to warn citizens of impending danger, like an air raid.  More commonly, they're used for tornadoes, fires, or, in the Middle East, to announce it's time to pray.  The installed base generally is old and in need of repair.  An upgrade cycle is underway.  LRAD's new "360" systems offer superior sound quality, lower costs, and greater versatility.  That line employs multiple speakers to direct sound in all directions.  New markets are opening up, including universities.  Schools need a way to respond when gunmen strike.  LRAD's units provide a means for telling people what to do, rather than just send out a general warning.

LRAD is down to the wire on two particularly large "360" deals in the Middle East.  Landing one almost would certainly fuel a major sales gain in fiscal 2015 (Sept.)  It also would provide a helpful reference account, setting the stage for additional contracts.  The company expects to find out before the end of the calendar year on both proposals.  Each is in the $8-$12 million range.  U.S. military business promises to bolster performance in the year ahead, as well.  And international growth is likely to remain robust.  Competition exists.  But no other company offers comparable sound quality.

We estimate income will advance 75% in fiscal 2015 (Sept.) to $.14 a share.  Sales could advance 40% to $35 million.  Explosive gains could follow in succeeding years.  Three activist shareholders sit on LRAD's five member board.  Once the company breaks into the mass notification market a sale of the company to one of the current industry leaders is possible.  Assuming the company remains independent sales could reach $75-$100 million in 2-3 years to provide (fully taxed) earnings of $.25-$.45 a share.  Tax loss carryforwards shelter income, so cash flow would be greater.  Applying a P/E multiple of 20x to the midpoint suggests a target price of $7.00 a share, potential appreciation of 155% from the current quote.

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Thursday, November 6, 2014

Xplore Technologies ( Nasdaq - XPLR ) -- Ready to Rumble

Xplore Technologies (XPLR $5.50) is a leading manufacturer of  tablet computers for business and military applications.  Its rugged systems withstand heat, vibration, water, and jarring drops better than consumer tablets.  They also have superior displays and a variety of special purpose inputs and processors to accommodate customer specific add-ons.  Xplore concentrated on the high end of the market until recently, selling the extremely rugged (Windows based) XC6 at prices ranging from $5,000 to $6,500 apiece.  Those machines remain in strong demand for environmentally challenging applications, particularly in the military area.  The company recently introduced two lower priced systems for the business market.  Many users are converting from notebook computers to tablets for ease of use and maintenance savings.  Consumer tablets, like Apple's iPad, have proven to be easier to carry and use than notebooks.  But they've tended to break easily, too, creating expensive downtime and repair bills.  Many large companies now are transitioning to more rugged tablets, like the ones made by Xplore, to reduce the cost of ownership while preserving the tablet's operational advantages.

A low-cost Android version ("Ranger") was released last year.  A major U.S. telecommunications provider placed a huge order for one of its divisions.  Pricing is approximately 33% of the high end XC6.  Google doesn't charge license fees for the Android operating system.  The physical characteristics of the machine are less robust than the XC6, as well.  For instance, the Ranger can survive 30 seconds under water; the CX6, 2 minutes.  The Ranger can keep working after a 5 foot fall onto concrete; the CX6 can handle a 10 foot drop.  For the field service applications the telecom had in mind, the Ranger was ample.

Last spring Xplore launched a low cost Windows unit ("Bobcat").  That system costs more than the Ranger, because Windows licensing fees are required.  But demand appears to be much greater.  Most corporations run their computer systems on Windows.  It's less expensive overall to pay a little more for the machines rather than rewrite large computer programs to operate on Android.  A dozen or more major prospects have been conducting Bobcat field trials.  Substantial orders now are rolling in.

September quarter results probably will be unexceptional.  Bobcat shipments will be low because most customers still were in the testing phase during the period.  Some of those units were provided as demos, moreover, and weren't recognized as sales.  The big Android telecom buyer also scaled back purchases temporarily.  It had to rewrite some software, delaying the full rollout.  That project now is complete.  The rest of the order will start shipping in the December quarter.  Sales to additional divisions appears likely next year.  Bobcat sales are mounting in the December period, as well.  And military orders for the CX6 remain vibrant.  That machine already is specified by several high profile programs, which are ramping up again as hostilities flare in the Middle East.  Xplore's lower cost Bobcat might do the trick but that would require extensive testing, which would delay production.

We estimate sales could approach $15 million in the third (December) quarter.  A similar level appears realistic for the March period.  For the entire year sales could attain $45 million (+26%) to provide (fully taxed) earnings of $.25 a share.  Next year all three lines promise to expand.  The Bobcat and Ranger offer the greatest potential.  Sales could advance 45% to $65 million.  Income could rise faster, as margins expand, to $.60 a share (+140%).  

Xplore faces two direct competitors -- Panasonic and a Taiwan computer manufacturer.  Neither participates in the Android segment.  And while both do well in the Windows area, they sell standard systems at elevated prices.  Xplore offers more customized solutions, which appeal to customers with unique applications.  The industrial tablet market is approximately $500 million in the United States.  Market research forecasts see it expanding to $1-$2 billion over the next 3-5 years, if not sooner.  Xplore doesn't do business overseas for now.  Export opportunities could emerge down the road.

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Saturday, November 1, 2014

Harvard Regenerative Technology (Nasdaq - HART) -- Bionic Men

Harvard Regenerative Technology (HART $6.25) is a leading developer of replacement organs that use a patient's own DNA make-up.  Transplants currently depend on donors.  Those organs create tissue rejection problems along with a variety of other complications.  Regenerative medicine promises to alleviate those issues with replacement parts that are completely natural to the patient.  The company currently is developing substitute tracheas that employ a plastic foundation and are infused with the patient's own cells  That allows the new airway to acclimate to the body and work naturally without side effects.  The product recently was granted orphan drug status and is expected to enter formal clinical trials in early 2015.  Nine humans already have received artifical tracheas under special exemptions dating back to 2008.  One died in an automobile accident.  Two others passed away from unrelated medical problems.  In all nine cases, though, the replacement tracheas performed well.  Orphan drug status precludes competition for seven years after F.D.A. approval is obtained.  Harvard's patent portfolio offers additional protection.  Insurance companies view the technology favorably because it eliminates the need for expensive long term care.  Surgeons and research hospitals are attracted because regenerative medicine is a leading edge concept and Harvard's version holds a high likelihood of success.

Harvard was spun off from its former parent, Harvard Bioscience, in November 2013.  Shareholders received one share of the regenerative medicine spin-off for every four shares of the parent.  Harvard received all the assets associated with the regenerative business, plus $15 million in cash.  The company's cash burn rate has been approximately $2 million per quarter since that time.  It recently announce plans to raise an additional $15 million in equity.  That transaction was delayed by the general market's sell-off in early October but is expected to be completed before long.

The potential market for replacement tracheas is estimated at $750 million per year.  That assumes an average price to Harvard of $100,000.  The company may assign a higher list price.  Research collaborations are underway in new areas including lung, esophagus, heart valves, and the heart itself.  Harvard also is considering work on the bronchus, the tubes that go into the lungs.  The trachea market is split 50%-50% between the United States and Europe.  Clinical trials are expected to start next year, at four hospitals in each region.  Harvard is budgeting an extra $5 million a year in expenses to support the trials, above its current burn rate.  The company has obtained grants in the past.  Participating hospitals might underwrite some of the trial cost, as a research expense.  But Harvard is planning to pay most of freight itself.

Each trial will include 15 patients, for 30 altogether.  Unlike most medical devices and drugs, replacement tracheas will have a simple end point -- lung function.  The follow-up review period is expected to be brief, just three months.  Approximately 10% of the patient population consists of cancer patients.  The rest suffer from trauma.  Cancer patients have a greater chance of side effects because cells can escape and metastasize elsewhere in the body.  The surgery itself is considered fairly straightforward.  It's a complicated operation that costs an average of $250,000 all-in, assuming $100,000 to Harvard.  But the methods are well understood.  A large number of surgeons have the necessary background.

The scaffolds will be manufactured in several standard sizes.  Harvard still is determining exactly how many and what shapes.  Custom designs were employed in several early cases.  That approach might prove superior in the long run.  For now, though, the F.D.A. requires standard repeatable products with statistically meaningful data.  The scaffolds will be made out of conventional Dacron, a plastic that's widely used in medical implants.  The tubes are specially treated to create openings and surfaces for new blood vessels to use.  Harvard has its own bioreactor system that multiplies the patients cells, which are extracted from bone marrow two days before the operation.  The plastic is coated with the cells.  The device is surgically inserted.  Then the cells mesh with the body, allowing a complete and natural integration.

The regenerative approach offers several advantages.  Nobody has to wait for a donor.  Tissue rejection is not a risk.  There's no need for ongoing anti-rejection drugs or chemotherapy.  Costs are lower.  Quality of life is better.  The people who have had the operation to date talk and breathe naturally.  They leave the hospital and don't return.  Our projections assume only a small percentage of the potential market will employ the technology in its early years.  F.D.A. approval is anticipated in 2017.  Full scale marketing is likely to begin in 2018, although things could move faster in Europe.

Our projections assume gross margins of 90%.  Overhead costs are certain to increase.  Still, only a modest penetration of the potential market could launch Harvard into the black.  Additional R&D projects are likely.  At this stage the company plans to bring in partners to finance most of the development.  That could include drug manufacturers that are threatened by regenerative advances.  Brand new entrants may find the industry attractive, as well.

Regenerative medicine is in an early stage of development.  Roadblocks could emerge that prevent the business from getting off the ground.  Stem cells sound great in theory but have proven to be exceptionally hard to apply in practice, so far.  The advantage Harvard offers is that its technology is 9-for-9 to date.  Those were performed mainly in Russian hospitals.  Problems could develop with those patients down the road.  The technology itself could experience problems as more patients are treated, moreover.  Still, the high success rate so far is unusual.  New medical devices typically take a long time to perfect.    So the outlook appears favorable.  Experience with tracheas also could facilitate development of other regenerative organs.  That would be great for business and the stock price.  It also could change the course of human history.

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