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Executives

Robert Putnam - Investor Relations

Tom Brown - Chairman, President and Chief Executive Officer

Kathy McDermott - Chief Financial Officer

Analysts

Jared Cohen

David Bench

Joe Carter

LRAD Corporation (LRAD) F3Q 2013 Earnings Conference Call August 6, 2013 4:30 PM ET

Operator

Good day, ladies and gentlemen and welcome to today’s Investor Relations Webcast. At this time, it is my pleasure to turn the floor over to your host, Robert Putnam. Sir, the floor is yours.

Robert Putnam - Investor Relations

Thank you, and welcome to LRAD Corporation’s fiscal third quarter 2013 conference call. I am Robert Putnam, Investor Relations for the company. Tom Brown, our Chairman, President and CEO and Kathy McDermott, our Chief Financial Officer, are also on today’s call. Ms. McDermott will recap our fiscal third quarter financial results followed by a brief presentation from Mr. Brown. After the presentation, we will open the call to questions.

Other than statements as to historical facts, statements made during this call are forward-looking statements and are based on our current expectations. During this call, we may discuss the company’s plans, expectations, outlook, or forecast for future performance. These forward-looking statements are subject to risks and uncertainties and actual results could differ materially from the views expressed today. For more information regarding potential risks and uncertainties, see the Risk Factors section of the company’s Form 10-K for the fiscal year ended September 30, 2012. LRAD Corporation disclaims any intent or obligation to update these forward-looking statements except as otherwise specifically stated.

I’ll now turn the call over to Kathy for the fiscal third quarter financial results recap. Kathy?

Kathy McDermott - Chief Financial Officer

Thanks, Robert. Good afternoon everyone. Thanks for joining us today. Revenues for our third fiscal quarter remains low digitally and receive orders in our pipeline. We were happy to receive the $12.2 million award from the U.S. Navy in Q3 as a result of competitive bid process that we began in June 2012. We also received some smaller orders from the Navy which we delivered in the third quarter and we received an initial $2 million order on this award, which will ship in the fourth quarter. We have announced over $3.3 million of additional non-military orders received since the end of the third quarter, so some of the delayed orders are starting to come in. We have been building inventory for these and other orders we expect to ship this quarter. So, we anticipate a strong fourth quarter and finished our fiscal year.

Revenues for the quarter ended June 30, 2013 were $2.2 million, compared to revenue of $3.2 million for the quarter ended June 30, 2012. Year-to-date revenues were $8.3 million compared to $9.2 million in the first nine months of fiscal 2012. Our revenues will continue to fluctuate in the quarter-to-quarter basis based on the nature of our business in customer base and the timing of deliveries.

Gross profit for the quarter ended June 30, 2013 was $916,000 or 42% of net revenues compared to $1.6 million or 50% of net revenues for the third quarter of the prior year. The decrease in gross profit was primarily due to decreased revenues and some unfavorable product mix partially offset by favorable manufacturing overhead spending. The gross profit as a percentage of sales is lower due to lower fixed absorption caused by the lower revenue levels.

Gross profit for the first nine months of fiscal 2013 was $3.8 million compared to $4.6 million for the prior year. The decrease in year-to-date gross profit was primarily due to decreased revenues, unfavorable product mix, and an increase in our annual maintenance costs with our third-party provider in the current year compared to a lower cost for the first year warranty service provided in the prior year. Again, the lower gross profit percentage reflects lower fixed absorption due to lower revenue levels.

Operating expenses for the third fiscal quarter increased $496,000 from $1.5 million to $2 million. The increase was primarily related to legal and other professional fees associated with the lawsuit and threatened proxy contest as well as some increase in salaries and benefits related to new business development personnel. Year-to-date expenses increased $857,000 from $4.6 million to $5.5 million. Again, the majority of increase is related to legal and other professional fees and to a lesser extent some increase in non-cash based compensation expense and salaries and benefits partially offset by reduced third-party sales commissions due to lower commissionable sales compared to the prior year.

We reported a net loss of $1.1 million, or $0.01 per share in the third quarter compared to net income of $200,000, or $0.01 per diluted share for the third quarter of 2012. For the nine months ended June 30, 2013, we reported a net loss of $1.7 million, or $0.05 per share compared to net income of $222,000, or $0.01 per diluted share for the nine months ended June 30, 2012. The increase in net loss was primarily due to reduced revenue and margin as well as increased legal and other professional fees.

On our balance sheet, our cash and cash equivalents balance as of June 30, 2013 was $15.1 million, an increase of $1.2 million from September 30, 2012. The cash was generated primarily by a reduction of accounts receivable from the high year end balance due to strong fiscal 2012 fourth quarter revenues partially offset by the year-to-date net operating loss after adjusting for non-cash expenses and an increase in inventory. The net inventory balance increased by $2.1 million year-to-date based on the current sales forecast. Working capital decreased slightly year-to-date to $20.5 million at June 30, 2013.

And with that, I will turn it back to Robert.

Robert Putnam - Investor Relations

Thank you, Kathy. I’ll now turn the call over to Tom for a brief management presentation. Tom?

Tom Brown - Chairman, President and Chief Executive Officer

Thanks, Robert, and thank you all for joining our call. While third financial performance did not meet our expectations, we had several good results in the quarter. First, we signed the agreement that was previously announced with Beijing Paier Technologies to develop the Chinese military and public safety markets. This will take some time, but we are now at a position to pursue this market.

We were awarded, as Kathy indicated, a $12.2 million contract with the U.S. Navy to provide various size LRAD products and we strengthen – probably the most important thing, we strengthened our sales organization by hiring three new business development personnel and we signed new reps in South America and in Asia. And we continue to look for additional business development personnel as we are starting to expand our sales internationally. And as Kathy indicated while third quarter revenues were down, fourth quarter orders have been strong. We have already received orders in excess of $5 million in the quarter and we are working on two other significant orders, which we hope to close and ship this quarter. Regardless, we will end the year on a positive note. We continue to grow our 360 market receiving an additional mass notification order for a small city in Asia and our first mobile 360 order was received and shipped to a state division of the Department of Homeland Security. We feel that we have significant opportunities in the mass notification market both domestically and internationally.

And finally in July, the shareholders nominated a new Board of Directors. The Board has approved a share buyback program under which the company may repurchase up to $3 million of its outstanding shares. We will be working on the details in the implementation of the buyback program this month. And with that Robert, let’s open it up to questions and answers.

Robert Putnam - Investor Relations

Thank you, Tom. We will now open the conference call to questions from management. We encourage callers with questions to queue up with the operator as soon as possible so that there will be minimal lag-time between each caller. Operator, please instruct the callers how to queue up with their questions?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And there appear to be no phone questions at this time. There are no questions at this time. And we do have a question from (Jared Cohen). Jared, please take your question.

Jared Cohen

Yes, just a quick question, I know you have been winning some business in the wild life conservation market can you go on in some of the other markets you have been working on besides the military?

Tom Brown

We have been working this mass notification market. We have our new 360 product that we introduced at the beginning of the year and we’ve sold product into Asia as part of a Tsunami warning system upgrade. And this last quarter – actually in this quarter current quarter we made our first sale of a mobile unit so that it’s on a trailer and we sold that into as I indicated the state division of Homeland Security and we see this as a very large market not just domestically, but also internationally. And we have gotten a lot of interest about a mobile communication network that you can setup in any disaster area where and when you needed. And the product quality is excellent, it’s better than anything that we see on the market today and we see big opportunities here, so this is something that we are really focused on, we just brought in a new person who has – who’s background is mass notification. We are interviewing other people who have been in this space both domestically and internationally as business development people, so we see this as a good opportunity, but at the same time we see big opportunities for our existing LRAD products. And this quarter is off to a very good start. And as I indicated if we can close the couple of the significant orders that are out there we are going to close them I am just hoping we can close them in time to get them shipped before the end of the year. And if that happens it’s going to be could be our second best quarter in the company’s history.

Jared Cohen

I saw that. I was just curious I did see that order, what is that around I know you won’t give it exactly, but just sort of what’s the price point for that type of product?

Tom Brown

Well, for the trailing unit, it depends on the configuration we have – what we call our LRAD 360, so it can be a single stack, double stack, it can go up to eight stacks, but actually you know the preferable stacking is probably two is probably enough. So, before we integrated trailer it depends on if you want solar panels, generation, a generator it depends on the power, so the price range is from roughly $55,000 to $90,000 depending on the options that you select.

Jared Cohen

Okay. And then nothing new in terms of any of the airport business both domestically or internationally?

Tom Brown

No, unfortunately nothing to report other than we are still pursuing some international efforts, we have proposals out, but nothing has closed and in my significant orders nothing touching the airports.

Jared Cohen

Okay, alright. Thank you very much.

Tom Brown

Thank you, Jared. Next caller please operator.

Operator

Thank you our next question comes from (David Bench). David please let your question.

David Bench

Yeah, guys I appreciate the buyback there, so I get to see you guys supporting the stock. A quick question regarding military, do you – we have any more color now than we did you know three or six months ago regarding sensor multi-orders or is this still too early to say?

Tom Brown

Dave it’s still everything has been pushed out with sequestration. There is still interest and there is still opportunity that we are pursuing. We are still working with the Kongsberg. We are going to be at a trade show with them in September at a key Army trade show. We are still promoting you know the product where the RFI had come out a couple of years ago, we are still looking to see if we can get funding for that program. So, the actual demand is still there, but the funding has been pushed out and you can say everybody is struggling with the trying to get funding out of the military. We were fortunate it took us a long time. Normally in the U.S. Navy, you the turnaround time is normally within 90 days of an RFP, but it took us almost a year to get awarded that contract actually a little bit more than a year. So, unfortunately military has been difficult, but we are trying, we are working on the international space. We were working on this new market with mass notification and our feeling is this is going to take a little while but we think that the Chinese market offers us some really big opportunities especially the public safety market. So, we feel good our sales team has been strengthened and the new personnel set the ground running. So, we feel good about that. So, we were going to end the year on a positive note. We think we can hopefully have a good 2014, but the military is something that we are pursuing, but we are not relying on anymore.

David Bench

Okay. And are the margins in the Chinese market similar to what we have seen in the past or we are going to see margin contraction there?

Tom Brown

No, it’s still – our margins are still good and we don’t anticipate any reduction in margins in China with the Chinese business. Actually, the Chinese business that we just booked this quarter, all of our pricing is consistent across the globe.

David Bench

Excellent, good to see.

Tom Brown

Thank you.

Operator

Our next question comes from (Joe Carter). Joe, please state your question.

Joe Carter

Hi, guys. Couple of things, first of all, I have been in communication with Robert a little bit about the state department opportunity that was discussed in the February conference call. And could you elaborate a little bit or update us on that please?

Tom Brown

I can. I didn’t say state department, I think I said department of the U.S. government, but anyhow, we are still working at and we are still working in that area. And as I indicated at the time that would be our most significant piece of business booked to-date if we can land it. There is still interest. We are working – we have some meetings setup this month and some demonstrations for key members of that department and we are hopeful that we can move this forward and especially now in light of all the closures and concerns in the global space, we think that we have some opportunities. So, we are hopeful and as soon as we hear anything we will make an announcement.

Joe Carter

It seemed that when you are talking about it in February that it was – I got the impression that was imminent?

Tom Brown

Yes, certain way, we were led to believe that it was a very imminent order and unfortunately maybe with the change in the state department itself, it puts some things on hold, but right now, things are back on track we feel.

Joe Carter

Okay. The next question regarding Kongsberg I know that you have talked about before and then I think you commented in one of your conference calls that there was going to be some presentations made in the – during the summer or sometime soon?

Tom Brown

Yes, actually they have pushed out to September. So, we have a presentation setup in early September at key Army Trade Show with Kongsberg.

Joe Carter

Okay. And that is leading to orders or is that just showing sell type of things?

Tom Brown

It’s still showing sell, but we have been showing and telling for quite sometime. So, it takes a long time to get funding especially these days, but both parties are still very aggressive in this space. And we think that we keep on pursuing and we are not going to get to let to die, because it’s definitely the right solution.

Joe Carter

I think you commented there are going to be some smaller orders made by Kongsberg, Bob purchasing some units for either trial or for existing installations, is that correct or no?

Tom Brown

I mentioned that a couple of years ago we were led to believe Kongsberg did by some small orders, but we are led to believe that there would be some larger orders. And unfortunately, those have not come to pass, but like I said, we are still, it’s still an opportunity that to life and we are still pursuing.

Joe Carter

Okay, does Kongsberg currently sell anything to the military that would be retrofitted potentially by or by putting on LRAD products?

Tom Brown

Well, Kongsberg several years ago won the work to provide CROWS systems the remote weapon sessions that are put on top of the MRAPs.

Joe Carter

Right.

Tom Brown

And they have put in place over 12,000 units in the field. And last year, last September, they were given another award for over $990 million for upgrades, maintenance, and an additional 3,000 CROWS systems. But in talking with them, so far they have not seen much funding against that award. So, there are also like a lot of companies dealing with the U.S. military these days, we are all waiting on seeing some of the funding getting cut lose.

Joe Carter

Alright. And this is I think just to confirm, this is separate from the Army RFI that has been discussed and I think that, that has 500 product on, is that correct?

Tom Brown

Yes, yes. The LRAD 500X was in the spec for the RFI and that’s – that was the RFI, famous RFI came out twice and that is for 6,350 pieces.

Joe Carter

Alright. I think you mentioned in one of the more recent conference calls, so that might be reduced by few hundred or so, but it still is obviously a large potential order?

Tom Brown

Yes. Yeah, still good.

Joe Carter

I’m sorry, no, I am going to say the Kongsberg projects in the field are all of those units that they have already sold of potentially being able to, I mean, could you retrofit them what 300 product or is it just a rough number that could be retrofitted?

Tom Brown

No, we could retrofit that’s in the field. It’s an Escalation of Force Kit that we are trying to sell. So, the Escalation of Force Kit includes a laser dazzler, which we do not manufacture, a high-powered white light, which we do not manufacture and the LRAD 300. So, it’s a complete package that they are offering and it needs to be – it needs basically the Escalation of Force requirements of shout, shine, and then eventually shoot.

Joe Carter

Right, right. So, it sounds like there is funding in place that just is not basically confirmed purchases, but at any given time, there might be purchases of the 300 product?

Tom Brown

We are still very aggressively pursuing that opportunity.

Joe Carter

Alright, okay. So, the three people that you have added to your sales team, do they replace people or they added in addition to who you already had?

Tom Brown

We did – we restructured the group and we did replace one individual, but we have the three people that we have added to net increase of two. And we are looking for probably an additional two people to add to the team. So, right now, we have sales group of it sounds small, but there are seven people in the sales team out of a total of 37. So, we are looking to continue to upgrade that group and continue to add some people, but we do a lot of our business, especially our international business through our rep network. And we have been improving that network as we go and we are seeing some good sales as you can see this quarter we have gotten some good sales out of Asia. And that’s very promising. We see some big opportunities in that market.

Joe Carter

Right. How many people do you have based overseas or is it really based in the States?

Tom Brown

Everybody – all of our employees are based in the U.S.

Joe Carter

Okay, okay. I was thinking that whereby it wasn’t share based on what some of the experiences. It seems like some people have quite a bit experience overseas and we might actually be based over there, okay?

Tom Brown

Alright, well thank you.

Joe Carter

I’m sorry.

Tom Brown

The couple of our sales people are very, very experienced in international business. So, but they are based here in the U.S.

Joe Carter

Right, okay. Regarding the share buyback, it doesn’t find you won the share or any of the guidelines that you have maybe in place as far as at what price level and what quantity that you want to earmarked certain dollar value. Can you discuss how you came up with that figure?

Tom Brown

It was approved by the Board of Directors based on looking at the financial requirements of the company and what we could. We are not looking to put any debt on our balance sheet. We are looking to grow, continue to grow organically which we have been doing for the last several years. And we felt that we had cash – some excess cash that we could devote to this program. We also feel like the fourth quarter is looking very strong. So, we should generate some positive cash flow on our fourth quarter. So, after analysis, we sat down and the Board approves the $3 million. In terms of details, we are still working through that. We are looking at an investment bank to work with. And once we fit them with them this is first time that we have gone through a buyback, so we will get an education and figure out what we need to do to implement the program.

Joe Carter

Great, okay, well I have been in support of some registry that happened. Thank you. Thanks very much for the information.

Tom Brown

Alright, thanks for the call.

Kathy McDermott

Thanks, Joe.

Tom Brown

Thank you, Joe. Next caller please operator.

Operator

There are no further questions at this time.

Tom Brown - Chairman, President and Chief Executive Officer

Thank you for participating in LRAD Corporation’s fiscal third quarter 2013 conference call. A replay of this webcast will be available in approximately two hours through the same link issued in our July 24 press release.

Operator

Thank you. This does conclude today’s webcast. We thank you for your participation. You may disconnect your lines at this time and have a great day.

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