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I've been following the progress of LRAD Corporation (LRAD), where activist investor Iroquois Capital has had success creating change. Back in May, Iroquois was able to place two directors on LRAD's board and have input on the selection of a third director:

LRAD Corporation announced today that it has reached an agreement with Iroquois Master Fund Ltd. and certain of its affiliates (collectively 'Iroquois'), under which two new independent directors proposed by Iroquois and a third new independent director mutually selected by the Company and Iroquois will stand for election in place of three independent members of the Company's current Board of Directors.

'We believe this agreement is in the best interests of the Company and our stockholders,' stated Tom Brown, chairman, president and CEO of LRAD Corporation.

The Company and Iroquois have also agreed to settle the pending derivative lawsuit brought by Iroquois, subject to approval by the Delaware Court of Chancery, with the Company agreeing to amend Mr. Brown's May 2012 stock option grant by raising the strike price from $1.33 to $3.00. The Company also agreed to pay certain Iroquois legal and advisory fees. Iroquois has agreed to certain standstill restrictions that expire prior to the Company's 2014 Annual Meeting.

'We are delighted to have settled with LRAD amicably and believe that General John G. Coburn, Dennis J. Wend and Richard H. Osgood III will enhance the composition of the Board,' said Richard Abbe, co-founder and managing partner of Iroquois Capital, LP. 'We look forward to working constructively together with the Board and management team to help maximize value for all stockholders.'

I like to follow situations like LRAD where an activist shareholder is acting as a catalyst that could realize and create value. This is especially appealing to me when investing in a small-cap company, where having a board of directors that keeps a close eye on management is more important.

I've shortlisted LRAD on the list of activist situations that I follow. I think LRAD is especially interesting because it has a debt-free balance sheet with a significant cash balance. This provides some downside protection and allows for a margin of error. Since the changeover at the board level, there have been several positive events at LRAD. I'd like to update readers about what has been going on.

Positive Event No. 1: Share Buyback Program

With a large shareholder (Iroquois) now on the board of directors thoughts on capital allocation at LRAD have changed. That change has led to one of the first pieces of business of the new board being the enactment of a share buyback program:

The company also announced today that its board of directors has approved a share buyback program under which the company may repurchase up to $3 million of its outstanding common shares from time to time on the open market and in privately negotiated transactions, depending on market conditions, share price and other factors. The company intends to fund the buyback program with available cash and from future cash flow from operations.

'Our strong balance sheet and anticipated organic business growth give us the flexibility to implement a repurchase program at this time to create further value for our stockholders,' said Brown. 'We have no debt and sufficient cash and cash equivalents to initiate this plan and continue our aggressive strategies to expand markets and applications for our globally recognized LRAD® products. We believe our unique long range communication technology and growing markets for our lifesaving systems offer a compelling opportunity for investors.'

As I already noted, LRAD has a debt free balance sheet with plenty of cash that will allow the company to buy back attractively valued shares and grow the business. A $3 million buyback would represent about one year of cash flow and not dip into LRAD's cash balance. If the board of directors believes that LRAD's shares are undervalued, this is an accretive use of cash.

Positive Event No. 2: Significant Business Momentum

At a similar time to the new board coming into place, LRAD's business is gaining some momentum. Over the past month and a half, LRAD has been able to announce a series of new business wins. I believe that the stock market might not have yet realized the amount of future cash flow that these deals are set to create.

Here are the announcements of the new business wins:

  1. June 11, 2013 -- Multi-year $12.2 million contract for small, medium and large LRAD AHDs from the United States Navy's Naval Surface Warfare Center located in Crane, Ind.
  2. June 13, 2013 -- A $1.98 million LRAD systems order from the United States Navy.
  3. July 30, 2013 -- A $580,000 LRAD systems and support equipment order for wildlife preservation and control from DeTect, Inc.
  4. Aug. 1, 2013 -- New LRAD® systems orders totaling over $1 million for Asian public safety, wildlife control and emergency. The orders are anticipated to ship this quarter.
  5. Aug. 1, 2013 -- A $760,000 LRAD 500Xsystems and support equipment order from the Middle East. The order is scheduled to ship this quarter with the LRAD systems being deployed for safety applications including crowd and riot control.

The above orders, which were received in basically a two-month period, are for a combined $16.5 million of new business. To put this in perspective, consider that 2012 revenues for the whole year were less than this.

Positive Event No. 3: New Directors Buying Shares With Their Own Money

I don't know how many companies that I look at over the course of a year where I can't find evidence of any directors buying shares with their own cash. Sure, they all have lots of stock granted to them for free. So when I see directors risking their own cash and buying shares in a company that they are on the board of, I get interested.

Two of the new directors appointed by the activist investor LRAD have done just that. New director Richard Osgood III spent $75,000 of his own cash buying shares of LRAD as follows:

Title of Security (Instr. 3)

2. Transaction Date (Month/Day/Year)

2A. Deemed Execution Date, if any (Month/Day/Year)

3. Transaction Code (Instr. 8)

4. Securities Acquired (A) or Disposed of (D) (Instr. 3, 4 and 5)

5. Amount of Securities Beneficially Owned Following Reported Transaction(s) (Instr. 3 and 4)

6. Ownership Form: Direct or Indirect (I) (Instr. 4)

7. Nature of Indirect Beneficial Ownership (Instr. 4)

Code

V

Amount

or

Price

Common Stock

08/08/2013

P

10,600

A

$1.479

10,600

D

Common Stock

08/08/2013

P

10,650

A

$1.48

21,250

D

Common Stock

08/08/2013

P

5,450

A

$1.489

26,700

D

Common Stock

08/08/2013

P

9,600

A

$1.49

36,300

D

Common Stock

08/08/2013

P

10,000

A

$1.499

46,300

D

Common Stock

08/08/2013

P

3,700

A

$1.5

50,000

D

New director Dennis Wend spent $37,000 of his own money also buying shares.

1. Title of Security (Instr. 3)

2. Transaction Date (Month/Day/Year)

2A. Deemed Execution Date, if any (Month/Day/Year)

3. Transaction Code (Instr. 8)

4. Securities Acquired or Disposed of (Instr. 3, 4 and 5)

5. Amount of Securities Beneficially Owned Following Reported Transaction(s) (Instr. 3 and 4)

6. Ownership Form: Direct or Indirect (Instr. 4)

7. Nature of Indirect Beneficial Ownership (Instr. 4)

Code

V

Amount

or

Price

Common Stock

08/12/2013

P

25,000

A

$1.4665

25,000

D

I'll admit to being more than a little surprised how quickly the activist efforts at LRAD have started to actually make a difference at the company. This is a bit of an unpredictable business, which gives me pause, but there are definitely good things going on here.

Source: Activist Investor Influence At LRAD Corporation Is Creating Positive Change