Brian Harvey - Director of Investor Relations Thomas Brown - President and Chief Executive Officer Katherine McDermott - Chief Financial Officer

Les Sulewski - Sidoti & Company Jonathan Manela - Rainmaker Associates Jared Cohen - JM Cohen & Company Anne Margaret Crow - Edison

Good day, ladies and gentlemen, and welcome to today's webcast. (Operator Instructions) At this time, it is my pleasure to turn the floor over to, Brian Harvey. Sir, the floor is yours.

Thank you, Dagmar. Good afternoon. And welcome to LRAD Corporation's fiscal first quarter 2014 financial results conference call. I am Brian Harvey, Director of Investor Relations for LRAD. On the call with me this afternoon are Tom Brown, our Chairman, President and CEO; and Kathy McDermott, our Chief Financial Officer. Ms. McDermott will recap our fiscal first quarter financial results, which will be followed by a brief presentation from Mr. Brown. After their presentations, we will open up the call to questions. But before I turn the call over to them, I would like to take this opportunity to remind you that during the course of this call, management will make forward-looking statements. Other than statements as to historical facts, statements made during this call that are forward-looking statements 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, 2013. LRAD Corporation disclaims any intent or obligation to update those forward-looking statements except as otherwise specifically stated. I will now turn the call over to Kathy for the fiscal first quarter 2014 financial results recap. Kathy?

Thanks, Brian, and thanks, everyone, for joining us today. Revenues for the fiscal first quarter of 2014 increased by 28% to $3.8 million compared to $3 million for the first fiscal quarter of 2013. This increase resulted from strong growth in our international markets, where we more than doubled our revenues compared to the prior year. Revenues in the U.S. declined year-over-year due to a reduction in U.S. military spending, which remains a challenge for us, as U.S. defense spending remains under pressure. Revenues during the quarter were diverse among a number of countries and markets, including public safety, oil, vessels and platforms, foreign military vehicles, bird mitigation for fisheries, maritime securities, coast guard and army-based communications. We've also had a few good placements in the mass notification market, including Tsunami warning and airport applications. While these orders are small, they present a good opportunity to showcase these installations, as we build our presence in this market. Our revenues continue to fluctuate on a quarter-to-quarter basis based on the nature of our business and customer base. Gross profit for the quarter ended December 31, 2013, was $1.9 million or 51% of net revenues compared to $1.5 million or 50% of net revenues for the first quarter of the prior year. The increase was primarily due to the increased revenues. Operating expenses for first fiscal quarter increased 14% from $1.6 million to $1.8 million, as a result of an increase of $227,000 in salaries and consulting fees, primarily related to business development efforts and $52,000 for third-party sales commissions, offset by a $55,000 decrease in non-cash share-based compensation expense. We've got a strong business development team and we believe it will enable us to grow our topline. We reported a net income of $132,000 or $0.00 per diluted share in the fiscal first quarter of 2014 compared to a net loss of $100,000 or $0.00 per share in the first quarter of 2013, as a result of the increased revenue and gross margins, partially offset by higher operating expenses. Our cash balance increased from $15.8 million at September 30, 2013, to $18.1 million at December 31, 2013, primarily generated from collection of our accounts receivables from our strong fourth fiscal quarter revenues, partially offset by a reduction in accounts payable for our fourth quarter purchases and an increase in inventory to support our sales forecast. Working capital increased slightly during the quarter to $24 million at December 31, 2013. And with that, I'll turn it back to Brian.

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

Thank you, Brian. Thank you all for joining our call. Our second quarter is off to a very good start. We announced a $4 million order last week, primarily for LRAD-2000X is our most significant order to date for that product line, and the second largest individual order that we have received for the LRAD-X product line. We anticipate shipping this order in our third quarter. As we announce today, we received a follow-on order in the amount of $763,000 for bird mitigation and wildlife preservation and a mining concern. Our product has proved very effective in this application. As Kathy indicated, we incurred some additional expense in the quarter, primarily attributed to increased headcount and consulting cost. Last May we restructured our sales team and have added four new sales professionals and will add an additional member this month to handle the former Russia and Eastern Europe. These are the regions that we've had some small sales in the past and we are looking forward to further develop this market through this hire. As a company, this is a strongest sales team that we have had since I arrived, and we feel we are well-positioned to expand sales with this group. That being said, we are continuing to look to add additional members. As we look at our business outlook, our international business is continuing to grow and represented 66% of our first quarter revenues. Asia, the Middle East and South America continue to be strong market for our products. We have developed strong partners in these territories and we anticipate strong business in 2014 from these areas, to offset the domestic business which continues to lag behind. We are continuing to work with the Army and the National Guard. The requirement demand still exist for both vehicles and escalation of force applications, but defense spending has slowed. Hopefully, we'll see a pickup in our fourth quarter. In 2013, we introduced a very competitive product offering in mass notification market. We have added dedicated business development and engineering personnel to support this market. Over the next 12 to 18 months, we will release some new product offerings to round out our product line and we anticipate increasing sales from this area. Next week we will attend an exhibit product at the Singapore Air Show. This is a major commercial and defense show and it will be our first time attending, and it's a major international show, not just an Asia show. In March we will exhibit a Gastech in Korea, a major oil and gas trade show. At both shows we will be exhibiting our LRAD-RX and our 360 mass notification speakers. Right now we feel we have an excellent product offering, a strongest sales team and we are positioned to continue to grow. Brian, let's turn over to Q&A.

Thank you, Tom. We'll now open up the conference call to questions for 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.

(Operator Instructions)

And, operator, while we are waiting for callers to queue up, we did receive an e-mail to question before the call that I'll read and we'll answer. And that question is, during the last quarterly call you indicated that you did not repurchase any share, yet you extended the program. Did you repurchase any shares during the last quarter?

So we did. We came out of blackout, we set our pricing and began to repurchase some shares in December, probably about second week of December, and the first quarter buyback of almost 52,000 shares for about $100,000. And now we have continued that going into the second quarter as well. So we're set at a good price and we had extended the original buyback program that was set to expire in December 2013. We extended that until December 2014, and increased the amount up to $4 million, and a press release we put out last year. So that program's been working out well.

And operator, we'll take questions now.

And our first question comes from Les Sulewski from Sidoti & Company. Les Sulewski - Sidoti & Company: You were able to achieve improved margins this quarter within 51%, 50% last quarter last year, and then there was a chop to 42%, probably 43% the following quarter. How were you able to achieve the gross margin expansion and what can we look at sequentially in the next two quarters?

Well, the main reason for the improved margins is we had increase sales. So we were able to spread our cost over some increased sales. Mix is always going to be an issue, but most of our product offerings we try to maintain at least a 50% margin, that's our target. We do have some of the newer products, some of the mass notification products, they have a little less margin, but pretty close to that 50%. So I think if you look at it over time, when our revenues are in this range, we usually have maintained a 49% to 51% margin and we anticipate maintaining that for the rest of the year. Les Sulewski - Sidoti & Company: And then, Tom, also you mentioned, you bought one person to sales this months, and I think you said four last year. So are your total at nine now, is that what it is? And is it geographically allocated, how would you look at it?

That's a good question. You're looking at our information very carefully. We do have nine sales people now. And we are allocated geographically. I have three people now working in Asia and in the Middle-East, Northern Africa. We're doing a little business in South Africa and Europe. And then we have three people that are dedicated to the Americas, North and South. And we have two peoples that we've put in place for this mass notification space, which probably and as we look at the year, we were working on a couple of good sized opportunities in mass notification, and if we're successful, we'll be looking at expanding that team. We think that that area right now offers us some pretty good potential growth, so we're going to look to staff up. As I said, we also had an engineering staff to help support that product line. Les Sulewski - Sidoti & Company: And then just to kind of go on to, I mean that was leading on to my next question. Can you provide a little bit more progress on your pursue into breaking into the mass notification market?

Well, right now, we are working on -- we have five outstanding Request for Proposal that we are submitting. It's going to be a competitive bid situation, each one of them, but we are working on five different opportunities right now. A couple of them are, I would classify as, mid-sized opportunities. They are large enough that we would announce, if we were successful. And there is two very significant opportunities that we're working on. The timing of these opportunities, probably we'll hear, the smaller ones should happen within the next three to four months, and we'll find out if we're successful. The larger ones will probably be pushed out towards September, October timeframe. But we are aggressively pursuing each one of these opportunities and we feel we have a very good product offering, and it's been well received in the demos and the trials. And so far we've done some good business in Asia with this product, so we're feeling pretty excited about the opportunities in this area. Les Sulewski - Sidoti & Company: And one more, can you provide an update on what's going on with your Chinese partner?

I just visited them last month. And, Les, in 2012 we had about $300,000 worth of business in China. Last year in 2013, we did a little bit over $2 million. This year we're anticipating that we'll at least maintain that level. We're trying to grow that. We've reviewed business plans. The Chinese have done quite a bit in marketing the product and doing some installations, some small installations. So we have a nice forecast for the future in China. It's going to take a little bit of time, as I've said before, and we're making progress. And $2 million last year, if we can maintain that and grow that a little bit this year, we'll be very pleased.

Our next question comes from Jonathan Manela with Rainmaker Associates. Jonathan Manela - Rainmaker Associates: So first, I appreciate the progress that you're making in terms of the business and as a shareholder. It feels as good a place that we've been in since I've been a shareholder, which is probably going on six, seven years now. So I applaud you and commend you for what's happening. So the one area that to me is both extremely important as a shareholder and very unclear, as to, Tom, what is really the position of the organization with this share repurchase program? I just don't understand what you're trying to accomplish with your strategy. Can you articulate and talk to that point a little bit?

Well, what we're trying to do, Jonathan, is put some of this cash to work. And we've looked at acquisitions and I'm still looking at small acquisitions, but honestly these small companies have a lot of baggage with them. Jonathan Manela - Rainmaker Associates: Well, I'm not talking -- I loved it. I love the fact that your plan is to buyback stock. I'm just not sure what your strategy is, because it seems like you guys came out of the gate and set sort of a ceiling as a strategy. And a floor on the stock, which ultimately will create, if you're purchasing up to a fixed price. And then you got blacked out and the stock ran away, and you ended up not purchasing any stock. It sounds like you've now raised the ceiling for, in essence, created a new floor, Kathy used the word, we set a good price.

We use the market, John, but actually you're correct. Jonathan Manela - Rainmaker Associates: You said, we set this at a good price.

Well, we set it at the market price at the time. But you're right. The market ran away and we were in a blackout period, so we couldn't readjust during the blackout. When we came out of blackout, we readjusted the price to market. Unfortunately, the stock has continued to run, but we are buying back shares. We have bought back shares this quarter. Jonathan Manela - Rainmaker Associates: So if I want to understand your strategy, your strategy is to do what exactly? You're picking a price point that you're willing to purchase shares up till that price, is that the strategy?

Yes. And we're adjusting it based on the market at that time, but we increased the market price because the shares had gone up. And we're looking to use the $4 million that we allocated for this to buyback shares. Jonathan Manela - Rainmaker Associates: So let me ask you this question, because I brought this up on the last conference call, unfortunately this is the only forum that you will have a conversation. So let me make my point. It sounds like you want to spend $750,000 a quarter to buyback stock, why don't you set a plan that spends $750,000 a quarter to buyback stock and stop creating price points picked by a person who is somehow thinking through a value of the business based on no real experience or merit. Just buy stock, and it's a great part of your story and a great value proposition to shareholders. So when you walk out of a meeting with investors, you can tell people, look, we are growing the business. I know, it's going to be lumpy, I can't tell you where we'll be in three to five years, but we're generating good cash flow and we continue to buy stock. So put your capital in along side our capital, because we keep buying stock. And if stock goes to 240, you buy stock; and it goes to 180, buy stock, in every quarter you buy stock, because we don't know if this thing is going to be $70 million or $23 million company over the next two or three or four years in terms of revenue, but we know it's not a growth story. We know it's lumpy and we know it's not going to be predictable. So you're not going to get a good valuation on your stock, no matter what, but if you keep buying stock and everyone knows that you're buying stock and you're spending the money every quarter, as opposed to playing these silly games with adjusting the price of the stock and it's a silly game. And it doesn't speak well to what your goals and intensions are. My suggestion is change the strategy. Don't pick prices, just buy stock. I appreciate you hear me out.

But Jonathan, wait a second, we're a growth story. This mass notification space has some huge potential in it. And the one thing you have to understand with the LRAD business, we're the pioneers, we're creating a market. And it takes a long time to develop a market, especially if you have a product that is not mainstream product. But mass notification, this is a well-established market, and if I can get 4% or 5% of the overall global market, we're all going to be happy. Jonathan Manela - Rainmaker Associates: Tom, I am with you. I've been with you all along. My money is in the stock, I am with you. The reality is, is if you do $22 million this year, you're going to be happy and you'll drop $4 million or $5 million of fresh cash to the bottomline. And next year, you may do $20 million -- it may take three or four years for you to get to where you want to go. In the meantime by buying stock you have an opportunity to return capital, return cash to shareholders in the form of purchasing stock that what will look like in three or four years from now at a very depressed price. What happens is if you try to look at where we are in the moment and pick a price of, let's say, $2 or $2.05 or $2.10 and this thing is going to keep bouncing from that and then you're going to be blackout. And you're going to miss opportunity and the quarters' going to run by. And I don't want to be on the call in three months from now and hear a $100,000 was bought. I want to hear $750,000 was bought. As long as that happens, you're going to bring in a lot of good shareholders into this company, because they're going to know that you're putting your money where your mouth is and you're buying back stock and that's what people want. So I believe in your growth story, but it may take time. I believe that the U.S. military is going come around, it may take time. I believe you're going to be profitable. But you're not going to be so profitability to the point where the valuation of the company is going to go up in a very meaningful way, because you dropped an extra $3 million or $4 million of cash to the bottomline. Until you can start counting a real growth, until you can start showing shareholders consistent revenue growth, which you admit, it's going to be lumpy and unpredictable. This is a great way for you to build a good base of new shareholders and keep driving the stock. So I just think if the strategy of taking a price is sending a message that you're saying it's not the intent, that the intent is to spend the $4 million, do that.

We don't disagree with you, Jonathan. Jonathan Manela - Rainmaker Associates: And I think it will go so long, and so far for you guys and it would just be such a great thing for you talk about in meetings, with investors everywhere you go, with great talking point, when you walk out. So look, I don't know what's going to be over the next six to 12 months, but I'm buying stock. Enough said. I mean that's a great job, great quarter. And I would seriously -- I am excited for the next couple of years.

Next question comes from Jared Cohen with JM Cohen & Company. Jared Cohen - JM Cohen & Company: Just a few questions. So I know, you don't want to give any sort of annual guidance, but can you give us the idea of more or less the size of your backlog, so that would give us a better idea of how things are going?

Well, Jared, we usually never give that. Jared Cohen - JM Cohen & Company: Well, I know that.

Right now, we have a pretty sizeable backlog and backlog being deals that we received in-house. So right now we're looking at an excess of $7 million of backlog that we will get out. The big one, that $4 million, we probably won't get it out until probably May timeframe, but we will get out of the door in May. And we've got a number of other orders that we need to get out before the end of March. So as I said, the quarter is off to a good start and we expect second quarter to be a good one. Jared Cohen - JM Cohen & Company: And secondly, now I think for the first time within the last few years, there is an official defense budget. Do you think that will help you out at least with the domestic military market, sort of opened it up a little bit?

Unfortunately there is no line item in the budget for the acoustic hailing devices. We're hopeful that we'll get some normal spending. We usually see some spending at the end of the year, which usually gives us a strong fourth quarter. Military still has demand for the product. We have some good demonstrations with the Army. We've been doing demonstrations for years. It gets frustrating, but we are making some progress in this area. So the National Guard has been a good source of revenue for us. And we're working on a number of different National Guard units and we're still hopeful that we'll see some decent orders out of military before the end of the year. We're working towards the 2015 budget, but as the last caller, Jonathan just indicated, it's going to be lumpy. And unfortunately the only budget that seems to be getting cut these days in Washington is the defense budgets. Jared Cohen - JM Cohen & Company: And I guess, lastly, just thinking about it, nothing new with the FAA in terms of with airports, at least here domestically?

Domestically, we haven't had any success, but we have had some small success internationally with airports. And we just did an installation in China and it's gone extremely well. And there are number of small airports and large airports in China. So our partners in China have focus on this on the short-term. And as I said, the installation, I saw pictures of it, I didn't go it because it was a pretty far inland in China. But installation, it looks really good and the feedback from the customer has been very positive. So that word of mouth helps get us, as Kathy indicated, once we get one or two these installations, the word of mouth really helps us grow the business. And we're small company with limited resources, but that word of mouth is what we rely on.

Our next question comes from [ph] Lloyd Quartin with Unique Investments.

I'd like to go back to China for a moment. The numbers you gave us from China, I believe that was prior to them opening up that display center in Beijing, is that correct.

Yes, right. I was there last month. I'll tell you it looks pretty good.

Obviously, the China is a market, which has tremendous growth opportunity, so I'd like to hear a little bit more when you were there what you saw? What your reactions were? What the potentials are from your visit over there?

Lloyd, the main thing that I saw was a lot of smog. Beijing is killing us right now, because the whole country is loaded with smog. And I feel personally, its impacting our weather patterns. But besides that, what I saw was very positive. The exhibition center is now up and they are getting quite a few visitors through that center. We're going to put another exhibition center in one of the Northern provinces where they have some manufacturing. And that should be up within the next three to four months. Right now, it's the Chinese New Year, so our guys won't be back until next week. But we went through their forecast. We want through all their marketing material and they've had some good success getting started. So far they have five sales people and they are expanding that, but there is also affiliations' with other companies. They indicated us, it's still going to take a little bit time to get budgets moving, but their focus right now is on these airports, and mainly public safety, which is the big -- it's like our Homeland Security. Public Safety Covers, Coast Guards, it covers their law enforcement and it covers their border security. So they're focused on that area right now. Military will come later.

If we did $2 million prior to the exhibition center, why not anticipate some growth now that so many of people can see the products, they are available out there. And have we penetrated in their Navy yet?

Not their Navy, but their Coast Guard we have.

When will be penetrating the Navy do you think?

I would say, [ph] Lloyd, maybe down the road, we're working on it. They have a board member who is a retired Navy, who has some strong connections, so we're working on it. But right now, I would say, it's going to take a little bit of time before we penetrate the military. And that's the area where we're going to need to do some local manufacturing, because their military is very sensitive to having local content. Just like our military is. We have to have local content in country. So I want to see some good growth before I commit to building product in that country.

The Homeland Security, if I'm not mistaken, we the National Guard, we've sold one or two units to two different guards, has there been any progress in that area?

We are still pushing. The National Guard is like the rest of the government, they like to spend their money in the summer and then the fall before the budget expires. We were just in New York this last week, doing demonstrations for the New York National Guard. Those went very well. So we had some good success in Colorado. We're approaching each state, one state at a time. And we were just in Michigan last week also. We've made some demonstrations to the Michigan National Guard. So we're working in the National Guard pretty hard. And we've sold some good product into a number of guards in the past, Illinois and California. So we're looking to continue that business. And it looks promising, but we're not going to see any orders until we get closer to our fourth quarter.

In the past, I think you said that we have product in about 60 countries now, is that correct?

66.

Of the 66 countries, how many would you consider active now as far as increasing the product line from LRAD?

That's a good question. I'd like to say all 66, but that's not true.

I mean, a reasonable number of them are interested in continuing to add LRAD products, what would you say?

I'd say that we have a number of -- we have good business right now in Asia and Southeast Asia, all those countries are buying. We have good business in the Middle East right now, not all the countries, but in some of the key countries in the Middle East. They've been buying the product. As Kathy indicated, we sold some product to oil platforms in a couple of oil related workboats this last quarter, and they're going into Africa. And South America, right now, is a focus for us. We think that there is good opportunities down there. We've had some success in a couple of the countries, but we're working some new countries down there. So we're trying to work every territory, Lloyd, but Europe has been slow. And I'd say probably Europe and Northern Africa has been kind of slow.

Our next question comes from Anne Margaret Crow with Edison. Anne Margaret Crow - Edison: I was going to ask a question about gross margins, but that's already been very thoroughly dealt with. So my second question is about the mass communication revenues during the quarter. You mentioned that there been a few good placements for mass communication products, and clearly going forward there's a lot in the pipeline. But what percentage of revenues during the first quarter were attributable to mass communication products?

Actually in this quarter it was very small. Kathy, do you have?

Yes. It's probably only a couple of percentage points in the quarter.

But the pipeline for mass notification, as you indicated, is good. We are working on a couple of programs that we think should close, as I said, within the next three to four months. And some bigger programs that we hope to see close before the end of our calendar year. So we've got a number of opportunities that we're very excited about that we're working and we have a really good product. We have a product that has been tested side-by-side, some of the old line competitive product, and we have clearly won all those side-by-side competition. So we feel pretty good about things right now with our mass notification product.

And we have one last question, and this comes from [ph] Jeff Clark.

I'd like to address this to Tom. Tom, looking forward, do you anticipate a percentage of revenue coming from service, support, maintenance, spares, training, that type of opportunity with your installed base and new customers going forward?

I do. And we have a long-term service agreement with one of our international customers and that generates about almost $800,000 in revenue on an annual base. Unfortunately, with the military, they like to repair the product instead of buying new product. So we get a lot of spare request from U.S. Navy and the U.S. Army, products that's been fielded for several years. So it is a focus for us. We are looking to get additional extended warranty revenue. But the problem is that the product stands up overtime, and it really doesn't fail. The only thing that usually fail on the product offering are the microphones or the MP3 players, because they get tossed around quite a bit. We have product that's been out there, even some of our older generation product is still out in the field, eight years down the road. So we try to get that additional extended warranty revenue, but the product is pretty tough.

We just had another question that came in. This one is from [ph] Carter Christopher with Christopher Business.

A question about the embassies, if there is any spending that you anticipate going forward on the embassies as a result of a [indiscernible]?

We're working on how to dance around this. But we have been working with the prominent side, the U.S. government for enhanced security. And this last quarter we made our first introductory, small sales for test and demo, and we have received information actually today that that test and demo has gone extremely well and that they're looking to buy some more product. How quickly that happens inside the U.S. government, I don't think anybody can determine, but we have our foot in the door.

Can you tell me what does the configuration look like? What products have you demo and how will this be configured as a standoff, a zone that would be created around that platform, typically what would it look like?

Well, originally when we were talking to this group, they were talking about standoff and we were looking at our RX systems as the permanent standoff. Now they're talking to us about some different product. Right now they're talking about more mass notification inside a compound and we're working in that area. But hopefully we'd like to eventually get to a situation where we can provide some permanent security for these locations, over 260 of them.

And there appear to be no more questions in the queue.

Thank you, Dagmar. And thank you everyone for listening too and participating in our conference call. A replay of the webcast will be available in about two hours through the same link issued in our January 27 press release. So thank you, again.

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.