Brian Harvey - Director, IR Richard Danforth - CEO Dennis Klahn - CFO

Scott Billeadeau - Walrus Partners

Good day, ladies and gentlemen and welcome to the First Quarter 2018 Financial Results Conference Call. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to Brian Harvey. Sir, the floor is yours.

Thank you, Jane. Good afternoon, everyone and welcome to LRAD Corporation's fiscal first quarter 2018 financial results conference call. I'm Brian Harvey, Director of Investor Relations for LRAD. On the call with me this afternoon are Dennis Klahn, LRAD's Chief Financial Officer; and LRAD's CEO, Richard Danforth. In just a moment, Mr. Klahn will open today's call with a recap of our fiscal first quarter 2018 financial results. Mr. Danforth will then provide an update on our business; afterward, we will open the call to questions. But before I turn the call over to Dennis, 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, please refer to the Risk Factors section of the Company's Form 10-K for the fiscal year-ended September 30, 2017. LRAD Corporation disclaims any intent or obligation to update those forward-looking statements, except as otherwise specifically stated. I would now like to turn the call over to LRAD CFO, Dennis Klahn. Dennis?

Thank you, Brian and good afternoon to everyone on the call. LRAD's fiscal 2018 opened with a strong first quarter with $7.6 million an increase of 159% of the 2.9 million in the first quarter of 2017. Gross profit for the quarter was $4 million or 51.9% of revenues compared to $1.2 million or 41.6% of revenues for the first quarter of prior fiscal year. Operating expenses in the quarter increased by 16% from $2.6 million in the first fiscal quarter of 2017 to $3 million in the first fiscal quarter of 2018 primarily due to higher computer related expenses associated with the implementation of a new ERP system, higher incentive expense this year, higher salary and related cost from employees hired throughout the past year and product development expenses. The company generated pretax income of $1 million in the first quarter of this fiscal year compared to a net loss of $1.3 million in the prior year first quarter primarily as a result of passage of the tax cuts and JOBS Act during the fiscal quarter and a reduction in the U.S. Federal Corporate Income Tax Rate we recorded $2.7 million for a non-cash income tax expense this quarter due to the income tax charge which reduced the deferred tax assets the company reported a net loss of 1.7 million or $0.05 per share. In the prior year the company reported a net loss of 812,000 or $0.02 per share for the first quarter. The balance sheet continues to be strong, cash and cash equivalents at December 31, 2017 were 15.1 million compared to 12.8 million at September 30, 2017. The $2.3 million increase in cash and cash equivalents which primarily due to the strong operating results decrease in short term marketable securities and timing of payments. Working capital increased 1.1 million from 25.4 million at September 30 to 26.5 million at December 31, 2017 primarily due to the results of operations. With that I would like to turn the call over to Richard.

Thank you, Dennis and good afternoon to everybody on the call. We opened fiscal 2018 with a strong first quarter as compared to our Q1 2017 revenues were up almost 2.5 times. The best quarterly revenues were reported in the last three fiscal years. Last notification was up nearly 300% and directional products were up 128%. Revenues were higher in all of our geographic sales regions and North America DoD sales to the U.S. Army, Air Force and National Guard grew the increases in revenues. Bookings increased 36% and included a $2 million mass notification booking. In fiscal year 2016 11% of our bookings were in mass notification and fiscal 2017 and the last quarter mass notification increased to 30% of our bookings. Of note in the trailing 12 months, LRAD has recorded $30 million in bookings from all product lines. Gross profit was up 223%, operating income increased to 175% excluding the remeasurements of the non-cash deferred tax asset related to the recent federal enactment of the lower corporate tax rate net income increased 200% over the fiscal Q1 2017. In the last quarter we issued press releases announcing over 4.4 million in orders which included our second follow-on mass notification order to our larger region oil and gas company. Directional systems and accessory orders from the U.S. Army, Air Force and Marine Corps and a follow-on AHD order from Southeast Asia for border and maritime security. In fiscal 2018 we expect the U.S. Army to release a competitive RFP for a multi-year program. Any award is of course dependent on an approved FY '18 Defense Appropriations Bill. Regarding the acquisition that we closed and announced last month we are working with the Genesis team incorporating their distributive recipient software solutions with advanced vast mass notification systems. The acquisition of Genesis and its experienced management and software development team, solid customer base and recurring revenues from long term support contracts now enables LRAD to compete in the fastest growing segment of the large and growing mass notification industry. The Genesis news solution integrates with cellular networks and geo locates all mobile phones within any selected area for millions of people in a nationwide broadcast to a group of individuals in a local alert. During public safety situation emergency managers use news to push alerts, warnings and instructions to the mobile phones of only those in the affected area. The mass messaging service combined with LRAD's attention commanding sirens and the industry's most intelligible voice broadcast provides mass notification solutions that are targeted as scalable. Growing concerns for public safety in the event of a local regional or national emergency are driving interest for comprehensive mass notifications solutions from domestic and international customers. The capability to integrate audible voice mass notification and mobile phone emergency messaging services puts LRAD in a terrific position to significantly grow LRAD's mass notification business. With over 2/3rds of the world's population carrying a mobile phone and the remaining living in areas where cellular infrastructure is being rapidly developed we see substantial opportunities for fully integrated turn-key solutions that can buy LRAD's advanced mass notification systems with the distributed recipient Genesis technology. It's trying [ph] to start fiscal 2018 a robust booking trend and $11.4 million in addressable backlog as the company on tracks for a successful year and fiscal year over year revenue growth. With that I will turn it back to Brian for Q&A.

Thank you, Richard. Jane we would now like to open up the conference call to questions. 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. Jane, please instruct the callers on how to queue up with their questions.

[Operator Instructions]. Our first question comes from [indiscernible]. Please state your question.

Congratulations on the acquisition of Genesis. Do you see the M&A market potentially been favourable to doing some acquisitions where you could wrap up your business and how do you view acquisitions versus organic growth going forward?

Both organic and acquisition are what this company is focused on. We were successful at acquiring Genesis and we believe it's completely complementary to our existing business. If there is another company out there that the economics work and it helps us on our market position then we will pursue it.

Great. And then in terms of just you have tremendous growth in mass notification, what do you think is driving on that growth and if you think that kind of growth rate will be sustainable given the large market opportunities?

Certainly hope so. The mass notification market you can argue this a bit but it is measured in the billions of dollars. The distributed recipient notification service side of that business has a high double digit CAGR. The whole mass notification market has a double digit CAGR. So I think from a software perspective with Genesis and LRAD hardware perspective we're in a terrific position as I said earlier.

Our next question comes from Scott Billeadeau from Walrus Partners. Please state your question.

Couple of things, one, I was just going to ask about on the audibles, I just you know with the RFP coming out, what has it then let? Is there an RFP out there, is it a matter of you've responded waiting for budget maybe give us a little update on the status of that at this point.

We expect [indiscernible] to release a competitive RFP this fiscal year. As I said earlier this is - the award of any contract is going to be subject to an FY '18 proof to Defense Appropriation Bill which we do not have.

Okay. In terms of right now are any business from that is it just kind of replacement or are the - is your sense they are just kind of do a control alt, delete--

No. The U.S. Army last year in fact the fourth quarter of last year ordered their largest - order for LRAD we have ever had. So as the demand in the Army for the product is there the budget for the product is there, the program offices in place that issued the RFP again, award of any contract will be dependent on approved FY '18 Defense Appropriations Bill, that's not in place now and it's subject to the vagaries of our federal government but it looks reasonably favorable for the overall defense budget right now but there is still a lot of politics it can play out as you know.

Yes. Great. And then secondly you know certainly with the Genesis acquisition in terms of what you see in terms of how they procure, have these been very much piecemeal or they look for hardware separate from that distributed solution or is there you see someone who's doing both of those and they will pick a Genesis and you guys to fulfil maybe give us a little idea of how on that side how it's worked in the past and what you think you can maybe change that in the future?

I will speak first for Genesis, Genesis has historically approached the marketplace from a software basis only. LRAD has approached the market generally from a hardware basis and most of our pursuits at LRAD of mass notification especially in the industrial marketplace, there's either a stated requirement or a desire to have a distributed call out system. Over the past couple of years LRAD has integrated into third party distributor systems that requires the customer in some cases to become effectively the prime responsible for the integration. I think the LRAD and Genesis command and control software, the distributed recipient software for Genesis and the LRAD hardware combined very, very well to provide a system that covers more than one way to warn the population of a significant interest or a significant event.

And is there anything else missing from that solution that usually gets deployed in the marketplace now or are those the two main things you think you've got them both now or is there an incremental thing that would be nice.

I think from a hardware and software perspective the development never ends. Last year LRAD I think we released 12 new products in the hardware group and it's staying up with you know advancing our technologies and our capabilities and the same thing happens in the software world, in fact it might even happen faster there that new ways, new applications, new requirements pop up all the time and that's a revenue opportunity, so that's a good thing for us. So I think a robust engineering company now with LRAD and Genesis it's terrific in both hardware and software development and it's poised to take a good piece of that market position.

And then just one last question I think you mentioned 11.5 million or so of I think is that current backlog or and just wondering is that you know six months burn, the 12 month kind of long would it take to kind run that through?

It was 11.4 million, and that's all addressable at our current fiscal year.

Our next question comes from [indiscernible] from Summit Brokerage. Please state your question.

I've a question on revenue recognition, looking back at your announcements of orders or bookings on September 26 you announced the 2.4 million order scheduled for delivery by December 31, on September 28 you announced a $6 million order scheduled for delivery basis December 31, and then November 1 you announced the $870,000 dollar scheduled for delivery by December 31 and that's up to $9.270 million. Can you tell me what happened?

So the large order the $6 million order you've referenced I believe was our award from the U.S. Army for $6 million, right. Subsequent to the award there was a significant change incorporated that pushed the revenue out of that quarter same backlog of course and it's addressable but did move out of that quarter.

And David we addressed that on the last conference call actually also. We had indicated that it was going to some of that order was going to ship into the current quarter.

But can you give me how much I mean it's still a pretty big miss, I mean - did the other one's actually ship, the other two?

Well I will have to know specifically what they are but I believe yes, our quarterly revenue in Q4 was $7.5 million.

And part of that $6 million order that announced at the end of September part of that shipped in September.

Okay, I will keep in mind. Why even tell people when you are expected to ship that's a huge difference.

It is and David it's something we discussed on the last conference call.

I know you articulated that you're not liable - you articulated that very well, I will take that into consideration more thoroughly. Thank you.

Thank you.

And our last question comes from Lloyd Gordan [ph]. Please state your question.

Few questions, where do you see from a year in the inside they are working with different sales people and knowing your customers, where do you see the great growth coming for this coming year that we're in now? I mean by region?

It might be a bit of a long answer but the U.S. especially U.S. DoD Lloyd is back. Obviously the army is a big deal to us and has all the caveats that we already talked about today but even in Q1 U.S. Army, U.S. Air Force, The National Guard they were the largest piece U.S. DoD was the largest piece of our Q1 revenue so it came back last year certainly in the bookings and it's running strong right now in the revenue. The Asia Pacific region continues to be very robust for us in both bookings and revenue and I think both the U.S. domestic and the Asia Pacific region will be the largest areas that will represent our bookings in revenue for this fiscal year.

Okay. Since your acquisition of Genesis is what few weeks ago?

Second week of January I think, yes.

Well it's pretty soon. But has there been any positive indications from anybody that we do business with Genesis?

We have had a lot of interest in our mass notification customer base, I'm not going to mention the customers but there is three or four in the last two weeks that have requested demonstrations and quoting and our sales team is working at now. That is just never to try to address the U.S. market. So it provides for a great opportunity for LRAD.

How many core - I mean the military is a core customer of ours, I think Japan is or was a core customer which you can probably depend upon some business front. How many are these types of core customers can we anticipate orders from this coming year?

My remarks at the end of Q4 I think I told you that about $10 million of our bookings came from new customers, let me just look at yes, 10 million of our 28 million in bookings came from new customers. I think that's going to continue especially as we continue to grow the mass notification side of the business.

I guess if we get a $1 million order from Indonesia just for an example. It's a drop in the bucket with our products of the potential for any of these countries, so is there a group of countries where we are active always active with and working with whether it be the military or mass notification where we can expect business from them.

Yes. The whole Asia Pacific region Indonesia, Singapore, Vietnam, Australia having continued to provide more bookings and revenue than they had in the prior years and again I'll go back to U.S. is stronger now than it was a year ago and finished last year very strong as well. We have a pretty steady group of business coming out of Japan, out of China. They are solid foundation customers, they are not necessarily huge dollars but you can count on them.

Great. Also when it comes to Genesis and the LRAD the company or the [indiscernible], how many other companies are there that have the both the software and the hardware for self?

I believe the answer to that is none.

Good.

I think it's good too.

[Operator Instructions]. We do have another question from Scott Billeadeau from Walrus Partners. Please state your question.

Just a follow-up maybe to bring me up to speed if I can remember right, in terms of distribution could you remind me in terms of mass notification and audible just kind of what's the distribution mechanism and then how different is that U.S. versus Asia-Pac or ex-U.S. I should say and does the Genesis go to the market differently than you guys did and is there a synergy or a disynergy based on how they went to market?

So LRAD goes to the market with a direct sales force and a distribution network that's around the world. Over the last fiscal year I talked about the growth for seen in the distribution network in fact it's doubled in the North America region and we have seen growth and replacements and change in the rest of the world as well. Genesis has not done a stellar job of marketing and selling their products outside a Spanish speaking countries, there is an exception into the country of Australia but generally speaking their distribution was through their very thin direct sales force. LRAD will exercise all of its direct personnel, sales people as well as where appropriate the distribution channels around the world with Genesis. The Genesis staff is coming in at San Diego in early April to begin the training of the sales force of LRAD. So whereas LRAD has been a hardware company, Genesis is a software company there's no overlap it's great. Genesis, the distribution and sale of Genesis as product can greatly be enhanced by the distribution of sales channels that LRAD brings.

Our next question comes from [indiscernible]. Please state your question.

My question is during the Genesis call that we just had I believe that you'd indicated that the mass notification business overall was about a $2 billion business of which we participate in or our segment is about 200 million of that and so based on where we were at as far as annual revenue, so we must be somewhere around maybe 13% to 15% of that whole segment that we participate in. If that's the case then where do we rank as far as other competitors you know as far as you know the capture of that business?

From a hardware perspective LRAD is the newest company to get into that space. LRAD started in this marketplace I believe it was in 2013 with the speaker only. There are several companies well established companies here in the United States and in Europe that have been around for a long time in the mass notification audible mass notification market. LRAD has been successful because its products and systems are better than the customer base, the supplier base that's out there today. If you've listened to me before you would say that if we can demonstrate our mass notification products and systems and decision is made on the quality of what they hear the decision will always be made on LRAD's behalf. As you know there is frequently other factors and an award decision but the quality of what LRAD does from a mass notification hardware perspective is terrific. Now last two years ago in FY '16, two years ago, our sales were 1.5 million, bookings were 1.5 million. Last year our booking were 8.5 million. So I think we're starting to solve that curve is in the right direction and we're starting to get the product out and demonstrate it and the sales are coming.

Our next question comes from Michael Murali [ph]. Please state your question.

Yes, I've been a long time stockholder and I'm very excited about the current news. I hope we can ship huge amounts of hardware. My question is about the manufacturing capacity, in view of all the huge increase in demand, has the company prepared to meet that demand, has enough manufacturing capacity to meet the anticipated demand?

Well to address that increase in demand and increase in capacity we have signed a lease for a larger building. In fact I think it's about twice the size from a manufacturing floor perspective. We expect to make that move sometime this summer.

I see. Okay. And what about the effect on the expense side is that going to be a huge expense to do that?

Well there is always expenses associated with moving, I think Dennis can comment on that - the expense associated with moving is in our economic models.

We have our next question from Lloyd Gordon [ph]. Please state your question.

Okay, guys a couple more. The 11.4 million backlog that we currently have, what can we anticipate will be shipped in the quarter we're in now?

We don't give guidance Lloyd but we closed FY '17 with 11.9 million in backlog collect and we did 7.6 million in Q1. So we're not going to give guidance but those are the facts.

And we still have a backlog of 11.4 million, correct?

That's correct.

Also is there a sales manager for Genesis? Who is going to be in charge of driving sales on that?

So there's a CEO of Genesis Company in Madrid that oversees the operation in total. The gentleman that runs our international sales and mass notification sales group is overseeing the build-up and growth of the mass notification sales force for Genesis. The engineering group in Madrid is also working from a dotted line perspective to the lead engineering manager here in San Diego.

Our next question comes from Adolf Hurst [ph]. Please state your question.

Yes. Well you didn't address from one of the questions is the availability of product. So you have you set up to move and I think in the past you said it's not going to be real issue, can you address that and also can you tell us a little bit about what's the size of your sales force at this point?

Yes, can you rephrase the first question?

Well when you move into your new facility your availability of getting product to ship out, that's not going to be an issue or is it going to be an issue?

Most of the - we work are in this area and we're only moving a mile or two away so it won't impact the supply side at all. And it's part of the sales people I will let Richard address that.

Our direct sales force is approximately 19 people I think. It's really the distribution channel that's large around the world and as I said that direct sales force and the distribution channels will be marketing and selling both Genesis and LRAD.

Is that substantially above what it was a year ago?

Yes. Well in the last year and a half we have added I think five direct sales people so it's a 30% increase.

And we have one last question from Tom Willard [ph]. Please state your question.

Just couple of quick questions on some general stuff I've heard over the last year or so maybe a couple years but is there still a pursue around the college campuses and that sort of the thing, is my first question.

Sure there is and that's also an application where both the distributor recipient and the LRAD systems coexist very well.

And then what about, [indiscernible] avoidance airports that sort of thing, radar technology company, did a company actually bought a couple of [indiscernible] from you guys few years back to - [indiscernible] or market for that or is it government financed?

Yes there is. I'm not specifically aware of the development you are talking about, we have integrated into radar and UIR [ph] devices. The largest application for LRAD and bird deterrents has been in the country of Canada for keeping birds away from the tailing as a consequence of the oil operations. We have sold to several airports in the United States mainly military. We sold overseas last year we had a reasonable sale in the country of Lebanon, Italy, that wasn't last year though but it hasn't taken off, Tom, the way one would have expected to but there's no legislation in the United States to do it whereas it seems to make sense to everybody it's not yet taken hold in a large way.

Right. I hear bits and pieces about it selling it out there, pushing it.

Right, and we continue to market and demonstrate and we'll have a breakthrough one of these days I'm sure.

This last year - probably hasn't brought before but I actually grew up overseas and there might be used to this sort of thing in mosques with their bird calls - I don't know if anyone has ever approached to you on that for the bird calls during the day, I mean I remember back in the days when I was kids speakers would be loudly and be blaring everywhere so I don't know if they are starting to pursue.

We pursued a program in Saudi Arabia last year, it wasn't for mosques but we did pursue a mosque opportunity in the Middle East maybe two years ago and it didn't happen but we continue to pursue those opportunities where appropriate.

Thank you, Tom and with that Jane I guess we will wrap it up. So I'd like to thank everyone for participating in LRAD Corporations fiscal first quarter 2018 financial results conference call. There will be a replay available in approximately four hours through the same link we issued on our January 25th press release. Thank you everybody.

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