Genasys Inc (GNSS) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the American Technology Corporation Q2, 2008 conference call.

At this time, all participants are in a listen-only mode. Later we will do a question and answer session on the phone lines. Instructions will follow at that time.

I would now like to turn the conference over to your speakers for today Tom Brown, Kathy McDermott, Robert Putnam and Elwood Norris. You may begin.

Thank you, and welcome everybody to the fiscal Q2, 2008 conference call.

We welcome everyone listening on the internet or through the telephone lines today. Before we begin, we would like to read the Safe Harbor statement. Except for historical information contained herein, the matters discussed on this conference call are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act. You should not place undue reliance on these statements. We base these statements on particular assumptions that we have made in light of our industry experience, the stage of product and market development, as well as our perception of historical trends, current market conditions, current economic data, expected future developments, and other factors that we believe are appropriate under the circumstances.

These statements involve risks and uncertainties that could cause actual results to differ materially from those suggested in the forward-looking statements; including but not limited to, the performance of our management team, market acceptance of our directed sound technologies and products, entry of competitors, the possibility our intellectual property protections will not prevent others from marketing products similar to or competitive with our products, potential technical or manufacturing difficulties that could delay product deliveries or increase warranty costs, and other risks identified and discussed in our filings with the Securities and Exchange Commission.

These forward-looking statements are based on information and management's expectations as of the date hereof. Future results may differ materially from our current expectations. For more information regarding other potential risks and uncertainties, see the risk factor section of the Company's Form 10K for the fiscal year ended September 30, 2007, and Form 10Q for the quarter ended March 31, 2008. American Technology Corporation disclaims any intent or obligation to update those forward-looking statements except as otherwise specifically stated. Now I'll turn the time over to our CEO and President, Tom Brown.

Oh, excuse me, I jumped the gun. I am going turn it over to Kathy McDermott, our CFO, to discuss the Q2 fiscal financial statements and then after that we will turn the over to Tom Brown for management presentation.

Thank you, Robert, and thank you for joining us today.

I'm going to walk through our financial performance for you, but the numbers don't really tell the story for the quarter. The first six months of fiscal 2008 we've been investing in R&D costs as you'll see when I go through the financials, to develop a new, advanced LRAD product line that is louder, clearer and more robust than our current product or anything else on the market.

The new LRAD-X line was launched in March 2008 and the feedback from our customers, including the customers for our two military contracts that we won last year has been very positive. We are very pleased with the units and we believe that this enhanced product line will provide more opportunities for us in both military and commercial space as Tom will expand on shortly.

We began shipping our new LRAD 500X and 1000X in March and our new remotely controlled pan and tilt LRAD RX product shipped in April. The release of these products was later than planned and as a result our revenues are below expectation in our year to date financials. Our net revenues for the quarter ended March 31, 2008 were $2 million, down 9% from net revenues of $2.3 million for the same quarter in the prior year. Our revenues for the six months year to date were $4.6 million, down 26% from net revenues of $6.2 million for the same period in the prior year. Revenue for the six months in the prior year include a large LRAD order of approximately $979,000 for the U.S. military. We also had shipments totaling $232,000 in March that would be recognized in Q3 due to shipping terms.

In addition, the launch of our new generation LRAD-X product line in March was later than originally expected and as a result certain sales expected for the quarter were pushed into our fiscal third quarter. Our quarterly revenues will often fluctuate like this due to the timing of large orders due to number of limited customers. Year to date through March 31, 2008, net revenue of our LRAD product was $3.8 million or 83% of total net revenue, compared to $4.8 million, or 78% of total net revenue in the prior year. This $1 million decline is primarily due to the $979,000 military order in the prior year and the delay of the launch of the LRAD-X product line.

Gross profit for the quarter ended March 31, 2008, was $731,000, or 36% of net revenues, compared to $1.1 million or 49% of net revenues for the same quarter in the prior year. Gross profit year to date through March 31, 2008, was $1.9 million or 41% of net revenues, compared to $3.1 million or 50% of net revenues for the same period in the prior year. The decline in gross profit to date is due primarily to the lower volume and also product mix.

Operating expenses for the quarter ended March 31, 2008 increased $691,000 to $2.9 million from $2.2 million for the same quarter in the prior fiscal year. Year to date operating expenses through March increased $963,000 to $5.8 million from $4.8 million for the same period in the prior fiscal year. The increase in expenses year to date is due to the increased development costs as we spoke about of $426,000 for the new LRAD product, increased non-cash share-based compensation by $726,000, and $235,000 for an increase in non-cash expense for the impairment of patents that are no longer consistent with our business strategy. This is partially offset by reduced professional fees of $328,000 and reduced sales commissions of $160,000 due to a change to a bonus plan compensation.

Net loss for the second fiscal quarter was $2.1 million or $0.07 per share, compared to a loss of $1 million or $0.03 per share in the prior year second quarter. Net loss year to date through March 31st was $3.9 million or $0.13 per share compared to $1.5 million or $0.05 per share for the prior year. The $2.4 million year to date increase in net loss is primarily due to the lower revenues, increased non-cash expenses of $961 for the share-based compensation and the impairment of patents, and increased development cost of $426,000 for the new LRAD products offset by some favorable expenses.

The Company continues to maintain a good balance sheet. Our cash and cash equivalents decreased by $2 million year to date to $4.5 million, most of which occurred in the second quarter. This was primarily due to the net loss year to date and increased receivables due to shipments late in the quarter primarily in the March time frame. We expect this cash flow to level off in the third fiscal quarter and then improve in the fourth quarter as our revenues improve and development spending tapers off.

Net inventory decreased by $58,000 year to date to $3.7 million at the end of the second fiscal quarter, the level of trades receivables at March 31st represented approximately 75 days of revenues compared to 55 days of revenues at September 2007 primarily due to revenues skewed toward the end of the quarter. At March 31, 2008, we had working capital of $7.3 million, compared to working capital of $9.8 million at September 30, 2007. This reduction is primarily due to the reduced cash, a customer deposit we received of $540,000, and increased accounts payable of $677,000 for some of the inventory purchases in the shipments ahead.

With that I'd like to turn the call back to Robert.

Thank you, Kathy.

At this point we will turn the time over to Tom Brown, our CEO and President.

Thank you, Robert.

As Kathy indicated our first half has been impacted by the transition to our new LRAD-X product line. Some shipments were delayed and we incurred significant costs especially in the design and development of our own pan and tilt device to support our LRAD RX product. Why did we make these investments in LRAD?

Since I joined ATC my focus has been developing the LRAD market. LRAD offers us the most opportunity for growth and success. Last year we grew the LRAD business by 40% and we expect greater increase this year. In order to grow the market, we need to have more than just an LRAD 500 and an LRAD 1000, we needed a remotely controlled device. So last year we introduced the LRAD R.

It's a good market acceptance and we sold several units; however, we experienced reliability issues with the pan and tilt mechanism which we had acquired from a major manufacturer of those devices. Since we view the LRAD R as the key to developing this market, we invested in designing and developing our own pan and tilt. While this cost was significant, we designed, developed, tested, and produced, and shipped our first units in less than five months. We will recover the cost of this development in less than six months as we deliver against in-house orders. This is a major accomplishment for us and for that matter, it's a major accomplishment for anybody to get a return in less than six months on an investment.

And our pan and tilt that we developed is superior to comparably priced devices on the market today. The acoustic hailing and warning market opportunity is large, not just with the U.S. military but commercial security applications, law enforcement, oil and gas platforms, pipeline security, infrastructure security, border security, Portland, Maine, Maritime Security, I can go on and on as well as international opportunities.

How do we know this? We are telling it to these markets today. In order to stay competitive and retain our leadership position we needed to upgrade our product line which we have done. We expect the strong second half from LRAD, but more importantly we expect strong sales into the mid-term. When you are developing a market, there are two things that you need. One, you need a market that has a need for your product; and, second, you need a product to meet that need. With the LRAD-X we have that. We have an excellent product for an extremely large marketplace.

Another large market that we are developing our products for is mass notification, our NeoPlanar based sound saver products offer high quality, intelligible directional sound. Most outdoor loud speakers do not offer clear intelligible sound, our product does. We have teams with ADT on a number of campus and military installations and see significant growth potential in this market. We are continuing to work on improving the cost structure and the performance of our product as we pursue market opportunities.

We have improved the reliability of our HSS product line along with the sound quality and we have reduced the price. We are working on a number of potential installations; however, I must say the sales of this product have been disappointing. We are investing in our future. The acoustic hailing and warning market offers us our greater opportunities for success. We now have the products to accomplish this.

The mass notification market is also a significant market that we can penetrate with our enhanced sound saver products. Both of these markets are large. We will continue to enhance our HSS offerings; however, the other markets are our main focus. When I arrived at ATC we had a number of science projects and our product offerings were very weak. We now have strong product offerings with real customers and strong customer acceptance in large market spaces. We are now positioned for the future.

At this point I'd like to turn it back to Robert.

Thank you, Tom.

Operator, you can go ahead and start queueing people up for the question and answer session.

Before we do that we would also like to turn sometime over to Elwood Norris, our founder and Chairman.

Thank you, Robert and thank you, Tom, and Kathy.

You haven't heard me talk a lot in some of these conference calls that we've had in the past because primarily of my confidence in our management. As you all know we've gone through a number of changes down through the years and my confidence in Tom and in Kathy and others that really are leading this company is as high as its ever been.

I want to take a minute and say a couple of things about HSS. That's really been my personal baby. I think a little bit of an explanation might be helpful as to why that thing isn't really the main stay of what we are doing as a company. Usually when a disruptive technology comes along like HSS is, small guys out on the fringes are the first to recognize the potential and the opportunity; and it's not unusual that what happens is those small guys, which has been our experience with HSS are underfunded, don't have their strategy totally down and in the case of our HSS product, it's a piece of a solution.

We don't sell it to an end user and he creates the content and does the installation and so on and so forth. There are providers who by the product from us and who do all that work. Those are the guys who are our customers and they are the ones who, so far along the growth curve, have been woefully underfunded. What we are starting to recognize is some bigger players, bigger name companies are now seeing that this digital signage opportunity could be a long-term advantage.

The kinds of companies that are contacting us now to look at buying HSS are substantially larger than the players that we've dealt with in the past. They are more funded financially and they've got a better vision and a better strategy and in some cases they've even got the ability to directly provide for content and so on to get this thing out into the marketplace. I think Tom's strategy of focusing on the LRAD is good because whereas we sell an HSS unit for $600 or lower in quantities, we sell LRAD products for substantial multiples of that number and it doesn't take a genius to figure out it takes much less volume of product sales to represent substantially greater dollars.

So we don't want you to think we are giving up on HSS, that's not the case. We have gone through an effort here recently to analyze the validity of a number of the patents. We have patents filed in places around the world that we have since deemed were really a waste of money. There isn't either a huge market in those areas or the honoring of patents in some of those countries isn't what really we think it ought to be and that's really what we've done in that effort.

So again, keep the faith. Things are looking good. We think this is going to still be a very good year for us. We've got the team in place and I think pretty much all the players on the team measure up to the task at hand.

Thank you, Woody.

We've got some questions that came in before the conference call so we are going to go through those while people are queueing up.

First question is from a shareholder, "Is your technology and associated patents equal to or superior to your competitors?"

I can answer this question a couple of different ways but basically the answer is obviously yes, and competitors in this space, we are the leaders in this space. As Woody indicated we are pioneers. We've been pioneers in the directional sound business since Woody started this company and there's nobody close to us from a competitive standpoint and we have patents in place, we have products now to support those patents. I think, I said that we have science projects when I came on board but actually we had good technology that we just didn't bring to the right level of productization. So now we are getting those products in place and we are attacking the market. So it's really up to us to execute on selling our product into that market.

Thank you, Tom.

Another question that came in, "Do you have the management depth to this deliver on the Company's business plan?"

We have been tweaking the management teams since I arrived. There were major changes made and we have been upgrading as we go. We have made some recent upgrades to our team. We've added some new sales business development people to the team so we feel like we have a very strong team in place to get us to the next level.

Thank you, Tom.

Another question, "Are you allocating enough resources to R&D and sales and marketing?"

Well, in term of R&D as we indicated, one of the big increases in our expenses for the first half was R&D related; and we are working with an internal--we have a very strong internal engineering team. It's small but they are very capable and we've been working with some outsourced engineering which is something that we've done for the first time as a company; and that's also given us the opportunity to get products to the market much faster than we ever have in the past.

So that is definitely--the money actually is being spent, you can see it in our financials. In terms of our sales and marketing team we realize that we need to grow our sales obviously and we've been trying to tweak that team as we go. We've added some additional people and percentagewise the sales and marketing group makes up a big part of our organization structure today. So we have a lot of pressure on that team to perform.

Thank you.

Another question is, "What happened to the handheld LRAD that was talked about a year ago?"

No, we didn't forget about that product. When we released the product I think we announced it last January that we had a handheld and we brought it to a couple of trade shows, and this is one of the things that we are doing is trying to get market feedback before we go ahead and try to build a product. Market feedback actually for that product was not bad, but I didn't like the product; I didn't feel that it could deliver the type of sales performance that we wanted from it.

So we've taken it back to the drawing board, we have a new product that we are running around. We've presented it to the U.S. military and the military feedback has been extremely positive. They already have placed orders for our new LRAD 100. We have tooled it, something that we hadn't done in the past but when you tool a product you get increased reliability and also a lower unit cost as you go forward. So we now have a product that we are working on and we hope to release by the end of June. So we are hoping to increase some sales from that product line in our second half.

Also can you talk a little bit about the 100X single horn which is a variation of the LRAD product mostly aimed at Homeland Security applications?

We do have--we've taken the single horn and we've incorporated a camera into the horn and we've also--we have an IP addressable similar to our LRAD RX, it's a remotely controlled unit that has been put into a couple of RFPs with major cities, we are working with SAIC, and we are working with Raytheon on two RFPs, and the product basically brings sound of security.

We have the combination of a speaker and a camera. So most security applications right now are just camera oriented. We bring sound into that equation and that's a very valuable add-on to a product offering. So our partners see that as a very viable product and we've incorporated into a few RFPs and hopefully we will see some business from that.

Well, and I might add, one of the great things about that product is we've integrated the camera and the sound into one unit. They move together so talk and look both.

Actually we've built the camera into the nose of the speaker.

Without sacrificing any of the performance of the product.

So the handheld has kind of diverged into two different products at this point aimed at two different markets.

Yes, so we have a number--the good thing about this organization and the management that was in place in this organization is we have a number of new product developments and we are not running out of product ideas. The key thing is to stay focused on the products that we have today and to try to improve them and to generate some revenue from them. So that's our focus.

Last question from the e-mail line and then we will open it up to the Q&A for the operator, "Will you need additional funding?"

At this point we have no desire to go out to the market to raise any cash. We feel we have enough cash flow to keep us alive and well. As Kathy indicated, we had a number of sales at the end of the quarter so that generated a lot of accounts receivable which we should bring in. So we feel that we have enough future business opportunities that we should be self-funded.

Thank you.

Could I say one thing more about my earlier comments on HSS?

Big companies have the option quite often when they come up with a new technology to toss a ton of money at it, to go out and create a market. We don't have that option, we are a small company, we have limited resources. So what's lucky for us is we've got this LRAD line of products that is being accepted now, and we are kind of biding our time on the HSS. We feel by virtue of the knowledge we've got and the feedback from customers that that market is going to come into its own and when it does we will be there ready for it.

We do have the patents. Many of them are issued, still a few pending in all the key countries. I personally believe that it will be kind of like the fax machine, took 20 or 30 years before fax machines caught on. I don't believe it will be 20 or 30 years. It's already been five or ten years since we started the actual development and when that market emerges and the big players are ready, we will be there ready for that opportunity.

Thank you, Woody.

Operator, you can go ahead and submit the first question, please.

Thank you. (OPERATOR INSTRUCTIONS)

Our first question is from Joel Achramowicz.

Thank you very much.

Hi Joel.

It was a good pronunciation.

I'm encourage to hear about the LRAD X product and the RX products. You'd alluded to them earlier, and it's obviously important if you are having malfunctions to obviously hedge yourself with an internally developed movement that's more reliable. It sounds like from your earlier comment, Tom, the customers are weighing in to the positive in that regard.

Hi, Joel, we are--we have shipped our first four units to the U.S. Navy and the Navy has tested them and has come back with very, very favorable comments; and we have a number of orders in-house that we are looking to ship, hopefully this quarter, and our customer feedback as we demo these products and get them out in front of our customer base has been extremely positive and this product is very impressive. And the pan and tilt device, there's nothing like this pan and tilt in the market today at this price; and it is a very rugged, robust product that we can put into deserts, we can put it on any naval type of application, whether it's an oil platform or it's a ship and it's going to stand up to the test. So we are very proud of it. It's a mill spec product so we meet all the military requirements and it's--we see it as a potential big winner.

Excellent. Are you, and Kathy you might want to weigh in here, are you getting--now that this product is out the door in its manifestations are you getting a better indication of visibility for both, for instance, the third quarter? You had mentioned some orders coming in late and hopefully you've mentioned some of these orders now for the LRAD X product that are--that you are starting to see. Are you beginning to get a feel for the potential revenue drive that you can generate from the new products as you enter the third quarter and move into the rest of the year?

Let me jump in on Kathy here.

We--Joel, ,this product line, we just brought in an order on Friday. An order for the U.S. Navy it's on the new Littoral Combat Ship, it's the new line of Navy ships and we just picked up a small order through Lockheed and unfortunately we've been working that order for over a year. So this product, it's very difficult to forecast timing on orders. Our goal is to try to get as many things in the fire as we can so that we can start to see a little bit of a steady stream of business quarter-over-quarter; but at this point we feel we are going to have a strong second half, but it's difficult for us to sit down and say, we are going to deliver x-dollars each quarter for the next two quarters.

Based on where the markets are I think the Company still remains very focused on fiscal year-over-year revenue growth and margin growth operating results rather than on a quarterly basis because we are still early on in the development of these markets.

That being said, we do feel that we now have products that are going to start to generate strong market acceptance. So we feel that we are going to start seeing some improvements in our business.

That's good to hear and I sense that.

How about another attack on the question? How is your impression now, besides the military, we have a very strong position and it makes a lot of sense. Robert and I talked about earlier the incident with the merchantship in the Gulf recently, what about opportunities in the Merchant Marine as well as opportunities in other commercial markets besides the military that can benefit from the LRAD devices? Any new developments in that area?

It's definitely a space that we are pursuing. We have sold a number of LRADs into the Merchant Marine. There are some shipping companies that we have made some progress with. Fortunately all these incidents are getting the customer base a little more interested in our product line. We are also letting our famous seaborne Spirit situation, we've sold into cruise lines; but definitely it's a big market opportunity for us and we are definitely pursuing it.

And some recent requests for proposal have come out and we've responded to them and a couple of other company's have responded including our product in their response. We are definitely pursuing that market as we're going after border security, all those things I mentioned, Joel, pipeline security, oil platforms; we sold a couple of LRAD Rs into the oil platforms, we just sold one in this quarter into an offshore Asian oil platform. So we are looking to expand in that business also. The product is perfect for those types of applications.

Well, hopefully we will look for it and we'll get more color going forward from some of those opportunities. There are obviously a huge amount of Merchant Marine vessels when compared to military vessels so it seems like that market would be huge.

It is. The one thing I have to say as I tried to indicate earlier, the market potential is gigantic. It's just a matter of us, as Woody indicated, we are a small company and we are limited resources, but we are trying to really develop our position in this marketplace and we are making progress and things don't happen overnight; but the good news is we are working a lot more opportunities today than we were three and six months ago.

Well, the other thing that's great is we now have established clearly credibility with not only all the government branches that are interested in this concept, but with big customers around the world in these commercial spaces. We have credibility in spite of our small size.

That's the key thing that Woody mentions is the military--working with the U.S. military gives us credibility in all other markets. So having military acceptance helps us in every other area that we are trying to address.

A good commercial example is the new UAE shipment that we previously had announced that we'll be delivering the Q3, that was a $1.1 million order that will be going out in this quarter as well, so that could be good opportunities going forward as well.

Yes, and you had talked about what 130 potential platforms out there or something?

There are, I think-- I just found out that off the coast of Kuwait there are 264 platforms controlled by an U.S. interest. Off the cost of Africa there is more than that, you take a look at the Gulf, you take a look at India, there are oil platforms everywhere. We are starting to sell to them and the one good thing is we do have an order in this month that we are--it's an RX order for, will be delivered to Conoco Phillips in Australia. So it's a pilot program; hopefully it's accepted and we can expand upon that. But the oil platform business and oil pipeline protection is big and we are definitely going after it.

It's typically multiple units per installation.

Sure. I remember you had talked about that one deal in particular and I recognize that there was a huge amount, probably thousands of platforms in the Gulf so--that provides potential. We will look forward to hearing some continued progress in that regard.

One final question, Kathy, what would be the long-term modeling of R&D expense you might expect like in the fourth quarter?

R&D expense should start to taper off in the third quarter. The bulk of it was in the first half. We should have some continuing to taper off as we final documentation and complete the development of the new units and then fourth quarter should go back down to more normal levels.

Great. Well, good luck, guys, and going forward we will look forward to more progress.

Thank you, Joel.

Thank you.

Our next question is from Michael Ciarmoli. Your line is open, sir.

Hey, guys, thanks for taking my call.

I can appreciate, this certainly sounds the market environment, the backdrop is very sizeable. There's a lot of opportunities out there. It seems like you guys continues to struggle with getting some of these LRAD shipments in volume. I think, Tom, you said working on the Navy Littoral Combat Ship for over a year and it sounds like it didn't pan out to a total volume order.

Can you give us a sense what your opportunity with the U.S. Navy for both the large and small ships looks like in the near term? Do you guys have any money or any orders in backlog, or do you get a sense that you might be close to receiving some specific line item funding in the DOD budget for either '09 or beyond that could really help jump start LRAD sales?

Let me piece this answer together. The Littoral Combat Ship, Michael, that's the first vessel, and we received an order for three units for that vessel. And the plan, from what we understand, the plan is to build 15 of those and if they get accepted, then that would be built upon by the U.S. Navy.

Okay.

In terms of the Navy, in the first--in our--in this last quarter, the second quarter, we shipped a little bit over $500,000 of product to the Navy; and in this quarter we are going to ship close to another--

About 650 on backlog right now for the order.

We are going to ship another, we should--we will ship over $500,000 this quarter.

Okay.

And they are now--the initial, the initial orders that we were shipping were for manual units and they just took an order for four pan and tilt units which the RX, which is a much more attractive sale for us; and they are looking at placing two of these on a vessel for trial and they have 332 large vessels. So our hope is that, yes, we can get built into--we won the RFP so we expect this to hopefully develop into a line item budget and we can start to sell against that.

So we see this as a major opportunity, but there are other opportunities that we are also working with the military on and that's the acoustic hailing device award that we received. It's for small vessels and small vehicles and the--that's not just with the Navy but that's also with the Army and the Coast Guard. It was a joint effort and our units are being tested.

We actually have a guy in Aberdeen today who's testing these units with that joint team and so far those units have tested out extremely well and we are hopeful that that's going to be built into a line item budget. And that opportunity is actual larger than the U.S. Navy if we can make that happen.

Okay. Just to get--I guess it sounds like you've got a couple of projects in pilot going back to the oil and gas industry, I think there was a press release earlier this year, a couple oil companies in India had taken product, more recently the Sacramento sheriff's department.

What's your sense in terms of, you said you've got a lot of your staff dedicated towards sales and marketing. What's the time frame around these pilots? Are you seeing some of the pilots now that you've got, I guess, more advanced products, you've taken care of some of the key performance issues on your end? Are you seeing a shortening of that pilot program time or just help me get an understanding of--and what I'm trying to get at is when we can start to see some orders of magnitude on a consistent basis rather than I can appreciate the one and two orders going into customers of size but it still seems like they are not converting into the real large orders.

Well, the orders, Michael, unfortunately, this is--it's frustrating to us, it's more frustrating to us than it is to you but the orders that we shipped last year to L3 for installation on oil platforms are just being installed and debugged right now.

Okay.

So that pilot project is still ongoing with L3. L3 just mentioned to us in a recent maritime publication that we are the center piece of their harbor guard project so that was positive. The Indian oil and gas order, we shipped it. This is one of the orders that we couldn't recognize this last quarter because we shipped it in March, but going through customs it wasn't received until mid-April and we have a fellow going over there at the end of this month to help install it. So it hasn't even been installed yet.

These things take a long time to get implemented. Once we make the sale then there's the implementation, then the trial runs for a couple of months and then hopefully other orders will come along. But the feedback that we are getting--the good news is we are getting very positive feedback. And these things unfortunately, it's frustrating in terms of the time but the positive thing is that they are coming in.

Okay.

So that's the good new.

Well, especially on some of the--a lot of the LRAD deals that we are working on and the RXs, they were waiting for us to get our pan and tilt because the old pan and tilt that we were using off the shelf from another company was not up to snuff and they were disappointed with that part of the product. So a lot of these guys have been waiting around for the X deliveries as well as the RX deliveries which we just began last quarter, at the end of it; and I think the feedback, what we are seeing is these people were very anxious to get these. They are putting them through their paces and they're excited by what they are seeing. So we think that now that really it's just beginning to start to take off for us and we will begin to start to see from these guys once the tests are completed some of these orders, the larger ones that we've been working on.

Michael that's why it's important for us to get as many of these things in the works as we can because they take a long time. So we need to have as many--work as many opportunities as we can and hopefully they trickle in because it's a long process.

Do you feel your sales and marketing capabilities are adequately staffed to meet those needs? I mean, have you been building out both a--I guess dealer network to kind of get the word out there, direct sales force? Do you think you have the right personnel in place to kind of get this product into the marketplace to meet its full potential?

That's been our biggest challenge. We've been trying to develop--I've added three new sales professionals over the last--over the first half of this year, and they are professionals; and we feel like we are improving our internal team. But really what we need to develop is that external network of reps and distributors; and we've added three new reps this quarter, not last quarter, this quarter, and we are trying to expand that base.

That's--we need feet on the street and that's been our biggest challenge, trying to find the right dealer and rep network. We have had a number of reps in the past and the performance has just hasn't been there. So we are trying to bring on high performance reps, I do have some reps that are working out extremely well in Asia and in India and in the Middle East. So those are all positive.

We are seeing some good sales coming in. They are all recently added to the mix, so this is a continuing process. We need to continue to grow this network and we are focused on it and I have a couple of players on my team that are totally focused on just building that type of distribution network.

Okay, and then can you help me quantify? I know at the close of 2007 you said your revenues for '08 would be an improvement over those in '07? Now you've got the year started, the first six months are lower, you are talking about much improved results over Q3 and Q4. Can you help me quantify? I mean is that--you are talking 10% over '07? Could it be meaningfully higher just based on what you are looking at in the marketplace or is it truly a case of the length of the pilots, the sales cycle, the visibility still just unknown?

It's still somewhat unknown but we still feel very confident that we are going to achieve higher revenues than we achieved last year. It's still--I can't give you a percentage, but I can tell you that we still feel very confident here that we are going to be able exceed the prior year.

Okay, and then with the pan/tilt with your own product development there what will be the impact on margins swapping out that--outside company you were using, should there be a bigger comp for the LRAD margins there?

Yes, yes, we will--our own product will be--the cost structure of our own product is lower than the cost structure of the product that we were buying off the shelf and the reliability will be greatly improved; and it's whenever you--I'm a firm believe in vertical integration. Whenever you can do things yourself and keep the margins in-house it's a better way to go.

Is there a market for your product outside of your own business? I mean are there other applications where you can sell that pan and tilt technology to?

Yes, that's something that we are--our focus is to sell LRAD RXs right now, Michael, but definitely we are--definitely want to get into that space because as I said earlier we have, we feel we have a superior product to anything that's in the market today at a comparable price. So it's definitely something we want to do and it's something-- we are also looking at some of the other components of our product that we could sell in the open market, and we are considering that but first things first our focus is build the business that we have. But it's definitely something we can do.

Okay. Great. I'll jump back in the queue. Thanks, guys.

Thanks, Michael.

Thank you.

Our next question is from Steve Wagner. Your line is open, sir.

Wonderful presentation, everybody.

I like the positive thinking about the future, but, Tom, I did have a question for you. You mentioned earlier in the call that you were disappointed by the mass notification NeoPlanar technology and the acceptance of it. Can you speak a little bit as more specifically as to what the disappointment is?

Well, Steve, no, I'm not disappointed with the mass notification business at all. I feel that's a tremendous opportunity for us. I was disappointed with the HSS sales. Our HSS sales have not--have not come in the way that we had hoped or anticipated. We had a number of orders that we had in-house and those orders have all fallen apart basically because of, as Woody indicated, because of the poor financial structure of some of our customer base. But Neo offers us--mass notification is a tremendous market right now and it offers us tremendous opportunities; and we feel that our product has an excellent opportunity to succeed in that space.

We have teams with ADT, we have put our product on a couple of major college universities, college campuses, mass notification is a big issue as we all know, and also on a number of military bases and we are looking to expand that business. So we see big opportunities, we've improved the product, we are still working on the cost structure of the product.

Unfortunately when we talk about mix, our profit margins on Neo are not as strong as the profit margins on our LRAD product and we are going to try to get them inline; and the way that we are going to get them inline is by driving down the cost structure of that product. But don't misunderstand, we are very pleased with that product offering and very encouraged by what we see in the mass notification market.

Well, yes, I obviously I misheard what you had mentioned about that, but--so let's talk a little bit then about that mass notification market. You mentioned that you've got it on couple of college campuses right now. Were those paying customers or are those like test roll-outs just to see how it works and can you tell us what kind of feedback you had from those campus?

Steve, we are not a charitable organization. Those are definitely paying customers.

We is sell them. We don't give them away.

The feedback has been very positive and it's very encouraging. So we are seeing other opportunities coming along and I think, as Woody indicated with HSS, our Neo product, we are a speaker. So we are part of that application. So we need to be integrated with strong partners in this space that offer the rest of the solution and ADT has been a very strong partner for us and we are very pleased that we are working with them.

We are also looking at other partners because ADT doesn't have a monopoly on this space, but we feel like there is big opportunity in the space. Mass notification as Homeland Security money comes out and municipalities starts to put in these mass notifications systems with their grant dollars we want to be in line to get some of that; and a couple of the townships that have put in mass notification to date, the quality of the speakers have been poor. We haven't participated in that space yet but the quality of the speakers, the feedback we've gotten from the market is that the speaker quality is poor and that there's need for something like the product we are offering.

Okay, and again, I'm really focused and I understand why LRAD needs and should be the number one priority. Most of my questions in that area have already been asked by the other two gentlemen, so I just kind of wanted to focus a little bit on the NeoPlanar because, again, it's a wonderful technology and it just seems like it's light years ahead of competitors, and I just wanted to talk a little bit about that. But just one more follow up question with respect to the NeoPlanar and particularly with regard to the--I'm very glad to hear your paying customers the college campuses; and I want to just emphasize that I completely respect your low key, we are going to show you rather than we are going to talk about it mentality, and I think that's something that we out here respect enormously.

That said, our share price is still what it is. And having been a long time investor and certainly having an enormous amount of clients invested in American Technology over the years, does it seem reasonable that it would be a good idea particularly in the case of a college campus installing this kind of technology on campus for mass notification, do you think that that would be worthy of some kind of release at that time to let investors know that, hey, this is something that's actually happening. It might even interest more shareholders to be interested in American Technology.

I can't disagree with you, Steve.

I would also say that I'm sure those orders were not material. In other words, not making a gigantic difference to the bottom line but I'm thinking more in terms of, hey, guys, this is a wonderful new market. We've talked about it in general terms before in press releases, but here's a specific buyer to the product. And I just, again, as somebody that's, again, interested in long-term performance, not short term pops and drops in the stock price it just seems like this would begin to renew some interest in American Technology by more shareholders. I see that as a big problem that we have right now.

Okay. Point is taken, Steve, and you're basically lining up behind Robert. Robert is looking for us to do more announcements, but my approach has been let's show some performance here and then we can start blowing our horn; but I think that the shareholder base does need to understand where we are heading and that's what we are trying to do with these earnings calls. But as we see some orders coming in that are different from what we've done in the past, yes, I think that probably we do need to communicate a little more effectively.

We really appreciate that; And in that area, again, I want to emphasize, I am in line with your thinking with respect to showing results rather than talking about stuff because, quite frankly, that's happened for the last eight to ten years and here we are at an all time--the shocking thing to an investor right now is that the average price of American Technology for the last ten years has been about $4. And yet here we are a better company than we've ever been before, a company certainly closer to realizing all of the hopes and dreams of the last ten years and yet we are at an all time low.

We've gone to a range where we're at that point and we're losing institutional interest. Over the last six months we've had significant evaporation of institutional holders. So I'm just thinking in terms of anything that we can do within reason, not just--not flooding the airwaves with press, but when you have something like a college campus put something like this, that's an exciting event and that really opens the door to a whole new exciting area of potential revenue for American Technology.

So I'll get off of that and go on to another question that I had for you guys; and again going back to the positive comments that have been made thus far, you've got a lot of irons in the fire, it sounds. And if these things along with the military contracts that have already been signed, if these things continue to really come in, how are you folks positioned from a manufacturing standpoint to potentially satisfy significant demand?

We are ready. We've been focused on the back end of this business since I arrived trying to improve our internal capability as well as finding better outsourced partners to help us hit the volumes, do eventually when and if the volumes eventually come in the door. So we are positioned to take any order and put the right lead time on it, which is a relatively short and get the orders shipped and delivered.

So we are gearing up, we are taking this time. We not only took the time to refresh the product line, but we've also taken the time to refresh the organization and bring in some very talented folks. We just brought in a supply chain person who was running supply chain for Visio, and Visio had a very nice supply chain operation.

So we are not increasing our cost structure, but we are enhancing the organizational structure and we are doing that every day. So we are ready. We are hoping that those orders come in, we are anticipating them and we are ready for them.

Fabulous. Thank you guys so much for all your hard work. Appreciate it.

Thank you.

Our next question is from Jonathan Manella. Your line is open.

Hi, gentlemen, how are you?

Hi, Jonathan.

I am going to be brief because I'm running out of time. I just want to understand, so the revenue shortfall right on this quarter, the last quarter that is, was due to delayed shipments. Are those shipments that have since been sent and revenue will be recognized this quarter or are those delayed infinitely?

Those are real orders. They are not fabricated orders. They are real orders, and some of those shipments were actually shipped last quarter; but we couldn't recognize them because of the orders were not received by the end of the month, by the end of our quarter. So we recognized them this quarter; and other orders we are shipping as we speak and we hope to have all the orders that we have in-house out the door by the end of June and recognized in this quarter.

So it would be fair to say then that we could expect that will have some bonus on top of what would normally be expected for this quarter?

That's our hope.

Okay, and we got six weeks to go, right?

We have--we have seven weeks but, yes.

We should have some visibility on the current quarter. I will tell you guys for sure I am looking for a $3 million number for the quarter, I don't know about what anyone else is thinking and I don't know what you're saying. It doesn't sounds like much in terms of specifics but I'm thinking of $3 million number. You guys are due. What do you think?

We are looking for strong second half and a strong quarter.

All right. Hey, quick question, is Woody out on the sales calls with any of the salespeople involved on some of the bigger deals that are trying to get closed or sold, does Woody go on those calls?

No.

Woody, I'm just curious, I have to ask you, I know that your primary focus for the organization right now is revenue, the first year was getting everything intact and I think everyone was patient, this year it's all about topline growth, sales, sales, sales, Tom, would you agree?

Yes.

Woody, if you're never on any of those meetings and you're not out on any of those sales calls, I'm curious, could you tell us what gives you the confidence that you were cheerleading about earlier in the call why you are so, so confident with the team in place, what do you see that we don't? You are there with these guys all the time. Let us know.

Well, let me just say this. Tom and I talk ad nauseam daily; and so all the information he gets from the sales team from the meetings that are going on in the field, the phone calls, I'm up to speed on all that. You might wonder where I spend my time, basically--

I actually thought you might go on those larger sales calls and so maybe you had some visibility and you were seeing thing that the rest of us weren't.

I'm certainly up to that, but the team that we've got in place right now I'm confident are adequate. I spend a lot of my time in advanced development. I've replaced our former advanced development person and that's where my talent really lies. I appreciate the implication of your question that I'm a good sales closer. I think I am but right now I think we are doing the right thing.

Okay. The reason I'm saying is that a lot of people on this call probably are in research but a lot of people are in sales as well and when you have such a big market that is clear and everyone is very happy about that and the feedback is so positive and the product so impressive, but yet the sales aren't getting closed it does leave a question, who is out there making the sales and these people competent and can they get the deal done?

I don't think it's a thing of closing, Jonathan. I think again it's more, again, what Tom talked about, it's the long sales cycle that it takes when you deal with large commercial enterprises or with the government or military. These guys don't make overnight decisions.

Multi-million dollars sales usually don't happen overnight. We are not losing any sales to anyone else. It's a matter of being persistent, just keep on pushing--pushing the opportunity until you can get a deal. They do take a long time and we are working them, but it's not like we are losing an order to someone else. We are not, it's just a continuing slow process.

I hear you. It's certainly frustrating from an investor standpoint especially with all the things happening in the world today whether it's issues in China or just boats getting--pirate ships attacking boats, it seems like there's a lot of opportunity to create urgency to close deals and it just doesn't seem to be moving forward quick enough for investors and I think you guys can probably appreciate that. One other thing, everyone talks about consistent order flow. I'll tell you this, you talking to one investor who is ready for an order of magnitude on an inconsistent basis.

I am going to tell you. I am ready for that.

Just hang in there.

The timing is difficult but the pipeline is definitely a lot more encouraging than it has been in the past. With the number of customers that we are talking to. Number of trials that are out there, the people that we've been working with and the quality of the customers that we are working with is much enhanced

And the size of the ultimate orders of what they could be.

We have our tentacles basically everywhere.

The biggest issue that we had to overcome was the product line itself and that's why we've devoted our attention to developing and refreshing the products that we offer and now we have products that customer response has been very positive. So it's easier to make a sale when you have something that a customer is looking for.

That's for sure. All right, guys. Good luck.

Thanks, Jonathan.

Thank you.

Our next question is from Robert Smith. Your line is open, sir.

Hi, good afternoon. Could you--do you have product in the Iraqi theater now?

We do.

And what is that?

LRAD, mostly older LRAD. First generation LRAD products.

We're on convoy trucks, we're on HumV's we're used on the ground. All over the place.

So what is the opportunity for the more advanced LRADs that you've been working with in that environment?

Opportunity is much greater actually. The field, the responses that have unofficially come from the field have been extremely positive. The LRAD has gotten very, very good field acceptance and that's what we need, we need feet on the ground that stand up and say that, yes, we need this product, we like this product; and the feedback has been very, very positive for our product so that's helped us continue to try to grow this business.

So we see big opportunities and we went ahead and redesigned the product to make it much more rugged. The performance is much improved and it will stand up to those types of desert environments which the old unit also stood up to but these units are much more, much more rugged when you compare the two.

And the quality of the sound is much improved.

Is vastly improved.

So when we see the supplemental appropriations approved, why aren't you getting orders, actually?

We are not denying any of that.

We right now with the acoustic hailing device award, we are in the testing mode so they are testing our product. Once our product passes the test then we are hoping that orders will open up; but we've been told all along that this testing will take place from now through the end of the summer and government cycles, October should be some timing when we will see some orders, that's why we are saying not just the second half but as we look into the mid-term we see some positive opportunities for us.

Are there such opportunities on border security here domestically?

We are working that issue. And unfortunately this whole SBI net has really gotten tied up in a lot of different political and performance issues. We were not initially involved with SBI net but that's the big border security initiative.

We have tested our product for some of the players in that space. They like it. We have another test coming up shortly. We see opportunities but I don't know how quickly that whole process is going to get implemented. And the 28 mile stretch hasn't gone as everyone had planned that was involved in it so it's hard to say whether it's going to be any short term opportunities there or not.

I think we like our position but we don't know what the political will of the country is as far as funding something like this so we will see where it goes.

And just going to HSS for a moment, is HSS--is this going to be more than just a curiosity? I mean, I've been around for a long time, Woody, any number of years ago you had a long, long list of grand projects that you saw would be applicable for this product and it just hasn't happened.

Well, the market itself just hasn't developed. If we were selling to the end user it may have been a lot quicker, but you take for instance, digital signage, whether it's car dealers, museums, movie theaters, check out lines, there has to be a whole infrastructure of creating the content. Usually you're working with one of the television networks, and it's just enough players involved in it and most of them are underfunded that we see it happening.

I haven't lost the vision, I'll tell you that. I've preached the same sermon for so many years, I'm still here. We all believe in it, it's going to happen. It's going to hatch. It's just taking a little longer to incubate, but I'm still as confident as ever it's going to happen. Thankfully this other opportunity arose.

After the USS Cole was blasted back in 2000 we were actually contacted by the government as as a result of having HSS and it opened this opportunity. So it's been a little bit serendipitous, but it's really been frustrated. I talk to people almost everyday that are saying when is this ever going to happen, when are we ever going to have an electric car, we need one. Eventually we will get one. This thing, eventually, I think will see this light of day and really kick butt to our vision.

It's really more than a little time.

It's been awful. I got to tell you, though. It's probably been six or seven years in there when we were exposing the product to the potentials of the marketplace but the product wasn't fully developed yet .

That's true.

And so we started out on that process sort of in parallel and I'm not sure how wise that was. No one else has captured that market. No one else has gone in and found an opportunity that we don't have. So as I said earlier, it's just the market has to come into being and when it does we will be ready for it.

Is the product sufficiently sound now, excuse the pun, that it can happen?

Well, lete's say one thing. As the original inventor, we always want to improve the quality of the sound; and we have done that. We haven't reached the ultimate on it yet but right now we have a viable commercial product, yes. The people that are buying it like it.

There are a number of potentially, really large opportunities in the hopper right now and our sales guys are very frustrated to close those. Tom puts a lot of heat on those guys as do I. We haven't given up, it's going to happen. It's just when it happens.

Thank you, good luck.

Thank you, Robert.

Thank you.

Our next question is from Adolph Hurst. Your line is open, sir.

Thank you.

To revisit an earlier comment in the beginning that was made and this sort of fits in, and that is your liquidity. Given the fact that you can't control these orders timingwise, I can understand your not wanting to raise money here; but do you have confidence that you have the availability of additional money if you need it of substance relative to the Company, of course?

I think for the short term certainly through the end of the year with where our expectations are for revenue levels and our cash flow, we should be fine. If we need additional working capital down the road certainly if we get a big military order and it's very easy to go to bank and get a working capital loan, but we could also go out to the market and probably raise capital pretty easily. We've been successful in the past, but at this point at in time we don't see that as being necessary but we do believe that there's avenues out there if needed.

Thank you.

Thank you.

We have a follow-up question from Michael Ciarmoli. Your line is open, sir.

Thanks, guys.

Quickly, I guess, Tom, did you say you were looking out more towards October until you saw a kind of significant government order as they proceed through with the testing phase here?

For the HD award, that's basically our 500X; and that's for Navy, Army, and Coast Guard. We are starting to see a couple of--fortunately the product has been tested to some extent and we are starting to see a couple of orders trickle in already and we have a five unit order that just came in today that is going to--basically to one of those branches of the military. So we are seeing some early progress but we are hoping to get some larger orders basically in the October timeframe; and the other project as I indicated earlier, Michael, we have received over $1 million worth of orders, 500,000 shipped last quarter, more than 500,000 to be shipped this quarter against the SPS Block Zero award. So we are seeing orders coming in and feedback has been very positive from the customer base so we are hoping to continue to grow that.

Okay. Great. Thank you.

Thanks, Michael.

Thank you. And our last question is from Joel Achramowicz. Your line is open, sir.

Thank you very much guys for taking this question.

I'm really also in the wanting orders camp. But the question I had to ask is since we were talking about a systems technology with the LRAD X in coupling sound with also movement and the ability to direct the device. How about the ability to detect motion in the field of view or some particular sector of view and basically combining that into an extraordinarily potent deterrent as well as a surveillance platform? I thoughts.

Maybe I could make a comment on that.

We actually have software that is developed at this point that allows you to pinpoint an object, a person or a vessel off in the distance and automatically track it so you can see it, zoom in on it, talk to it, I think we have infrared capability. We have super high intensity lights that allow us to operate when it's not daylight, and all that works over the internet so that you could easily control this from anywhere on the planet, and address the device individually or a group of devices and move them together.

I think that's why we're so excited about the RX of being able to have whole networks of these devices out there. When you couple it with radar, you don't have to have somebody watch every screen. You are pinged, you focus your attention on the area where that LRAD RX is stationed and then instantly go into working mode where you begin your communication process. You also can scramble forces if you need to; but yes, I think the radar piece coupling that with and RX network is some of the larger opportunities that we are working on.

One more think I'll add.

Tom maybe implied that we make speakers which we do. We also make the electronics. We also own the software, the pan/tilt mechanism, all the mounting and installation hardware that's critical and unique for almost half or more of the installations you do. So we are providing closer and closer to the complete solution than what we used to do.

So you are saying, Woody, that you can get there, you are either working towards that or you actually have the capability today for detection?

We have that capability as we speak.

So, I mean--

We have integrated our product with a number of different radar applications.

We have our own camera, for instance now, whereas before we were buying it from a third party and giving them that margin. So we have that.

If you can couple all those thing together there's just no way this device cannot, it would seem, cannot be successful. There are so many applications for this, for remote surveillance detection and deterrence, it should be an extraordinarily powerful platform.

Let me just add that any opportunity we've gone for like these two RFPs with the military, we've won hands down. We haven't gone after some opportunity large or small and lost it to a third party.

Joel, the L3 application, their harbor guard system basically they've incorporated our LRAD into their package and their package is radar and other sensors. So our device is much more sophisticated. As Woody indicated, we have more of a solution than just a LRAD on an tri-pod. So we have a solution that can get incorporated and we've made it generic enough so that it can get incorporated with any type of radar that's out in the marketplace today. We haven't gotten into the radar business but we have worked with a number of companies that do offer radar and our product is compatible with their systems.

Well, it sounds like the watch word now is marketing and sales. So good luck, guys.

Thanks, Joel.

This concludes the American Technology Q2, 2008 conference call. A replay will be available approximately three hours from now. Thank you for participating.

Ladies and gentlemen, thank you for your participation. You may all disconnect, and have a wonderful day.