UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June 30, 2017~~December 31, 2017

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 000-24248

LRAD CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	87-0361799
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

16990 Goldentop Rd. Ste. A, San Diego, California	92127
(Address of principal executive offices)	(Zip Code)

(858) 676-1112

(Registrant~~(Registrant’s~~’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting ~~company or an emerging growth~~ company. See the definitions of “large accelerated filer,” “accelerated filer”, and “smaller reporting ~~company” and “emerging growth~~ company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of shares of Common Stock, $0.00001 par value, outstanding on ~~August 2, 2017~~February 1, 2018 was ~~31,925,103.~~

32,249,288 .

PART I. FINANCIAL INFORMATION

Item~~Item~~ 1.

Financial Statements

LRAD Corporation

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30,

2017

September 30,

(Unaudited)

2016

ASSETS

Current assets:

Cash and cash equivalents
$ 14,376,387 $ 13,466,711
Short-term marketable securities
3,614,298 2,936,124
Accounts receivable
2,384,115 3,408,912
Inventories, net
5,711,032 4,763,909
Prepaid expenses and other
618,561 595,638
Total current assets
26,704,393 25,171,294

Long-term marketable securities
1,408,893 2,187,536
Deferred tax assets
9,281,569 8,527,000
Property and equipment, net
556,822 473,344
Intangible assets, net
65,092 62,905
Other assets
211,391 391,454
Total assets
$ 38,228,160 $ 36,813,533

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable
$ 1,797,908 $ 574,566
Accrued liabilities
1,898,339 1,503,044
Total current liabilities
3,696,247 2,077,610
Other liabilities - noncurrent
61,468 165,038
Total liabilities
3,757,715 2,242,648
Commitments and contingencies (Note 9)

Stockholders' equity:

Preferred stock, $0.00001 par value; 5,000,000 shares authorized; none issued and outstanding
- -
Common stock, $0.00001 par value; 50,000,000 shares authorized; 31,925,103 and 31,800,103 shares issued and outstanding
319 318
Additional paid-in capital
87,411,137 86,467,215
Accumulated deficit
(52,937,591 ) (51,895,099 )
Accumulated other comprehensive loss
(3,420 ) (1,549 )
Total stockholders' equity
34,470,445 34,570,885
Total liabilities and stockholders' equity
$ 38,228,160 $ 36,813,533

	December 31,
	2017			September 30,
	(Unaudited)			2017

ASSETS
Current assets:
Cash and cash equivalents	$	15,117,544		$	12,803,887
Short-term marketable securities		3,602,254			4,359,542
Accounts receivable, net		5,678,220			5,681,882
Inventories, net		5,259,934			5,257,234
Prepaid expenses and other		589,561			983,322
Total current assets		30,247,513			29,085,867

Long-term marketable securities		1,005,660			711,124
Deferred tax assets, net		5,622,112			8,331,000
Property and equipment, net		505,469			509,603
Intangible assets, net		53,885			55,689
Other assets		117,644			164,517
Total assets	$	37,552,283		$	38,857,800

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,903,001		$	1,112,366
Accrued liabilities		1,858,548			2,561,395
Total liabilities		3,761,549			3,673,761
Commitments and contingencies (Note 9)

Stockholders' equity:
Preferred stock, $0.00001 par value; 5,000,000 shares authorized; none issued and outstanding		-			-
Common stock, $0.00001 par value; 50,000,000 shares authorized; 32,249,288 and 32,158,436 shares issued and outstanding, respectively		322			322
Additional paid-in capital		88,254,818			87,956,839
Accumulated deficit		(54,455,106	)		(52,771,853	)
Accumulated other comprehensive loss		(9,300	)		(1,269	)
Total stockholders' equity		33,790,734			35,184,039
Total liabilities and stockholders' equity	$	37,552,283		$	38,857,800

See accompanying notes

LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended						Nine months ended						Three months ended
	June 30,						June 30,						December 31,
	2017			2016			2017			2016			2017			2016
Revenues:
Product sales	$	3,852,676		$	4,753,898		$	12,026,248		$	10,657,412		$	7,336,025		$	2,701,959
Contract and other		276,878			288,271			787,032			808,263			292,542			239,375
Total revenues		4,129,554			5,042,169			12,813,280			11,465,675			7,628,567			2,941,334
Cost of revenues		2,420,126			2,601,731			6,945,496			6,095,413			3,671,027			1,716,824

Gross profit		1,709,428			2,440,438			5,867,784			5,370,262			3,957,540			1,224,510

Operating expenses:
Selling, general and administrative		2,039,755			1,568,226			5,899,235			5,305,012			2,188,398			1,966,436
Research and development		666,244			632,416			1,858,894			1,791,253			778,037			587,410
Total operating expenses		2,705,999			2,200,642			7,758,129			7,096,265			2,966,435			2,553,846

(Loss) income from operations		(996,571	)		239,796			(1,890,345	)		(1,726,003	)
Income (loss) from operations														991,105			(1,329,336	)

Other income		32,682			30,512			94,884			95,469			34,530			30,128

(Loss) income from operations before income taxes		(963,889	)		270,308			(1,795,461	)		(1,630,534	)
Income tax (benefit) expense		(435,726	)		(6,614	)		(752,969	)		(862,720	)
Net (loss) income	$	(528,163	)	$	276,922		$	(1,042,492	)	$	(767,814	)
Income (loss) from operations before income taxes														1,025,635			(1,299,208	)
Income tax expense (benefit)														2,708,888			(486,528	)
Net loss													$	(1,683,253	)	$	(812,680	)

Net (loss) income per common share - basic and diluted	$	(0.02	)	$	0.01		$	(0.03	)	$	(0.02	)

Weighted average common shares outstanding:
Basic		31,861,916			31,798,853			31,820,632			32,028,153
Diluted		31,861,916			31,861,308			31,820,632			32,028,153
Cash dividends declared per common share	$	-		$	0.01		$	-		$	0.03
Net loss per common share - basic and diluted													$	(0.05	)	$	(0.03	)
Weighted average common shares outstanding: - basic and diluted														32,236,039			31,800,103

See accompanying notes

LRAD Corporation
Consolidated Statements of Comprehensive Loss

~~LRAD Corporation~~

~~Consolidated Statements of Comprehensive (Loss) Income~~

~~(Unaudited)~~

Three months ended

Nine months ended

June 30,

June 30,

2017

2016

2017

2016

Net (loss) income
$ (528,163 ) $ 276,922 $ (1,042,492 ) $ (767,814 )
Other comprehensive income (loss), net of tax:

Unrealized gain (loss) on marketable securities, net of tax
107 781 (1,871 ) 252
Other comprehensive income (loss)
107 781 (1,871 ) 252
Comprehensive (loss) income
$ (528,056 ) $ 277,703 $ (1,044,363 ) $ (767,562 )

	Three months ended
	December 31,
	2017			2016

Net loss	$	(1,683,253	)	$	(812,680	)
Other comprehensive loss, net of tax:
Unrealized loss on marketable securities, net of tax		(8,031	)		(6,310	)
Other comprehensive loss		(8,031	)		(6,310	)
Comprehensive loss	$	(1,691,284	)	$	(818,990	)

See accompanying ~~notes~~ notes

LRAD Corporation

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended						Three months ended
	June 30,						December 31,
	2017			2016			2017			2016
Operating Activities:
Net loss	$	(1,042,492	)	$	(767,814	)	$	(1,683,253	)	$	(812,680	)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		93,859			133,844			60,105			32,506
Provision for doubtful accounts		-			11,018
Warranty provision								12,361			9,696
Inventory obsolescence		(186,772	)		1,408			40,301			24
Share-based compensation		943,923			456,279			138,461			464,749
Deferred income taxes		(754,569	)		(864,560	)		2,708,888			(486,528	)
Changes in operating assets and liabilities:
Accounts receivable		1,024,797			(442,115	)		3,662			1,929,765
Inventories		(760,351	)		(257,354	)		(43,001	)		(327,680	)
Prepaid expenses and other		(22,923	)		(15,115	)		393,761			80,378
Other assets		180,063			140,613			46,874			46,871
Accounts payable		1,223,342			750,313			790,635			500,042
Accrued and other liabilities		291,725			1,038,416			(715,209	)		(8,857	)
Net cash provided by operating activities		990,602			184,933			1,753,585			1,428,286

Investing Activities:
Purchases of available-for-sale marketable securities		(2,304,263	)		(1,301,829	)
Proceeds from maturities of available-for-sale marketable securities		2,402,861			1,220,353
Purchases of marketable securities								(1,673,295	)		(1,470,704	)
Proceeds from maturities of marketable securities								2,128,016			1,555,314
Capital expenditures		(171,735	)		(163,521	)		(54,167	)		(13,863	)
Patent costs paid		(7,789	)		(6,200	)		-			(1,721	)
Net cash used in investing activities		(80,926	)		(251,197	)
Net cash provided by investing activities								400,554			69,026

Financing Activities:
Repurchase of common stock		-			(1,748,456	)
Common stock cash dividends paid		-			(954,650	)
Net cash used in financing activities		-			(2,703,106	)

Net increase (decrease) in cash		909,676			(2,769,370	)
Proceeds from exercise of stock options								159,518			-
Net cash provided by financing activities								159,518			-
Net increase in cash								2,313,657			1,497,312
Cash and cash equivalents, beginning of period		13,466,711			18,316,103			12,803,887			13,466,711
Cash and cash equivalents, end of period	$	14,376,387		$	15,546,733		$	15,117,544		$	14,964,023

Noncash investing activities:
Change in unrealized loss on marketable securities							$	(8,031	)	$	(6,310	)

See accompanying notes

LRAD Corporation

Notes to Condensed Consolidated Financial Statements ~~(Unaudited)~~(Unaudited)

1. OPERATIONS

LRAD~~LRAD~~^® Corporation, a Delaware corporation (the “Company”), is engaged in the design, development and commercialization of directed and omnidirectional sound technologies and products. The ~~Company sells its~~principal markets for the Company’s proprietary sound reproduction technologies and products are in ~~markets around the world.~~North and South America, Europe, Middle East and Asia.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

General

The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with the instructions to Form ~~10-Q~~10-Q and Article 8 of Regulation ~~S-X~~S-X and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the footnotes. The condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended September 30, ~~2016~~2017 included in the Company’s Annual Report on Form ~~10-K,~~10-K, as filed with the SEC on December ~~7, 2016.~~ 13, 2017. The accompanying condensed consolidated balance sheet at September 30, ~~2016~~ 2017 has been derived from the audited consolidated balance sheet at September 30, ~~2016,~~ 2017 contained in the above referenced Form ~~10-K.~~10-K. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

Principles of Consolidation

The Company has a currently inactive wholly owned subsidiary, LRAD International Corporation, which the Company formed to conduct international marketing, sales and distribution activities. The condensed consolidated financial statements include the accounts of this subsidiary after elimination of intercompany transactions and accounts.

Reclassifications

Where necessary, the prior ~~year’s~~year’s information has been reclassified to conform to the current year presentation.

3. RECENT ACCOUNTING PRONOUNCEMENTS

~~3. RECENT ACCOUNTING PRONOUNCEMENTS~~

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2016-09,~~2016-09,Compensation – Stock Compensation (Topic ~~718)~~718): Improvements to Employee Share-Based Payment Accounting. This guidance changes how companies account for certain aspects of share-based payments to employees. Among other things, under the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in-capital (“APIC”), but will instead record such items as income tax expense or benefit in the income statement, and APIC pools will be eliminated. Companies will apply this guidance prospectively. Another component of the new guidance allows companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards, whereby forfeitures can be estimated, as required today, or recognized when they occur. If elected, the change to recognize forfeitures when they occur needs to be adopted using a modified retrospective approach. The ~~new~~ guidance ~~will be~~is effective for the Company in the first quarter of fiscal ~~year beginning October 1, 2017. Early~~2018. The adoption ~~is permitted. The Company is currently evaluating the impact~~ of this ~~guidance, if any, on its financial statements~~standard resulted in the recognition of $1.1 million of gross deferred tax assets related to the historical excess tax benefits from stock-based compensation that was not previously included in deferred tax assets and ~~related disclosures.~~a corresponding increase in the Company’s valuation allowance.

In February 2016, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~ASU 2016-02,~~Accounting Standards Update (“ASU”) 2016-02,Leases (Topic ~~842)~~842), which issued new guidance related to leases that outlines a comprehensive lease accounting model and supersedes the current lease guidance. The new guidance requires lessees to recognize lease liabilities and corresponding right-of-use assets for all leases with lease terms of greater than 12 months. It also changes the definition of a lease and expands the disclosure requirements of lease arrangements. The new guidance must be adopted using the modified retrospective approach and will be effective for the Company in the fiscal year beginning October 1, 2019. Early adoption is permitted. The Company is currently evaluating the impact of this guidance, if any, on its financial statements and related disclosures.

In ~~July 2015,~~ May 2014, the FASB issued ASU No. ~~2015-11,~~~~Inventory (Topic 330): Simplifying the Measurement of Inventory~~. The guidance requires an entity to measure inventory at the lower of cost or net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation, rather than the lower of cost or market in the previous guidance. This amendment applies to inventory that is measured using first-in, first-out (FIFO). This new guidance is effective for the Company in the fiscal year beginning October 1, 2017. A reporting entity should apply the amendments prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of this guidance, if any, on its consolidated financial statements and related disclosures.

~~In May~~ 2014 ~~the FASB issued ASU No. 2014-09,~~-09,Revenue from Contracts with Customers (“ASU ~~2014-09”~~2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU ~~2014-09~~2014-09 will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles when it becomes effective. ~~Recently,~~In July 2015, the FASB has issued guidance clarifying certain topics such as (i) gross versus net revenue reporting, (ii) identifying performance obligations and licensing and (iii) accounting for shipping and handling fees and costs and accounting for consideration givendeferred the effective date of the standard by ~~a vendor~~an additional year; however, it provided companies the option to ~~a customer.The new guidance~~adopt one year earlier, commensurate with the original effective date. Accordingly, the standard will be effective for the Company in the fiscal year beginning October 1, ~~2018, with an option to adopt the standard for the fiscal year beginning October 1, 2017.~~ 2018. The Company is currently evaluating the impact of this ~~standard and has not yet selected a transition method or the effective date on which it plans to adopt the standard, nor has it determined the effect of the standard~~guidance, if any, on its financial statements and related disclosures.

4.	FAIR VALUE MEASUREMENTS

The ~~Company’s~~Company’s financial instruments consist principally of cash equivalents, short and long-term marketable securities, accounts receivable and accounts payable. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

Level 1: Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.

Level 2: Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.

Level 3: Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

The fair value of the Company’s cash equivalents and marketable securities was determined based on Level 1 and Level 2 inputs. The Company did not have any marketable securities in the Level 3 category as of ~~June 30,~~December 31, 2017 or September 30, ~~2016.~~ 2017. The Company believes that the recorded values of its other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

Instruments Measured at Fair Value

The following ~~tables~~tables present the Company’s cash equivalents and marketable securities’ costs, gross unrealized gains and losses, and fair value by major security type recorded as cash equivalents or short-term or long-term marketable securities as of ~~June 30,~~December 31, 2017 and September 30, ~~2016.~~2017.

December 31, 2017

Unrealized

Fair

Cash

Short-term

Long-term

Cost Basis

Losses

Value

Equivalents

Securities

Level 1:

Money Market Funds

531,566

Level 2:

Certificates of deposit

936,801

437,801

499,000

Municipal securities

86,186

(198

)

85,988

Corporate bonds

3,594,227

(9,102

)

3,585,125

3,078,465

506,660

Subtotal

4,617,214

(9,300

)

4,607,914

3,602,254

1,005,660

Total

5,148,780

(9,300

)

5,139,480

531,566

3,602,254

1,005,660

June 30, 2017

Unrealized

Fair

Cash

Short-term

Long-term

Cost Basis

Losses

Value

Equivalents

Securities

Securities

Level 1:

Money Market Funds
$ 90,054 $ - $ 90,054 $ 90,054 $ - $ -

Level 2:

Corporate bonds
$ 2,763,669 $ (3,428 ) $ 2,760,241 $ - $ 1,540,351 $ 1,219,890
Certificates of deposit
2,237,493 - 2,237,493 - 2,048,490 189,003
Municipal securities
25,449 8 25,457 - 25,457 -
Subtotal
5,026,611 (3,420 ) 5,023,191 - 3,614,298 1,408,893

Total
$ 5,116,665 $ (3,420 ) $ 5,113,245 $ 90,054 $ 3,614,298 $ 1,408,893

September 30, 2017

Unrealized

Fair

Cash

Short-term

Long-term

Cost Basis

Losses

Value

Equivalents

Securities

Level 1:

Money Market Funds

55,257

Level 2:

Certificates of deposit

2,436,647

1,937,647

499,000

Municipal securities

25,315

(12

)

25,303

Corporate bonds

2,609,973

(1,257

)

2,608,716

2,396,592

212,124

Subtotal

5,071,935

(1,269

)

5,070,666

4,359,542

711,124

Total

5,127,192

(1,269

)

5,125,923

55,257

4,359,542

711,124

September 30, 2016

Unrealized

Fair

Cash

Short-term

Long-term

Cost Basis

Losses

Value

Equivalents

Securities

Securities

Level 1:

Money Market Funds
$ 95,538 $ - $ 95,538 $ 95,538 $ - $ -

Level 2:

Certificates of deposit
$ 3,236,168 $ - $ 3,236,168 $ - $ 1,299,133 $ 1,937,035
Municipal securities
140,637 - 140,637 - 140,637 -
Corporate bonds
1,748,404 (1,549 ) 1,746,855 - 1,496,354 250,501
Subtotal
5,125,209 (1,549 ) 5,123,660 - 2,936,124 2,187,536

Total
$ 5,220,747 $ (1,549 ) $ 5,219,198 $ 95,538 $ 2,936,124 $ 2,187,536

55.. INVENTORIES

Inventories consisted of the following:

	June 30,			September 30,			December 31,			September 30,
	2017			2016			2017			2017
Raw materials	$	4,783,309		$	4,393,928		$	4,619,587		$	3,784,935
Finished goods		858,780			775,628			900,645			1,742,960
Work in process		462,303			174,485			198,535			147,871
Inventories, gross		6,104,392			5,344,041			5,718,767			5,675,766
Reserve for obsolescence		(393,360	)		(580,132	)		(458,833	)		(418,532	)
Inventories, net	$	5,711,032		$	4,763,909		$	5,259,934		$	5,257,234

6. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

June 30,

September 30,

2017

2016

Office furniture and equipment
$ 1,104,417 $ 976,856
Machinery and equipment
995,616 957,829
Leasehold improvements
76,138 71,738
Property and equipment, gross
2,176,171 2,006,423
Accumulated depreciation
(1,619,349 ) (1,533,079 )
Property and equipment, net
$ 556,822 $ 473,344

Nine months ended

June 30,

2017

2016

Depreciation expense
$ 88,257 $ 128,833

	December 31,			September 30,
	2017			2017
Office furniture and equipment	$	1,097,619		$	1,093,502
Machinery and equipment		1,044,206			994,157
Leasehold improvements		76,138			76,138
Property and equipment, gross		2,217,963			2,163,797
Accumulated depreciation		(1,712,494	)		(1,654,194	)
Property and equipment, net	$	505,469		$	509,603

	Three months ended
	December 31,
	2017		2016
Depreciation expense	$	58,301	$	30,684

7. ACCRUED LIABILITIES ~~AND OTHER LIABILITIES—NONCURRENT~~

Accrued liabilities consisted of the following:

	June 30,		September 30,		December 31,		September 30,
	2017		2016		2017		2017

Payroll and related	$	1,167,742	$	382,845	$	847,042	$	1,870,579
Deferred revenue						446,913		268,580
Accrued contract costs						345,551		197,034
Warranty reserve		400,179		285,402		188,308		179,101
Accrued contract costs		255,460		197,034
Deferred revenue		65,990		637,763
Customer deposits		8,968		-
Deferred rent						30,734		46,101
Total	$	1,898,339	$	1,503,044	$	1,858,548	$	2,561,395

Other liabilities - noncurrent consisted of the following:

Deferred rent	$	61,468	$	93,456
Extended warranty		-		71,582
Total	$	61,468	$	165,038

Payroll and related

Payroll and related consists primarily of accrued vacation, bonus, sales commissions, and benefits.

Deferred Revenue

Deferred revenue consists primarily of prepayments from customers in advance of product shipment.

Warranty Reserve

Changes in the warranty reserve and extended warranty were as follows:

	Three month ended						Nine months ended
	June 30,						June 30,						Three months ended December 31
	2017			2016			2017			2016			2017			2016
Beginning balance	$	449,141		$	317,822		$	356,984		$	315,618		$	179,101		$	356,984
Warranty provision		(2,761	)		4,307			108,608			30,610			12,361			9,696
Warranty settlements		(46,201	)		(7,850	)		(65,413	)		(31,949	)		(3,154	)		(12,742	)
Ending balance	$	400,179		$	314,279		$	400,179		$	314,279		$	188,308		$	353,938

Accrued contract costs

~~We have~~ The Company has contracted with a third ~~party~~-party service provider to administer the required services under the terms of a repair and maintenance agreement with a foreign military. This payment is made in arrears for each contract year ended March 26.

8~~Deferred Revenue~~

~~Deferred revenue consists primarily of prepayments from customers in advance of product shipment.~~

8.. INCOME TAXES

~~At June 30, 2017,~~The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. Subsequently, the SEC issued Staff Accounting Bulletin (“SAB”) 118, which allows for the recording of provisional amounts related to U.S. tax reform and subsequent adjustments related to U.S. tax reform during a measurement period not to exceed one year from the enactment date. Accordingly, the Company ~~had federal~~remeasured its net ~~operating losses (“NOLs”) and related state NOLs.~~ deferred tax assets on a provisional basis based on the rates at which they are expected to be realized in the future, which is generally 21% resulting in a decrease to our net deferred tax assets of $2,474,000 for the quarter ended December 31, 2017. The Company ~~released $188,000~~will continue to analyze certain aspects of the Act, and ~~$8,339,000~~refine its calculations as appropriate during the measurement period, which could affect the measurement of these balances.

For the three months ended December 31, 2017, the Company recorded income tax expense of $234,888 reflecting an effective tax rate of 22.9% and an additional discrete tax expense of $2,474,000 due to the remeasurement of its deferred tax assets as a result of tax reform. For the three months ended December 31, 2016, the Company recorded an income tax benefit of $486,528 reflecting an effective tax rate of 37.4%. For the three months ended December 31, 2017, when compared to the same period in 2016, the decrease in the effective tax rate was primarily attributable to the decrease in Federal statutory tax rate due to tax reform. The Company continues to maintain a partial valuation allowance against its deferred tax assets during the years ended September 30, 2016 and 2015, respectively, as it determined that it was more likely than not that those assets would be realized. The Company continues to maintain a valuation allowance of $12,109,000 at June 30, 2017 and September 30, 2016 as the Company believes that the negative evidence that it will be able to recover these net deferred tax assets outweighs the positive evidence.

The Company recorded an income tax benefit of $752,969 and $862,720, reflecting effective tax rates of 41.9% and 52.9% for the nine months ended June 30, 2017 and 2016, respectively. The tax benefit recorded in these two periods is related to the Company’s losses for those periods and the determination that a valuation allowance is not required on the benefit related to those losses.

Accounting ~~Standard~~Standards Codification (“ASC”) 740,Accounting for Uncertainty in Income Taxes, requires the Company to recognize in its consolidated financial statements uncertainties in tax positions taken that may not be sustained upon examination by the taxing authorities. If interest or penalties are assessed, the Company would recognize these charges as income tax expense. The Company has not recorded any income tax expense or benefit for uncertain tax positions.

99.. COMMITMENTS AND CONTINGENCIES

Litigation

The Company may at times be involved in litigation in the ordinary course of business. The Company will, from time to time, when appropriate in ~~management’s~~management’s estimation, record adequate reserves in the Company’s consolidated financial statements for pending litigation. Currently, there are no pending material legal proceedings to which the Company is a party or to which any of its property is subject.

Bonus Plan

The Company has an incentive bonus plan for fiscal year ~~2017~~2018 designed to motivate its key employees to achieve the Company’s financial objectives. All of the Company’s key employees are entitled to participate in the incentive plan. Target Bonus Amounts (“Target”) vary based on a percentage of the employee’s base salary which range from ~~10%~~25% to 75% of base salary and a bonus payment may be made at three levels, including at 50% of Target, at 100% of Target and at 200% of Target, depending upon the achievement by the Company of specified performance goals. Performance targets include certain fiscal ~~2017~~2018 metrics, including product bookings, net revenues, operating income and operating cash ~~flow, depending on the employee’s position.~~flow. Included in such calculation is the cost of the incentive plan. During the ~~nine~~three months ended ~~June 30,~~December 31, 2017 and 2016, the Company accrued ~~$745,900~~$405,267 and ~~$0,~~$185,086, respectively, for bonuses and related payroll tax expenses in connection with the bonus plans.

10~~10.~~. SHARE-BASED COMPENSATION ~~PLANS AND AWARDS~~

Stock Option Plans

At ~~June 30,~~December 31, 2017, the Company had two equity incentive plans. The 2005 Equity Incentive Plan (“(“2005 Equity Plan”) was terminated with respect to new grants in March 2015, but remains in effect for grants issued prior to that time. The ~~Amended and Restated~~ 2015 Equity Incentive Plan (“(“2015 Equity Plan”) was approved by the Company’s Board of Directors on December 6, 2016 and by the Company’s stockholders on March 14, 2017. The 2015 Equity Plan authorizes for issuance as stock options, restricted stock, stock appreciation rights, restricted stock units ~~(“RSUs”)~~ and performance awards, an aggregate of 5,000,000 new shares of common stock to employees, directors, advisors or consultants. At ~~June 30,~~December 31, 2017, there were options ~~and RSUs~~ outstanding covering ~~2,477,502~~2,216,002 and ~~2,500,500~~2,279,315 shares of common stock under the 2005 Equity Plan and 2015 Equity Plan, respectively.

Stock Option Activity

The following table summarizes information about stock option activity during the ~~nine~~three months ended ~~June 30,~~December 31, 2017:

Number

Weighted Average

of Shares

Exercise Price

Outstanding October 1, 2016
4,404,002 $ 2.18
Granted
464,000 $ 1.70
Forfeited/expired
(15,000 ) $ 1.66
Outstanding June 30, 2017
4,853,002 $ 2.14
Exercisable June 30, 2017
3,372,123 $ 2.22

	Number			Weighted Average
	of Shares			Exercise Price
Outstanding October 1, 2017		4,663,502		$	2.16
Granted		3,500		$	2.21
Forfeited/expired		(80,833	)	$	2.84
Exercised		(90,852	)	$	1.76
Outstanding December 31, 2017		4,495,317		$	2.15
Exercisable December 31, 2017		3,251,811		$	2.24

Options outstanding are exercisable at prices ranging from ~~$0.93~~$0.93 to ~~$3.17~~$3.17 and expire over the period from 2018 to 2024 with an average life of ~~4.2~~4.6 years. The aggregate intrinsic value of options outstanding and exercisable at ~~June 30,~~December 31, 2017 was ~~$140,084~~$1,780,084 and ~~$132,183,~~$1,368,424, respectively.

During the ~~nine months~~quarter ended ~~June 30, 2017,~~ December 31, 2016, the Company incurred non-cash share-based compensation expense of ~~$307,324~~$307,324 resulting from the modification of stock options in accordance with a Separation Agreement and General Release related to the June 30, 2016 departure of the Company’s prior chief executive ~~officer.~~officer (“CEO”). As per the agreement, all unvested options became fully vested on December 31, 2016 and shall remain exercisable for a period of 24 months following the December 31, 2016 separation date as defined in the agreement. The expense is measured as the excess of the fair value of the modified awards over the fair value of the original awards immediately before its terms are modified as per ASC ~~718-20-35.~~718-20-35.

Performance-Based Stock Options

On August 1, 2016, the Company awarded a performance-based stock option (PVO) to purchase 750,000 shares of the ~~Company’s~~Company’s common stock to a key executive, with a contractual term of seven years. Vesting is based upon the achievement of certain performance criteria for each of fiscal 2019 and 2020 ~~(375,000~~ (375,000 shares for each year) including minimum free cash flow margin and net revenue targets at four different target levels for each of the years. Additionally, vesting is subject to the executive being employed by the Company at the time the Company achieves such financial targets.

The Company has made the assumption that the lowest performance target level for each of the years will be met, and therefore 187,500 shares of the PVO are assumed to vest. The weighted average grant date fair value for the PVO was ~~$0.81~~$0.81 per share, which was estimated on the date of grant using the Black-Scholes option pricing model. Non-cash share-based compensation expense related to this award is recognized on a ~~straight line~~straight-line basis over the requisite service periods. The Company will continue to review these targets each quarter and will adjust the expected outcome as needed, recognizing compensation expense cumulatively in such period for the difference in expense.

Restricted Stock Units

During the quarter ended December 31, 2016, the Board of Directors approved the grant of 25,000 RSUs to each of our non-employee directors, subject to stockholder approval of ~~theAmended~~the Amended and Restated 2015 Equity Incentive Plan at the 2017 Annual Meeting of Stockholders. These RSUs were granted as replacements for 20,000 stock options that would have been granted on the date of the 2016 Annual Meeting of Stockholders and vested on the first anniversary of the 2016 Annual Meeting of Stockholders, which was May 17, 2017.As a result of the stockholders approval of the Amended and Restated 2015 Equity Incentive Plan at the 2017 Annual Meeting of Stockholders on March 14, 2017, the RSUs previously granted were made effective at a market value of ~~$197,500~~$197,500 and were expensed on a straight line basis through the May 17, 2017 vest date.

On March 14, 2017, the Board of Directors approved an additional grant of 25,000 RSUs to each of our non-employee directors that will vest on the first anniversary of the grant date. These were also issued at a market value of ~~$197,500,~~$197,500, which will be expensed on a straight line basis through the March 14, 2018 vest date.

Share-Based Compensation

The Company recorded share-based compensation expense and classified it in the condensed consolidated statements of operations as follows:

	Three months ended				Nine months ended				Three months ended
	June 30,				June 30,				December 31,
	2017		2016		2017		2016		2017		2016
Cost of revenues	$	6,192	$	6,157	$	17,943	$	17,895	$	6,209	$	5,877
Selling, general and administrative		272,118		115,864		856,215		362,224		109,322		435,497
Research and development		23,462		26,001		69,765		76,160		22,930		23,375
Total	$	301,772	$	148,022	$	943,923	$	456,279	$	138,461	$	464,749

The employee stock ~~options~~options granted in the ~~nine~~three months ended ~~June 30,~~December 31, 2017 and 2016 had a weighted-average estimated fair value of ~~$0.71~~$0.89 per share and ~~$0.62~~$0.71 per share, respectively, using the Black-Scholes option pricing model with the following weighted-average assumptions (annualized percentages):

	Nine months ended						Three months ended
	June 30,						December 31,
	2017			2016			2017		2016
Volatility	47.5%	-	53.7%	49.0%	-	52.0%		45.4%	52.4%	-	53.7%
Risk-free interest rate	1.7%	-	2.0%	1.1%	-	1.7%		2.2%	1.7%	-	2.0%
Forfeiture rate	10.0%			10.0%				10.0%		10.0%
Dividend yield	0.0%			2.2%	-	2.7%		0.0%		0.0%
Expected life in years	3.8	-	4.6	3.2	-	4.6		4.6	3.8	-	4.6

The Company ~~declared~~did not declare a dividend for the ~~quarter~~quarters ended December 31, ~~2015, which reflects a dividend yield assumption based on the expected annual yield, but the dividend was discontinued during the quarter ended June 30,~~ 2017 and 2016. Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with the expected life of the options. The risk-free interest rate is based on rates published by the Federal Reserve Board. The expected life is based on observed and expected time to post-vesting exercise. The expected forfeiture rate is based on past experience and employee retention data. Forfeitures are estimated at the time of the grant and revised in subsequent periods if actual forfeitures differ from those estimates or if the Company updates its estimated forfeiture rate. Such amounts will be recorded as a cumulative adjustment in the period in which the estimate is changed.

Since the Company has a ~~NOL~~net operating loss carryforward as of ~~June 30,~~December 31, 2017, no excess tax benefit for the tax deductions related to share-based awards was recognized for the ~~nine~~three months ended ~~June 30,~~December 31, 2017 and 2016. As of ~~June 30,~~December 31, 2017, there was approximately ~~$800,000~~$600,000 of total unrecognized compensation cost related to non-vested share-based employee compensation ~~arrangements, including stock options and RSUs.~~arrangements. The cost is expected to be recognized over a weighted-average period of ~~1.9~~2.1 years.

111. STOCKHOLDERS’ EQUITY

Summary

The following table summarizes changes in the components of ~~stockholders’~~stockholders’ equity during the ~~nine~~three months ended ~~June 30,~~December 31, 2017:

											Accumulated															Accumulated
					Additional						Other			Total							Additional					Other			Total
	Common Stock				Paid-in			Accumulated			Comprehensive			Stockholders'			Common Stock				Paid-in		Accumulated			Comprehensive			Stockholders'
	Shares		Amount		Capital			Deficit			Loss			Equity			Shares		Amount		Capital		Deficit			Loss			Equity
Balances, September 30, 2016		31,800,103	$	318	$	86,467,215		$	(51,895,099	)	$	(1,549	)	$	34,570,885
Balances, September 30, 2017																		32,158,436	$	322	$	87,956,839	$	(52,771,853	)	$	(1,269	)	$	35,184,039
Share-based compensation expense		-		-		943,923			-			-			943,923			-		-		138,461		-			-			138,461
Shares issued pursuant to stock awards		125,000		1		(1	)		-			-			-
Issuance of common stock upon exercise of stock options, net																		90,852		-		159,518								159,518
Other comprehensive loss		-		-		-			-			(1,871	)		(1,871	)		-		-		-		-			(8,031	)		(8,031	)
Net loss		-		-		-			(1,042,492	)		-			(1,042,492	)		-		-		-		(1,683,253	)					(1,683,253	)
Balances, June 30, 2017		31,925,103	$	319	$	87,411,137		$	(52,937,591	)	$	(3,420	)	$	34,470,445
Balances, December 31, 2017																		32,249,288	$	322	$	88,254,818	$	(54,455,106	)	$	(9,300	)	$	33,790,734

Share Buyback Program

The Board of Directors approved a share buyback program in ~~2015~~2013 under which the Company was authorized to repurchase up to $4$4 million of its outstanding common shares. ~~The original share buyback authorization expired on~~ There were no shares repurchased during the quarters ended December 31, ~~2016,~~ 2017 and in 2016 respectively. At December ~~2016,~~ 31, 2017, all repurchased shares were retired. In December 2017, the Board of Directors extended the program through December 31, 2017. There were no shares repurchased during the nine months ended June 30, 2017. During the nine months ended June 30, 2016, 1,099,608 shares were repurchased for $1,748,456 under these two programs. At June 30, 2017, $3,894,664 was remaining as authorized under the buyback program.

~~Dividends~~2018.

On December 3, 2015, the Company announced a cash dividend of $0.01 per share on the Company’s common stock, payable on January 29, 2016 to stockholders of record on January 15, 2016, and on February 4, 2016, the Company announced a cash dividend of $0.01 per share on the Company’s common stock, payable on March 30, 2016 to stockholders of record on March 15, 2016. Dividends ~~charged to retained earnings in the three and nine months ended June 30, 2016 were $317,989 and $954,650, respectively.~~

There were no dividends declared in the ~~nine~~three months ended ~~June 30, 2017.~~December 31, 2017 and 2016.

1~~12.~~2 ~~(LOSS)~~.NET ~~INCOME~~ LOSS PER SHARE

The following table sets forth the computation of basic and diluted ~~(loss) income~~loss per share:

Three months ended

Nine months ended

June 30,

June 30,

2017

2016

2017

2016

Numerator:

(Loss) income available to common stockholders
$ (528,163 ) $ 276,922 $ (1,042,492 ) $ (767,814 )

Denominator:

Weighted average common shares outstanding
31,861,916 31,798,853 31,820,632 32,028,153
Assumed exercise of dilutive options and warrants
- 62,455 - -
Weighted average dilutive shares outstanding
31,861,916 31,861,308 31,820,632 32,028,153

Basic income (loss) per common share
$ (0.02 ) $ 0.01 $ (0.03 ) $ (0.02 )
Diluted income (loss) per common share
$ (0.02 ) $ 0.01 $ (0.03 ) $ (0.02 )

Potentially dilutive securities outstanding at period end excluded from the diluted computation as the inclusion would have been antidilutive:

Options
4,853,002 2,348,083 4,853,002 3,351,169
Restricted stock units
125,000 - 125,000 -
Total
4,978,002 2,348,083 4,978,002 2,895,669

	Three months ended
	December 31,
	2017			2016
Numerator:
Loss available to common stockholders	$	(1,683,253	)	$	(812,680	)

Denominator:
Weighted average common shares outstanding		32,236,039			31,800,103

Basic loss per common share	$	(0.05	)	$	(0.03	)
Diluted loss per common share	$	(0.05	)	$	(0.03	)

Potentially dilutive securities outstanding at period end excluded from the diluted computation as the inclusion would have been antidilutive:
Options		3,289,067			4,849,002

1~~13.~~3. MAJOR CUSTOMERS

For the three months ended ~~June 30,~~December 31, 2017, revenues from two customers accounted for ~~47%~~31% and ~~13%~~26% of total revenues, ~~and for the nine months ended June 30, 2017, revenues from two customers accounted for 15% and 10% of total revenues,~~respectively, with no other single customer accounting for more than 10% of revenues. At ~~June 30,~~December 31, 2017, accounts receivable from ~~two customers~~one customer accounted for ~~41% and 25%~~42% of total accounts receivable, with no other single customer accounting for more than 10% of the accounts receivable balance.

For the three months ended ~~June 30,~~December 31, 2016, revenues from ~~three customers~~one customer accounted for ~~22%, 19% and 15%~~11% of total revenues, and for the nine months ended June 30, 2016, there were no customers accounting for more than 10% of revenues. At June 30, 2016, accounts receivable from two customers accounted for 39% and 30% of total accounts receivable, with no other single customer accounting for more than 10% of revenues. At December 31, 2016, accounts receivable from two customers accounted for 40% and 19% of total accounts receivable, respectively, with no other single customer accounting for more than 10% of the accounts receivable balance.

The following table summarizes revenues by geographic region. Revenues are attributed to countries based on ~~customer’s~~customer’s delivery location.

	Three months ended				Nine months ended
	June 30,				June 30,				Three months ended December 31,
	2017		2016		2017		2016		2017		2016
Americas	$	1,367,044	$	811,296	$	5,088,553	$	4,426,953	$	6,053,038	$	1,622,357
Asia Pacific										1,021,906		984,600
Europe, Middle East and Africa		150,474		390,732		1,204,267		888,054		553,623		334,377
Asia Pacific		2,612,036		3,840,141		6,520,460		6,150,668
Total Revenues	$	4,129,554	$	5,042,169	$	12,813,280	$	11,465,675	$	7,628,567	$	2,941,334

14. SUBSEQUENT EVENTS

On January 18, 2018, the Company acquired all of the issued and outstanding shares of capital stock of Genasys Holdings, S.L. and its subsidiaries (“Genasys”), pursuant to a Stock Purchase Agreement, dated January 18, 2018. Genasys is a leading software provider of advanced location-based mass messaging solutions for emergency warning systems and workforce management. The aggregate consideration paid by the Company was 3.1 million Euros (approximately $3.8 million), including the assumption of 1.2 million Euros (approximately $1.5 million) of debt subject to certain working capital adjustments as outlined in the Stock Purchase Agreement. The acquisition was funded from available cash on hand. The Company is in the initial stages of determining the accounting treatment for the transaction, specifically related to the fair value of acquired tangible and intangible assets, liabilities assumed and the related tax impact.

Item~~Item~~ 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis set forth below should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included under Item 1 of this Quarterly Report on Form 10-Q, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended September 30, ~~2016.~~

~~Forward Looking Statements~~2017.

Forward Looking Statements

This report contains certain statements of a forward-looking nature relating to future events or future performance. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the only means of identifying forward-looking statements. Prospective investors are cautioned that such statements are only predictions and actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider various factors identified in this report and any matters set forth under Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K, which could cause actual results to differ materially from those indicated by such forward-looking statements.

Overview

Our Company ~~develops~~is a leading innovator and ~~delivers highly intelligible, directed Long Range Acoustic Devices~~^® ~~(“LRAD~~^®”)manufacturer of acoustic communication systems that ~~beam, focus and~~ control sound from 30° - 360° over short and long distances. By ~~placing sound~~broadcasting audible voice messages and tones with exceptional clarity and only where needed, ~~we not only enhance many typical speaker applications, but~~ we offer novel sound applications that conventional ~~speakers~~bullhorns, loudspeakers, and public address and emergency warning systems cannot achieve. We have developed two LRAD^® product lines using our proprietary technologies:

•~~Our LRAD-X~~ Acoustic Hailing Devices (“AHD’s”), which project audible broadcasts with exceptional intelligibility in a 30° beam from close range out to 5,500 meters, and;

• ONE VOICE^® ~~product line offers~~Mass Notification Systems(“MNS”), which project 60° - 360° audible broadcasts with industry-leading vocal intelligibility from close range to over 14 square kilometers from a ~~variety of directed sound products, which use focused acoustic output to clearly transmit critical information, instructions~~single installation.

LRAD systems are a technological breakthrough in broadcasting audible, highly intelligible voice messages and ~~warnings~~tones over long ~~distances. The LRAD-X product line features clear voice intelligibility~~distances and ~~meets the military’s~~high ambient noise using minimal power. Our AHD's meet stringent ~~environmental~~military requirements and are packaged in ~~a number of packages and~~several form factors, from ~~our~~portable, hand held ~~LRAD 100X~~units to ~~our LRAD 2000X unit, which communicates up to 5,500 meters.Through~~permanently installed, remotely operated systems. Through the use of powerful voice commands, prerecorded messages in multiple languages, and warning tones, our ~~LRAD-X products~~AHD's are designed to create large safety zones while determining the intent and influencing the behavior of security threats. We continue to expand our ~~LRAD-X~~AHD product line to provide a complete range of systems and accessories, including ~~a new,~~our recently patented XL ~~speaker~~driver technology, ~~introduced in 2014,~~ which generates higher audio output in a smaller and lighter form ~~factor,~~factor. We have incorporated, and ~~has been incorporated~~plan to continue incorporating, this proprietary technology into our AHD and ONE VOICE products.

Building on the success of our AHD's, we launched our omnidirectional product line. Unlike most siren-based mass notification systems on the market, our ONE VOICE systems broadcast both emergency warning sirens and highly intelligible voice messages with uniform 60° - 360° coverage over local and wide areas. We believe our ability to shape the broadcast coverage area, our industry-leading speech intelligibility, and our multiple system activation and control options, make us more competitive in ~~several new products in recent years.~~ the large and growing mass notification market.

Our products are designed to meet a broad range of diverse applications including emergency warning and mass notification, fixed and mobile military deployments, maritime, ~~security,~~ critical infrastructure, ~~and~~ perimeter, ~~security,~~ commercial, ~~security,~~ border, and homeland security, law enforcement, ~~and~~ emergency responder and fire rescue communications, asset protection, and wildlife preservation and ~~control.Our LRAD-X products have been competitively selected over other commercially available systems by the United States military and by several international militaries.~~

control.Building on the success of our LRAD-X directional technology, in 2012 we launched our first omnidirectional product, the LRAD 360X. Unlike standard siren systems in the market, the LRAD 360X broadcasts alerts and notifications with the same highly intelligible voice clarity of our directional products. Since the LRAD 360X product launch, we have expanded our ONE VOICE^® omnidirectional product line to include various offerings, a 60-degree unit, a mobile trailer-mounted system, and various configurations of amplifiers, power sources, software and other products to provide a more fully integrated mass notification solution for municipalities, military bases, airports, college/business campuses, etc. We expect that the ONE VOICE product line will allow us to expand our business opportunities into the large and growing worldwide emergency warning and mass notification market. Through increased focus and investment in domestic and international sales and marketing activities, we have pioneered a new global market, By selling our ~~directional LRAD-X long-range acoustic hailing devices (“AHDs”)~~industry-leading AHD's and advanced ONE VOICE ~~omnidirectional~~ mass notification systems into over 70 ~~countries.~~countries, we have created a new worldwide market and a recognized global brand. We continue to develop new acoustic innovations and believe we have established a significant competitive advantage in our principal markets.

~~Revenues~~ Business developmentsin the ~~third~~ fiscal quarter ended ~~June 30,~~December 31, 2017:

●

Received $870,000 in AHD orders for the U.S. Army and U.S. Marine Corps.

●

Announced $1.1 million follow-on AHD order from Southeast Asia for border and maritime security.

●

Received $1.5 million follow-on LRAD 360XT order from one of the largest oil & gas companies in Eurasia. The mobile mass notification systems are being equipped with our solar power option and integrated with a gas detection alarm system.

●

Announced $1.0 million LRAD 500X-RE systems and accessories order for domestic and international U.S. Air Force bases.

Revenues in the first fiscal quarter ended December 31, 2017, were ~~$4.1~~$7.6 million, an ~~18% decrease~~increase from ~~$5.0~~$2.9 million in the ~~third~~first fiscal quarter of ~~2016.~~2017. The ~~decrease in revenues came primarily from the Asia Pacific region, despite a large $1.9 million shipment to one country in the third quarter of 2017, partially offset by an~~ increase in revenues ~~in the Americas~~was driven by ~~a $525,000 order for~~increases in both AHD and mass notification revenues. AHD revenues increased $2,559,000, or 128%, and mass notification revenues increased $2,074,748, or 297%, compared to the ~~U.S. Navy. While revenues decreased, a number~~first fiscal quarter of ~~new orders were received during~~2017. Based on the ~~quarter, including a $1.6 million ONE VOICE Mobile Mass Notification order for an oil~~timing of budget cycles, as well as financial issues and ~~gas application~~military conflict in Eurasia, a $528,000 bird protection order for a Canadian mining site, $1.7 million in public safety orders for Southeast Asia, and $1.0 million in international AHD orders. Backlog at June 30, 2017 was $6.5 million and is scheduled to ship in the next 12 months. As a resultcertain areas of the U.S. presidential election, U.S. defense spending may increase, although it is too early to determine the new administration’s budget priorities. Demand for our products remains strong and we continue to build awareness and interestworld, delays in ~~our LRAD-X AHD and ONE VOICE mass notification products throughout the world. Revenues are expected to remain~~awarding contracts often occur, resulting in uneven ~~on a quarter over quarter basis.~~quarterly revenues. Gross profit ~~decreased~~increased compared to the same quarter in the prior year ~~due to the decrease in shipments, increased costs related to an annual maintenance contract with~~as a ~~foreign navy,~~result of higher sales and higher ~~manufacturing~~fixed overhead ~~costs.~~absorption. Operating expenses increased by ~~23%~~16.2% from ~~$2.2~~$2.6 million to $3.0 million in the quarter ended ~~June 30, 2016 to $2.7 million in the quarter ended June 30,~~December 31, 2017, primarily due to ~~increased bonus~~higher incentive expense accrual ~~of $347,171~~ based on the Company’s expectation for meeting current year financial goals, ~~non-cash share-based~~computer related expenses and increased salaries and consulting for additional engineering and sales personnel. The first quarter of ~~$153,715, and other increases. We reported an~~fiscal 2018 results, reflect a $2.7 million income tax ~~benefit~~expense including $2.5 million for a decrease to the deferred tax asset due to enactment of ~~$435,726~~the “Tax Cuts and Jobs Act” (the “Act”) on December 22, 2017, which reduces the U.S. federal corporate tax rate to 21% effective January 1, 2018. Primarily as a result of this fiscal 2018 income tax expense, we reported a net loss of ~~$528,163~~$1,683,253 for the quarter, ~~ended June 30, 2017,~~ or ~~$0.02~~$0.05 per share, compared to ~~income~~a net loss of ~~$276,922,~~$812,680, or ~~$0.01~~$0.03 per ~~diluted~~ share for the same quarter in the prior year.

Overall Business Outlook

Our ~~products continue~~product line-up continues to gain worldwide awareness and recognition through media exposure, trade show participations, product demonstrations and word of mouth as a result of positive responses and increased acceptance of our products. We believe we have a solid global brand, technology and product foundation with our LRAD-X directed product line, which we have expanded over the years to service new markets and customers for greater business growth. We have launched a line of omnidirectional products targeted to meet the needs of the large and growing mass notification ~~market, which we continue to expand to incorporate a more fully integrated solution.~~market. We believe that we have strong market opportunities for our directional and omnidirectional product offerings within the global government and military sector, as well as increasing commercial applications as a result of continued threats to governments, commerce and law enforcement, ~~defense, homeland security~~ and ~~public safety sectors, and commercial applications including maritime, oil and gas, critical infrastructure and~~in wildlife preservation and ~~control.~~control applications. We intend to continue expanding our international mass notification business, particularly in the Middle East, Europe and Asia where we believe there are greater market opportunities for our omnidirectional products. ~~We have expanded our~~Our selling network has expanded through the addition of ~~two full-time and three part-time business development employees and~~sales consultants ~~in the current year. We also continue~~as well as continuing to improve and increase our relationships with key integrators and sales representatives within the ~~U.S.~~United States and in a number of worldwide locations. However, we may continue to face challenges ~~with~~in fiscal 2018 due to continuing economic and geopolitical conditions in some international ~~regions, which impact spending for our products.~~regions. We anticipate that the new U.S. government administration will support U.S. ~~Military~~military spending, which we believe could benefit us, although there is uncertainty as to priorities and timing. We continue to pursue large business opportunities, but it is difficult to anticipate how long it will take to close these opportunities, or if they will ever ultimately come to fruition. It is also difficult to determine whether our omnidirectional product will be accepted as a viable solution in the mass notification market, which includes a number of large, well-known competitors.

Critical Accounting Policies

We have identified a number of accounting policies as critical to our business operations and the understanding of our results of operations. These are described in our consolidated financial statements located in ~~Management’s~~Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, ~~2016.~~2017. The impact and any associated risks related to these policies on our business operations is discussed below and throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results.

The methods, estimates and judgments we use in applying our accounting policies, in conformity with generally accepted accounting principles in the U.S., have a significant impact on the results we report in our financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The estimates affect the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

Comparison of Results of Operations for the Three Months Ended ~~June 30,~~ December 31, 2017 and 2016

Revenues

The following table sets forth for the periods indicated certain items of our condensed consolidated statements of operations expressed in dollars and as a percentage of net revenues. The financial information and the discussion below should be read in conjunction with the condensed consolidated financial statements and notes contained in this report.

	Three months ended																		Three months ended
	June 30, 2017						June 30, 2016												December 31, 2017						December 31, 2016
				% of Total						% of Total			Fav (Unfav)									% of Total						% of Total			Fav(Unfav)
	Amount			Revenues			Amount			Revenues			Amount			%			Amount			Revenues			Amount			Revenues			Amount			%
Revenues:
Product sales	$	3,852,676			93.3	%	$	4,753,898			94.3	%	$	(901,222	)		(19.0%	)	$	7,336,025			96.2	%	$	2,701,959			91.9	%	$	4,634,066			171.5	%
Contract and other		276,878			6.7	%		288,271			5.7	%		(11,393	)		(4.0%	)		292,542			3.8	%		239,375			8.1	%		53,167			22.2	%
Total revenues		4,129,554			100.0	%		5,042,169			100.0	%		(912,615	)		(18.1%	)		7,628,567			100.0	%		2,941,334			100.0	%		4,687,233			159.4	%

Cost of revenues		2,420,126			58.6	%		2,601,731			51.6	%		181,605			7.0	%		3,671,027			48.1	%		1,716,824			58.4	%		(1,954,203	)		(113.8	%)
Gross profit		1,709,428			41.4	%		2,440,438			48.4	%		(731,010	)		(30.0%	)		3,957,540			51.9	%		1,224,510			41.6	%		2,733,030			223.2	%

Operating expenses:
Selling, general and administrative		2,039,755			49.4	%		1,568,226			31.1	%		(471,529	)		(30.1%	)		2,188,398			28.7	%		1,966,436			66.9	%		(221,962	)		(11.3	%)
Research and development		666,244			16.1	%		632,416			12.5	%		(33,828	)		(5.3%	)		778,037			10.2	%		587,410			19.9	%		(190,627	)		(32.5	%)
Total operating expenses		2,705,999			65.5	%		2,200,642			43.6	%		(505,357	)		(23.0%	)		2,966,435			38.9	%		2,553,846			86.8	%		(412,589	)		(16.2	%)

(Loss) income from operations		(996,571	)		(24.1%	)		239,796			4.8	%		(1,236,367	)		(515.6%	)
Income (loss) from operations																				991,105			13.1	%		(1,329,336	)		(45.2	%)		2,320,441			(174.6	%)

Other income		32,682			0.8	%		30,512			0.6	%		2,170			7.1	%		34,530			0.5	%		30,128			1.0	%		4,402			14.6	%

(Loss) income from operations before income taxes		(963,889	)		(23.3%	)		270,308			5.4	%		(1,234,197	)		(456.6%	)
Income tax benefit		(435,726	)		(10.6%	)		(6,614	)		(0.1%	)		429,112		na

Net (loss) income	$	(528,163	)		(12.8%	)	$	276,922			5.5	%	$	(805,085	)		(290.7%	)
Income (loss) from continuing operations before income taxes																				1,025,635			13.4	%		(1,299,208	)		(44.2	%)		2,324,843			(178.9	%)
Income tax expense (benefit)																				2,708,888			35.5	%		(486,528	)		(16.5	%)		(3,195,416	)		na
Net loss																			$	(1,683,253	)		(22.1	%)	$	(812,680	)		(27.6	%)	$	(870,573	)		107.1	%

Revenues ~~decreased~~increased in the current quarter compared to ~~the same period in~~ the prior year due to ~~a 32% reduction in shipments~~the larger backlog at September 30, 2017 compared to the Asia Pacific region, despite a $1.9 million public safety order shipped to an Asian Pacific country during the quarter. International public safety and law enforcement continues to be a strong market for LRAD products. RevenuesSeptember 30, 2016. Sales improved in the ~~Americas increased 69% in the third~~current quarter ~~of 2017~~both AHD (up $2,559,319 or 128%) and MNS (up $2,074,748, or 297%) product lines compared to the prior ~~year quarter, primarily due to a $525,000 order from the U.S. Navy.~~year. The receipt of orders will often be uneven due to the timing of approvals or budgets. At ~~June 30,~~December 31, 2017, we had aggregate deferred revenue of ~~$65,990~~$437,945 for prepayments from customers in advance of product shipment.

Gross Profit

The ~~decrease~~increase in gross profit in the current quarter compared to the prior year was primarily due to ~~decreased revenue, increased costs related to~~the higher level of sales, partially offset by an ~~annual maintenance contract with a foreign navy, and increases~~increase in ~~fixed~~ manufacturing overhead ~~expense~~expenses to support the ~~requirements of the mass notification business.~~increased sales.

Our products have varying gross margins, so product mix may affect gross profits. In addition, our margins vary based on the sales channels through which our products are sold in a given period. We continue to implement product updates and changes, including raw material and component changes that may impact product costs. With such product updates and changes we have limited warranty cost experience and estimated future warranty costs can impact our gross margins. We do not believe that historical gross profit margins should be relied upon as an indicator of future gross profit margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased ~~by $281,720 for bonus accrual, $156,254 for non-cash share-based~~$221,962 over the prior year quarter. This reflects $209,322 higher information technology related expenses, $154,197 higher incentive compensation ~~costs, $74,735 for~~expense, $81,957 higher salaries, benefits and ~~consultants,~~consulting expense, primarily for business development and ~~$20,205 for other expenses,~~$59,885 in increased travel. The increases were offset by a ~~reduction of one-time expenses of $61,385~~$326,175 decrease in non-cash compensation, primarily due to the prior year non-recurring expense related to a Separation Agreement and General Release related to the departure of the Company’s prior ~~chief executive officer.~~CEO. A new enterprise resource planning software system was implemented in the first quarter of fiscal year 2018 and this rate of expense is not expected to recur in future periods.

We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses in the three months ended ~~June 30,~~December 31, 2017 and 2016 of ~~$272,118~~$109,322 and ~~$115,864,~~$435,497, respectively.

We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize revenue opportunities. Commission expenses will fluctuate based on the nature of our sales.

~~Research and Development Expenses~~

Research and development expenses increased compared to the prior year primarily due to $65,451 for bonus accrual, $13,381 for product development and testing expense, and $10,308 of other expenses, partially offset by a $55,312 reduction for salaries and benefits.

~~Included in research and development expenses for the three months ended June 30, 2017 and 2016 was $23,462 and $26,001 of non-cash share-based compensation costs, respectively.~~

Research and development costs vary period to period due to the timing of projects, and the timing and extent of outside consulting, design and development firms’ use. We continually improve our product offerings and we expect to continue to expand our product line in 2017 with new products, customizations and enhancements. Based on current plans, we may expend additional resources on research and development in the current year compared to the prior year.

~~Net Income~~

The ~~reduction in net income was primarily due to the~~ decrease in gross margin, and increase in operating expenses, partially offset by an increase in income tax benefit. We recognized income tax benefit of $435,726 for the three months ended June 30, 2017, compared to an income tax benefit of $6,614 for the three months ended June 30, 2016.

~~Comparison of Results of Operations for the Nine Months Ended June 30, 2017 and 2016~~

~~Revenues~~

Nine months ended

June 30, 2017

June 30, 2016

% of Total

% of Total

Fav (Unfav)

Amount

Revenue

Amount

Revenue

Amount

%

Revenues:

Product sales
$ 12,026,248 93.9 % $ 10,657,412 93.0 % $ 1,368,836 12.8 %
Contract and other
787,032 6.1 % 808,263 7.0 % (21,231 ) (2.6% )
Total revenues
12,813,280 100.0 % 11,465,675 100.0 % 1,347,605 11.8 %

Cost of revenues
6,945,496 54.2 % 6,095,413 53.2 % (850,083 ) (13.9% )
Gross profit
5,867,784 45.8 % 5,370,262 46.8 % 497,522 9.3 %

Operating expenses:

Selling, general and administrative
5,899,235 46.1 % 5,305,012 46.2 % (594,223 ) (11.2% )
Research and development
1,858,894 14.5 % 1,791,253 �� 15.6 % (67,641 ) (3.8% )
Total operating expenses
7,758,129 60.6 % 7,096,265 61.8 % (661,864 ) (9.3% )

Loss from operations
(1,890,345 ) (14.8% ) (1,726,003 ) (15.0% ) (164,342 ) (9.5% )

Other income
94,884 0.8 % 95,469 0.8 % (585 ) (0.6% )

Loss from operations before income taxes
(1,795,461 ) (14.0% ) (1,630,534 ) (14.2% ) (164,927 ) (10.1% )
Income tax benefit
(752,969 ) (5.9% ) (862,720 ) (7.5% ) (109,751 ) (12.7% )
Net loss
$ (1,042,492 ) (8.1% ) $ (767,814 ) (6.7% ) $ (274,678 ) (35.8% )

Year to date revenues increased 12% primarily due to a $1.9 million increase in mass notification revenues, which included a $1.3 million mobile mass notification order for an oil and gas application in Eurasia, tsunami warning applications, power plant security, U.S. Navy communication on carriers and amphibious ships, a U.S. maritime port, and others. Year to date revenues increased in all major geographic areas, including the Americas, Asia Pacific and Europe, Middle East and Africa and across many markets. The receipt of orders will often be uneven due to the timing of approvals or budgets. At June 30, 2017, we had aggregate deferred revenue of $65,990 for prepayments from customers in advance of product shipment.

~~Gross Profit~~

The increase in gross profit in the nine months ended June 30, 2017 was due to increased sales volume and favorable margin on product shipments, partially offset by an increase in fixed manufacturing overhead expenses to support the requirements of the mass notification business, increased warranty reserve due to increased shipments, and higher expenses related to an annual maintenance contract for a foreign navy compared to the prior year.

~~Selling, General and Administrative Expenses~~

~~The increase in selling, general and administrative expenses~~ is primarily due to ~~$535,463 for bonus accrual, $493,991 for non-cash share-based compensation~~non-recurring expense $205,460 for sales commission expense, $147,076 for salaries, benefits and consulting expense primarily for business development, $35,367 for marketing and trade shows, $29,347 for travel expenses and $44,676 of other increases, partially offset by one-time expenses of $897,157 in the prior year related to ~~our response to~~a Separation Agreement and ~~settlement of a proxy contest initiated by one of our stockholders, and separation costs~~General Release related to the departure of the Company’s prior ~~chief executive officer.~~

~~We incurred non-cash share-based compensation expenses allocated to selling, general and administrative expenses~~CEO in the ~~nine months ended June 30, 2017 and 2016 of $856,215 and $362,224, respectively.~~prior year quarter.

We may expend additional resources on the marketing and selling of our products in future periods as we identify ways to optimize potential opportunities. Commission expenses will fluctuate based on the nature of our sales.

Research and Development Expenses

Research and development expenses increased compared to the prior year primarily due to ~~$155,252~~$75,162 for ~~bonus accrual, $22,351 for~~increased product development, ~~and testing expense and $17,564 of other increases, offset by a decrease of $127,526~~$58,609 for salaries and ~~benefits.~~benefits due to increased engineering staff compared to the prior year quarter and $60,405 for bonus accrual.

Included in research and development expenses for the ~~nine~~three months ended ~~June 30,~~December 31, 2017 and 2016 was ~~$69,765~~$22,930 and ~~$76,160~~$23,375 of non-cash share-based compensation costs, respectively.

Research and development costs vary period to period due to the timing of projects, and the timing and extent of the use of outside consulting, design and development ~~firms’ use.~~firms. We continually improve our product offerings and we expect to continue to expand our product line in ~~2017~~2018 with new products, customizations and enhancements. Based on current plans, we may expend additional resources on research and development in the current year compared to the prior year.

Net Loss

The increase in net loss compared to the prior year was due to income tax expense for the three months ended December 31, 2017 primarily due to ~~the increase in operating expenses and~~ a reduction in the deferred tax asset resulting from the change to the U.S. Corporate income tax ~~benefit,~~rates effective for the calendar year ended December 31, 2018. The additional non-cash expense was partially offset by an increase in gross ~~margin.~~profit. We recognized an income tax benefit of ~~$752,969 and $862,720~~$486,528 for the ~~nine~~three months ended ~~June 30, 2017 and 2016, respectively.~~December 31, 2016.

Liquidity and Capital Resources

Cash and cash equivalents at ~~June 30,~~December 31, 2017 was ~~$14,376,387,~~$15,117,544, compared to ~~$13,466,711~~$12,803,887 at September 30, ~~2016,~~2017 primarily as a result of cash generated from operations. Other than cash and expected future cash flows from operating activities in subsequent periods, we have no unused sources of liquidity at this time.

Principal factors that could affect our liquidity include:

~~ability to meet sales projections;~~

●

ability to meet sales projections;

~~government spending levels;~~

●

government spending levels;

●

introduction of competing technologies;

~~introduction of competing technologies;~~

●

product mix and effect on margins;

~~product mix and effect on margins;~~

●

ability to reduce current inventory levels;

~~ability to reduce current inventory levels;~~

●

product acceptance in new markets;

~~product acceptance in new markets; and~~

●

value of shares repurchased; and

~~value of shares repurchased.~~

●

value of dividends declared.

Principal factors that could affect our ability to obtain cash from external sources include:

~~volatility in the capital markets; and~~

●

volatility in the capital markets; and

~~market price and trading volume of our common stock.~~

●

market price and trading volume of our common stock.

Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the next twelve months. However, we operate in a rapidly evolving and unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that we may not be required to raise additional funds through the sale of equity or debt securities or from credit facilities. Additional capital, if needed, may not be available on satisfactory terms, or at all.

Cash Flows

Our cash flows from operating, investing and financing ~~activities,~~activities, as reflected in the condensed consolidated statements of cash flows, are summarized in the table below:

	Nine months ended						Three Months Ended
	June 30,						December 31,
	2017			2016			2017		2016
Cash provided by (used in):
Cash provided by:
Operating activities	$	990,602			184,933		$	1,753,585	$	1,428,286
Investing activities		(80,926	)		(251,197	)		400,554		69,026
Financing activities		-			(2,703,106	)		159,518		-

Operating Activities

Net loss of ~~$1,042,492~~$1,683,253 for the ~~nine~~three months ended ~~June 30,~~December 31, 2017 was decreased by ~~$96,441~~$2,960,116 of non-cash items that included a reduction to deferred income taxes primarily resulting from enactment of the “Act”, share-based compensation, ~~inventory obsolescence and~~ depreciation and ~~amortization.~~amortization, warranty provision, and inventory obsolescence. Cash provided by operating activities in the current year reflected an increase in accounts payable of ~~$1,223,342~~$790,635 due to ~~increased inventory purchases, a decrease~~the timing of payments, decreases in ~~accounts receivable~~prepaid expenses and other of ~~$1,024,797,~~$393,761, an increase in accrued and other liabilities of ~~$291,725 primarily for increased accrued bonuses and commissions, partially offset by~~$311,483, a ~~reduction~~decrease in ~~deferred revenue consisting of prepayments from customers, and~~ other assets of ~~$180,063.~~$46,874 and a decrease in accounts receivable of $3,662. Cash used in operating activities included a decrease in payroll and related of $1,023,538 primarily for payment of incentive compensation earned in fiscal 2017, an increase in inventory of ~~$760,351~~$43,001 and ~~an increase in prepaid expenses and other~~warranty settlements of ~~$22,923.~~ $3,154.

Net loss of ~~$767,814~~$812,680 for the ~~nine~~three months ended ~~June 30,~~December 31, 2016 was ~~increased~~decreased by ~~$262,011~~$20,447 of non-cash items that included deferred income taxes, share-based compensation, depreciation and amortization, warranty provision, ~~for doubtful accounts~~ and inventory obsolescence. Cash provided by operating activities in the current year reflected ~~an increase~~a decrease in ~~accrued and other liabilities~~accounts receivable of ~~$1,038,416, primarily for payroll costs related~~$1,929,765 due to the ~~separation agreement with the Company’s prior CEO and other payroll expenses for June 30, 2016 that were not paid until July 1, 2016. It also reflected~~collection of a high year-end balance, an increase in accounts payable of ~~$750,313,~~$500,042 due to the timing of payments, payroll and ~~a decrease~~related of $180,766 primarily for accrued bonuses, and decreases in prepaid expenses and other of $80,378 and other assets of ~~$140,613.~~$46,871. Cash used in operating activities included an increase in ~~accounts receivable~~inventory of ~~$442,115, an increase~~$327,680, a decrease in ~~inventories of $257,354, an increase in prepaid expenses~~accrued and other liabilities of ~~$15,115~~$176,881 for decreased deferred revenue for customer prepayments and warranty settlements of ~~$31,949.~~$12,742.

We had accounts receivable of ~~$2,384,115~~$5,678,220 at ~~June 30,~~December 31, 2017, compared to ~~$3,408,912~~$5,681,882 at September 30, ~~2016.~~2017. The level of trade accounts receivable at ~~June 30,~~December 31, 2017 represented approximately 5368 days of revenues compared to 6470 days of revenues at September 30, ~~2016,~~2017 due to the ~~lower receivables balance at June 30,~~timing of shipments and related collections in this quarter compared to the fourth fiscal quarter of 2017. Terms with individual customers vary greatly. We typically require thirty-day terms from our customers if credit is approved. Our receivables can vary dramatically due to overall sales volume, quarterly variations in sales, timing of shipments to and receipts from large customers, payment terms, and the timing of contract payments.

~~Our~~At December 31 and September 30, 2017, our working capital ~~decreased slightly~~was $26,485,964 and $25,412,106 respectively. The increase in working capital was primarily due to cash generated from ~~$23,093,684 at September 30, 2016, to $23,008,146 at June 30, 2017.~~operations.

Investing Activities

In the ~~nine~~three months ended ~~June 30,~~December 31, 2017, we decreased our holding of short and long-term marketable securities by ~~$98,598,~~$454,721, compared to ~~an $81,476 increase~~sales of $84,610 in the ~~nine~~three months ended ~~June 30,~~December 31, 2016.

We also use cash in investing activities primarily for the purchase of tooling, computer equipment and software, and investment in new or existing patents. Cash used in investing activities for ~~equipment~~tooling and patents was ~~$179,524~~$54,167 and ~~$169,721~~$15,584 for the ~~nine~~three months ended ~~June 30,~~December 31, 2017 and 2016, respectively. We anticipate some additional ~~expenditure~~expenditures for equipment ~~and software~~ during the balance of fiscal year ~~2017.~~2018.

Financing Activities

In the ~~nine~~three months ended ~~June 30,~~December 31, 2017, ~~we did not use any~~ cash ~~for financing activities.~~provided from the exercise of stock options was $159,518. In the ~~nine~~three months ended ~~June 30,~~December 31, 2016, we ~~used $1,748,456 for the repurchase of common stock and $954,650 for the payment of~~had no cash ~~dividends.~~from financing activities.

The Board of Directors approved a share buyback program in 2013 under which the Company was authorized to repurchase up to $4 million of its outstanding common shares. There were no shares repurchased during the quarters ended December 31, 2017 and 2016, respectively. At December 31, 2017, all repurchased shares were retired. In December 2017, the Board of Directors extended the program through December 31, 2018.

Recent Accounting Pronouncements

New pronouncements issued for future implementation are discussed in Note 3, Recent Accounting Pronouncements, to our condensed consolidated financial statements.

Item~~Item~~ 3.

Qua~~Quantitative~~ntitative and ~~Qualitative~~Qualitative Disclosures about Market Risk.

Foreign Currency Risk

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, all sales to customers and all arrangements with third-party manufacturers, with one exception, provide for pricing and payment in U.S. dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the U.S. dollar relative to other currencies could make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the U.S. dollar relative to other currencies could result in our suppliers raising their prices to continue doing business with us. Fluctuations in currency exchange rates could affect our business in the future.

Item~~Item~~ 4.

Controls and Procedures.

We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of our disclosure controls and procedures as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of ~~June 30,~~December 31, 2017.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during our fiscal quarter ended ~~June 30,~~December 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies, which may be identified during this process.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

We may at times be involved in litigation in the ordinary course of business. We will also, from time to time, when appropriate in ~~management’s~~management’s estimation, record adequate reserves in our consolidated financial statements for pending litigation. Currently, there are no pending material legal proceedings to which the Company is a party or to which any of its property is subject.

Item~~Item~~ 1A.

Risk ~~Factors.~~Factors.

As a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.

Item~~Item~~ 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None

Item~~Item~~ 3. Defaults Upon Senior Securities.

None.

Item~~Item~~ 4.

Mine Safety ~~Disclosures.~~Disclosures.

Not Applicable.

Item~~Item~~ 5.

Other Information.

None.

Item~~Item~~ 6.

~~Exhibits.~~Exhibits.


31.1	Certification of Richard S. Danforth, Principal Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2	Certification of ~~Katherine H. McDermott,~~Dennis D. Klahn, Principal Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Richard S. Danforth, Principal Executive Officer and ~~Katherine H. McDermott,~~Dennis D. Klahn, Principal Financial Officer.*

101.INS	XBRL Instance DocumentDocument

101.SCH	~~XBRL~~XBRL Taxonomy Extension Schema Document*

101.CAL	XBRL Taxonomy Extension Calculation Linkbase DocumentDocument

101.DEF	XBRL Taxonomy Extension Definition Linkbase DocumentDocument

101.LAB	XBRL Taxonomy Extension Label Linkbase DocumentDocument

101.PRE	XBRL Taxonomy Extension Presentation Linkbase DocumentDocument

*	Filed concurrently herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	LRAD CORPORATION

Date: ~~August 9, 2017~~ February 8, 2018	By:	/s/ ~~KATHERINE H. MCDERMOTT~~ DENNIS D. KLAHN
		Dennis D. Klahn~~Katherine H. McDermott,~~, Chief Financial Officer
		(Principal Financial Officer)

	September 30, 2016
			Unrealized			Fair		Cash		Short-term		Long-term
	Cost Basis		Losses			Value		Equivalents		Securities		Securities

Level 1:
Money Market Funds	$	95,538	$	-		$	95,538	$	95,538	$	-	$	-

Level 2:
Certificates of deposit	$	3,236,168	$	-		$	3,236,168	$	-	$	1,299,133	$	1,937,035
Municipal securities		140,637		-			140,637		-		140,637		-
Corporate bonds		1,748,404		(1,549	)		1,746,855		-		1,496,354		250,501
Subtotal		5,125,209		(1,549	)		5,123,660		-		2,936,124		2,187,536

Total	$	5,220,747	$	(1,549	)	$	5,219,198	$	95,538	$	2,936,124	$	2,187,536

	Number			Weighted Average
	of Shares			Exercise Price
Outstanding October 1, 2016		4,404,002		$	2.18
Granted		464,000		$	1.70
Forfeited/expired		(15,000	)	$	1.66
Outstanding June 30, 2017		4,853,002		$	2.14
Exercisable June 30, 2017		3,372,123		$	2.22