Edgar Filing: LUNA INNOVATIONS INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

_____________________________________

FORM 10-Q

_____________________________________



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

For the quarterly period ended September 30, 2018



¨	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 000-52008

_____________________________________

LUNA INNOVATIONS INCORPORATED

(Exact name of registrant as specified in its charter)

_____________________________________



Delaware		54-1560050
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

301 First Street SW, Suite 200

Roanoke, VA 24011

(Address of Principal Executive Offices)

(540) 769-8400

(Registrant’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. ý Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ý Yes ¨ No

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

Large accelerated filer o Accelerated filer o

Non-accelerated filer o Smaller reporting company ý

Emerging growth company o

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. o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 7, 2018, there were 27,936,401 shares of the registrant’s common stock outstanding.

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LUNA INNOVATIONS INCORPORATED

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2018

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PART I. FINANCIAL INFORMATION		3
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34
ITEM 4.	CONTROLS AND PROCEDURES	35
PART II. OTHER INFORMATION		36
ITEM 1.	LEGAL PROCEEDINGS	36
ITEM 1A.	RISK FACTORS	36
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	54
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	54
ITEM 4.	MINE SAFETY DISCLOSURES	54
ITEM 5.	OTHER INFORMATION	54
ITEM 6.	EXHIBITS	54
SIGNATURES		56

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PART I. FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

Luna Innovations Incorporated

Consolidated Balance Sheets



	September 30, 2018			December 31, 2017
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	47,144,719		$	36,981,533
Accounts receivable, net	9,110,713			5,929,042
Receivable from sale of HSOR business	4,002,342			4,000,976
Contract assets	2,611,122			1,778,142
Inventory	5,462,414			4,634,781
Prepaid expenses and other current assets	730,368			1,140,999
Current assets held for sale	—			4,336,105
Total current assets	69,061,678			58,801,578
Long-term contract assets	343,492			209,699
Property and equipment, net	2,678,411			2,854,641
Intangible assets, net	1,709,003			1,727,390
Other assets	1,995			1,995
Non-current assets held for sale	—			2,627,333
Total assets	$	73,794,579		$	66,222,636
Liabilities and stockholders’ equity
Liabilities:
Current liabilities:
Current portion of long-term debt obligations	$	1,073,571		$	1,833,333
Current portion of capital lease obligations	39,748			43,665
Accounts payable	2,297,457			2,111,077
Accrued liabilities	6,589,310			6,547,230
Contract liabilities	1,548,371			3,318,379
Current liabilities held for sale	—			972,451
Total current liabilities	11,548,457			14,826,135
Long-term deferred rent	1,072,696			1,184,438
Long-term debt obligations	—			603,007
Long-term capital lease obligations	83,405			71,275
Total liabilities	12,704,558			16,684,855
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.001, 1,321,514 shares authorized, issued and outstanding at September 30, 2018 and December 31, 2017, respectively	1,322			1,322
Common stock, par value $0.001, 100,000,000 shares authorized, 29,189,506 and 28,354,822 shares issued, 27,936,401 and 27,283,918 shares outstanding at September 30, 2018 and December 31, 2017, respectively	30,081			29,186
Treasury stock at cost, 1,253,105 and 1,070,904 shares at September 30, 2018 and December 31, 2017, respectively	(2,116,640		)	(1,649,746		)
Additional paid-in capital	85,353,909			83,563,208
Accumulated deficit	(22,178,651		)	(32,406,189		)
Total stockholders’ equity	61,090,021			49,537,781
Total liabilities and stockholders’ equity	$	73,794,579		$	66,222,636

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The accompanying notes are an integral part of these consolidated financial statements.

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Luna Innovations Incorporated

Consolidated Statements of Operations



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
	(unaudited)						(unaudited)
Revenues:
Technology development	$	5,315,861		$	4,590,054		$	15,418,919		$	13,428,428
Products and licensing	5,371,165			3,712,657			13,960,003			9,791,213
Total revenues	10,687,026			8,302,711			29,378,922			23,219,641
Cost of revenues:
Technology development	3,918,666			3,491,840			11,131,965			10,045,261
Products and licensing	2,079,749			1,469,961			5,381,333			3,994,044
Total cost of revenues	5,998,415			4,961,801			16,513,298			14,039,305
Gross profit	4,688,611			3,340,910			12,865,624			9,180,336
Operating expense:
Selling, general and administrative	3,233,485			2,831,493			9,898,064			8,983,016
Research, development and engineering	873,629			662,142			2,513,497			1,961,770
Total operating expense	4,107,114			3,493,635			12,411,561			10,944,786
Operating income/(loss)	581,497			(152,725		)	454,063			(1,764,450		)
Other income/(expense):
Investment income	171,896			—			350,976			—
Other income/(expense)	8,319			13,733			(16,001		)	26,286
Interest expense	(28,029		)	(54,847		)	(103,208		)	(178,879		)
Total other income/(expense)	152,186			(41,114		)	231,767			(152,593		)
Income/(loss) from continuing operations before income taxes	733,683			(193,839		)	685,830			(1,917,043		)
Income tax benefit	(559,093		)	(388,787		)	(674,329		)	(662,049		)
Net income/(loss) from continuing operations	1,292,776			194,948			1,360,159			(1,254,994		)
(Loss)/income from discontinued operations, net of income tax of $216,813, $(91,705), $235,312, and $249,184	(56,418		)	465,710			1,132,436			337,904
Gain on sale, net of income taxes of $1,866,232 and $1,508,373	7,612,044			15,096,666			7,571,810			15,096,666
Net income from discontinued operations	7,555,626			15,562,376			8,704,246			15,434,570
Net income	8,848,402			15,757,324			10,064,405			14,179,576
Preferred stock dividend	63,235			33,699			190,895			97,331
Net income attributable to common stockholders	$	8,785,167		$	15,723,625		$	9,873,510		$	14,082,245
Net income/(loss) per share from continuing operations:
Basic	$	0.05		$	0.01		$	0.05		$	(0.05	)
Diluted	$	0.04		$	0.01		$	0.04		$	(0.05	)
Net income per share from discontinued operations:
Basic	$	0.27		$	0.56		$	0.32		$	0.56
Diluted	$	0.23		$	0.48		$	0.27		$	0.56
Net income per share attributable to common stockholders:
Basic	$	0.31		$	0.57		$	0.36		$	0.51
Diluted	$	0.27		$	0.48		$	0.30		$	0.51
Weighted average common shares and common equivalent shares outstanding:

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Basic	27,901,631	27,692,539	27,547,955	27,611,905
Diluted	33,055,881	32,714,389	32,721,860	27,611,905

The accompanying notes are an integral part of these consolidated financial statements.

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Luna Innovations Incorporated

Consolidated Statements of Cash Flows



	Nine Months Ended September 30,
	2018			2017
	(unaudited)
Cash flows (used in)/provided by operating activities
Net income	$	10,064,405		$	14,179,576
Adjustments to reconcile net income to net cash (used in)/provided by operating activities
Depreciation and amortization	898,215			2,241,867
Share-based compensation	345,582			476,428
Bad debt expense	6,000			40,753
(Gain)/loss on disposal of fixed assets	(1,000		)	3,640
Gain on sale of discontinued operations	(7,571,810		)	(15,096,666		)
Change in assets and liabilities
Accounts receivable	(4,056,716		)	2,127,794
Contract assets	(957,012		)	—
Inventory	(992,075		)	(2,251,236		)
Other current assets	482,155			380,858
Accounts payable and accrued expenses	243,965			(1,581,608		)
Contract liabilities	(1,906,117		)	—
Deferred revenue	—			59,980
Net cash (used in)/provided by operating activities	(3,444,408		)	581,386
Cash flows provided by investing activities
Acquisition of property and equipment	(272,039		)	(893,698		)
Intangible property costs	(277,068		)	(392,485		)
Proceeds from sale of property and equipment	1,000			3,000
Proceeds from sales of discontinued operations	14,775,541			28,026,528
Net cash provided by investing activities	14,227,434			26,743,345
Cash flows used in financing activities
Payments on capital lease obligations	(33,064		)	(38,753		)
Payments of debt obligations	(1,375,000		)	(1,374,999		)
Repurchase of common stock	(466,894		)	(228,020		)
Proceeds from the exercise of options and warrants	1,255,118			29,020
Net cash used in financing activities	(619,840		)	(1,612,752		)
Net increase in cash and cash equivalents	10,163,186			25,711,979
Cash and cash equivalents—beginning of period	36,981,533			12,802,458
Cash and cash equivalents—end of period	$	47,144,719		$	38,514,437
Supplemental disclosure of cash flow information
Cash paid for interest	$	97,867		$	173,275
Cash paid for income taxes	$	7,686		$	41,131
Non-cash investing and financing activities
Dividend on preferred stock, 59,469 shares of common stock issuable	$	190,895		$	97,331

The accompanying notes are an integral part of these consolidated financial statements.

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Luna Innovations Incorporated

Notes to Unaudited Consolidated Financial Statements


1.	Basis of Presentation and Significant Accounting Policies

Nature of Operations

Luna Innovations Incorporated (“we,” “Luna Innovations” or the “Company”), headquartered in Roanoke, Virginia, was incorporated in the Commonwealth of Virginia in 1990 and reincorporated in the State of Delaware in April 2003. We are a leader in advanced optical technology, providing unique capabilities in high performance fiber optic test products for the telecommunications industry and distributed fiber optic sensing for the aerospace and automotive industries. Prior to the sale of our optoelectronics business in July 2018 (See Note 2), we also developed and manufactured custom optoelectronic components and sub-assemblies for various industrial applications. We are organized into two reportable segments, which work closely together to turn ideas into products: our Technology Development segment and our Products and Licensing segment. Our business model is designed to accelerate the process of bringing new and innovative technologies to market.

Unaudited Interim Financial Information

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United Stated of America (“U.S. GAAP”) for interim financial statements and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. The unaudited consolidated interim financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management reflect all adjustments, consisting of only normal recurring accruals considered necessary to present fairly our financial position at September 30, 2018, results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017. The results of operations for the three and nine months ended September 30, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The consolidated balance sheet as of December 31, 2017 was derived from our audited consolidated financial statements.

The consolidated interim financial statements, including our significant accounting policies, should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2017, included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 21, 2018.

Reclassifications

Certain amounts in the prior period have been reclassified to conform to current presentation. As a result of the adoption of Accounting Standards Codification ("ASC") 2014-09, Revenue from Contracts with Customers (Topic 606), we presented balances entitled contract assets and contract liabilities within the consolidated balance sheet as well as the impact of the changes in these balances within the consolidated statement of cash flows. We reclassified comparable balances within the December 31, 2017 consolidated balance sheet as well as the impact of changes in those balances within the consolidated statement of cash flows in order to enhance comparability. These reclassifications had no effect on our reported financial condition, results of operations, or cash flows. Any other reclassifications were immaterial to the consolidated interim financial statements taken as a whole.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants. Various valuation approaches can be used to determine fair value, each requiring different valuation inputs. The following hierarchy classifies the inputs used to determine fair value into three levels:


•	Level 1—Quoted prices for identical instruments in active markets


•	Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets


•	Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable

The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term nature of these instruments. The carrying value of our debt approximates fair value, as we consider the floating interest

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rate on our credit facilities with Silicon Valley Bank ("SVB") to be at market for similar instruments. Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis in accordance with U.S. GAAP. This includes items such as non-financial assets and liabilities initially measured at fair value in a business combination and non-financial long-lived asset groups measured at fair value for an impairment assessment. In general, non-financial assets including intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized.

Net Income/(Loss) Per Share

Basic per share data is computed by dividing our net income/(loss) by the weighted average number of shares outstanding during the period. Diluted per share data is computed by dividing net income/(loss), if applicable, by the weighted average shares outstanding during the period increased to include, if dilutive, the number of additional common share equivalents that would have been outstanding if potential shares of common stock had been issued using the treasury stock method. Diluted per share data would also include the potential common share equivalents relating to convertible securities by application of the if-converted method.

The effects of 5.2 million and 5.0 million common stock equivalents (which include outstanding warrants, preferred stock and stock options) are included for the diluted per share data for the three months ended September 30, 2018 and 2017, respectively. The effect of 5.2 million common stock equivalents are included for the diluted per share data for the nine months ended September 30, 2018. The effect of 4.9 million common stock equivalents are not included for the nine months ended September 30, 2017, as they are anti-dilutive to earnings per share due to our net loss from continuing operations.

Recently Issued Accounting Pronouncements

Effective January 1, 2018, we adopted Revenue from Contracts with Customers (Topic 606), using the modified retrospective transition method. Under the modified retrospective approach, we apply the standards to new contracts and those that were not completed as of January 1, 2018. For those contracts not completed as of January 1, 2018, this method resulted in a cumulative adjustment to decrease the accumulated deficit in the net amount of $0.4 million. Prior periods will not be retrospectively adjusted, but we will maintain dual reporting for the year of initial application in order to maintain comparability of the periods presented. The cumulative effect of the changes made to our January 1, 2018 unaudited consolidated balance sheet for the adoption of Topic 606 was as follows:



	Balance at			Adjustment for		Adjusted balance at
	December 31, 2017			Topic 606		January 1, 2018
Assets:
Current assets held for sale	$	4,336,105		$	379,891	$	4,715,996

Liabilities:
Contract liabilities	$	3,318,379		$	2,250	$	3,320,629
Current liabilities held for sale	$	862,205		$	23,613	$	885,818

Stockholders' equity:
Accumulated deficit	$	(32,406,189	)	$	354,028	$	(32,052,161	)

Contract assets were formerly reported as unbilled accounts receivable. Contract liabilities were formerly reported as accrued liabilities or deferred revenue. Inventory was also impacted by the adoption of the new guidance. The titles have been changed in the table below to be consistent with accounts currently used under the new standard.

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	December 31, 2017
	As Reported		As Adopted
Accounts receivables, net	$	9,857,009	$	5,929,042
Contract assets	—		1,778,142
Current assets held for sale	—		1,940,126
Long-term contract assets	—		209,699
Accrued liabilities	8,959,935		6,547,230
Contract liabilities	—		3,318,379
Current liabilities held for sale	—		120,665
Deferred revenue	1,026,339		—

Under the new standard, contracts in our Technology Development segment, which primarily provide research services, are not materially impacted upon the adoption of Topic 606 as revenue will continue to be recognized over time using an input model. Contracts in our Products and Licensing segment generally provide for the following revenue sources: standard product sales, custom product development and sales, product rental, extended warranties, training/service, and certain royalties. Revenues for this segment are recognized using either the “point in time” or “over time” methods of Topic 606, depending upon the revenue source. The major change in revenue recognition for the Products and Licensing segment related to custom optoelectronic products which changed from “point in time” to “over time” upon the adoption of Topic 606. This change results in the acceleration of revenue when compared to existing standards with the cumulative adjustment relating to contracts that are not complete as of December 31, 2017 recognized as an adjustment to opening accumulated deficit on January 1, 2018. The revenue received from our custom optoelectronic products segment is included as part of our discontinued operations section (Note 2) and shown above in the current assets and liabilities held for sale as of December 31, 2017. Our revenue for our standard products will continue to be recognized using the "point in time" model of Topic 606, and the timing of such revenue recognition is not expected to differ materially from our historical revenue recognition. Other immaterial adjustments related to the Products and Licensing segment that are sometimes offered to customers include discounts on future purchases related to rental agreements, customer rights of return, and volume discounts.

Technology Development Revenues

We perform research and development for U.S. Federal government agencies, educational institutions and commercial organizations. We account for a research contract when a contract has been executed, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of the contract price is considered probable. Revenue is earned under cost reimbursable, time and materials and fixed price contracts. Direct contract costs are expensed as incurred.

Our contracts with agencies of the U.S. government are subject to periodic funding by the respective contracting agency. Funding for a contract may be provided in full at inception of the contract or ratably throughout the contract as the services are provided. In evaluating the probability of funding for purposes of assessing collectability of the contract price, we consider our previous experience with our customers, communication with our customers regarding funding status and our knowledge of available funding for the contract or program. If funding is not assessed as probable, revenue recognition is deferred until realization is reasonably assured.

Under the typical payment terms of our U.S. government contracts, the customer pays us either performance-based payments ("PBPs") or progress payments. PBPs, which are typically used in the firm fixed price contracts, are interim payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments, which are typically used in our cost type contracts, are interim payments based on costs incurred as the work progresses. For our U.S. government cost-type contracts, the customer generally pays us during the performance period for 80%-90% of our actual costs incurred. Because the customer retains a small portion of the contract price until completion of the contract and audit of allowable costs, cost type contracts generally result in revenue recognized in excess of billings which we present as contract assets on the balance sheet. Amounts billed and due from our customers are classified as receivables on the balance sheet. For non-U.S. government contracts, we typically receive interim payments as work progresses, although for some contracts, we may be entitled to receive an advance payment. We recognize a liability for these advance payments and PBPs paid in advance which are in excess of the revenue recognized and present these amounts as contract liabilities on the balance sheet.

To determine the proper revenue recognition method for research and development contracts, we evaluate whether two or more contracts should be combined and accounted for as one single modified contract and whether the combined or single contract should

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be accounted for as more than one performance obligation. For instances where a contract has options that were bid with the initial contract and awarded at a later date, we combine the options with the original contract when options are awarded. For most of our contracts, the customer contracts for research with multiple milestones that are interdependent. Consequently, the entire contract is accounted for as one performance obligation. The effect of the combined or modified contract on the transaction price and measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

Contract revenue recognition is measured over time as we perform because of continuous transfer of control to the customer. For U.S. government contracts which are typically subject to the Federal Acquisition Regulation ("FAR"), this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for cost incurred plus a reasonable profit and take control of any work in process. From time to time, as part of normal management processes, facts may change, causing revisions to estimated total costs or revenues expected. The cumulative impact of any revisions to estimates and the full impact of anticipated losses on any type of contract are recognized in the period in which they become known.

Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the services to be provided. We generally use the input method, more specifically the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. The underlying bases for estimating our contract research revenues are measurable expenses, such as labor, subcontractor costs and materials, and data that are updated on a regular basis for purposes of preparing our cost estimates. Our research contracts generally have a period of performance of six months to three years, and our estimates of contract costs have historically been consistent with actual results. Revisions in these estimates between accounting periods to reflect changing facts and circumstances have not had a material impact on our operating results, and we do not expect future changes in these estimates to be material. The cumulative impact of any revisions to estimates and the full impact of anticipated losses on any type of contract are recognized in the period in which they become known.

Under cost reimbursable contracts, we are reimbursed for costs that are determined to be reasonable, allowable and allocable to the contract and paid a fixed fee representing the profit negotiated between us and the contracting agency. Revenue from cost reimbursable contracts is recognized as costs are incurred plus an estimate of applicable fees earned. We consider fixed fees under cost reimbursable contracts to be earned in proportion to the allowable costs incurred in performance of the contract.

Revenue from time and materials contracts is recognized based on direct labor hours expended at contract billing rates plus other billable direct costs.

Fixed price contracts may include either a product delivery or specific service performance throughout a period. For fixed price contracts that are based on the proportional performance method and involve a specified number of deliverables, we recognize revenue based on the proportion of the cost of the deliverables compared to the cost of all deliverables included in the contract as this method more accurately measures performance under these arrangements. For fixed price contracts that provide for the development and delivery of a specific prototype or product, revenue is recognized based upon the percentage of completion method.

Whether certain costs under government contracts are allowable is subject to audit by the government. Certain indirect costs are charged to contracts using provisional or estimated indirect rates, which are subject to later revision based on government audits of those costs. Management is of the opinion that costs subsequently disallowed, if any, would not likely have a significant impact on revenues recognized for those contracts.

Products and Licensing Revenues

We produce standard and customized products for commercial organizations, educational institutions, and U.S. Federal government agencies. In addition we will also offer extended warranties, product rentals, and services which include testing, training, or repairs for specific products. Customers also pay royalties as agreed based on sales or usage. We account for product and related items when a contract has been executed, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of the contract price is considered probable.

To determine the proper revenue recognition method for Products and Licensing contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. We recognize revenue when the performance obligation has been satisfied by

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transferring the control of the product or service to the customer. For tangible products that contain software that is essential to the tangible product’s functionality, we consider the product and software to be a single performance obligation and recognize revenue accordingly. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation based on their relative stand-alone selling prices. In such circumstances, we use the observable price of goods or services which are sold separately in similar circumstances to similar customers. If these prices are not observable, then we will estimate the stand-alone selling price using information that is reasonably available. For the majority of our standard products and services, price list and discount structures related to customer type are available. For products and services that do not have price list and discount structures, we may use one or more of the following: (i) adjusted market assessment approach, (ii) expected cost plus a margin approach, and (iii) residual approach. The adjusted market approach requires us to evaluate the market in which we sell goods or services and estimate the price that a customer in that market would be willing to pay for those goods or services. The expected cost plus margin approach requires us to forecast our expected costs of satisfying the performance obligation and then add a reasonable margin for that good or service. The residual approach decreases the total transaction price by the sum of the observable standalone selling prices if either the company sells the same good or services to different customers for a broad range of amounts or the company has not established a price for the good or service and that good or service has not been sold on a standalone basis. Shipping and handling activities primarily occur after a customer obtains control and are considered fulfillment cost rather than separate performance obligations. Similarly, sales and similar taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer are excluded from the measurement of the transaction price.

For standard products, we recognize revenue at a point in time when control passes to the customer. Absent substantial product acceptance clauses, this is based on the shipping terms. For custom products that require engineering and development based on customer requirements, we will recognize revenue over time using the output method for any items shipped and any finished goods or work in process that is produced for balances of open sales orders. For any finished goods or work in process that has been produced for the balance of open sales orders we recognize revenue by applying the average selling price for such open order to the lesser of the on hand balance in finished goods or open sales order quantity which we present as a contract asset on the balance sheet. Cost of sales is recognized based on the standard cost of the finished goods and work in process associated with this revenue and inventory balances are reduced accordingly. For extended warranties and product rentals, revenue is recognized over time using the output method based on the time elapsed for the warranty or service period. In the case of warranties, we record a contract liability for amounts billed but that are not recognized until subsequent period. A separate contract liability is recorded for the cost associated with warranty repairs based on our estimate of future expense. For testing services where we are performing testing on an asset the customer controls, revenue is recognized over time by the output method using the performance to date. For training where the customer is receiving the benefit of training as it is occurring and for repairs to a customer controlled asset, revenue is recognized over time by the output method using the performance to date. For royalty revenue, we apply the practical expedient “royalty exception” recognizing revenue based on the royalty agreement which specifies an amount based on sales or minimum amount, whichever is greater.

In some product rental contracts, a customer may be offered a discount on the purchase of an item that would provide for a material right. When a material right has been provided to a customer, a separate performance obligation is established and a portion of the rental revenue will be deferred until the future product is purchased or the option expires. This deferred revenue is recognized as a contract liability on the balance sheet. In certain circumstances we may offer a "right of return" to a distributor of our products, in which case a contract liability is calculated based on the terms of the agreement and recorded as a reduction to revenue. In addition, a contract asset for the rights to recover products from customers and a reduction of cost of sales is also calculated and recorded.

Unfulfilled performance obligations represent amounts expected to be earned on executed contracts. Indefinite delivery and quantity contracts and unexercised options are not reported in total unfulfilled performance obligations. Unfulfilled performance obligations include funded obligations, which is the amount for which money has been directly authorized by the U.S. government and for which a purchase order has been received by a commercial customer, and unfunded obligations, representing firm orders for which funding has not yet been appropriated. The approximate value of our Technology Development segment unfulfilled performance obligations was $28.8 million at September 30, 2018. We expect to satisfy 25% of the performance obligations in 2018, 54% in 2019 and the remaining by 2022. The approximate value of our Products and Licensing segment unfulfilled performance obligations was $1.8 million at September 30, 2018. We expect to satisfy 84% of the performance obligations in 2018, 8% in 2019 and the remaining by 2023.

We disaggregate our revenue from contracts with customers by geographic locations, customer-type, contract type, timing of recognition, and major categories for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the tables below.

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		Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
		(unaudited)						(unaudited)
		Technology Development		Products and Licensing		Total		Technology Development		Products and Licensing		Total
Total Revenue by Geographic Location
	United States	$	5,315,861	$	3,251,602	$	8,567,463	$	15,418,919	$	7,961,048	$	23,379,967
	Asia	—		1,143,767		1,143,767		—		3,280,348		3,280,348
	Europe	—		899,683		899,683		—		2,542,017		2,542,017
	Canada, Central and South America	—		1,330		1,330		—		99,807		99,807
	All Others	—		74,783		74,783		—		76,783		76,783
	Total	$	5,315,861	$	5,371,165	$	10,687,026	$	15,418,919	$	13,960,003	$	29,378,922


Total Revenue by Major Customer Type
	Sales to the U.S. government	$	5,216,389	$	977,076	$	6,193,465	$	15,284,661	$	1,364,755	$	16,649,416
	U.S. direct commercial sales and other	99,472		2,250,656		2,350,128		134,258		6,583,006		6,717,264
	Foreign commercial sales & other	—		2,143,433		2,143,433		—		6,012,242		6,012,242
	Total	$	5,315,861	$	5,371,165	$	10,687,026	$	15,418,919	$	13,960,003	$	29,378,922


Total Revenue by Contract Type
	Fixed-price contracts	$	2,004,166	$	5,371,165	$	7,375,331	$	6,611,758	$	13,960,003	$	20,571,761
	Cost-type contracts	3,311,695		—		3,311,695		8,807,161		—		8,807,161
	Total	$	5,315,861	$	5,371,165	$	10,687,026	$	15,418,919	$	13,960,003	$	29,378,922


Total Revenue by Timing of Recognition
	Goods transferred at a point in time	$	—	$	5,190,830	$	5,190,830	$	—	$	13,505,897	$	13,505,897
	Goods/services transferred over time	5,315,861		180,335		5,496,196		15,418,919		454,106		15,873,025
	Total	$	5,315,861	$	5,371,165	$	10,687,026	$	15,418,919	$	13,960,003	$	29,378,922


Total Revenue by Major Products/Services
	Technology development	$	5,315,861	$	—	$	5,315,861	$	15,418,919	$	—	$	15,418,919
	Optical test and measurement systems	—		4,469,677		4,469,677		—		12,129,197		12,129,197
	Other	—		901,488		901,488		—		1,830,806		1,830,806
	Total	$	5,315,861	$	5,371,165	$	10,687,026	$	15,418,919	$	13,960,003	$	29,378,922

The following tables summarize the impacts of adopting Topic 606 on our consolidated financial statements as of and for the three and nine months ended September 30, 2018.

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	Impact of changes in accounting policies
	As Reported			Adjustments			Balances without adoption of Topic 606
	(unaudited)			(unaudited)			(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	47,144,719		$	—		$	47,144,719
Accounts receivable, net	9,110,713			—			9,110,713
Receivable from sale of HSOR business	4,002,342			—			4,002,342
Contract assets	2,611,122			—			2,611,122
Inventory	5,462,414			—			5,462,414
Prepaid expenses and other current assets	730,368			—			730,368
Total current assets	69,061,678			—			69,061,678
Long-term contract assets	343,492			—			343,492
Property and equipment, net	2,678,411			—			2,678,411
Intangible assets, net	1,709,003			—			1,709,003
Other assets	1,995			—			1,995
Total assets	$	73,794,579		$	—		$	73,794,579
Liabilities and stockholders’ equity
Liabilities:
Current liabilities:
Current portion of long-term debt obligations	$	1,073,571		$	—		$	1,073,571
Current portion of capital lease obligations	39,748			—			39,748
Accounts payable	2,297,457			—			2,297,457
Accrued liabilities	6,589,310			—			6,589,310
Contract liabilities	1,548,371			(3,880		)	1,544,491
Total current liabilities	11,548,457			(3,880		)	11,544,577
Long-term deferred rent	1,072,696			—			1,072,696
Long-term capital lease obligations	83,405			—			83,405
Total liabilities	12,704,558			(3,880		)	12,700,678
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.001, 1,321,514 shares authorized, issued and outstanding at September 30, 2018 and December 31, 2017, respectively	1,322			—			1,322
Common stock, par value $0.001, 100,000,000 shares authorized, 29,189,506 and 28,354,822 shares issued, 27,936,401 and 27,283,918 shares outstanding at September 30, 2018 and December 31, 2017, respectively	30,081			—			30,081
Treasury stock at cost, 1,253,105 and 1,070,904 shares at September 30, 2018 and December 31, 2017, respectively	(2,116,640		)	—			(2,116,640		)
Additional paid-in capital	85,353,909			—			85,353,909
Accumulated deficit	(22,178,651		)	3,880			(22,174,771		)
Total stockholders’ equity	61,090,021			3,880			61,093,901
Total liabilities and stockholders’ equity	$	73,794,579		$	—		$	73,794,579

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	Impact of changes in accounting policies
	Three Months Ended September 30, 2018									Nine Months Ended September 30, 2018
	As reported			Adjustments			Balances without adoption of Topic 606			As reported			Adjustments		Balances without adoption of Topic 606
	(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)		(unaudited)
Revenues:
Technology development	$	5,315,861		$	—		$	5,315,861		$	15,418,919		$	—	$	15,418,919
Products and licensing	5,371,165			(2,790		)	5,368,375			13,960,003			1,630		13,961,633
Total revenues	10,687,026			(2,790		)	10,684,236			29,378,922			1,630		29,380,552
Cost of revenues:
Technology development	3,918,666			—			3,918,666			11,131,965			—		11,131,965
Products and licensing	2,079,749			—			2,079,749			5,381,333			—		5,381,333
Total cost of revenues	5,998,415			—			5,998,415			16,513,298			—		16,513,298
Gross profit	4,688,611			(2,790		)	4,685,821			12,865,624			1,630		12,867,254
Operating expense:
Selling, general and administrative	3,233,485			—			3,233,485			9,898,064			—		9,898,064
Research, development and engineering	873,629			—			873,629			2,513,497			—		2,513,497
Total operating expense	4,107,114			—			4,107,114			12,411,561			—		12,411,561
Operating income	581,497			(2,790		)	578,707			454,063			1,630		455,693
Other income:
Investment income	171,896			—			171,896			350,976			—		350,976
Other income/(expense)	8,319			—			8,319			(16,001		)	—		(16,001		)
Interest expense	(28,029		)	—			(28,029		)	(103,208		)	—		(103,208		)
Total other income	152,186			—			152,186			231,767			—		231,767
Income from continuing operations before income taxes	733,683			(2,790		)	730,893			685,830			1,630		687,460
Income tax benefit	(559,093		)	—			(559,093		)	(674,329		)	—		(674,329		)
Net income from continuing operations	$	1,292,776		$	(2,790	)	$	1,289,986		$	1,360,159		$	1,630	$	1,361,789

Effective January 1, 2018, we adopted Accounting Standards Update ("ASU") No. 2016-15, Statement of Cash Flows (Topic 230), which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how cash receipts and cash payments are presented in the statement of cash flows. The adoption of ASU No. 2016-15 did not have a significant impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize in its statement of financial position an asset and liability for most leases with a term greater than 12 months. Lessees should recognize a liability to make lease payments and a right-of-use asset representing the lessee's right to use the underlying asset for the lease term. This guidance is effective for us in our first quarter of fiscal 2019. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides lessees an additional, and optional, transition method to apply the new leasing standard to all open leases at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. We currently plan to elect this transition method, and as a result, we will not adjust our comparative period financial information or make the required lease disclosures for periods before the effective date. We are currently evaluating the impact the adoption of ASU 2016-02 and ASU 2018-11 will have on our consolidated financial statements and expect to have increases in the assets and liabilities of our consolidated balance sheet.

In February 2018, the FASB issued ASU 2018-02: Income Statement – Reporting Comprehensive Income (Topic 220). Under current accounting guidance, the income tax effects for changes in income tax rates and certain other transactions are recognized in income from continuing operations resulting in income tax effects recognized in AOCI that do not reflect the current tax rate of the

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entity (“stranded tax effects”). The new guidance allows us the option to reclassify these stranded tax effects to accumulated deficit that relate to the change in the federal tax rate resulting from the passage of the Tax Cuts and Jobs Act. This update is effective for fiscal years beginning after December 15, 2018, including interim periods therein, and early adoption is permitted. We do not expect the adoption of this standard will have a significant impact on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This update simplifies the subsequent measurement of goodwill. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The accounting standard will be effective for reporting periods beginning after December 15, 2019. We do not expect ASU 2017-04 will have a material impact on our financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement. which amends the disclosure requirements in ASC 820 by adding, changing, or removing certain disclosures. The ASU applies to all entities that are required under this guidance to provide disclosures about recurring or nonrecurring fair value measurements. These amendments are effective for all entities for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. We do not expect ASU 2018-13 will have a material impact on our financial statements.

2. Discontinued Operations

On August 9, 2017, we completed the sale of our high speed optical receivers ("HSOR") business, which was part of our Products and Licensing segment, to an unaffiliated third party for an initial purchase price of $33.5 million, of which $29.5 million in cash has been received, and $4.0 million was placed into escrow until December 15, 2018 for potential satisfaction of certain post-closing indemnification obligations (the "Transaction"). The HSOR business was a component of the operations of Advanced Photonix, Inc., which we acquired in May 2015. The HSOR business accounted for 34.5% of revenues and 37.2% of our cost of revenues for the three months ended September 30, 2017 and 35.5% of revenues and 39.6% of our cost of revenues for the nine months ended September 30, 2017.

On July 31, 2018 , we sold the assets and operations related to our optoelectronic components and subassemblies ("Opto") business, which was part of our Products and Licensing segment, to an unaffiliated third party for an initial purchase price up to $18.5 million, of which $17.5 million was received at closing and has been properly recorded in the financial statements with the remaining purchase price adjustment up to $1.0 million which is contingent upon the attainment of specified revenue targets during the eighteen months following the closing of the sale. The purchase price is subject to adjustment in the future based upon a determination of final working capital, as defined in the asset purchase agreement. The Opto business was a component of the operations of Advanced Photonix, Inc., which we acquired in May 2015, and represented all of our operations in our Camarillo, California and Montreal, Quebec facilities.

We have reported the results of operations of both our HSOR and Opto businesses as discontinued operations in our consolidated interim financial statements. We allocated a portion of the consolidated tax expense to discontinued operations based on the ratio of the discontinued business's loss before allocations.

The following table presents a summary of the transactions related to the sales of HSOR in the nine months ended September 30, 2017 and Opto in the nine months ended September 30, 2018:

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	Nine Months Ended September 30,
	2018			2017
	(unaudited)			(unaudited)

Sale price	$	17,500,000		$	33,500,000
Less: transition services payments	—			(1,500,000		)
	17,500,000			32,000,000

Assets held for sale	(8,193,184		)	(16,851,540		)
Liabilities held for sale	989,453			2,330,052
Transaction costs	(858,227		)	(873,473		)
Income tax expense	(1,866,232		)	(1,508,373		)
Gain on sale of discontinued operations	$	7,571,810		$	15,096,666

Assets and liabilities held for sale associated with our Opto business as of December 31, 2017 were as follows:



	December 31, 2017
Assets
Current assets:
Accounts receivable, net	$	1,940,125
Inventory	2,316,329
Prepaid expenses and other assets	79,651
Total current assets	4,336,105
Property and equipment, net	599,102
Intangible assets, net	1,510,203
Goodwill	502,000
Other assets	16,028
Total non-current assets	2,627,333
Total assets held for sale	$	6,963,438
Liabilities
Current liabilities:
Accounts payable	$	851,785
Accrued liabilities	120,666
Total current liabilities	972,451
Total liabilities held for sale	$	972,451

The key components of net income from discontinued operations were as follows:

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	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018		2017
	(unaudited)						(unaudited)
Net revenues	$	1,089,681		$	4,380,747		$	8,363,606	$	16,158,672
Cost of revenues	648,652			2,945,264			5,294,268		10,806,456
Operating expenses	271,262			1,044,104			1,714,920		4,733,603
Other (expenses)/income	(9,372		)	(17,374		)	13,330		(31,525		)
Income before income taxes	160,395			374,005			1,367,748		587,088
Allocated tax expense/(benefit)	216,813			(91,705		)	235,312		249,184
Operating (loss)/income from discontinued operations	(56,418		)	465,710			1,132,436		337,904
Gain on sale, net of related income taxes	7,612,044			15,096,666			7,571,810		15,096,666
Net income from discontinued operations	$	7,555,626		$	15,562,376		$	8,704,246	$	15,434,570

For the nine months ended September 30, 2018 and 2017, cash flows provided by/(used in) operating activities for discontinued operations were $0.1 million and $(0.3) million, respectively. For the nine months ended September 30, 2018 and 2017 cash flows provided by investing activities for discontinued operations were $16.6 million and $26.6 million, respectively.


3.	Contract Balances

Our contract assets consist of unbilled amounts for technology development contracts as well as custom product contracts. Also included in contract assets are royalty revenue and carrying amounts of right of returned inventory. Long-term contract assets include the fee withholding on cost reimbursable contracts that will not be billed within a year. Contract liabilities include excess billings, subcontractor accruals, warranty expense, extended warranty revenue, right of return refund, and customer deposits.

The following table shows the significant changes in contract balances for the nine month period ending September 30, 2018:



	Contract Assets			Contract Liabilities
Opening Balance as of January 1, 2018	$	1,987,841		$	3,320,629
Revenue recognized that was included in the contract liabilities balance at the beginning of the period	—			(808,977		)
Transferred to payables from contract liabilities recognized at the beginning of the period	—			(2,052,955		)
Increases due to cash received or adjustment of estimates, excluding amounts recognized as revenue during the period	—			1,089,674
Transferred to receivables from contract assets recognized at the beginning of the period	(1,543,925		)	—
Increases as a result of cumulative catch-up adjustment arising from changes in the estimate of the stage of completion	2,510,698			—
Balance as of September 30, 2018	$	2,954,614		$	1,548,371


4.	Inventory

Inventory consists of finished goods, work-in-process and raw materials valued at the lower of cost (determined on the first-in, first-out basis) or market. We write down inventory for estimated obsolescence or unmarketable inventory in an amount

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equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions.

Components of inventory were as follows:



	September 30, 2018		December 31, 2017
	(unaudited)
Finished goods	$	1,036,581	$	762,394
Work-in-process	389,801		288,165
Raw materials	4,036,032		3,584,222
Total inventory	$	5,462,414	$	4,634,781

5. Accrued Liabilities

Accrued liabilities at September 30, 2018 and December 31, 2017 consisted of the following:



	September 30, 2018		December 31, 2017
	(unaudited)
Accrued compensation	$	4,164,573	$	5,274,005
Income tax payable	1,676,503		403,548
Accrued professional fees	104,742		117,445
Deferred rent	143,933		144,741
Royalties	231,122		290,235
Accrued interest	6,439		—
Accrued liabilities - other	261,998		317,256
Total accrued liabilities	$	6,589,310	$	6,547,230


6.	Debt

Silicon Valley Bank Facility

We currently have a Loan and Security Agreement with SVB (the "Credit Facility") under which, as amended on May 8, 2015, we have a term loan with an original borrowing amount of $6.0 million (the “Original Term Loan”). The Original Term Loan is repayable in 48 monthly installments of $125,000, plus accrued interest payable monthly in arrears, and unless earlier terminated, is scheduled to mature in May 2020. The Original Term Loan carries a floating annual interest rate equal to SVB’s prime rate then in effect plus 2%. We may prepay amounts due under the Original Term Loan at any time, subject to an early termination fee of up to 2% of the amount of prepayment.

In September 2015, we entered into the Waiver and Seventh Loan Modification Agreement, which provided an additional $1.0 million of available financing for purchases of equipment through December 31, 2015, which we fully borrowed in December 2015 (the "Second Term Loan" and, together with the Original Term Loan, the "Term Loans"). The Second Term Loan also bears interest at a floating prime rate plus 2% and is to be repaid in 35 monthly installments of $27,778 plus accrued interest.

The Credit Facility requires us to maintain a minimum cash balance of $4.0 million and to maintain at each month end a ratio of cash plus 60% of accounts receivable greater than or equal to 1.5 times the outstanding principal of the Term Loans. The Credit Facility also requires us to observe a number of additional operational covenants, including protection and registration of intellectual property rights, and certain customary negative covenants. As of September 30, 2018, we were in compliance with all covenants under the Credit Facility.

Amounts due under the Credit Facility are secured by substantially all of our assets, including intellectual property, personal property and bank accounts. In addition, the Credit Facility contains customary events of default, including nonpayment of principal, interest or other amounts, violation of covenants, material adverse change, an event of default under any subordinated debt documents, incorrectness of representations and warranties in any material respect, bankruptcy,

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judgments in excess of a threshold amount, and violations of other agreements in excess of a threshold amount. If any event of default occurs SVB may declare due immediately all borrowings under the Credit Facility and foreclose on the collateral. Furthermore, an event of default under the Credit Facility would result in an increase in the interest rate on any amounts outstanding. As of September 30, 2018, there were no events of default on the Credit Facility.

The aggregate balance under the Term Loans at September 30, 2018 and December 31, 2017, was $1.1 million and $2.5 million, respectively. One term loan, with a balance of $0.1 million and $0.3 million as of September 30, 2018 and December 31, 2017, respectively, matures on December 1, 2018. The other term loan, with a balance of $1.0 million and $2.1 million as of September 30, 2018 and December 31, 2017, respectively, matures on May 1, 2019. The effective rate of our Term Loan at September 30, 2018 was 7%.

The following table presents a summary of debt outstanding as of September 30, 2018 and December 31, 2017:



	September 30, 2018		December 31, 2017
	(unaudited)
Silicon Valley Bank Term Loan	$	1,083,333	$	2,458,333
Less: unamortized debt issuance costs	9,762		21,993
Less: current portion	1,073,571		1,833,333
Total long-term debt	$	—	$	603,007

The schedule of remaining principal payments under our Term Loans as of September 30, 2018 was as follows:



2018 (remaining three months)	458,333
2019	625,000
	$	1,083,333


7.	Capital Stock and Share-Based Compensation

We recognize share-based compensation expense based upon the fair value of the underlying equity award on the date of the grant. For restricted stock awards and restricted stock units, we recognize expense based upon the price of our underlying stock at the date of the grant. We have elected to use the Black-Scholes-Merton option pricing model to value any option or warrant awards granted. We recognize share-based compensation for such awards on a straight-line basis over the requisite service period of the awards. The risk-free interest rate is based on U.S. Treasury interest rates, the terms of which are consistent with the expected life of the stock options. The expected life is based upon historical experience of homogeneous groups within our company. We also assume an expected dividend yield of zero for all periods, as we have never paid a dividend on our common stock and do not have any plans to do so in the future.

Stock Options

A summary of the stock option activity for the nine months ended September 30, 2018 is presented below:



	Options Outstanding							Options Exercisable
	Number of Shares		Price per Share Range	Weighted Average Exercise Price		Aggregate Intrinsic Value (1)		Number of Shares	Weighted Average Exercise Price		Aggregate Intrinsic Value (1)
Balance, January 1, 2018	2,714,561		$0.61 - $6.55	$	1.88	$	2,098,195	2,590,030	$	1.89	$	2,013,034
Granted	273,212		$2.46 - $3.27	$	3.24
Exercised	(76,425	)	$0.65 - $2.46	$	2.07
Canceled	(645,421	)	$1.21 - $6.55	$	2.11
Balance, September 30, 2018	2,265,927		$0.61 - $6.23	$	1.83	$	3,239,122	1,979,179	$	1.81	$	3,149,186

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(1)	The intrinsic value of an option represents the amount by which the market value of the stock exceeds the exercise price of the option of in-the-money options only. The aggregate intrinsic value is based on the closing price of our common stock on the Nasdaq Capital Market, as applicable, on the respective dates.

At September 30, 2018, the outstanding stock options to purchase an aggregate of 2.3 million shares had a weighted-average remaining contractual term of 4.3 years, and the exercisable stock options to purchase an aggregate of 2.0 million shares had a weighted-average remaining contractual term of 3.5 years. The fair value of shares underlying vested options was $6.4 million at September 30, 2018. The fair value of shares underlying options exercised during the nine months ended September 30, 2018 was $255,102.

For the nine months ended September 30, 2018 and 2017 we recognized $0.3 million and $0.5 million in share-based compensation expense, respectively, which is included in our selling, general and administrative expense in the accompanying consolidated interim financial statements. We expect to recognize $0.6 million in share-based compensation expense over the weighted-average remaining service period of 3.8 years for stock options outstanding as of September 30, 2018.

Restricted Stock and Stock Units

For the nine months ended September 30, 2018, we issued 280,000 shares of restricted stock to certain employees. Shares of restricted stock issued to employees vest in three equal annual installments on the anniversary dates of their grant. For the nine months ended September 30, 2018, 182,500 shares of restricted stock vested.

For the nine months ended September 30, 2018, we issued 16,287 restricted stock units to certain non-employee members of our Board of Directors in respect of the annual equity grants pursuant to our non-employee director compensation policy. This amount represents the equity compensation to those non-employee directors who did not elect to defer the receipt of their equity compensation pursuant to our non-employee director deferred compensation plan described below. Restricted stock units issued to our directors vest at the earlier of the one year anniversary of their grant or the next annual stockholders' meeting. During the nine months ended September 30, 2018, 129,865 restricted stock units vested.

The following table summarizes the value of our unvested restricted stock awards and restricted stock units:



	Number of Unvested Shares		Weighted Average Grant Date Fair Value		Aggregate Value of Unvested Shares
Balance, January 1, 2018	489,698		$	1.51	$	738,345
Granted	296,287		$	3.07	909,600
Vested	(312,365	)	$	2.75	(454,339		)
Forfeitures	(15,000	)	$	1.41	(21,150		)
Balance, September 30, 2018	458,620		$	2.56	$	1,172,456

Non-employee Director Deferred Compensation Plan

We maintain a non-employee director deferred compensation plan (the “Deferred Compensation Plan”) that permits our non-employee directors to defer receipt of certain of the compensation that they receive for serving on our board and board committees. The Deferred Compensation Plan has historically permitted the participants to elect to defer cash fees to which they were entitled for board and committee service. For participating directors, in lieu of payment of cash fees, we credit their accounts under the Deferred Compensation Plan with a number of stock units based on the trading price of our common stock as of the date of the deferral. These stock units vest immediately, although the participating directors do not receive the shares represented by such units until a future qualifying event.

In December 2017, we amended and restated our Deferred Compensation Plan to also permit participating non-employee directors to elect, beginning in 2018, to defer the receipt of some or all of the equity compensation that they receive for board and committee service. Stock units representing this equity compensation vest at the earlier of the one year anniversary of their grant or the next annual stockholders' meeting.

The following is a summary of our stock unit activity under the Deferred Compensation Plan for the nine months ended September 30, 2018:

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	Number of Stock Units	Weighted Average Grant Date Fair Value per Share	Intrinsic Value Outstanding
Balance, January 1, 2018	466,702	$1.40	$	1,134,086
Granted	80,006	$3.00
Forfeitures	—	—
Converted	—	—
Balance, September 30, 2018	546,708	$1.64	$	1,765,867

As of September 30, 2018, 48,859 of the outstanding stock units had not yet vested.

The following table details our equity transactions during the nine months ended September 30, 2018:



	Preferred Stock		Common Stock			Treasury Stock			Additional Paid-in Capital	Accumulated Deficit		Total
	Shares	$	Shares		$	Shares	$		$
Balance at January 1, 2018, as previously reported	1,321,514	1,322	27,283,918		29,186	1,070,904	(1,649,746	)	83,563,208	(32,406,189	)	49,537,781
Impact of change in accounting policy	—	—	—		—	—	—		—	354,028		354,028
As adjusted balance at January 1, 2018	1,321,514	1,322	27,283,918		29,186	1,070,904	(1,649,746	)	83,563,208	(32,052,161	)	49,891,809
Exercise of stock options	—	—	442,425		442	—	—		1,054,412	—		1,054,854
Share-based compensation	—	—	262,394		262	—	—		345,582	—		345,844
Non-cash compensation	—	—	129,865		131	—	—		199,872	—		200,003
Stock dividends to Carilion Clinic⁽¹⁾	—	—	—		60	—	—		190,835	(190,895	)	—
Net Income	—	—	—		—	—	—		—	10,064,405		10,064,405
Purchase of treasury stock	—	—	(182,201	)	—	182,201	(466,894	)	—	—		(466,894	)
Balance, September 30, 2018	1,321,514	1,322	27,936,401		30,081	1,253,105	(2,116,640	)	85,353,909	(22,178,651	)	61,090,021

(1)

The stock dividends payable in connection with Carilion Clinic’s Series A Preferred Stock will be issued subsequent to September 30, 2018. For the period from January 12, 2010, the original issue date of the Series A Preferred Stock, through September 30, 2018, the Series A Preferred Stock issued to Carilion has accrued $1,351,226 in dividends. The accrued and unpaid dividends as of September 30, 2018 will be paid by the issuance of 691,162 shares of our common stock upon Carilion’s written request.

Stock Repurchase Program

In May 2016, our board of directors authorized us to repurchase up to $2.0 million of our common stock through May 31, 2017. As of May 31, 2017, we had repurchased a total of 205,500 shares for an aggregate purchase price of $0.2 million under this stock repurchase program, after which this stock repurchase program expired.

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In September 2017, our board of directors re-instituted the stock repurchase program and authorized us to repurchase up to $2.0 million of our common stock through September 19, 2018. Our stock repurchase program does not obligate us to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. As of September 19, 2018, we had repurchased a total of 565,629 shares for an aggregate purchase price of $1.1 million under this stock repurchase program, after which this stock repurchase program expired. We currently maintain all repurchased shares under these stock repurchase programs as treasury stock.


8.	Income Taxes

We and our subsidiaries file U.S. Federal income tax returns and income tax returns in various state, local and foreign jurisdictions.

Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant variation due to several factors, including the variability in accurately predicting our pre-tax and taxable income and the mix of jurisdictions to which they relate, changes in how we do business, changes in our stock price, tax law developments (including changes in statues, regulations, case law, and administrative practices), and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount if pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.

For 2018, the anticipated effective income tax rate is expected to continue to differ from the Federal statutory rate of 21% primarily because of the release of valuation allowance related to net operating loss carryfowards expected to be used to offset taxable income in the period and certain discrete items.

We consider both positive and negative evidence when evaluating the recoverability of our deferred tax assets ("DTAs"). The assessment is required to determine whether based on all available evidence, it is more likely than not (i.e. greater than a 50% probability) that all or some portion of the DTAs will be realized in the future. As of September 30, 2018 management has concluded a full valuation allowance of the DTAs is necessary because of sufficient uncertainty in our ability to realize the benefit associated with such DTAs in the future.


9.	Operating Segments

Our operations are divided into two operating segments—“Technology Development” and “Products and Licensing”.

The Technology Development segment provides applied research to customers in our areas of focus. Our engineers and scientists collaborate with our network of government, academic and industry experts to identify technologies and ideas with promising market potential. We then compete to win fee-for-service contracts from government agencies and industrial customers who seek innovative solutions to practical problems that require new technology. The Technology Development segment derives its revenues primarily from services.

The Products and Licensing segment derives its revenues from product sales, funded product development and technology licenses.

Through September 30, 2018, our Chief Executive Officer and his direct reports collectively represented our chief operating decision makers, and they evaluated segment performance based primarily on revenues and operating income or loss. The accounting policies of our segments are the same as those described in the summary of significant accounting policies (see Note 1 to our Financial Statements, “Organization and Summary of Significant Accounting Policies,” presented in our Annual Report on Form 10-K as filed with the SEC on March 21, 2018).

The table below presents revenues and operating income/(loss) for reportable segments:

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	Three Months Ended September 30,					Nine Months Ended September 30,
	2018		2017			2018			2017
	(unaudited)					(unaudited)
Revenues:
Technology development	$	4,590,054	$	5,315,861		$	13,428,428		$	15,418,919
Products and licensing	3,712,657		5,371,165			9,791,213			13,960,003
Total revenues	$	10,687,026	$	8,302,711		$	29,378,922		$	23,219,641
Technology development operating income/(loss)	$	340,852	$	182,776		$	864,540		$	(77,323	)
Products and licensing operating income/(loss)	240,645		(335,501		)	(410,477		)	(1,687,127		)
Total operating income/(loss)	$	581,497	$	(152,725	)	$	454,063		$	(1,764,450	)
Depreciation, technology development	$	95,673	$	87,389		$	283,550		$	267,282
Depreciation, products and licensing	$	42,559	$	117,219		$	127,796		$	688,700
Amortization, technology development	$	43,708	$	28,935		$	121,770		$	95,540
Amortization, products and licensing	$	56,062	$	247,522		$	178,028		$	1,178,113

Products and licensing depreciation includes amounts from discontinued operations of $0.6 million for the nine months ended September 30, 2017. Products and licensing amortization includes amounts from discontinued operations of $1.0 million for the nine months ended September 30, 2017.

The table below presents assets for reportable segments:



	September 30, 2018		December 31, 2017
	(unaudited)
Total segment assets:
Technology development	$	42,536,930	$	32,011,084
Products and licensing	31,257,649		34,211,552
Total assets	$	73,794,579	$	66,222,636
Property plant and equipment, and intangible assets, technology development	$	2,194,466	$	1,762,561
Property plant and equipment, and intangible assets, products and licensing	$	2,192,948	$	2,819,470

The U.S. government accounted for 58% and 45% of total consolidated revenues for the three months ended September 30, 2018 and 2017, respectively and for 57% and 45% of total consolidated revenues for the nine months ended September 30, 2018 and 2017, respectively.

International revenues (customers outside the United States) accounted for 20% and 19% of total consolidated revenues for the three months ended September 30, 2018 and 2017, respectively, and 20% of the total consolidated revenues for each of the nine months ended September 30, 2018 and 2017. No single country, outside of the United States, represented more than 10% of total revenues in the three and nine months ended September 30, 2018 and 2017.


10.	Contingencies and Guarantees

We are from time to time involved in certain legal proceedings in the ordinary course of conducting our business. While the ultimate liability pursuant to these actions cannot currently be determined, we believe it is not reasonably possible that these legal proceedings will have a material adverse effect on our financial position or results of operations.

In March 2018, we received a notice of claim (the "Claim") from Macom Technology Solutions, Inc. ("Macom"), who acquired our HSOR business in August 2017 pursuant to an asset purchase agreement. Under the asset purchase agreement, we agreed to indemnify Macom for certain matters, including, among other things, the collection of accounts receivable from certain major customers, and placed $4.0 million of the purchase price into an escrow account for the potential settlement of any valid indemnity claims. The notice of claim received from Macom totaled $2.0 million under various indemnity

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provisions. We have disputed Macom's assertion of right to payment for the matters described in the Claim. It is uncertain what amount, if any, will be owed in settlement of the Claim.

On July 31, 2018, we sold the assets associated with our Opto components business to an unaffiliated third party. The asset purchase agreement provides for additional consideration of up to $1.0 million contingent upon the achievement of a specified revenue level by the sold business during the 18 months following the sale. In addition, the asset purchase agreement provides for a potential adjustment to the consideration paid, either positive or negative, to the extent that working capital transferred to the buyer is greater or less than a specified target amount. There have been no amounts recorded in reference to the above matter in the financial statements as of September 30, 2018. It is uncertain what amount, if any, will be received or paid with respect to each of these potential adjustments.

We executed a non-cancelable purchase order totaling $0.5 million in the fourth quarter of 2017 and a non-cancelable purchase order totaling $1.1 million in the first quarter of 2018 for multiple shipments of tunable lasers to be delivered over an 18-month period. At September 30, 2018, approximately $0.4 million of these commitments remained and is expected to be delivered by July 30, 2019.

We have entered into indemnification agreements with our officers and directors, to the extent permitted by law, pursuant to which we have agreed to reimburse the officers and directors for legal expenses in the event of litigation and regulatory matters. The terms of these indemnification agreements provide for no limitation to the maximum potential future payments. We have a directors and officers insurance policy that may, in certain instances, mitigate the potential liability and payments.

11. Subsequent Event

On October 15, 2018, we acquired substantially all of the assets, other than cash, as well as specified liabilities of Micron Optics, Inc. ("Micron"), a leading provider of innovative optical components and laser-based measurement technology, whose sensing and measurement solutions are deployed in multiple industries, for total cash consideration of $5.0 million, including $4.0 million paid at closing and $1.0 million placed in escrow until the later of October 1, 2019 or the date that specified matters are resolved as agreed by us and Micron. The purchase price is subject to positive or negative adjustment based upon the final determination of working capital of Micron compared to a target working capital amount specified in the asset purchase agreement. Due to the timing of the acquisition, the initial accounting has not been finalized as we were drafting Micron's opening balance sheet and related preliminary purchase price allocation as of the date the financial statements were available for issuance.



ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” under Items 2 and 3, respectively, of Part I of this report, and the section entitled “Risk Factors” under Item 1A of Part II of this report, may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. All statements other than statements of historical fact are “forward-looking statements” for purposes of these statutes, including those relating to future events or our future financial performance. In some cases, you can identify these forward looking statements by words such as “intends,” “will,” “plans,” “anticipates,” “expects,” “may,” “might,” “estimates,” “believes,” “should,” “projects,” “predicts,” “potential” or “continue,” or the negative of those words and other comparable words, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. Similarly, statements that describe our business strategy, goals, prospects, opportunities, outlook, objectives, plans or intentions are also forward-looking statements. These statements are only predictions and may relate to, but are not limited to, expectations of future operating results or financial performance, capital expenditures, introduction of new products, regulatory compliance and plans for growth and future operations, as well as assumptions relating to the foregoing.

These statements are based on current expectations and assumptions regarding future events and business performance and involve known and unknown risks, uncertainties and other factors that may cause actual events or results to be materially different from any future events or results expressed or implied by these statements. These factors include those set forth in the

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following discussion and within Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q and elsewhere within this report.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this report.

Overview of Our Business

We are a leader in advanced optical technology, providing unique capabilities in high performance fiber optic test products for the telecommunications industry and distributed fiber optic sensing for the aerospace and automotive industries. Our distributed fiber optic sensing products provide critical stress, strain and temperature information to designers and manufacturers working with advanced materials. Prior to the sale of our optoelectronics business in July 2018, we also developed and manufactured custom optoelectronic products for various applications such as metrology, missile guidance, flame monitoring, and temperature sensing. In addition, we provide applied research services, typically under research programs funded by the U.S. government, in areas of advanced materials, sensing, and healthcare applications. Our business model is designed to accelerate the process of bringing new and innovative products to market. We use our in-house technical expertise across a range of technologies to perform applied research services for companies and for government funded projects. We continue to invest in product development and commercialization, which we anticipate will lead to increased product sales growth.

We are organized into two main business segments, the Products and Licensing segment and the Technology Development segment. Our Products and Licensing segment develops, manufactures and markets fiber optic sensing products, as well as test and measurement products, and also conducts applied research in the fiber optic sensing area for both corporate and government customers. Our Products and Licensing segment revenues represented 50% and 45% of our total revenues for the three months ended September 30, 2018 and 2017, respectively, and 48% and 42% of our total revenues for the nine months ended September 30, 2018 and 2017, respectively. The approximate value of our Products and Licensing segment backlog was $1.8 million at September 30, 2018 and $6.9 million at December 31, 2017. The backlog at September 30, 2018 is expected to be recognized as revenue in the future as follows:



	2018		2019		2020		2021		2022 and beyond		Total
Products and Licensing	$	1,547,440	$	151,681	$	62,324	$	23,126	$	64,869	$	1,849,440

The Technology Development segment performs applied research principally in the areas of sensing and instrumentation, advanced materials and health sciences. This segment comprised 50% and 55% of our total revenues for the three months ended September 30, 2018 and 2017, respectively, and 52% and 58% of our total revenues for the nine months ended September 30, 2018 and 2017, respectively. Most of the government funding for our Technology Development segment is derived from the Small Business Innovation Research ("SBIR") program coordinated by the U.S. Small Business Administration ("SBA"). The Technology Development segment revenues have historically accounted for a large portion of our total revenues, and we expect that they will continue to represent a significant portion of our total revenues for the foreseeable future. The Technology Development segment revenues were $5.3 million and $4.6 million for the three months ended September 30, 2018 and 2017, respectively, and $15.4 million and $13.4 million for the nine months ended September 30, 2018 and 2017. Within the Technology Development segment, we have historically had a backlog of contracts for which work has been scheduled, but for which a specified portion of work has not yet been completed. We define backlog as the dollar amount of obligations payable to us under negotiated contracts upon completion of a specified portion of work that has not yet been completed, exclusive of revenues previously recognized for work already performed under these contracts, if any. Total backlog includes funded backlog, which is the amount for which money has been directly authorized by the U.S. government and for which a purchase order has been received by a commercial customer, and unfunded backlog, representing firm orders for which funding has not yet been appropriated. Indefinite delivery and quantity contracts and unexercised options are not reported in total backlog. The approximate value of our Technology Development segment backlog was $28.8 million at September 30, 2018 and $23.5 million at December 31, 2017. The backlog at September 30, 2018 is expected to be recognized as revenue in the future as follows:

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Technology Development	2018		2019		2020		2021		2022 and beyond		Total
Funded	$	6,582,679	$	13,238,423	$	3,745,951	$	99,658	$	754	$	23,667,465
Unfunded	$	720,238	$	2,286,629	$	1,371,922	$	500,921	$	250,460	$	5,130,170

Revenues from product sales are mostly derived from the sales of our, sensing and test and measurement products that make use of light-transmitting optical fibers, or fiber optics. We continue to invest in product development and commercialization, which we anticipate will lead to increased product sales growth. Prior to the sale of our optoelectronics business in July 2018, revenues from product sales also included custom optoelectronic components and sub-assemblies sold to scientific instrumentation manufacturers. Although we have been successful in licensing certain technology in past years, we do not expect license revenues to represent a significant portion of future revenues. Over time, however, we do intend to gradually increase such revenues. In the near term, we expect revenues from product to continue to be primarily in areas associated with our fiber optic-based test and measurement and sensing platforms. In the long term, we expect that revenues from product sales will represent a larger portion of our total revenues and that as we develop and commercialize new products, these revenues will reflect a broader and more diversified mix of products.

On October 15, 2018, we acquired substantially all of the assets, other than cash, as well as specified liabilities of Micron Optics, Inc. ("Micron"), a leading provider of innovative optical components and laser-based measurement technology, whose sensing and measurement solutions are deployed in multiple industries, for total cash consideration of $5.0 million, including $4.0 million paid at closing and $1.0 million placed in escrow until the later of October 1, 2019 or the date that specified matters are resolved as agreed by us and Micron. The purchase price is subject to positive or negative adjustment based upon the final determination of working capital of Micron compared to a target working capital amount specified in the asset purchase agreement. We may also grow our business in part through acquisitions of additional companies and complementary technologies, which could cause us to incur transaction expenses, amortization or write-offs of intangible assets and other acquisition-related expenses.

Description of Revenues, Costs and Expenses

Revenues

We generate revenues from technology development, product sales and commercial product development and licensing activities. We derive Technology Development segment revenues from providing research and development services to third parties, including government entities, academic institutions and corporations, and from achieving milestones established by some of these contracts and in collaboration agreements. In general, we complete contracted research over periods ranging from six months to three years, and recognize these revenues over the life of the contract as costs are incurred. The Technology Development segment revenues represented 50% and 55% of total revenues for the three months ended September 30, 2018 and 2017, respectively and 52% and 58% of our total revenues for the nine months ended September 30, 2018 and 2017, respectively.

The Products and Licensing segment revenues reflect amounts that we receive from sales of our products or development of products for third parties and, to a lesser extent, fees paid to us in connection with licenses or sub-licenses of certain patents and other intellectual property, and represented 50% and 45% of our total revenues for the three months ended September 30, 2018 and 2017, respectively, and 48% and 42% of our total revenues for nine months ended September 30, 2018 and 2017, respectively.

Cost of Revenues

Cost of revenues associated with our Technology Development segment revenues consists of costs associated with performing the related research activities including direct labor, amounts paid to subcontractors and overhead allocated to Technology Development segment activities.

Cost of revenues associated with our Products and Licensing segment revenues consists of license fees for use of certain technologies, product manufacturing costs including all direct material and direct labor costs, amounts paid to our contract manufacturers, manufacturing, shipping and handling, provisions for product warranties, and inventory obsolescence as well as overhead allocated to each of these activities.

Operating Expense

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Operating expense consists of selling, general and administrative expenses, as well as expenses related to research, development and engineering, depreciation of fixed assets and amortization of intangible assets. These expenses also include compensation for employees in executive and operational functions including certain non-cash charges related to expenses from option grants, facilities costs, professional fees, salaries, commissions, travel expense and related benefits of personnel engaged in sales, product management and marketing activities, costs of marketing programs and promotional materials, salaries, bonuses and related benefits of personnel engaged in our own research and development beyond the scope and activities of our Technology Development segment, product development activities not provided under contracts with third parties, and overhead costs related to these activities.

Investment Income

Investment income consists of amounts earned on our cash equivalents. We sweep on a daily basis a portion of our cash on hand into a fund invested in U.S. government obligations.

Interest Expense

Interest expense is composed of interest paid under our term loans as well as interest accrued on our capital lease obligations.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or judgments.

Our critical accounting policies are described in the Management’s Discussion and Analysis section and the notes to our audited consolidated financial statements previously included in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission ("SEC") on March 21, 2018. Changes to our critical accounting estimates as a result of adopting Topic 606 are discussed in Note 1 of our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. Changes to our accounting estimates as a result of Topic 606 did not have a significant impact to the financial statements.

Results of Operations

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

Revenues

Three Months Ended September 30,

2018

2017

$ Difference

% Difference

Revenues:

Technology development