NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Luna Innovations Incorporated (“we” 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 high performance fiber optic test products for the telecommunications industry and distributed fiber optic sensing products for industries utilizing composite and other advanced materials, such as the automotive, aerospace, energy and infrastructure industries. Our distributed fiber optic sensing products help designers and manufacturers more efficiently develop new and innovative products by providing valuable information such as highly detailed stress, strain, and temperature measurements of a new design or manufacturing process. In addition, our distributed fiber optic sensing products are used to monitor the structural integrity or operational health of critical assets, including large civil structures such as bridges. Our communications test products accelerate the development of advanced fiber optic components and networks by providing fast and highly accurate characterization of components and networks. We also 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.
Consolidation Policy
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and include our accounts and the accounts of our wholly owned subsidiaries. We eliminate from our financial results all intercompany transactions.
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.
Use of Estimates
The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements and accompanying notes.
Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may differ from such estimates and assumptions.
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%
to
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 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, 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.
Product Sales Revenues
Revenues from product sales are generated by the sale of commercial products and services under various sales programs to the end user and through distribution channels. We sell fiber optic sensing systems to end users for use in numerous fiber optic based measurement applications. Revenues are recorded net of applicable sales taxes collected from customers and payable to state or local governmental entities.
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 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.
Allowance for Uncollectible Receivables
Accounts receivable are recorded at their face amount, less an allowance for doubtful accounts. We review the status of our uncollected receivables on a regular basis. In determining the need for an allowance for uncollectible receivables, we consider our customers’ financial stability, past payment history and other factors that bear on the ultimate collection of such amounts. The allowance was
$0.3 million
at each of
December 31, 2018
and
2017
.
Cash Equivalents
We consider all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. To date, we have not incurred losses related to cash and cash equivalents. Cash equivalents at
December 31, 2018
and
2017
included
$38.3 million
and
$25.2 million
, respectively, invested in U.S. Treasury obligations through a sweep account with our bank. The full value of amounts invested through the sweep account are convertible to cash on a daily basis. Our cash transactions are processed through reputable commercial banks. We regularly maintain cash balances with financial institutions which exceed Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At
December 31, 2018
and
2017
, we had approximately
$4.0 million
and
$11.5 million
, respectively, in excess of FDIC insured limits.
We have outstanding term loans that require us to comply with certain financial covenants, including maintaining a minimum cash balance of at least
$4.0 million
.
Fair Value Measurements
Our financial assets and liabilities are measured at fair value, which is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. Valuation techniques are based on observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs have created the following fair value hierarchy:
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Level 1—Quoted prices for identical instruments in active markets.
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•
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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 significant value drivers are observable.
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•
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Level 3—Valuations derived from valuation techniques in which significant value drivers are unobservable.
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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. We consider the terms of the Silicon Valley Bank ("SVB") debt facility including its interest rate of prime plus
2%
, to be at market based upon similar instruments that would be available to us.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. We record depreciation using the straight-line method over the following estimated useful lives:
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Equipment
|
3 – 7 years
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Furniture and fixtures
|
7 years
|
Software
|
3 years
|
Leasehold improvements
|
Lesser of lease term or life of improvements
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Intangible Assets
Intangible assets consist of patents related to certain intellectual property that we have developed or acquired and identifiable intangible assets recognized in connection with our merger with Advanced Photonix, Inc. ("API") and Micron Optics, Inc. ("MOI"). We amortize our identified intangible assets over their estimated useful lives ranging between
one
and
eleven years
, and analyze the reasonableness of the remaining useful life whenever events or circumstances indicate that the carrying amount may not be recoverable to determine whether their carrying value has been impaired.
Goodwill
Goodwill is reviewed for impairment at least annually, or more frequently if events or circumstances indicate that goodwill might be impaired. We have established October 1 as our specified annual date for impairment testing.
Research, Development and Engineering
Research, development and engineering expenses not related to contract performance are expensed as incurred. We expensed
$3.8 million
and
$2.7 million
of non-contract related research, development and engineering expenses for the year ended
December 31, 2018
and
2017
, respectively.
Valuation of Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of by sale are reflected at the lower of their carrying amount or fair value less cost to sell.
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 net realizable value.
Net Income/(Loss) per Share
Basic per share data is computed by dividing net income/(loss) attributable to common stockholders by the weighted average number of shares outstanding during the period. Diluted per share data is computed by dividing net income/(loss) attributable to common stockholders 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 common shares 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 effect of
4.9 million
common stock equivalents (which include outstanding warrants, preferred stock, accrued stock dividends, and stock options) are included for the diluted per share data for the year ended
December 31, 2018
. The effect of
4.3 million
common stock equivalents (which include outstanding warrants, preferred stock and stock options) are not included for the year ended
December 31, 2017
, as they are anti-dilutive to earnings per share due to us having a net loss from continuing operations.
Stock-Based Compensation
We have two stock-based compensation plans, which are described further in Note 10. We recognize compensation expense based upon the fair value of the underlying equity award as of the date of grant. We have elected to use the Black-Scholes option pricing model to value any stock options granted. Restricted stock and restricted stock units awarded are valued at the closing price of our common stock on the date of the award. We recognize stock-based compensation for such awards on a straight-line method over the requisite service period of the awards taking into account the effects of the employees’ expected exercise. We reduce stock-based compensation expense for the value of any forfeitures of vested awards as such forfeitures occur.
We recognize expense for equity instruments issued to non-employees based upon the fair value of the equity instruments issued.
Advertising
We expense the cost of advertising as incurred. Advertising expenses were
$0.1 million
for each of the years ended
December 31, 2018
and
2017
.
Income Taxes
We account for income taxes using the liability method. Deferred tax assets or liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when the differences reverse. A valuation allowance against net deferred tax assets is provided unless we conclude it is more likely than not that the deferred tax assets will be realized.
We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We evaluate our ability to benefit from all deferred tax assets and establish valuation allowances for amounts we believe are not more-likely-than-not to be realizable. For uncertain tax positions, we use a more-likely-than-not threshold, 51% or greater, based on the technical merits of the income tax position taken. Income tax positions that meet the more-likely-than-not recognition threshold are measured in order to determine the tax benefit recognized in the financial statements. Penalties, if probable and reasonably estimable, and interest expense related to uncertain tax positions are recognized as a component of the tax provision.
We account for income taxes using the liability method. Deferred tax assets or liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when the differences reverse. A valuation allowance against net deferred tax assets is provided unless we conclude it is more likely than not that the deferred tax assets will be realized.
Recent 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 consolidated balance sheet for the adoption of Topic 606 was as follows:
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Balance at
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Adjustment for
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Adjusted balance at
|
|
December 31, 2017
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Topic 606
|
|
January 1, 2018
|
Assets:
|
|
|
|
|
|
Current assets held for sale
|
$
|
4,336,105
|
|
|
$
|
379,891
|
|
|
$
|
4,715,996
|
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|
|
|
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Liabilities:
|
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|
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Contract liabilities
|
$
|
3,318,379
|
|
|
$
|
2,250
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|
|
$
|
3,320,629
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|
Current liabilities held for sale
|
$
|
862,205
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$
|
23,613
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|
$
|
885,818
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Stockholders' equity:
|
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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
|
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As Reported
|
|
As Adopted
|
Accounts receivables, net
|
$
|
9,857,009
|
|
|
$
|
5,929,042
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|
Contract assets
|
—
|
|
|
1,778,142
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|
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
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Deferred revenue
|
1,026,339
|
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|
—
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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 (Note 17) 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%
to
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 contract and whether the combined or single contract should 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, 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. We have agreed on final billing rates with the government through December 31, 2017.
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 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
$26.0 million
at
December 31, 2018
. We expect to satisfy
87%
of the performance obligations in 2019,
9%
in 2020 and the remaining by 2022. The approximate value of our Products and Licensing segment unfulfilled performance obligations was
$5.8 million
at
December 31, 2018
. We expect to satisfy
95%
of the performance obligations in 2019,
4%
in 2020 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2018
|
|
Year Ended December 31, 2018
|
|
|
(unaudited)
|
|
|
|
|
Technology Development
|
Products and Licensing
|
Total
|
|
Technology Development
|
Products and Licensing
|
Total
|
Total Revenue by Geographic Location
|
|
|
|
|
|
|
|
United States
|
$
|
5,548,639
|
|
$
|
3,624,247
|
|
$
|
9,172,886
|
|
|
$
|
20,967,556
|
|
$
|
11,585,296
|
|
$
|
32,552,852
|
|
|
Asia
|
—
|
|
2,697,215
|
|
2,697,215
|
|
|
—
|
|
5,977,563
|
|
5,977,563
|
|
|
Europe
|
—
|
|
1,331,145
|
|
1,331,145
|
|
|
—
|
|
3,873,161
|
|
3,873,161
|
|
|
Canada, Central and South America
|
—
|
|
282,990
|
|
282,990
|
|
|
—
|
|
382,797
|
|
382,797
|
|
|
All Others
|
—
|
|
54,089
|
|
54,089
|
|
|
—
|
|
130,872
|
|
130,872
|
|
|
Total
|
$
|
5,548,639
|
|
$
|
7,989,686
|
|
$
|
13,538,325
|
|
|
$
|
20,967,556
|
|
$
|
21,949,689
|
|
$
|
42,917,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue by Major Customer Type
|
|
|
|
|
|
|
|
Sales to the U.S. government
|
$
|
5,418,679
|
|
$
|
469,534
|
|
$
|
5,888,213
|
|
|
$
|
20,703,338
|
|
$
|
1,834,289
|
|
$
|
22,537,627
|
|
|
U.S. direct commercial sales and other
|
129,960
|
|
3,154,714
|
|
3,284,674
|
|
|
264,218
|
|
9,737,720
|
|
10,001,938
|
|
|
Foreign commercial sales & other
|
—
|
|
4,365,438
|
|
4,365,438
|
|
|
—
|
|
10,377,680
|
|
10,377,680
|
|
|
Total
|
$
|
5,548,639
|
|
$
|
7,989,686
|
|
$
|
13,538,325
|
|
|
$
|
20,967,556
|
|
$
|
21,949,689
|
|
$
|
42,917,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue by Contract Type
|
|
|
|
|
|
|
|
Fixed-price contracts
|
$
|
2,777,012
|
|
$
|
7,989,686
|
|
$
|
10,766,698
|
|
|
$
|
9,388,770
|
|
$
|
21,949,689
|
|
$
|
31,338,459
|
|
|
Cost-type contracts
|
2,771,627
|
|
—
|
|
2,771,627
|
|
|
11,578,786
|
|
—
|
|
11,578,786
|
|
|
Total
|
$
|
5,548,639
|
|
$
|
7,989,686
|
|
$
|
13,538,325
|
|
|
$
|
20,967,556
|
|
$
|
21,949,689
|
|
$
|
42,917,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue by Timing of Recognition
|
|
|
|
|
|
|
|
Goods transferred at a point in time
|
$
|
—
|
|
$
|
7,824,102
|
|
$
|
7,824,102
|
|
|
$
|
—
|
|
$
|
21,329,999
|
|
$
|
21,329,999
|
|
|
Goods/services transferred over time
|
5,548,639
|
|
165,584
|
|
5,714,223
|
|
|
20,967,556
|
|
619,690
|
|
21,587,246
|
|
|
Total
|
$
|
5,548,639
|
|
$
|
7,989,686
|
|
$
|
13,538,325
|
|
|
$
|
20,967,556
|
|
$
|
21,949,689
|
|
$
|
42,917,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue by Major Products/Services
|
|
|
|
|
|
|
|
Technology development
|
$
|
5,548,639
|
|
$
|
—
|
|
$
|
5,548,639
|
|
|
$
|
20,967,556
|
|
$
|
—
|
|
$
|
20,967,556
|
|
|
Optical test and measurement systems
|
—
|
|
7,625,325
|
|
7,625,325
|
|
|
—
|
|
19,641,434
|
|
19,641,434
|
|
|
Optical components and sub-assemblies
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
|
Other
|
—
|
|
364,361
|
|
364,361
|
|
|
—
|
|
2,308,255
|
|
2,308,255
|
|
|
Total
|
$
|
5,548,639
|
|
$
|
7,989,686
|
|
$
|
13,538,325
|
|
|
$
|
20,967,556
|
|
$
|
21,949,689
|
|
$
|
42,917,245
|
|
The following tables summarize the impacts of adopting Topic 606 on our consolidated financial statements as of and for the three months and year ended
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of changes in accounting policies
|
|
December 31, 2018
|
|
As Reported
|
|
Adjustments
|
|
Balances without adoption of Topic 606
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
42,460,267
|
|
|
$
|
—
|
|
|
$
|
42,460,267
|
|
Accounts receivable, net
|
13,037,068
|
|
|
—
|
|
|
13,037,068
|
|
Receivable from sale of HSOR business
|
2,500,000
|
|
|
—
|
|
|
2,500,000
|
|
Contract assets
|
2,422,495
|
|
|
—
|
|
|
2,422,495
|
|
Inventory
|
6,873,742
|
|
|
—
|
|
|
6,873,742
|
|
Prepaid expenses and other current assets
|
935,185
|
|
|
—
|
|
|
935,185
|
|
Total current assets
|
68,228,757
|
|
|
—
|
|
|
68,228,757
|
|
Long-term contract assets
|
336,820
|
|
|
—
|
|
|
336,820
|
|
Property and equipment, net
|
3,627,886
|
|
|
—
|
|
|
3,627,886
|
|
Intangible assets, net
|
3,302,270
|
|
|
—
|
|
|
3,302,270
|
|
Goodwill
|
101,008
|
|
|
—
|
|
|
101,008
|
|
Other assets
|
1,995
|
|
|
—
|
|
|
1,995
|
|
Total assets
|
$
|
75,598,736
|
|
|
$
|
—
|
|
|
$
|
75,598,736
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Current portion of long-term debt obligations
|
$
|
619,315
|
|
|
$
|
—
|
|
|
$
|
619,315
|
|
Current portion of capital lease obligations
|
40,586
|
|
|
—
|
|
|
40,586
|
|
Accounts payable
|
2,395,984
|
|
|
—
|
|
|
2,395,984
|
|
Accrued liabilities
|
6,597,458
|
|
|
—
|
|
|
6,597,458
|
|
Contract liabilities
|
2,486,111
|
|
|
(3,880
|
)
|
|
2,482,231
|
|
Total current liabilities
|
12,139,454
|
|
|
(3,880
|
)
|
|
12,135,574
|
|
Long-term deferred rent
|
1,035,974
|
|
|
—
|
|
|
1,035,974
|
|
Long-term capital lease obligations
|
68,978
|
|
|
—
|
|
|
68,978
|
|
Total liabilities
|
13,244,406
|
|
|
(3,880
|
)
|
|
13,240,526
|
|
Commitments and contingencies
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
Preferred stock, par value $0.001, 1,321,514 shares authorized, issued and outstanding at December 31, 2018 and December 31, 2017, respectively
|
1,322
|
|
|
—
|
|
|
1,322
|
|
Common stock, par value $0.001, 100,000,000 shares authorized, 29,209,506 and 28,354,822 shares issued, 27,956,401 and 27,283,918 shares outstanding at December 31, 2018 and 2017, respectively
|
30,120
|
|
|
—
|
|
|
30,120
|
|
Treasury stock at cost, 1,253,105 and 1,070,904 shares at December 31, 2018 and December 31, 2017, respectively
|
(2,116,640
|
)
|
|
—
|
|
|
(2,116,640
|
)
|
Additional paid-in capital
|
85,744,750
|
|
|
—
|
|
|
85,744,750
|
|
Accumulated deficit
|
(21,305,222
|
)
|
|
3,880
|
|
|
(21,301,342
|
)
|
Total stockholders’ equity
|
62,354,330
|
|
|
3,880
|
|
|
62,358,210
|
|
Total liabilities and stockholders’ equity
|
$
|
75,598,736
|
|
|
$
|
—
|
|
|
$
|
75,598,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of changes in accounting policies
|
|
Three Months Ended December 31, 2018
|
|
Year Ended December 31, 2018
|
|
As reported
|
|
Adjustments
|
|
Balances without adoption of Topic 606
|
|
As reported
|
|
Adjustments
|
|
Balances without adoption of Topic 606
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Technology development
|
$
|
5,548,639
|
|
|
$
|
—
|
|
|
$
|
5,548,639
|
|
|
$
|
20,967,556
|
|
|
$
|
—
|
|
|
$
|
20,967,556
|
|
Products and licensing
|
7,989,686
|
|
|
—
|
|
|
7,989,686
|
|
|
21,949,689
|
|
|
1,630
|
|
|
21,951,319
|
|
Total revenues
|
13,538,325
|
|
|
—
|
|
|
13,538,325
|
|
|
42,917,245
|
|
|
1,630
|
|
|
42,918,875
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Technology development
|
4,268,509
|
|
|
—
|
|
|
4,268,509
|
|
|
15,400,475
|
|
|
—
|
|
|
15,400,475
|
|
Products and licensing
|
2,697,538
|
|
|
—
|
|
|
2,697,538
|
|
|
8,078,870
|
|
|
—
|
|
|
8,078,870
|
|
Total cost of revenues
|
6,966,047
|
|
|
—
|
|
|
6,966,047
|
|
|
23,479,345
|
|
|
—
|
|
|
23,479,345
|
|
Gross profit
|
6,572,278
|
|
|
—
|
|
|
6,572,278
|
|
|
19,437,900
|
|
|
1,630
|
|
|
19,439,530
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
4,896,136
|
|
|
—
|
|
|
4,896,136
|
|
|
14,794,205
|
|
|
—
|
|
|
14,794,205
|
|
Research, development and engineering
|
1,252,663
|
|
|
—
|
|
|
1,252,663
|
|
|
3,766,160
|
|
|
—
|
|
|
3,766,160
|
|
Total operating expense
|
6,148,799
|
|
|
—
|
|
|
6,148,799
|
|
|
18,560,365
|
|
|
—
|
|
|
18,560,365
|
|
Operating income
|
423,479
|
|
|
—
|
|
|
423,479
|
|
|
877,535
|
|
|
1,630
|
|
|
879,165
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
(1,070
|
)
|
|
—
|
|
|
(1,070
|
)
|
|
(17,143
|
)
|
|
—
|
|
|
(17,143
|
)
|
Investment income
|
198,525
|
|
|
—
|
|
|
198,525
|
|
|
549,580
|
|
|
—
|
|
|
549,580
|
|
Interest expense
|
(21,136
|
)
|
|
—
|
|
|
(21,136
|
)
|
|
(124,344
|
)
|
|
—
|
|
|
(124,344
|
)
|
Total other income
|
176,319
|
|
|
—
|
|
|
176,319
|
|
|
408,093
|
|
|
—
|
|
|
408,093
|
|
Income from continuing operations before income taxes
|
599,798
|
|
|
—
|
|
|
599,798
|
|
|
1,285,628
|
|
|
1,630
|
|
|
1,287,258
|
|
Income tax expense
|
722,148
|
|
|
—
|
|
|
722,148
|
|
|
47,818
|
|
|
—
|
|
|
47,818
|
|
Net (loss)/income from continuing operations
|
$
|
(122,350
|
)
|
|
$
|
—
|
|
|
$
|
(122,350
|
)
|
|
$
|
1,237,810
|
|
|
$
|
1,630
|
|
|
$
|
1,239,440
|
|
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).
This standard revises the accounting for leases and requires lessees to recognize, for all leases with terms greater than one year, a right-of-use asset and liability which depicts the rights and obligations arising from a lease. This standard also requires qualitative and quantitative disclosures designed to provide information regarding the nature, amount and timing of lease expense. The new guidance is not expected to significantly change the recognition and measurement of lease expense. It is effective for the first interim and annual periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842): Targeted Improvements
, permitting the recognition of a cumulative-effect adjustment to retained earnings on the date of adoption. We adopted the standard beginning January 1, 2019 using the alternative transition method. We are finalizing the value as of the adoption date of the right-of-use asset and lease liabilities and estimate that the right-of-use asset will be between
$4 million
and
$5 million
and that the lease liability will be reasonably consistent with the right-of-use asset amounts. We do not expect a material impact from adopting the new standard on our results of operations or cash flows.
In January 2017, the Financial Accounting Standards Board ("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 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 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 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. 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 net realizable value.
Components of inventory are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Finished goods
|
$
|
1,339,832
|
|
|
$
|
762,394
|
|
Work-in-process
|
643,420
|
|
|
288,165
|
|
Raw materials
|
4,890,490
|
|
|
3,584,222
|
|
|
$
|
6,873,742
|
|
|
$
|
4,634,781
|
|
Our contract assets consist of unbilled amounts for technology development contracts, custom product contracts, royalty revenue receivable and the 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 year ended
December 31, 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
|
—
|
|
|
(878,402
|
)
|
Transferred to payables from contract liabilities recognized at the beginning of the period
|
—
|
|
|
(2,078,640
|
)
|
Increases due to cash received or adjustment of estimates, excluding amounts recognized as revenue during the period
|
—
|
|
|
2,122,524
|
|
Transferred to receivables from contract assets recognized at the beginning of the period
|
(1,679,363
|
)
|
|
—
|
|
Increases as a result of cumulative catch-up adjustment arising from changes in the estimate of the stage of completion
|
2,450,837
|
|
|
—
|
|
Balance as of December 31, 2018
|
$
|
2,759,315
|
|
|
$
|
2,486,111
|
|
4. 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 2019. 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 was repaid in December 2018.
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
December 31, 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, 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
December 31, 2018
there were no events of default on the Credit Facility.
The aggregate balance under the Term Loans at
December 31, 2018
and
December 31, 2017
was
$0.6 million
and
$2.5 million
, respectively. The remaining term loan, with a balance of $
0.6 million
as of
December 31, 2018
, matures on May 1, 2019. The effective rate of our Term Loan at
December 31, 2018
was
7%
.
The following table presents a summary of debt outstanding:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Silicon Valley Bank Term Loans
|
$
|
625,000
|
|
|
$
|
2,458,333
|
|
Less: unamortized debt issuance costs
|
5,685
|
|
|
21,993
|
|
Less: current portion
|
619,315
|
|
|
1,833,333
|
|
Total long-term debt obligations
|
$
|
—
|
|
|
$
|
603,007
|
|
Debt issuance costs associated with the issuance of the SVB Term Loans totaled
$55 thousand
. Amortization of debt issuance costs is computed using the effective interest method and is included in interest expense. Amortization of the debt issuance costs totaled
$16 thousand
for the year ended
December 31, 2018
.
Maturities on outstanding debt are as follows:
|
|
|
|
|
Year
|
Amount
|
2019
|
$
|
625,000
|
|
Total
|
$
|
625,000
|
|
Interest expense for the years ended
December 31, 2018
and
2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2018
|
|
2017
|
Interest expense on Term Loans
|
|
$
|
108,062
|
|
|
$
|
201,696
|
|
Amortization of debt issuance costs
|
|
16,308
|
|
|
16,308
|
|
Other interest income
|
|
(26
|
)
|
|
(652
|
)
|
Total interest expense
|
|
$
|
124,344
|
|
|
$
|
217,352
|
|
5. Accounts Receivable, Net
Accounts receivable, net consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Billed
|
$
|
13,289,790
|
|
|
$
|
6,189,625
|
|
Other
|
31,361
|
|
|
20,000
|
|
|
13,321,151
|
|
|
6,209,625
|
|
Less: allowance for doubtful accounts
|
(284,083
|
)
|
|
(280,583
|
)
|
|
$
|
13,037,068
|
|
|
$
|
5,929,042
|
|
6. Property and Equipment
Property and equipment, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Building
|
$
|
69,556
|
|
|
$
|
69,556
|
|
Equipment
|
9,341,007
|
|
|
8,213,626
|
|
Furniture and fixtures
|
640,890
|
|
|
565,885
|
|
Software
|
1,122,231
|
|
|
1,122,231
|
|
Leasehold improvements
|
4,950,510
|
|
|
4,840,510
|
|
|
16,124,194
|
|
|
14,811,808
|
|
Less—accumulated depreciation
|
(12,496,308
|
)
|
|
(11,957,167
|
)
|
|
$
|
3,627,886
|
|
|
$
|
2,854,641
|
|
Depreciation for the years ended
December 31, 2018
and
2017
was approximately
$0.5 million
and
$0.7 million
, respectively.
7. Intangible Assets
Intangible assets, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Estimated Life
|
|
2018
|
|
2017
|
Patent costs
|
1 - 18 years
|
|
$
|
4,991,460
|
|
|
$
|
4,658,198
|
|
Developed technology
|
5 years
|
|
2,600,000
|
|
|
1,400,000
|
|
In-process research and development
|
N/A
|
|
200,000
|
|
|
—
|
|
Customer base
|
7 years
|
|
100,000
|
|
|
—
|
|
Trade names
|
3 years
|
|
150,000
|
|
|
—
|
|
|
|
|
8,041,460
|
|
|
6,058,198
|
|
Accumulated amortization
|
|
|
(4,739,190
|
)
|
|
(4,330,808
|
)
|
|
|
|
$
|
3,302,270
|
|
|
$
|
1,727,390
|
|
Amortization for the years ended
December 31, 2018
and
2017
was approximately
$0.4 million
and
$0.5 million
, respectively. Estimated aggregate amortization, based on the net value of intangible assets at
December 31, 2018
, for each of the next five years and beyond is as follows:
|
|
|
|
|
Year Ending December 31,
|
|
2019
|
$
|
591,120
|
|
2020
|
558,156
|
|
2021
|
535,288
|
|
2022
|
480,219
|
|
2023
|
279,631
|
|
2023 and beyond
|
857,856
|
|
|
$
|
3,302,270
|
|
8. Accrued Liabilities
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
Accrued compensation
|
$
|
4,467,587
|
|
|
$
|
5,274,005
|
|
|
Accrued professional fees
|
198,062
|
|
|
117,445
|
|
|
Accrued income tax
|
236,636
|
|
|
403,547
|
|
|
Deferred rent
|
146,542
|
|
|
144,740
|
|
|
Royalties
|
302,428
|
|
|
290,235
|
|
|
Accrued liabilities-other
|
404,752
|
|
|
317,258
|
|
|
Working capital payable
|
542,983
|
|
|
—
|
|
|
Liability to related party
|
298,468
|
|
|
—
|
|
Total accrued liabilities
|
$
|
6,597,458
|
|
|
$
|
6,547,230
|
|
9. Income Taxes
Income tax expense/(benefit) from continuing operations consisted of the following for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2018
|
|
2017
|
Current:
|
|
|
|
Federal
|
$
|
(44,727
|
)
|
|
$
|
(1,154,105
|
)
|
State
|
92,545
|
|
|
5,526
|
|
Deferred federal
|
—
|
|
|
—
|
|
Deferred state
|
—
|
|
|
—
|
|
Income tax expense/(benefit)
|
$
|
47,818
|
|
|
$
|
(1,148,579
|
)
|
Deferred tax assets consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
Long-Term
|
|
|
Long-Term
|
Bad debt and inventory reserve
|
|
$
|
332,721
|
|
|
|
$
|
226,358
|
|
Inventory adjustment
|
|
(21,785
|
)
|
|
|
405,242
|
|
UNICAP
|
|
2,804
|
|
|
|
32,579
|
|
Deferred revenue
|
|
115,676
|
|
|
|
84,669
|
|
Deferred rent
|
|
288,017
|
|
|
|
340,199
|
|
Depreciation and amortization
|
|
(838,540
|
)
|
|
|
(1,238,458
|
)
|
Charitable contributions
|
|
—
|
|
|
|
3,385
|
|
Net operating loss carryforwards- Luna
|
|
349,421
|
|
|
|
349,421
|
|
Net operating loss carryforwards- API
|
|
1,265,538
|
|
|
|
1,436,568
|
|
Net operating loss carryforwards - state
|
|
179,149
|
|
|
|
534,194
|
|
Net operating loss carryforwards- Canada
|
|
10,503
|
|
|
|
10,503
|
|
Research and development credits
|
|
—
|
|
|
|
235,613
|
|
California manufacturing credit
|
|
—
|
|
|
|
15,554
|
|
Accrued liabilities
|
|
394,118
|
|
|
|
504,472
|
|
Deferred compensation
|
|
216,944
|
|
|
|
223,607
|
|
Stock-based compensation
|
|
803,757
|
|
|
|
1,275,372
|
|
Restricted stock
|
|
60,681
|
|
|
|
—
|
|
State bonus
|
|
44,861
|
|
|
|
—
|
|
AMT credit
|
|
—
|
|
|
|
581,467
|
|
Transaction costs
|
|
63,668
|
|
|
|
—
|
|
Total
|
|
3,267,533
|
|
|
|
5,020,745
|
|
Valuation allowance
|
|
(3,267,533
|
)
|
|
|
(5,020,745
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
|
$
|
—
|
|
The expense/(benefit) from income taxes from continuing operations differs from the amount computed by applying the federal statutory income tax rate to our loss from continuing operations before income taxes as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2018
|
|
2017
|
Income tax expense at federal statutory rate
|
|
21.00
|
%
|
|
34.00
|
%
|
State taxes, net of federal tax effects
|
|
—
|
%
|
|
(10.84
|
)%
|
Change in tax rate from Tax Cuts and Jobs Act
|
|
—
|
%
|
|
(79.17
|
)%
|
Change in valuation allowance
|
|
(27.65
|
)%
|
|
113.86
|
%
|
Incentive stock options
|
|
(1.05
|
)%
|
|
(9.65
|
)%
|
Provision to return adjustments
|
|
21.16
|
%
|
|
3.87
|
%
|
Meals and entertainment
|
|
0.97
|
%
|
|
(0.65
|
)%
|
Capitalized merger costs
|
|
—
|
%
|
|
—
|
%
|
AMT Carryover
|
|
(9.83
|
)%
|
|
—
|
%
|
Other permanent differences
|
|
(0.88
|
)%
|
|
(3.55
|
)%
|
Income tax expense/(benefit)
|
|
3.72
|
%
|
|
47.87
|
%
|
The realization of our deferred income tax assets is dependent upon sufficient taxable income in future periods. In assessing whether deferred tax assets may be realized, we consider whether it is more likely than not that some portion, or all, of the deferred tax asset will be realized. We consider scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies that we can implement in making our assessment. We have
no
U.S. federal income tax net operating loss carryforwards at
December 31, 2018
for Luna and net operating loss carryforwards of approximately
$6.0 million
for API expiring at varying dates through
2025
.
In 2015, we performed a formal section 382 study and determined that we do not have a limitation on our net operating loss available to offset future income for the Luna net operating losses. As a result of the acquisition of API, the API net operating loss carryover and research and development credits will be subject to the Section 382 limitation. A formal Section 382 study was prepared in
2017
, and it was determined that there was no ownership changes in
2017
resulting in a limitation on NOLs, but a portion of the net operating losses will expire unutilized. As there is a full valuation allowance against all of the API deferred tax assets, there will not be a statement of operations impact to any expiration of the net operating losses or research and development credits.
The U.S. federal statute of limitations remains open for the year
2015 and onward
. We currently have no federal income tax returns under examination. U.S. state jurisdictions have statutes of limitation generally ranging from
three
to
seven years
. We currently have no state income or franchise tax returns under examination. We currently do not file tax returns in any foreign tax jurisdiction other than Canada.
We currently have
no
positions for which we expect that the amount of unrecognized tax benefit will increase or decrease significantly within twelve months of the reporting date or for which we believe there is significant risk of disallowance upon audit. We have no tax interest or penalties reported in either our statement of operations or statement of financial position for any year reported herein. Management believes it is not more likely than not that the deferred tax assets at
December 31, 2018
or
December 31, 2017
will not be realized, and as a result a valuation allowance was established against all such deferred tax assets.
Effective January 1, 2018, we adopted ASC Topic 606,
Revenue from Contracts with Customers
, which changes the timing of contract revenue recognition from recognizing at customer delivery to recognizing over a period of time. The adoption of ASC Topic 606 did not have a significant impact on our consolidated financial statements.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. This legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation
reduced the U.S. corporate tax rate from the current rate of
35%
to
21%
. As a result of the enacted law, we were required to revalue deferred tax assets and liabilities at the enacted rate. This revaluation resulted in a
$1.9 million
reduction in the deferred tax asset and a corresponding reduction in the valuation allowance. In 2018, we realized a benefit of
$0.7 million
in recovery of the alternative minimum tax credit from prior periods. The other provisions of the Tax Cuts and Jobs Act did not have a material impact on our consolidated financial statements.
10. Stockholders’ Equity
Series A Convertible Preferred Stock
In January 2010, we entered into a transaction with Carilion, in which Carilion agreed to exchange all of its Senior Convertible Promissory Notes with an original principal amount of
$5.0 million
plus all accrued but unpaid interest, totaling
$1.2 million
, for
1,321,514
shares of our newly designated Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock is non-voting, carries a dividend of
6%
payable
in shares of common stock and maintains a liquidation preference up to
$6.2 million
. As of
December 31, 2018
,
710,985
shares of common stock were issuable to Carilion as dividends and have been recorded in the statement of stockholders’ equity. These dividends are issuable on demand. Each share of Series A Convertible Preferred Stock may be converted into
one
share of our common stock at the option of the holder. We recorded the fair value of the Series A Convertible Preferred Stock, determined based upon the conversion value immediately prior to the exchange, the fair value of the new warrant issued to Carilion, determined using the Black-Scholes valuation model, and the incremental fair value of the prior warrant due to the re-pricing and extension of maturity to stockholders’ equity.
Equity Incentive Plans
In April 2016, we adopted our 2016 Equity Incentive Plan (the "2016 Plan") as a successor to the 2006 Plan. Under the 2016 Plan, our Board of Directors is authorized to grant both incentive and non-statutory stock options to purchase common stock and restricted stock awards to our employees, directors, and consultants. The 2016 Plan provides for the issuance of
3,500,000
shares plus any amounts forfeited from grants under the 2006 Plan after the expiration date of the 2006 Plan. Options generally have a life of
10 years
and exercise price equal to or greater than the fair market value of the Common Stock as determined by the Board of Directors.
Vesting for employees typically occurs over a
four
-year period.
The following table sets forth the activity of the options to purchase common stock under the 2006 Plan and the 2016 Plan. The prices represent the closing price of our Common Stock on the Nasdaq Capital Market on the respective dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 at January 1, 2017
|
2,857,114
|
|
|
$0.61 - 6.83
|
|
$
|
1.89
|
|
|
$
|
107,063
|
|
|
2,367,630
|
|
|
$
|
1.93
|
|
|
$
|
101,071
|
|
Forfeited
|
(178,665
|
)
|
|
$1.27 - 6.83
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
Exercised
|
(83,888
|
)
|
|
$0.82 - 1.40
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
Granted
|
120,000
|
|
|
$1.51 - 2.40
|
|
$
|
1.82
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
2,714,561
|
|
|
$0.61 - 6.55
|
|
$
|
1.88
|
|
|
$
|
2,098,195
|
|
|
2,590,030
|
|
|
$
|
1.89
|
|
|
$
|
2,013,034
|
|
Forfeited
|
(675,607
|
)
|
|
$1.15 - 6.55
|
|
$
|
1.90
|
|
|
|
|
|
|
|
|
|
Exercised
|
(96,425
|
)
|
|
$0.65 - 2.46
|
|
$
|
2.07
|
|
|
|
|
|
|
|
|
|
Granted
|
1,166,339
|
|
|
$2.67 - 3.53
|
|
$
|
3.09
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
3,108,868
|
|
|
$0.61 - 6.55
|
|
$
|
2.26
|
|
|
$
|
3,669,794
|
|
|
1,986,740
|
|
|
$
|
1.81
|
|
|
$
|
3,314,494
|
|
|
|
(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 fair value of each option granted is estimated as of the grant date using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2018
|
|
2017
|
Risk-free interest rate range
|
|
3.0%
|
|
2.05%
|
Expected life of option-years
|
|
7
|
|
6.5
|
Expected stock price volatility
|
|
67%
|
|
69%
|
Expected dividend yield
|
|
—%
|
|
—%
|
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. Expected volatility is based upon the average historical volatility of our common stock over the period commensurate with the expected term of the related instrument. The expected life and estimated post-employment termination behavior is based upon historical experience of homogeneous groups, executives and non-executes, within our company. We do not currently pay dividends on our common stock nor do we expect to in the foreseeable future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of
Exercise Prices
|
|
Options
Outstanding
|
|
Weighted
Average
Remaining
Life in
Years
|
|
Weighted
Average
Exercise
Price
|
|
Options
Exercisable
|
|
Weighted
Average
Exercise
Price of
Options
Exercisable
|
Year ended December 31, 2017
|
$0.61 - 6.55
|
|
2,714,561
|
|
|
4.23
|
|
$1.88
|
|
2,590,030
|
|
|
$1.89
|
Year ended December 31, 2018
|
$0.61 - 6.55
|
|
3,108,868
|
|
|
5.72
|
|
$2.26
|
|
1,986,740
|
|
|
$1.81
|
|
|
|
|
|
|
|
|
|
|
Total Intrinsic Value of
Options Exercised
|
|
Total Fair Value of
Options Vested
|
Year ended December 31, 2017
|
$
|
62,549
|
|
|
$
|
3,962,746
|
|
Year ended December 31, 2018
|
$
|
112,213
|
|
|
$
|
2,980,110
|
|
For the years ended
December 31, 2018
and
2017
, the weighted average grant date fair value of options granted was
$2.07
and
$1.18
per share, respectively. We estimate the fair value of options at the grant date using the Black-Scholes model. For all stock options granted through
December 31, 2018
, the weighted average remaining service period is
3.6 years
.
Unamortized stock option expense at
December 31, 2018
that will be amortized over the weighted-average remaining service period of
3.6
years totaled
$2.2 million
.
Restricted Stock and Restricted Stock Units
In
2018
and
2017
, we issued
280,000
and
349,000
shares of restricted stock, respectively, to certain employees. Shares issued to employees vest in
three
equal annual installments on the anniversary dates of their grant. In
2018
and
2017
,
182,500
and
530,542
shares of restricted stock vested, respectively.
In addition, in
2018
and
2017
, we issued
16,286
and
129,865
, respectively, restricted stock units to members of our Board of Directors in respect of the annual equity compensation under our non-employee director compensation policy. Restricted stock units issued to our Board of Directors vest at the earlier of the one year anniversary of their grant or the next annual stockholders' meeting. In
2018
and
2017
,
129,865
and
86,956
restricted stock units, respectively, vested.
The following table summarizes our aggregate restricted stock awards and restricted stock unit activity in
2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
Number of Unvested Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Aggregate Value of Unvested Shares
|
Balance at January 1, 2017
|
829,998
|
|
|
$1.19
|
|
$
|
988,763
|
|
Granted
|
478,865
|
|
|
$1.63
|
|
$
|
780,252
|
|
Vested
|
(617,498
|
)
|
|
$1.23
|
|
$
|
(758,653
|
)
|
Forfeitures
|
(201,667
|
)
|
|
$1.35
|
|
$
|
(272,017
|
)
|
Balance at December 31, 2017
|
489,698
|
|
|
$1.51
|
|
$
|
738,345
|
|
Granted
|
296,287
|
|
|
$3.07
|
|
$
|
909,600
|
|
Vested
|
(312,365
|
)
|
|
$1.45
|
|
$
|
(454,339
|
)
|
Forfeitures
|
(15,000
|
)
|
|
$1.41
|
|
$
|
(21,150
|
)
|
Balance at December 31, 2018
|
458,620
|
|
|
$2.56
|
|
$
|
1,172,456
|
|
We recognized
$0.6 million
and
$0.7 million
in stock-based compensation expense, which is recorded in selling, general and administrative expenses on the consolidated statement of operations for the years ended
December 31, 2018
and
2017
, respectively, and we will recognize
$0.9 million
over the remaining requisite service period.
Unamortized restricted stock and restricted stock units expense at
December 31, 2018
that will be amortized over the weighted-average remaining service period of
2
years totaled
$1.0 million
.
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. During the years ended December 31,
2018
and
2017
, the Deferred Compensation Plan permitted the participants to elect to defer cash fees to which they were entitled for board and committee service. For
2018
, the Deferred Compensation Plan also permitted participants to defer the annual equity compensation for board service (which would otherwise be issued in the form of restricted stock units) under our non-employee director compensation policy. For participating directors, 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 are vested immediately, in the case of stock units in lieu of cash fees, and upon the earlier of the one year anniversary date of the grant or next annual meeting of stockholders, in the case of annual equity compensation, although the participating directors do not receive the shares represented by such units until a future qualifying event. A summary of stock unit activity under the Deferred Compensation Plan for
2018
and
2017
is as follows.
|
|
|
|
|
|
|
|
|
|
|
Number of Stock Units
|
|
Weighted Average Grant Date Fair Value per Share
|
|
Intrinsic Value Outstanding
|
January 1, 2017
|
393,012
|
|
|
$1.37
|
|
|
Granted
|
73,690
|
|
|
$1.54
|
|
|
Vested
|
—
|
|
|
$1.15
|
|
|
Converted
|
—
|
|
|
$0.00
|
|
|
December 31, 2017
|
466,702
|
|
|
$1.40
|
|
$
|
1,134,086
|
|
Granted
|
40,588
|
|
|
$2.99
|
|
|
Vested
|
—
|
|
|
$1.15
|
|
|
Converted
|
—
|
|
|
$0.00
|
|
|
December 31, 2018
|
507,290
|
|
|
$1.40
|
|
$1,699,422
|
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.
In September 2017, our board of directors authorized a new stock repurchase program and providing for the repurchase of up to
$2.0 million
of our common stock through September 19, 2018. Our stock repurchase program did 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
December 31, 2018
and
2017
, we had repurchased a total of
565,629
and
433,179
shares, respectively, for an aggregate purchase price of
$1.1 million
under this stock repurchase program. We currently maintain all repurchased shares under these stock repurchase programs as treasury stock.
11. Commitments and Contingencies
Obligation under Operating Leases
We lease facilities in Virginia, Michigan, and Georgia under operating leases that as of
December 31, 2018
were scheduled to expire between March 2020 and December 2024. Certain of the leases are subject to fixed escalations and provide for possible termination prior to their expiration dates. We recognize rent expense on such leases on a straight-line basis over the lease term. The difference between the straight line method and cash paid is reflected in changes to the deferred rent balance in our consolidated balance sheets. Deferred rent primarily resulted from recognition of the value of certain leasehold improvements associated with our Blacksburg, Virginia facility at the inception of the lease. Rent expense under these leases recorded in selling, general and administrative expense on our statements of operations totaled approximately
$1.0 million
and
$1.1 million
, respectively, for the years ended
December 31, 2018
and
2017
.
Minimum future payments, as of
December 31, 2018
, under the aforementioned operating leases for each of the next five years and thereafter are:
|
|
|
|
|
2019
|
1,216,124
|
|
2020
|
1,117,684
|
|
2021
|
640,800
|
|
2022
|
544,704
|
|
2023
|
544,704
|
|
Thereafter
|
544,704
|
|
|
$
|
4,608,720
|
|
Purchase Commitment
We executed a non-cancelable purchase order totaling
$0.5 million
in the fourth quarter of
2017
, a non-cancelable purchase order totaling
$1.1 million
in the first quarter of
2018
, and a non-cancelable purchase order totaling
$0.7 million
in the second quarter of
2018
for multiple shipments of tunable lasers to be delivered over an
18
-month period. At
December 31, 2018
, approximately
$0.8 million
of these commitments remained and is expected to be delivered by
July 30, 2019
.
Royalty Agreement
We have licensed certain third-party technologies from vendors for which we owe minimum royalties aggregating
$0.4 million
payable over the remaining patent terms of the underlying technology.
12. Employee Profit Sharing Plan
We maintain a salary reduction/profit-sharing plan under provisions of Section 401(k) of the Internal Revenue Code. The plan is offered to all of our permanent employees. We contribute
25%
of the salary deferral elected by each employee up to a maximum deferral of
10%
of annual salary.
We contributed approximately
$0.3 million
to the plan for each of the years ended
December 31, 2018
and
2017
.
13. Litigation and Other Contingencies
From time to time, we may become involved in litigation in relation to claims arising out of our operations in the normal course of business. While management currently believes it is not reasonably possible the amount of ultimate liability, if any, with respect to these actions will have a material adverse effect on our financial position, results of operations or liquidity, the ultimate outcome of any litigation is uncertain.
In December 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 Claim received from Macom totaled
$2.1 million
under various indemnity 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. As of December 31, 2018,
$1.5 million
of the escrow balance had been received with the remaining
$2.5 million
in the escrow account pending resolution of the dispute.
On July 31, 2018, we sold the assets associated with our optoelectronic components and sub-assemblies ("Opto") 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. There have been no amounts recorded in reference to the above matter in the financial statements as of
December 31, 2018
. It is uncertain what amount, if any, will be received with respect to this potential adjustment.
We have made, and will continue to make, efforts to comply with current and future environmental laws. We anticipate that we could incur additional capital and operating costs in the future to comply with existing environmental laws and new requirements arising from new or amended statutes and regulations. In addition, because the applicable regulatory agencies have not yet promulgated final standards for some existing environmental programs, we cannot at this time reasonably estimate
the cost for compliance with these additional requirements. The amount of any such compliance costs could be material. We cannot predict the impact that future regulations will impose upon our business.
14. Relationship with Major Customers
During the years ended
December 31, 2018
and
2017
, approximately
53%
and
48%
, respectively, of our consolidated revenues were attributable to contracts with the U.S. government.
At
December 31, 2018
and
2017
, receivables with respect to contracts with the U.S. government represented
23%
and
20%
of total trade receivables, respectively.
15. Financial Information About Segments
Our operations are divided into
two
operating segments: Technology Development and Products and Licensing. 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 revenue primarily from services. The Technology Development segment provides applied research to customers in our areas of focus.
The Products and Licensing segment develops and sells products or licenses technologies based on commercially viable concepts developed by the Technology Development segment. The Products and Licensing segment derives its revenue from product sales, funded product development and technology licenses.
Our President and Chief Executive Officer and his direct reports collectively represent our chief operating decision makers, and they evaluate segment performance based primarily on revenue and operating income or loss.
Information about the results of operations for each segment is set forth in the table below. There were no significant inter-segment sales during the years ended
December 31, 2018
and
2017
.
During the years ended
December 31, 2018
and
2017
,
24%
and
19%
, respectively, of our total sales took place outside the United States. No single country, outside of the United States, represented more than 10% of total revenues during the years ended
December 31, 2018
or
2017
.
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2018
|
|
2017
|
Technology Development revenue
|
|
$
|
20,967,556
|
|
|
$
|
18,576,383
|
|
Products and Licensing revenue
|
|
21,949,689
|
|
|
14,505,482
|
|
Total revenue
|
|
42,917,245
|
|
|
33,081,865
|
|
Technology Development operating income/(loss)
|
|
378,212
|
|
|
(120,417
|
)
|
Products and Licensing operating income/(loss)
|
|
499,323
|
|
|
(2,087,731
|
)
|
Total operating income/(loss)
|
|
$
|
877,535
|
|
|
$
|
(2,208,148
|
)
|
Depreciation, Technology Development
|
|
$
|
379,952
|
|
|
$
|
359,626
|
|
Depreciation, Products and Licensing
|
|
$
|
273,185
|
|
|
$
|
747,216
|
|
Amortization, Technology Development
|
|
$
|
130,765
|
|
|
$
|
139,067
|
|
Amortization, Products and Licensing
|
|
$
|
418,349
|
|
|
$
|
1,280,699
|
|
Products and licensing depreciation includes amounts from discontinued operations of
$0.1 million
and
$0.4 million
for the years ended
December 31, 2018
and
2017
, respectively. Products and licensing amortization includes amounts from discontinued operations of
$0.1 million
and
$0.9 million
for the years ended
December 31, 2018
and
2017
, respectively.
Additional segment information is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Total segment assets:
|
|
|
|
Technology Development
|
$
|
34,823,525
|
|
|
$
|
32,011,084
|
|
Products and Licensing
|
40,775,211
|
|
|
34,211,552
|
|
Total
|
$
|
75,598,736
|
|
|
$
|
66,222,636
|
|
Property plant and equipment and intangible assets, Technology Development
|
$
|
2,103,711
|
|
|
$
|
2,361,663
|
|
Property plant and equipment and intangible assets, Products and Licensing
|
$
|
4,927,453
|
|
|
$
|
4,831,671
|
|
For December 31, 2017, the products and licensing segment assets include assets held for sale in the amount of
$7.0 million
. Property plant and equipment, and intangible assets as of
December 31, 2017
excludes assets associated with the optoelectronic components business sold during 2018.
16. Quarterly Results (unaudited)
The following table sets forth our unaudited historical revenues, operating loss and net (loss)/income by quarter during
2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
(Dollars in thousands,
except per share amounts)
|
March 31,
2018
|
|
June 30,
2018
|
|
September 30,
2018
|
|
December 31,
2018
|
|
March 31,
2017
|
|
June 30,
2017
|
|
September 30,
2017
|
|
December 31,
2017
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology development
|
$
|
4,637
|
|
|
$
|
5,466
|
|
|
$
|
5,316
|
|
|
$
|
5,549
|
|
|
$
|
4,235
|
|
|
$
|
4,602
|
|
|
$
|
4,591
|
|
|
$
|
5,549
|
|
Products and licensing
|
4,131
|
|
|
4,457
|
|
|
5,371
|
|
|
7,990
|
|
|
2,398
|
|
|
3,681
|
|
|
3,713
|
|
|
4,637
|
|
Total revenues
|
8,768
|
|
|
9,923
|
|
|
10,687
|
|
|
13,538
|
|
|
6,633
|
|
|
8,283
|
|
|
8,304
|
|
|
10,186
|
|
Gross margin
|
4,929
|
|
|
5,693
|
|
|
5,998
|
|
|
6,572
|
|
|
1,770
|
|
|
2,414
|
|
|
2,385
|
|
|
4,384
|
|
Operating income/(loss)
|
(373
|
)
|
|
205
|
|
|
581
|
|
|
423
|
|
|
(1,374
|
)
|
|
(237
|
)
|
|
(150
|
)
|
|
(61
|
)
|
Net income/(loss) from continuing operations
|
(272
|
)
|
|
299
|
|
|
1,293
|
|
|
(122
|
)
|
|
(1,254
|
)
|
|
(195
|
)
|
|
194
|
|
|
257
|
|
Income/(loss) from discontinued operations net of income taxes
|
421
|
|
|
768
|
|
|
7,556
|
|
|
1,062
|
|
|
(102
|
)
|
|
(26
|
)
|
|
15,563
|
|
|
749
|
|
Net (loss)/income
|
149
|
|
|
1,067
|
|
|
8,849
|
|
|
940
|
|
|
(1,356
|
)
|
|
(221
|
)
|
|
15,757
|
|
|
1,006
|
|
Net (loss)/income attributable to common stockholders
|
$
|
84
|
|
|
$
|
1,004
|
|
|
$
|
8,785
|
|
|
$
|
873
|
|
|
$
|
(1,390
|
)
|
|
$
|
(251
|
)
|
|
$
|
15,723
|
|
|
$
|
939
|
|
Net income/(loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.05
|
|
|
$
|
—
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Diluted
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
—
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Net income/(loss) per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.27
|
|
|
$
|
0.04
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.56
|
|
|
$
|
0.03
|
|
Diluted
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.23
|
|
|
$
|
0.04
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.48
|
|
|
$
|
0.02
|
|
Net income/(loss) attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
—
|
|
|
$
|
0.04
|
|
|
$
|
0.31
|
|
|
$
|
0.03
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.57
|
|
|
$
|
0.03
|
|
Diluted
|
$
|
—
|
|
|
$
|
0.03
|
|
|
$
|
0.27
|
|
|
$
|
0.03
|
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.48
|
|
|
$
|
0.03
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
27,204,989
|
|
|
27,531,361
|
|
|
27,901,631
|
|
|
28,067,348
|
|
|
27,541,356
|
|
|
27,600,147
|
|
|
27,692,539
|
|
|
27,485,278
|
|
Diluted
|
27,204,989
|
|
|
31,506,745
|
|
|
33,055,881
|
|
|
28,067,348
|
|
|
27,541,356
|
|
|
27,600,147
|
|
|
32,714,389
|
|
|
31,790,418
|
|
17. 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 possible working capital adjustments to the purchase price and potential satisfaction of certain post-closing indemnification obligations (the "Transaction"). 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 HSOR business was a component of the operations of Advanced Photonix, Inc., which we acquired in May 2015. As part of the Transaction, the buyer also hired approximately
49
of our employees who were engaged in the development, manufacture, and sale of HSOR products in addition to certain corporate administrative functions. The buyer provided certain transition services to us with respect to infrastructure and administration for which we paid
$0.3 million
per month for a period of
five
months, for a total of
$1.5 million
. We recorded this obligation as a reduction of the value of the purchase price. In assessing the fair value of the services expected to be received by us in relation to those we expected to deliver to the buyer, we concluded that the transition service payments were more closely aligned with the fair value of the assets sold than the services received and, thus, should be accounted for as part of the consideration reconciliation rather than operating activities. Our HSOR business accounted for
16.1%
of revenues and
18.5%
of our costs of revenues for the year ended
December 31, 2017
.
On
July 31, 2018
, we sold the assets and operations related to our 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 in accordance with GAAP 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 API, 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 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. We allocated a portion of the consolidated tax (benefit)/expense to discontinued operations based on the ratio of the discontinued business's loss/(income) before allocations.
The following table presents a summary of the transactions related to the sales of Opto in the year ended
December 31, 2018
and HSOR in the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
Sale price
|
$
|
17,500,000
|
|
|
$
|
33,500,000
|
|
Less: transition services payments
|
—
|
|
|
(1,500,000
|
)
|
Adjusted purchase price
|
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
|
)
|
|
(895,186
|
)
|
Return of working capital
|
730,000
|
|
|
—
|
|
Income tax expense
|
(1,572,245
|
)
|
|
(912,298
|
)
|
Gain on sale of discontinued operations
|
$
|
8,595,797
|
|
|
$
|
15,671,028
|
|
Assets and liabilities held for sale 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 current 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
|
|
Deferred revenue
|
|
—
|
|
Total current liabilities
|
|
972,451
|
|
Long-term deferred rent
|
|
—
|
|
Total non-current liabilities
|
|
—
|
|
Total liabilities held for sale
|
|
$
|
972,451
|
|
The key components of income from discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2018
|
|
2017
|
Net revenues
|
$
|
8,363,606
|
|
|
$
|
19,511,646
|
|
Cost of revenues
|
5,294,268
|
|
|
12,994,656
|
|
Operating expenses
|
1,728,113
|
|
|
5,413,952
|
|
Other (income)/expenses
|
(13,330
|
)
|
|
31,758
|
|
Income before income taxes
|
1,354,555
|
|
|
1,071,280
|
|
Allocated tax expense
|
183,921
|
|
|
876,588
|
|
Operating income from discontinued operations
|
1,170,634
|
|
|
194,692
|
|
Gain on sale, net of related income taxes
|
8,595,797
|
|
|
15,671,028
|
|
Net income from discontinued operations
|
$
|
9,766,431
|
|
|
$
|
15,865,720
|
|
For the years ended
December 31, 2018
and
2017
, depreciation and amortization from discontinued operations were
$0.2 million
and
$1.3 million
, respectively. For the years ended
December 31, 2018
and
2017
, the acquisition of property plant and equipment for discontinued operations were
$0.1 million
in each period. For the years ended
December 31, 2018
and
2017
, intangible property costs associated with discontinued operations were
$0.01 million
and
$0.1 million
, respectively. Proceeds from the sale of the Opto business which were included in cash flows from investing activities in
2018
were
$16.0 million
and proceeds from the sale of the HSOR business which are included in cash flows from investing activities for
2017
were
$28.0 million
. The gain on sale of discontinued operations included in non-cash adjustments to cash flows from operating activities for
2018
and
2017
was
$8.6 million
and
$15.7 million
, respectively.
18. Business Acquisitions
On October 15, 2018, we acquired substantially all of the assets, other than cash, the United States operations of Micron Optics, Inc. ("MOI") for cash consideration of
$5.5 million
, of which
$5.0 million
was paid during 2018, with the remaining
$0.5 million
reflected in accrued liabilities. The transaction has been accounted for under the acquisition method of accounting in accordance with ASC 805. We incurred approximately
$0.8 million
of costs associated with the acquisition during 2018, which are included in selling, general and administrative expenses in our consolidated statement of operations. For the period from the closing of the acquisition through December 31, 2018, we recognized revenues of
$2.6 million
and income of
$1.1 million
associated with the operations of MOI.
Under the acquisition method of accounting, the total estimated purchase consideration is allocated to the acquired tangible and intangible assets and assumed liabilities based on their estimated fair values as of the acquisition date. Any excess of the fair value of the acquisition consideration over the identifiable assets acquired and liabilities assumed is recognized as goodwill. We have completed a preliminary allocation of the purchase consideration with the assistance of a third-party valuation expert. The following allocation of the purchase consideration is subject to revision as additional information becomes known in the future.
|
|
|
|
|
|
|
|
Preliminary
|
|
|
Allocation
|
|
|
|
Accounts receivable
|
|
$
|
1,742,693
|
|
Inventory
|
|
1,435,606
|
|
Other current assets
|
|
69,951
|
|
Property and equipment
|
|
996,460
|
|
Identifiable intangible assets
|
|
1,650,000
|
|
Goodwill
|
|
101,008
|
|
Accounts payable and accrued expenses
|
|
(450,985
|
)
|
Total purchase consideration
|
|
$
|
5,544,733
|
|
The preliminary identifiable intangible assets and their estimated useful lives were as follows:
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
Estimated
|
|
|
Fair Value
|
|
Useful Life
|
|
|
|
|
|
Developed technology
|
|
$
|
1,200,000
|
|
|
5.0 years
|
In process research and development
|
|
200,000
|
|
|
7.0 years
|
Trade names
|
|
150,000
|
|
|
3.0 years
|
Customer base
|
|
100,000
|
|
|
7.0 years
|
|
|
$
|
1,650,000
|
|
|
|
Developed technologies acquired primarily consists of MOI's existing technologies related to fiber optic sensing instruments, modules, and components. The developed technologies were valued using the "multi-period excess earnings" method, under the income approach. The multi-period excess earnings method reflects the present value of the projected cash flows that are expected by the developed technologies less charges representing the contribution of other assets to those cash flows. A discount rate of
24.5%
was used to discount the cash flows to present value.
In process research and development represents the fair value of incomplete MOI research and development projects that had not reached technological feasibility as of the closing date of the acquisition. In the future, the fair value of such project at
the closing date of the acquisition will be either amortized or impaired depending on whether the project is completed or abandoned. The fair value of in process research and development was determined using the multi-period excess earnings method. A discount rate of
29.5%
was used to discount the cash flows to the present value.
Customer base represents the fair value of projected cash flows that will be derived from the sale of products to MOI's existing customers as of the closing date of the acquisition. Customer relationships were valued using the "distributor" method, under the income approach. Under this premise, the margin of a distributor within the industry is deemed to be the margin attributable to customer relationships. This isolates the cash flows attributable to the customer relationships for which a market participant would be willing to pay. A discount rate of
24.5%
was used to discount cash flows to present value.
Trade names and trademarks are considered a type of guarantee of a certain level of quality or performance represented by the MOI brand. Trade names and trademarks were valued using the "relief from royalty" method of the income approach. This method is based on the assumption that in lieu of ownership, a market participant would be willing to pay a royalty in order to exploit the related benefits of this asset. A discount rate of
17%
was used to discount the cash flows to the present value.
Goodwill represents the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed in connection with the acquisition.
Pro forma consolidated results of operations
The following unaudited pro forma financial information presents combined results of operations for each of the periods presented as if the acquisition of MOI had been completed on January 1, 2017. The pro forma information includes adjustments to depreciation expense for property and equipment acquired, to amortize expense for the intangible assets acquired, and to eliminate the acquisition transaction expenses recognized in each period. Transaction-related expenses associated with the acquisition and excluded from the pro forma income/(loss) from continuing operations were
$0.8 million
. The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations or the combined business had the acquisition of MOI actually occurred on January 1, 2017, or the results of future operations of the combined business. For instance, planned or expected operational synergies following the acquisition are not reflected in the pro forma information. Consequently, actual results will differ from the unaudited pro forma information presented below.
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
Revenue
|
|
$
|
49,494,358
|
|
|
$
|
40,954,093
|
|
|
|
|
|
|
Income/(loss) from continuing operations
|
|
$
|
1,579,318
|
|
|
$
|
(2,778,487
|
)
|
On March 1, 2019, we acquired the outstanding stock of General Photonics Corporation for cash consideration of
$19.0 million
. Of the purchase price,
$17.1 million
was paid at closing and
$1.9 million
was placed into escrow for possible working capital adjustments to the purchase price and potential satisfaction of certain post-closing indemnification obligations. Additionally, we can become obligated to pay additional cash consideration of up to
$1.0 million
if certain revenue targets for the General Photonics Corporation historical business are met for the twelve month period following the closing. The purchase price is also subject to adjustment based upon the determination of final working capital as of the closing date compared to a target working capital valued specified in the stock purchase agreement. We have not yet completed its analysis of the fair market value of the assets acquired and liabilities assumed as of the closing date and the associated allocation of the purchase price.