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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 _____________________________________ 
FORM 10-Q
  _____________________________________  
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
COMMISSION FILE NUMBER 000-52008
  _____________________________________ 
LUNA INNOVATIONS INCORPORATED
(Exact name of registrant as specified in its charter)
  _____________________________________  
Delaware
 
54-1560050
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
301 First Street SW, Suite 200
Roanoke, VA 24011
(Address of Principal Executive Offices)
(540) 769-8400
(Registrant’s Telephone Number, Including Area Code)

   _____________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.001 par value per share
LUNA
The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes   o   No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ý  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer        o                Accelerated filer         o    
 
Non-accelerated filer        ý                Smaller reporting company ý    

Emerging growth company o    
                    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    ý  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 6, 2019, there were 28,300,766 shares of the registrant’s common stock outstanding.
 




Table of Contents

LUNA INNOVATIONS INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2019
TABLE OF CONTENTS

ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.


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PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
Luna Innovations Incorporated
Consolidated Balance Sheets
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
23,537,673

 
$
42,460,267

Accounts receivable, net
13,845,438

 
13,037,068

Receivable from sale of HSOR business
2,500,375

 
2,500,000

Contract assets
3,094,279

 
2,422,495

Inventory
9,732,937

 
6,873,742

Prepaid expenses and other current assets
1,063,124

 
935,185

Total current assets
53,773,826

 
68,228,757

Long-term contract assets
386,350

 
336,820

Property and equipment, net
3,752,698

 
3,627,886

Intangible assets, net
10,952,448

 
3,302,270

Goodwill
10,345,249

 
101,008

Other assets, net
2,978,346

 
1,995

Total assets
$
82,188,917

 
$
75,598,736

Liabilities and stockholders’ equity
 
 
 
Liabilities:
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt obligations
$

 
$
619,315

Current portion of capital lease obligations

 
40,586

Accounts payable
3,000,066

 
2,395,984

Accrued liabilities
8,972,412

 
6,597,458

Contract liabilities
2,407,830

 
2,486,111

Total current liabilities
14,380,308

 
12,139,454

Long-term deferred rent

 
1,035,974

Other long-term liabilities
2,620,446

 

Long-term capital lease obligations

 
68,978

Total liabilities
17,000,754

 
13,244,406

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.001, 1,321,514 shares authorized, issued and outstanding at June 30, 2019 and December 31, 2018
1,322

 
1,322

Common stock, par value $0.001, 100,000,000 shares authorized, 29,606,604 and 29,209,506 shares issued, 28,300,766 and 27,956,401 shares outstanding at June 30, 2019 and December 31, 2018, respectively
30,557

 
30,120

Treasury stock at cost, 1,305,838 and 1,253,105 shares at June 30, 2019 and December 31, 2018, respectively
(2,337,110
)
 
(2,116,640
)
Additional paid-in capital
87,004,906

 
85,744,750

Accumulated deficit
(19,511,512
)
 
(21,305,222
)
Total stockholders’ equity
65,188,163

 
62,354,330

Total liabilities and stockholders’ equity
$
82,188,917

 
$
75,598,736

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

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Luna Innovations Incorporated
Consolidated Statements of Operations
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(unaudited)
 
(unaudited)
Revenues:
 
 
 
 
 
 
 
Products and licensing
$
11,372,664

 
$
4,457,084

 
$
19,565,039

 
$
8,588,838

Technology development
6,440,999

 
5,466,280

 
13,081,742

 
10,103,056

       Total revenues
17,813,663

 
9,923,364

 
32,646,781

 
18,691,894

Cost of revenues:
 
 
 
 

 
 
Products and licensing
4,577,774

 
1,747,585

 
7,827,112

 
3,322,988

Technology development
4,483,974

 
3,945,127

 
9,300,121

 
7,298,628

       Total cost of revenues
9,061,748

 
5,692,712

 
17,127,233

 
10,621,616

Gross profit
8,751,915

 
4,230,652

 
15,519,548

 
8,070,278

Operating expense:
 
 
 
 

 
 
Selling, general and administrative
6,002,613

 
3,265,408

 
12,228,709

 
6,598,898

Research, development and engineering
1,735,342

 
760,276

 
3,193,235

 
1,639,868

       Total operating expense
7,737,955

 
4,025,684

 
15,421,944

 
8,238,766

Operating income/(loss)
1,013,960

 
204,968

 
97,604

 
(168,488
)
Other income/(expense):
 
 
 
 

 
 
Investment income
76,813

 
99,844

 
268,020

 
175,756

Other expense
(3,056
)
 
(9,369
)
 
(4,452
)
 
(20,223
)
Interest expense
(52
)
 
(34,484
)
 
(12,775
)
 
(75,131
)
Total other income
73,705

 
55,991

 
250,793

 
80,402

Income/(loss) from continuing operations before income taxes
1,087,665

 
260,959

 
348,397

 
(88,086
)
Income tax expense/(benefit)
247,373

 
(38,269
)
 
(1,617,774
)
 
(115,236
)
Net income from continuing operations
840,292

 
299,228

 
1,966,171

 
27,150

Income from discontinued operations, net of income tax of ($59,864) and $18,499

 
768,100

 

 
1,188,853

Net income
840,292

 
1,067,328

 
1,966,171

 
1,216,003

Preferred stock dividend
89,549

 
63,235

 
172,607

 
127,660

Net income attributable to common stockholders
$
750,743

 
$
1,004,093

 
$
1,793,564

 
$
1,088,343

Net income per share from continuing operations:
 
 
 
 
 
 
 
       Basic
$
0.03

 
$
0.01

 
$
0.07

 
$

       Diluted
$
0.02

 
$
0.01

 
$
0.06

 
$

Net income per share from discontinued operations:
 
 
 
 
 
 
 
       Basic
$

 
$
0.03

 
$

 
$
0.04

       Diluted
$

 
$
0.02

 
$

 
$
0.04

Net income per share attributable to common stockholders:
 
 
 
 
 
 
 
        Basic
$
0.03

 
$
0.04

 
$
0.06

 
$
0.04

        Diluted
$
0.02

 
$
0.03

 
$
0.05

 
$
0.03

Weighted average common shares and common equivalent shares outstanding:
 
 
 
 
 
 
 
        Basic
28,246,840

 
27,531,361

 
28,143,534

 
27,368,185

        Diluted
33,650,790

 
31,506,745

 
33,588,951

 
31,257,277

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

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Luna Innovations Incorporated
Consolidated Statements of Cash Flows
 
 
Six Months Ended June 30,
 
2019
 
2018
 
(unaudited)
Cash flows provided by/(used in) operating activities
 
 
 
Net income
$
1,966,171

 
$
1,216,003

Adjustments to reconcile net income to net cash provided by/(used in) operating activities
 
 

Depreciation and amortization
1,165,609

 
622,577

Share-based compensation
720,649

 
212,149

Bad debt expense

 
6,000

(Gain)/loss on disposal of fixed assets

 
(1,000
)
Change in assets and liabilities
 
 

Accounts receivable
712,805

 
(1,522,604
)
Contract assets
(721,315
)
 
(645,824
)
Inventory
(161,196
)
 
(482,194
)
Other current assets
(17,483
)
 
164,809

Accounts payable and accrued expenses
(2,313,551
)
 
(253,372
)
Contract liabilities
(234,854
)
 
(2,053,566
)
Net cash provided by/(used in) operating activities
1,116,835

 
(2,737,022
)
Cash flows used in investing activities
 
 
 
Acquisition of property and equipment
(405,795
)
 
(198,012
)
Intangible property costs
(136,852
)
 
(185,909
)
       Proceeds from sale of property and equipment

 
1,000

Acquisition of General Photonics Corporation
(19,004,250
)
 

Net cash used in investing activities
(19,546,897
)
 
(382,921
)
Cash flows used in financing activities
 
 
 
Payments on finance lease obligations
(14,545
)
 
(25,309
)
Payments of debt obligations
(625,000
)
 
(916,665
)
Repurchase of common stock
(220,470
)
 
(466,894
)
Proceeds from the exercise of options and warrants
367,483

 
840,078

Net cash used in financing activities
(492,532
)
 
(568,790
)
Net decrease in cash and cash equivalents
(18,922,594
)
 
(3,688,733
)
Cash and cash equivalents—beginning of period
42,460,267

 
36,981,533

Cash and cash equivalents—end of period
$
23,537,673

 
$
33,292,800

Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
$
13,407

 
$
72,127

Cash paid for income taxes
$
687,275

 
$
8,156

Non-cash investing and financing activities
 
 
 
Contingent liability for business combination
$
915,000

 

Dividend on preferred stock, 39,646 shares of common stock issuable for each of the six months ended June 30, 2019 and 2018
$
172,607

 
$
127,660

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

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Luna Innovations Incorporated
Notes to Unaudited Consolidated Financial Statements
 
1.
    Basis of Presentation and Significant Accounting Policies
Nature of Operations
Luna Innovations Incorporated (“we,” “Luna Innovations” or the “Company”), headquartered in Roanoke, Virginia, was incorporated in the Commonwealth of Virginia in 1990 and reincorporated in the State of Delaware in April 2003. We are a leader in advanced optical technology, providing 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.
Unaudited Interim Financial Information
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United Stated of America (“U.S. GAAP”) for interim financial statements and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. The unaudited consolidated interim financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management reflect all adjustments, consisting of only normal recurring accruals considered necessary to present fairly our financial position at June 30, 2019, results of operations and changes in stockholders' equity for the three and six months ended June 30, 2019 and 2018, and cash flows for the six months ended June 30, 2019 and 2018. The results of operations for the three and six months ended June 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The consolidated balance sheet as of December 31, 2018 was derived from our audited consolidated financial statements.
The consolidated interim financial statements, including our significant accounting policies, should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2018, included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 15, 2019.
Business Combinations
We apply the provisions of Accounting Standards Codification ("ASC") 805, Business Combinations, in the accounting for acquisitions. ASC 805 requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in our consolidated statements of operations. Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include: future expected cash flows from product sales; customer contracts and acquired technologies; expected costs to develop in-process research and development into commercially viable products and estimated cash flows from the projects when completed; and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results.

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Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis, as of October 1 of each year, or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be
recoverable. Purchased intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives and reviewed for impairment as described above.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants. Various valuation approaches can be used to determine fair value, each requiring different valuation inputs. The following hierarchy classifies the inputs used to determine fair value into three levels:
 
Level 1—Quoted prices for identical instruments in active markets
Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets
Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable
The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term nature of these instruments. The carrying value of our debt as of December 31, 2018 approximates fair value, as we consider the floating interest rate on our credit facilities with Silicon Valley Bank ("SVB") to be at market for similar instruments. Certain non-financial assets and liabilities are measured at fair value on a nonrecurring basis in accordance with U.S. GAAP. This includes items such as non-financial assets and liabilities initially measured at fair value in a business combination and non-financial long-lived asset groups measured at fair value for an impairment assessment. In general, non-financial assets including intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized.
Net Income Per Share
Basic per share data is computed by dividing our net income by the weighted average number of shares outstanding during the period. Diluted per share data is computed by dividing net income by the weighted average shares outstanding during the period increased to include, if dilutive, the number of additional common share equivalents that would have been outstanding if potential shares of common stock had been issued using the treasury stock method. Diluted per share data would also include the potential common share equivalents relating to convertible securities by application of the if-converted method.
The effects of 5.4 million and 4.0 million common stock equivalents (which include outstanding warrants, preferred stock and stock options) are included for the diluted per share data for three months ended June 30, 2019 and 2018, respectively. The effects of 5.4 million and 3.9 million common stock equivalents are included for the diluted per share data for the six months ended June 30, 2019 and 2018, respectively.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued a new standard related to Leases, Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) and subsequent amendments, which replaced existing U.S. GAAP and requires lessees to recognize right-of-use ("ROU") assets and lease liabilities on the balance sheet for those leases classified as operating leases for greater transparency. The Company, using a modified retrospective adoption approach, is required to recognize and measure leases existing at the beginning of the adoption period, with certain practical expedients available.
The Company adopted the standard effective January 1, 2019. The standard allows a number of optional practical expedients to use for transition. The Company choose the certain practical expedients allowed under the transition guidance which permitted us to not to reassess any existing or expired contracts to determine if they contain embedded leases, to not to reassess our lease classification on existing leases, to account for lease and non-lease components as a single lease component for equipment leases, and whether initial direct costs previously capitalized would qualify for capitalization under FASB ASC 842. The new standard also provides practical expedients and recognition exemptions for an entity's ongoing accounting policy elections. The Company has elected the short-term lease recognition for all leases that qualify, which means that we do not recognize a ROU asset and lease liability for any lease with a term of twelve months or less.

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The most significant impact of adopting the standard was the recognition of ROU assets and lease liabilities for operating leases on the Company's consolidated balance sheet but it did not have an impact on the Company's consolidated statements of operations or consolidated statements of cash flows. The cumulative effect of the changes made to our January 1, 2019 unaudited consolidated balance sheet as a result of the adoption of ASC 842 are as follows:
 
Balance at
 
Adjustment for
 
Adjusted balance at
 
December 31, 2018
 
ASC 842
 
January 1, 2019
Assets:
 
 
 
 
 
Property and equipment, net
3,627,886

 
(90,494
)
 
3,537,392

Other assets, net
1,995

 
3,536,133

 
3,538,128

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Accrued liabilities
6,597,458

 
1,242,669

 
7,840,127

Current portion of capital lease obligations
40,586

 
(40,586
)
 

Long-term deferred rent
1,035,974

 
(1,035,974
)
 

Long-term operating lease liability

 
3,271,705

 
3,271,705

Long-term capital lease obligations
68,978

 
(68,978
)
 

Long-term finance lease liability

 
76,803

 
76,803


Effective January 1, 2018, we adopted 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 June 2016, the FASB issued ASU 2016-13: Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. The ASU requires companies to measure credit losses by using a methodology that reflects the expected credit losses based on historical information current economic conditions, and reasonable and supportable information. The new standard is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. We do not expect the adoption of ASU 2016-13 will have a significant impact on our consolidated 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 accumulated other comprehensive income 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 ASU 2018-02 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 consolidated financial statements.    

2.
Business Combinations

On October 15, 2018, we acquired substantially all of the assets, other than cash, of the United States operations of Micron Optics, Inc. ("MOI") for cash consideration of $5.5 million, of which $5.0 million was paid as of June 30, 2019, with the remaining $0.5 million reflected in accrued liabilities.


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For the three months ended June 30, 2019, we recognized revenue of $2.6 million and operating income of $0.7 million associated with the acquired operations of MOI, and for the six months ended June 30, 2019, we recognized revenue of $5.3 million and operating income of $1.3 million associated with the acquired operations of MOI.

On March 1, 2019, we acquired the outstanding stock of General Photonics Corporation ("GP") 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 GP historical business are met for the twelve month period following the closing. We currently estimate the fair value of the contingent obligation to be $0.9 million, which is shown in accrued liabilities on the consolidated balance sheet. The fair value of the contingent obligation was determined using the present value of estimated likely future payments.

For the three months ended June 30, 2019, we recognized revenue of $3.2 million and operating income of $0.3 million associated with the acquired operations of GP, and we recognized revenue of $3.9 million and operating income of $0.2 million associated with the acquired operations of GP for the period from the closing of the acquisition through June 30, 2019. Operating income for the three months ended June 30, 2019 included $0.6 million in amortization expense for the acquired intangibles associated with the acquisition of GP, and operating income included $0.8 million in amortization expense for the acquired intangibles associated with the acquisition of GP for the period from the closing of the acquisition through June 30, 2019. Operating income for the three months ended June 30, 2019 also included $43.7 thousand of costs associated with the acquisition of GP. Operating income for the six months ended June 30, 2019 included $0.9 million of costs associated with the acquisition of GP. The amortization expense for the acquired intangibles as well as the costs associated with the acquisition of GP are included in the cost of goods sold and selling, general and administrative expenses in our consolidated statements of operations.

These acquisitions have been accounted for under the acquisition method of accounting in accordance with ASC 805. 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 of each acquisition is subject to revision as additional information becomes known in the future.

 
 
Preliminary Allocation
 
 
MOI
 
GP
Accounts receivable
 
$
1,742,693

 
$
1,520,950

Inventory
 
1,435,606

 
2,698,000

Other current assets
 
69,951

 
763,873

Property and equipment
 
996,460

 
286,000

Identifiable intangible assets
 
1,650,000

 
8,200,000

Goodwill
 
101,008

 
10,315,490

Accounts payable and accrued expenses
 
(450,985
)
 
(3,865,063
)
Total purchase consideration
 
$
5,544,733

 
$
19,919,250




The preliminary identifiable intangible assets and their estimated useful lives were as follows:
 
 
Estimated
 
Estimated Fair Value
 
 
Useful Life
 
MOI
 
GP
Developed technology
 
5 - 8 years
 
$
1,200,000

 
$
7,200,000

In process research and development
 
7 years
 
200,000

 

Trade names and trademarks
 
3 years
 
150,000

 
400,000

Customer base
 
7 - 15 years
 
100,000

 
600,000

 
 
 
 
$
1,650,000

 
$
8,200,000


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Developed technologies acquired primarily consist of MOI's technologies related to fiber optic sensing instruments, modules, and components and GP's technologies relating to the measurement and control of the polarization of light. 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. Discount rates of 24.5% and 17% were used to discount the cash flows of MOI and GP, respectively, 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 each 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 existing customers of MOI and GP as of the respective closing dates of their acquisitions. 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. Discount rates of 24.5% and 16% were used to discount cash flows of MOI and GP, respectively, 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 and GP brands. 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. Discount rates of 17% and 16% were used to discount the cash flows of MOI and GP, respectively, 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. Goodwill generated from our business acquisitions was primarily attributable to expected synergies from future growth.

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 acquisitions of MOI and GP had been completed on January 1, 2018. 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 pro forma income from continuing operations were $43.7 thousand for the three months ended June 30, 2019, and $0.9 million for the six months ended June 30, 2019. There were no transaction-related expenses associated with the acquisition for either the three or six months ended June 30, 2018. 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 acquisitions of MOI and GP actually occurred on January 1, 2018, 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.

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Revenue
 
$
17,813,663

 
$
14,332,673

 
$
34,676,073

 
$
27,451,509

 
 
 
 
 
 
 
 
 
Income/(loss) from continuing operations
 
$
1,150,903

 
$
208,892

 
$
3,488,723

 
$
(134,604
)



3.    Discontinued Operations

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On July 31, 2018, we sold the assets and operations related to our optoelectronic components and subassemblies ("Opto") business, which was part of our Products and Licensing segment, to an unaffiliated third party for an initial purchase price up to $18.5 million, of which $17.5 million was received at closing and has been properly recorded in the financial statements with the remaining purchase price adjustment up to $1.0 million which is contingent upon the attainment of specified revenue targets during the eighteen months following the closing of the sale. The Opto business was a component of the operations of Advanced Photonix, Inc., which we acquired in May 2015, and represented all of our operations in our Camarillo, California and Montreal, Quebec facilities.
    We have reported the results of operations of the Opto business as discontinued operations in our consolidated interim financial statements. We allocated a portion of the consolidated tax expense to discontinued operations based on the ratio of the discontinued business's loss before allocations.
The key components of net income from discontinued operations were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(unaudited)
 
(unaudited)
Net revenues
$

 
$
3,849,283

 
$

 
$
7,273,925

Cost of revenues

 
2,407,467

 

 
4,645,617

Operating expenses

 
745,635

 

 
1,443,658

Other income

 
12,055

 

 
22,702

Income before income taxes

 
708,236

 

 
1,207,352

Allocated tax expense

 
(59,864
)
 

 
18,499

Net income from discontinued operations
$

 
$
768,100

 
$

 
$
1,188,853


For the six months ended June 30, 2018, cash flows provided by operating activities for discontinued operations was $0.1 million. For the six months ended June 30, 2018 cash flows used in investing activities for discontinued operations was $0.1 million.


4.
Goodwill

The changes in the carrying value of goodwill during the six months ended June 30, 2019 were as follows:

Balance as of December 31, 2018
$
101,008

   Goodwill resulting from business combination - GP
10,315,490

   Measurement Period Adjustment - MOI
(71,249
)
Balance as of June 30, 2019
$
10,345,249


     
5.
Inventory
Inventory consists of finished goods, work-in-process and raw materials valued at the lower of cost (determined on the first-in, first-out basis) or market. We write down inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions.
Components of inventory were as follows:

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June 30,
2019
 
December 31,
2018
 
(unaudited)
 
 
Finished goods
$
1,598,532

 
$
1,339,832

Work-in-process
1,118,736

 
643,420

Raw materials
7,015,669

 
4,890,490

       Total inventory
$
9,732,937

 
$
6,873,742

 
6.    Accrued Liabilities

Accrued liabilities at June 30, 2019 and December 31, 2018 consisted of the following:
 
June 30, 2019
 
December 31, 2018
 
 
(unaudited)
 
 
 
Accrued compensation
$
4,814,036

 
$
4,467,587

 
Income tax payable
409,145

 
236,636

 
Accrued professional fees
272,905

 
198,062

 
Deferred Rent

 
146,542

 
Current operating lease liability
1,384,294

 

 
Current finance lease liability
50,743

 

 
Royalties
167,662

 
302,428

 
Accrued liabilities - other
415,644

 
404,752

 
       Liability to related party

 
298,468

 
       Contingent liability
915,000

 

 
       Working capital adjustment - MOI
542,983

 
542,983

 
       Total accrued liabilities
$
8,972,412

 
$
6,597,458

 

7.
Debt
Silicon Valley Bank Facility
We previously maintained a Loan and Security Agreement with SVB (the "Credit Facility") under which we had a term loan with an original borrowing amount of $6.0 million (the “Term Loan”). The Term Loan carried a floating annual interest rate equal to SVB’s prime rate then in effect plus 2%. The Term Loan matured and was repaid in May 2019.
The following table presents a summary of debt outstanding as of June 30, 2019 and December 31, 2018:
 
June 30, 2019
 
December 31, 2018
 
 
(unaudited)
 
 
 
Silicon Valley Bank Term Loan
$

 
$
625,000

 
Less: unamortized debt issuance costs

 
5,685

 
Less: current portion

 
619,315

 
Total long-term debt
$

 
$

 

8.
Leases

The Company has operating leases for our facilities, which have remaining terms ranging from 1 to 5 years. Most of our leases do not have an option to extend the lease period beyond the stated term unless the new term is agreed by both parties. They also do not have an early termination clause included. Our operating lease agreements do not contain any material

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restrictive covenants. Some of our operating lease agreements contain variable payment provisions that provide for rental increases based on consumer price indices. The change in rent expense resulting from changes in these indices are included within variable rent.

The Company also has finance leases for equipment which have remaining terms ranging from 1 to 4 years. These lease agreements are for general office equipment with a 5-year useful life. These lease agreements do not have an option to extend the lease beyond the stated terms nor do they have an early termination clause. These lease agreements do not have any variable payment provisions included.



As of June 30, 2019, the Company's lease components included in the consolidated balance sheet were as follows:

Lease component
Classification
June 30, 2019
Assets
 
 
ROU assets - operating lease
Other assets
$
2,847,594

ROU assets - finance lease
Other assets
94,716

   Total ROU assets
 
$
2,942,310

 
 
 
Liabilities
 
 
Current operating lease liability
Accrued liabilities
$
1,384,294

Current finance lease liability
Accrued liabilities
50,743

Long-term operating lease liability
Other liabilities
2,572,862

Long-term finance lease liability
Other liabilities
47,584

   Total lease liabilities
 
$
4,055,483


Rent expense is recognized on a straight-line basis over the life of the lease. Rent expense consists of the following:

 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2019
Operating lease costs
$
404,531

 
$
808,430

Variable rent costs
(48,256
)
 
(72,955
)
   Total rent expense
$
356,275

 
$
735,475



Future minimum lease payments under non-cancellable leases were as follows:


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June 30, 2019
2019 - remaining 6 months
$
814,046

2020
1,467,701

2021
640,800

2022
544,704

2023
544,704

2024 and beyond
544,704

   Total future minimum lease payments
4,556,659

   Less: Interest
599,503

     Total operating lease liabilities
$
3,957,156

 
 
Current operating lease liability
$
1,384,294

Long-term operating lease liability
2,572,862

   Total operating lease liabilities
$
3,957,156





Other information related to leases is as follows:

 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2019
Finance lease cost:
 
 
 
   Amortization of right-of-use assets
$
10,320

 
$
21,965

   Interest on lease liabilities
55

 
2,231

Total finance lease cost
$
10,375

 
$
24,196

 
 
 
 
Other information:
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
   Operating cash flows from operating leases
$
404,531

 
$
808,430

   Finance cash flows from finance leases
$
8,791

 
$
15,554

Right-of-use assets obtained in exchange for new operating lease liabilities

 

Right-of-use assets obtained in exchange for new finance lease liabilities
$

 
$
14,541

Weighted-average remaining lease term - operating leases
3.9

 
3.9

Weighted-average remaining lease term - finance leases
3.9

 
3.9

Weighted-average discount rate - operating leases
7
%
 
7
%
Weighted-average discount rate - finance leases
7
%
 
7
%



9.
Capital Stock and Share-Based Compensation
We recognize share-based compensation expense based upon the fair value of the underlying equity award on the date of the grant. For restricted stock awards and restricted stock units, we recognize expense based upon the price of our underlying stock at the date of the grant. We have elected to use the Black-Scholes-Merton option pricing model to value any option or warrant awards granted. We recognize share-based compensation for such awards on a straight-line basis over the requisite service period of the awards. The risk-free interest rate is based on U.S. Treasury interest rates, the terms of which are consistent with the expected life of the stock options. The expected life is based upon historical experience of homogeneous

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groups within our company. We also assume an expected dividend yield of zero for all periods, as we have never paid a dividend on our common stock and do not have any plans to do so in the future.

Stock Options
A summary of the stock option activity for the six months ended June 30, 2019 is presented below:
 
Options Outstanding
 
Options Exercisable
 
Number of
Shares
 
Price per Share
Range
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value (1)
 
Number of
Shares
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value (1)
Balance, January 1, 2019
3,108,868

 
$0.61 - $6.55
 
$
2.26

 
$
3,669,794

 
1,986,740

 
$
1.81

 
$
3,314,494

Granted
565,070

 
$3.21 - $3.37
 


 
 
 
 
 
 
 
 
Exercised
(451,844
)
 
$0.82 - $1.81
 


 
 
 
 
 
 
 
 
Canceled
(7,507
)
 
$1.47 - $1.98
 


 
 
 
 
 
 
 
 
Balance, June 30, 2019
3,214,587

 
$0.61 - $6.23
 
$
2.57

 
$
6,204,781

 
1,724,056

 
$
2.09

 
$
4,156,431

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

At June 30, 2019, the outstanding stock options to purchase an aggregate of 3.2 million shares had a weighted-average remaining contractual term of 6.5 years, and the exercisable stock options to purchase an aggregate of 1.7 million shares had a weighted-average remaining contractual term of 4.0 years. The fair value of shares underlying vested options was $7.8 million at June 30, 2019. The fair value of shares underlying options exercised during the six months ended June 30, 2019 was $1,671,069.
For the six months ended June 30, 2019 and 2018 we recognized $0.7 million and $0.2 million in share-based compensation expense, respectively, which is included in our selling, general and administrative expense in the accompanying consolidated interim financial statements. We expect to recognize $3.0 million in share-based compensation expense over the weighted-average remaining service period of 3.3 years for stock options outstanding as of June 30, 2019.

Restricted Stock and Restricted Stock Units

Historically, we have granted shares of restricted stock to certain employees that have vested in three equal annual installments on the anniversary dates of their grant. However, beginning in 2019, we altered our approach for these grants to replace the grant of restricted stock subject to time-based vesting with the grant of a combination of restricted stock units ("RSUs") subject to time-based vesting and performance-based vesting. Each RSU represents the contingent right to receive a single share of our common stock upon the vesting of the award. For the six months ended June 30, 2019, we issued an aggregate of 230,000 RSUs to certain employees. Of the RSUs issued during the six months ended June 30, 2019, 167,000 of such RSUs are subject to time-based vesting and are scheduled to vest in three equal annual installments on the anniversary dates of the grant. The remaining 63,000 RSUs are performance-based awards that will vest based on our achievement of long-term performance goals, in particular, based on our levels of 2021 revenue and operating income. The 63,000 shares issuable upon vesting of the performance-based RSUs represent the maximum payout under our performance-based awards, based upon 150% of our target performance for 2021 revenue and operating income (the payout of such awards based on target performance for 2021 revenue and operating income would be 42,000 shares). In the case of the time-based and performance-based RSUs, vesting is also subject to the employee's continuous service with us through vesting. During the six months ended June 30, 2019, 177,665 shares of restricted stock vested.

In addition, in conjunction with our 2018 and 2019 Annual Meetings of Stockholders, we issued RSUs to certain members of our Board of Directors in respect of the annual equity compensation under our non-employee director compensation policy (other members of our Board of Directors elected to receive their annual equity compensation for Board service in the form of stock units under our Deferred Compensation Plan as described below). RSUs issued to our non-employee Directors vest at the earlier of the one-year anniversary of their grant or the next annual stockholders' meeting. For

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the six months ended June 30, 2019, we issued 11,600 RSUs to certain non-employee members of our Board of Directors in respect of the annual equity grants pursuant to our non-employee director compensation policy. During the six months ended June 30, 2019, 16,286 RSUs vested.


The following table summarizes the value of our unvested restricted stock awards and RSUs:
 
Number of Unvested Shares
 
Weighted Average Grant Date Fair Value
 
Aggregate Grant Date Fair Value of Unvested Shares
Balance, January 1, 2019
458,620

 
$
2.56

 
$
1,172,456

Granted
241,600

 
3.04

 
733,429

Vested
(193,951
)
 
2.32

 
(450,935
)
Forfeitures

 

 

Balance, June 30, 2019
506,269

 
$
2.87

 
$
1,454,950

Non-employee Director Deferred Compensation Plan
We maintain a non-employee director deferred compensation plan (the “Deferred Compensation Plan”) that permits our non-employee directors to defer receipt of certain of the compensation that they receive for serving on our board and board committees. The Deferred Compensation Plan has historically permitted the participants to elect to defer cash fees to which they were entitled for board and committee service. For participating directors, in lieu of payment of cash fees, we credit their accounts under the Deferred Compensation Plan with a number of stock units based on the trading price of our common stock as of the date of the deferral. These stock units vest immediately, although the participating directors do not receive the shares represented by such units until a future qualifying event.
In December 2017, we amended and restated our Deferred Compensation Plan to also permit participating non-employee directors to elect, beginning in 2018, to defer the receipt of some or all of the equity compensation that they receive for board and committee service. Stock units representing this equity compensation vest at the earlier of the one year anniversary of their grant or the next annual stockholders' meeting.
The following is a summary of our stock unit activity under the Deferred Compensation Plan for the six months ended June 30, 2019:
 
Number of Stock Units
 
Weighted Average Grant Date Fair Value per Share
 
Intrinsic Value Outstanding
Balance, January 1, 2019
507,290

 
$1.53
 
$
1,699,422

  Granted
100,043

 
4.21

 
 
  Forfeitures

 

 
 
  Converted

 

 
 
Balance, June 30, 2019
607,333

 
$1.97
 
$
2,732,999

As of June 30, 2019, 34,800 of the outstanding stock units had not yet vested.

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The following tables detail our equity transactions during the six months ended June 30, 2019 and 2018:
 
Preferred Stock
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Total
 
Shares
 
$
 
Shares
 
$
 
Shares
 
$
 
$
 
 
 
 
Balance at January 1, 2019, as previously reported
1,321,514

 
1,322

 
27,956,401

 
30,120

 
1,253,105

 
(2,116,640
)
 
85,744,750

 
(21,305,222
)
 
62,354,330

Exercise of stock options

 

 
189,312

 
189

 

 

 
184,769

 

 
184,958

Share-based compensation

 

 

 

 

 

 
342,765

 

 
342,765

Non-cash compensation

 

 

 

 

 

 

 

 

Stock dividends to Carilion Clinic(1)

 

 

 
20

 

 

 
83,038

 
(83,058
)
 

Net Income

 

 

 

 

 

 

 
1,125,879

 
1,125,879

Purchase of treasury stock

 

 

 

 

 

 

 



Balance, March 31 2019
1,321,514

 
1,322

 
28,145,713

 
30,329

 
1,253,105

 
(2,116,640
)
 
86,355,322

 
(20,262,401
)
 
64,007,932

Exercise of stock options

 

 
207,786

 
208

 

 

 
182,317

 

 
182,525

Share-based compensation

 

 

 

 

 

 
377,884

 

 
377,884

Non-cash compensation

 

 

 

 

 

 

 

 

Stock dividends to Carilion Clinic(1)

 

 

 
20

 

 

 
89,383

 
(89,403
)
 

Net Income

 

 

 

 

 

 

 
840,292

 
840,292

Purchase of treasury stock

 

 
(52,733
)
 

 
52,733

 
(220,470
)
 

 

 
(220,470
)
Balance, June 30 2019
1,321,514

 
1,322

 
28,300,766

 
30,557

 
1,305,838

 
(2,337,110
)
 
87,004,906

 
(19,511,512
)
 
65,188,163




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Table of Contents

 
Preferred Stock
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Total
 
Shares
 
$
 
Shares
 
$
 
Shares
 
$
 
$
 
 
 
 
Balance at January 1, 2018, as previously reported
1,321,514

 
1,322

 
27,283,918

 
29,186

 
1,070,904

 
(1,649,746
)
 
83,563,208

 
(32,406,189
)
 
49,537,781

Impact of change in accounting policy
 
 
 
 
 
 
 
 
 
 
 
 
 
 
354,028

 
354,028

As adjusted balance at January 1, 2018
1,321,514

 
1,322

 
27,283,918

 
29,186

 
1,070,904

 
(1,649,746
)
 
83,563,208

 
(32,052,161
)
 
49,891,809

Exercise of stock options

 

 
10,727

 
11

 

 

 
22,277

 

 
22,288

Share-based compensation

 

 

 

 

 

 
94,606

 

 
94,606

Non-cash compensation

 

 

 

 

 

 

 

 

Stock dividends to Carilion Clinic(1)

 

 

 
20

 

 

 
64,405

 
(64,425
)
 

Net Income

 

 

 

 

 

 

 
148,676

 
148,676

Purchase of treasury stock

 

 
(132,450
)
 

 
132,450

 
(306,041
)
 

 

 
(306,041
)
Balance, March 31 2018
1,321,514

 
1,322

 
27,162,195

 
29,217

 
1,203,354

 
(1,955,787
)
 
83,744,496

 
(31,967,910
)
 
49,851,338

Exercise of stock options

 

 
250,115

 
250

 

 

 
617,259

 

 
617,509

Share-based compensation

 

 
280,000

 
280

 

 

 
117,543

 

 
117,823

Non-cash compensation

 

 
129,865

 
130

 

 

 
199,871

 

 
200,001

Stock dividends to Carilion Clinic(1)

 

 

 
20

 

 

 
63,216

 
(63,236
)
 

Net Income

 

 

 

 

 

 

 
1,067,328

 
1,067,328

Purchase of treasury stock

 

 
(49,751
)
 

 
49,751

 
(160,853
)
 

 

 
(160,853
)
Balance, June 30 2018
1,321,514

 
1,322

 
27,772,424

 
29,897

 
1,253,105

 
(2,116,640
)
 
84,742,385

 
(30,963,818
)
 
51,693,146



(1)
The stock dividends payable in connection with Carilion Clinic’s Series A Preferred Stock will be issued subsequent to June 30, 2019. For the period from January 12, 2010, the original issue date of the Series A Preferred Stock, through June 30, 2019, the Series A Preferred Stock issued to Carilion has accrued $1,590,241 in dividends. The accrued and unpaid dividends as of June 30, 2019 will be paid by the issuance of 750,631 shares of our common stock upon Carilion’s written request.

Stock Repurchase Program

In September 2017, our board of directors authorized us to repurchase 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

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program, shares could be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. As of September 19, 2018, we had repurchased a total of 565,629 shares for an aggregate purchase price of $1.1 million under this stock repurchase program, after which this stock repurchase program expired. We currently maintain all repurchased shares under this stock repurchase program as treasury stock.

10.
Revenue Recognition

Our operations are divided into two operating segments—“Products and Licensing” and “Technology Development”.
The Products and Licensing segment derives its revenues from product sales, funded product development and technology licenses.
The Technology Development segment provides applied research to customers in our areas of focus. Our engineers and scientists collaborate with our network of government, academic and industry experts to identify technologies and ideas with promising market potential. We then compete to win fee-for-service contracts from government agencies and industrial customers who seek innovative solutions to practical problems that require new technology. The Technology Development segment derives its revenues primarily from services.

Disaggregation of Revenue

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.

The details are listed in the table below for the three and six months ended June 30, 2019 and 2018:












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Three Months Ended June 30, 2019
 
Three Months Ended June 30, 2018
 
 
(unaudited)
 
(unaudited)
 
 
Technology Development
Products and Licensing
Total
 
Technology Development
Products and Licensing
Total
Total Revenue by Geographic Location
 
 
 
 
 
 
 
United States
$
6,440,999

$
5,638,130

$
12,079,129

 
$
5,466,280

$
2,267,950

$
7,734,230

 
Asia

3,316,102

3,316,102

 

1,133,448

1,133,448

 
Europe

1,775,291

1,775,291

 

1,054,928

1,054,928

 
Canada, Central and South America

536,395

536,395

 

758

758

 
All Others

106,746

106,746

 



 
Total
$
6,440,999

$
11,372,664

$
17,813,663

 
$
5,466,280

$
4,457,084

$
9,923,364

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Revenue by Major Customer Type
 
 
 
 
 
 
 
Sales to the U.S. government
$
6,293,061

$
411,979

$
6,705,040

 
$
5,463,116

$
377,323

$
5,840,439

 
U.S. direct commercial sales and other
147,938

5,226,152

5,374,090

 
3,164

1,890,629

1,893,793

 
Foreign commercial sales & other

5,734,533

5,734,533

 

2,189,132

2,189,132

 
Total
$
6,440,999

$
11,372,664

$
17,813,663

 
$
5,466,280

$
4,457,084

$
9,923,364

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Revenue by Contract Type
 
 
 
 
 
 
 
Fixed-price contracts
$
3,504,291

$
11,372,664

$
14,876,955

 
$
2,375,939

$
4,457,084

$
6,833,023

 
Cost-type contracts
2,936,708


2,936,708

 
3,090,341


3,090,341

 
  Total
$
6,440,999

$
11,372,664

$
17,813,663

 
$
5,466,280

$
4,457,084

$
9,923,364

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Revenue by Timing of Recognition
 
 
 
 
 
 
 
Goods transferred at a point in time
$

$
11,070,193

$
11,070,193

 
$

$
4,350,718

$
4,350,718

 
Goods/services transferred over time
6,440,999

302,471

6,743,470

 
5,466,280

106,366

5,572,646

 
Total
$
6,440,999

$
11,372,664

$
17,813,663

 
$
5,466,280

$
4,457,084

$
9,923,364

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Revenue by Major Products/Services
 
 
 
 
 
 
 
Technology development
$
6,440,999

$

$
6,440,999

 
$
5,466,280

$

$
5,466,280

 
Optical test and measurement systems

10,745,548

10,745,548

 

3,971,510

3,971,510

 
Other

627,116

627,116

 

485,574

485,574

 
Total
$
6,440,999

$
11,372,664

$
17,813,663

 
$
5,466,280

$
4,457,084

$
9,923,364






20

Table of Contents

 
 
Six Months Ended June 30, 2019
 
Six Months Ended June 30, 2018
 
 
(unaudited)
 
(unaudited)
 
 
Technology Development
Products and Licensing
Total
 
Technology Development
Products and Licensing
Total
Total Revenue by Geographic Location
 
 
 
 
 
 
 
United States
$
13,081,742

$
9,558,073

$
22,639,815

 
$
10,103,056

$
4,709,447

$
14,812,503

 
Asia

5,722,104

5,722,104

 

2,136,580

2,136,580

 
Europe

3,430,598

3,430,598

 

1,642,334

1,642,334

 
Canada, Central and South America

717,580

717,580

 

98,477

98,477

 
All Others

136,684

136,684

 

2,000

2,000

 
Total
$
13,081,742

$
19,565,039

$
32,646,781

 
$
10,103,056

$
8,588,838

$
18,691,894

 
 
 
 

 
 
 
 
 
 
 
 

 
 
 
 
Total Revenue by Major Customer Type
 

 
 
 
 
 
Sales to the U.S. government
$
12,768,509

$
1,197,202

$
13,965,711

 
$
10,068,270

$
387,680

$
10,455,950

 
U.S. direct commercial sales and other
313,233

8,360,872

8,674,105

 
34,786

4,332,348

4,367,134

 
Foreign commercial sales & other

10,006,965

10,006,965

 

3,868,810

3,868,810

 
Total
$
13,081,742

$
19,565,039

$
32,646,781

 
$
10,103,056

$
8,588,838

$
18,691,894

 
 
 
 

 
 
 
 
 
 
 
 

 
 
 
 
Total Revenue by Contract Type
 

 
 
 
 
 
Fixed-price contracts
$
7,166,725

$
19,565,039

$
26,731,764

 
$
4,607,593

$
8,588,838

$
13,196,431

 
Cost-type contracts
5,915,017


5,915,017

 
5,495,463


5,495,463

 
  Total
$
13,081,742

$
19,565,039

$
32,646,781

 
$
10,103,056

$
8,588,838

$
18,691,894

 
 
 
 

 
 
 
 
 
 
 
 

 
 
 
 
Total Revenue by Timing of Recognition
 

 
 
 
 
 
Goods transferred at a point in time
$

$
18,665,786

$
18,665,786

 
$

$
8,315,068

$
8,315,068

 
Goods/services transferred over time
13,081,742

899,253

13,980,995

 
10,103,056

273,770

10,376,826

 
Total
$
13,081,742

$
19,565,039

$
32,646,781

 
$
10,103,056

$
8,588,838

$
18,691,894

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Revenue by Major Products/Services
 
 
 
 
 
 
 
Technology development
$
13,081,742

$

$
13,081,742

 
$
10,103,056

$

$
10,103,056

 
Optical test and measurement systems

18,088,741

18,088,741

 

7,659,520

7,659,520

 
Other

1,476,298

1,476,298

 

929,318

929,318

 
Total
$
13,081,742

$
19,565,039

$
32,646,781

 
$
10,103,056

$
8,588,838

$
18,691,894








21

Table of Contents


Contract Balances

Our contract assets consist of unbilled amounts for technology development contracts as well as custom product contracts. Also included in contract assets are royalty revenue and carrying amounts of right of returned inventory. Long-term contract assets include the fee withholding on cost reimbursable contracts that will not be billed within a year. Contract liabilities include excess billings, subcontractor accruals, warranty expense, extended warranty revenue, right of return refund, and customer deposits. The net contract assets (liabilities) increased $0.8 million, due primarily to increased contract assets in addition to a slight decrease in contract liabilities. The increase in contract assets is a result of the increased number of government research programs in addition to an increase in the number of our Fixed-Price contracts that have not reached milestones as designated in their respective contracts.

The following table shows the components of our contract balances as of June 30, 2019 and December 31, 2018:

 
June 30, 2019
 
December 31, 2018
Contract assets
$
3,480,629