This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Such forward-looking statements include, in particular, projections about our future results included in our Exchange Act reports and statements about our plans, strategies, business prospects, changes and trends in our business and the markets in which we operate. These forward-looking statements may be identified by the use of terms and phrases such as “anticipates,” “believes,” “can,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “plans,” “projects,” “should,” “targets,” “will,” “would,” and similar expressions or variations of these terms and similar phrases. Additionally, statements concerning future matters such as our expected liquidity, development of new products, enhancements or technologies, sales levels, expense levels, expectations regarding the outcome of legal proceedings

and other statements regarding matters that are not historical are forward-looking statements. Management cautions that these forward-looking statements relate to future events or our future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance, or achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation the following: (a) the rapidly evolving markets for the Company's products and uncertainty regarding the development of these markets; (b) the Company's historical dependence on sales to a limited number of customers and fluctuations in the mix of products and customers in any period; (c) delays and other difficulties in commercializing new products; (d) the failure of new products: (i) to perform as expected without material defects, (ii) to be manufactured at acceptable volumes, yields, and cost, (iii) to be qualified and accepted by our customers, and (iv) to successfully compete with products offered by our competitors; (e) uncertainties concerning the availability and cost of commodity materials and specialized product components that we do not make internally; (f) actions by competitors; (g) risks and uncertainties related to applicable laws and regulations, including the impact of changes to applicable tax laws and tariff regulationsregulations; (h) acquisition-related risks, including that (i) the revenues and (h)net operating results obtained from the Systron Donner ("SDI") business may not meet our expectations, (ii) the costs and cash expenditures for integration of the SDI business operations may be higher than expected, (iii) there could be losses and liabilities arising from the acquisition of SDI that we will not be able to recover from any source, and (iv) we may not realize sufficient scale in our navigation systems product line from the SDI acquisition and will need to take additional steps, including making additional acquisitions, to achieve our growth objectives for this product line; and (i) other risks and uncertainties discussed in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, as such risk factors may be amended, supplemented or superseded from time to time by our subsequent periodic reports we file with the Securities and Exchange Commission (“SEC”). These cautionary statements apply to all forward-looking statements wherever they appear in this Quarterly Report.

Forward-looking statements are based on certain assumptions and analysis made in light of our experience and perception of historical trends, current conditions and expected future developments as well as other factors that we believe are appropriate under the circumstances. While these statements represent our judgment on what the future may hold, and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results. All forward-looking statements in this Quarterly Report are made as of the date hereof, based on information available to us as of the date hereof, and subsequent facts or circumstances may contradict, obviate, undermine, or otherwise fail to support or substantiate such statements. We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. Certain information included in this Quarterly Report may supersede or supplement forward-looking statements in our other reports filed with the SEC. We assume no obligation to update any forward-looking statement to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.

We currently have one reporting segment: Fiber Optics. This segment is comprised of three product lines: Broadband (which includes Cable TV (“CATV”) systems and components, radio frequency over glass (“RFoG”) products, satellite/microwave communications products and wireless communication products), Chip Devices and Navigation Systems.

Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by U.S. GAAP for annual financial statements. In our opinion, the interim financial statements reflect all normal adjustments that are necessary to provide a fair presentation of the financial results for the interim periods presented. Operating results for interim periods are not necessarily indicative of results that may be expected for an entire fiscal year. The condensed consolidated balance sheet as of September 30, 2018 has been derived from the audited consolidated financial statements as of such date. For a more complete understanding of our business, financial position, operating results, cash flows, risk factors and other matters, please refer to our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

(a)    New Accounting Updates Recently Adopted

(b)    Recent Accounting Standards or Updates Not Yet Effective

Our significant accounting policies are detailed in “Note 2 - Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended September 30, 2018. Significant changes to our accounting policies as a result of adopting Topic 606 are discussed below:

The vast majority of our revenues are from product sales to our customers, pursuant to purchase orders with short lead times. Revenues from product sales are recognized when the customer obtains control of our product, which occurs at a point in time. The Company has elected to account for shipping and handling activities as a fulfillment cost as permitted by the standard. When we perform shipping and handling activities after the transfer of control to the customer (e.g. when control transfers prior to delivery), they are considered fulfillment activities, and accordingly, the costs are accrued when the related revenue is recognized. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less.

In certain instances, inventory is maintained by our customers at consigned locations. Revenues from consigned sales are recognized when the customer obtains control of our product, which occurs at a point in time. This is typically when the customer pulls product for use.

We use a number of wholesale distributors around the world and recognize revenue when the wholesale distributor obtains control of our product, which occurs at a point in time, typically upon shipment. Our wholesale distributors are contractually obligated to pay us on standard commercial terms, consistent with our end-use customers. We do not sell to wholesale distributors on consignment and do not give wholesale distributors a right of return.

In certain instances, prior to customers accepting product that is manufactured at one of our contract manufacturers, these customers require that they first qualify the product and manufacturing processes at our contract manufacturer (e.g. customer acceptance clause). The customers’ qualification process determines whether the product manufactured at our contract manufacturer achieves their quality, performance, and reliability standards. After a customer completes the initial qualification process, we receive approval to ship qualified product to that customer. Revenues are recognized when the customer obtains control of the qualified product, which occurs at a point in time, typically upon shipment.

To a lesser extent, we enter into other types of contracts including non-recurring engineering contracts. We recognize revenue for these arrangements over time or at a point in time depending on our evaluation of when the customer obtains control of the promised goods or services. For contracts that include multiple performance obligations, we allocate revenue to each performance obligation based on estimates of the relative standalone selling price that we would charge the customer for each promised product or service.

 

Revenue is also classified by major product category and is presented below:

Classification of an asset or liability within this hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs.

Cash consists primarily of bank deposits or highly liquid short-term investments with a maturity of three months or less at the time of purchase. Restricted cash represents temporarily restricted deposits held as compensating balances against short-term borrowing arrangements. Cash, cash equivalents and restricted cash are based on Level 1 measurements.

The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, other current assets, and accounts payable approximate fair value because of the short maturity of these instruments. See Note 4 for discussion of the fair value measurement of assets acquired and liabilities assumed in the SDI acquisition.

The components of accounts receivable consisted of the following:

The allowance for doubtful accounts is based on the age of receivables and a specific identification of receivables considered at risk of collection.

The following table summarizes changes in the allowance for doubtful accounts for the three and nine months ended December 31, 2018June 30, 2019 and 2017.2018.

The components of inventory consisted of the following:

The non-current inventory balance of $0.9 million and $1.4 million as of both December 31, 2018June 30, 2019 and September 30, 2018, respectively, is comprised entirely of raw materials which we acquired as part of a last time purchase as a result of the vendor announcing it would cease manufacturing a part. During the three and nine months ended December 31,June 30, 2019, we recorded a $0.2 million and $0.7 million reserve, respectively, on non-current inventory due to the decline in sales and future demand of the inventory. During the three and nine months ended June 30, 2018, we recorded a $0.4$0.5 million reservewrite-down on non-current inventory due to the decline in sales and future demand of the inventory.

The components of property, plant, and equipment, net consisted of the following:

The components of accrued expenses and other current liabilities consisted of the following:

Our severance and restructuring-related accruals specifically relate to the separation agreement discussedSeparation Agreement described above and non-cancelable obligations associated with an abandoned leased facility. Expense related to severance and restructuring accruals is included in selling, general, and administrative expense on our consolidated statements of operations and comprehensive income.loss. The following table summarizes the changes in the severance and restructuring accrual account:

On November 11, 2010, we entered into a Credit and Security Agreement (the(as amended, the “Credit Facility”) with Wells Fargo Bank, N.A. The Credit Facility is secured by the Company's assets and is subject to a borrowing base formula based on the Company's eligible accounts receivable, inventory, and machinery and equipment accounts.

On July 27, 2017, we entered into a Ninth Amendment of the Credit Facility which adjusted the interest rate to LIBOR plus 1.75%. On November 7, 2018, we entered into a Tenth Amendment of the Credit Facility which extended the maturity date of the facility to November 2021. The Credit Facility currently provides us with a revolving credit line of up to $15.0 million, subject to a borrowing base formula, that can be used for working capital requirements, letters of credit, acquisitions, and other general corporate purpose subject to a requirement, for certain specific uses, that the Company have liquidity of at least $25$25.0 million after such use.

As of December 31, 2018,June 30, 2019, there were no amounts outstanding under this Credit Facility and the Company was in compliance with all financial covenants. Also, as of December 31, 2018,June 30, 2019, the Credit Facility had approximately $0.5 million reserved for one outstanding stand-by letter of credit and $5.5$6.4 million available for borrowing. As of January 31,August 2, 2019, there was noan outstanding balance under this Credit Facility andof $1.6 million, $0.5 million reserved for one outstanding stand-by letter of credit.credit and $6.8 million available for borrowing.

For the three months ended December 31,June 30, 2019 and 2018, the Company recorded income tax expense of approximately $14,000 and 2017,$0, respectively. Income tax expense for the three months ended June 30, 2019 is primarily comprised of state minimum tax expense. For the nine months ended June 30, 2019 and 2018, the Company recorded income tax (expense) benefit of approximately $(15,000)$(44,000) and $0.3$0.5 million, respectively. Income tax expense for the threenine months ended December 31, 2018June 30, 2019 is primarily comprised of state minimum tax expense. Income tax benefit for threethe nine months ended December 31, 2017June 30, 2018 is primarily comprised of the effect of the December 22, 2017 Tax Cuts and Jobs Act (the “Tax Act”) which eliminated Alternative Minimum TaxesAMT and resulted in a refund to the Company of amounts paid in prior fiscal years, state minimum tax expense, and foreign tax expense included within continuing operations.years.

For the three months ended December 31,June 30, 2019 and 2018, and 2017, the effective tax rate on continuing operations was 0%0.1% and (80.2)0.0%, respectively. The higher tax rate for the three months ended June 30, 2019 is primarily due to the state minimum tax expense.

For the nine months ended June 30, 2019 and 2018, the effective tax rate on continuing operations was 0.2% and (4.2)%, respectively. The lower tax rate for the threenine months ended December 31, 2018June 30, 2019 is primarily due to the operating loss and state minimum tax expense. The higher beneficial tax rate for threethe nine months ended December 31, 2017June 30, 2018 was primarily due to the effect of the Tax Act, which resulted in a credit to the Company on future tax payments for past AMT amounts paid and the fiscal year 2018current period operating loss. Income tax expense is comprised of estimated alternative minimum tax as prescribed by ASC 740 and foreign tax expense. The Company uses some estimates to forecast permanent differences between book and tax accounting.

All deferred tax assets have a full valuation allowance at December 31, 2018.June 30, 2019. However, on a quarterly basis, the Company will evaluate the positive and negative evidence to assess whether the more likely than not criteria, mandated by ASC 740, has been satisfied in determining whether there will be further adjustments to the valuation allowance.

During the three and nine months ended December 31,June 30, 2019 and 2018, and 2017, there were no material increases or decreases in unrecognized tax benefits. As of December 31, 2018June 30, 2019 and September 30, 2018, we had approximately $0.5 million and $0.4 million, respectively, of interest and penalties accrued as tax liabilities on our balance sheet. We believe that it is reasonably possible that none of the uncertain tax positionpositions will be paid or settled within the next 12 months. Interest that is accrued on tax liabilities is recorded within interest expense on the statement of condensed consolidated statements of operations.

In May 2016 (and retroactively effective on February 1, 2016), the Company entered into a five year lease agreement for facilities in Beijing, China where some manufacturing work is to be performed. In connection with the lease agreement, the Company has recorded an ARO liability in the amount of $0.1 million at December 31, 2018June 30, 2019 and September 30, 2018.

 

a) Intellectual Property Lawsuits

We protect our proprietary technology by applying for patents where appropriate and, in other cases, by preserving the technology, related know-how and information as trade secrets. The success and competitive position of our product lines are impacted by our ability to obtain intellectual property protection for our research and development efforts. We have, from time to time, exchanged correspondence with third parties regarding the assertion of patent or other intellectual property rights in connection with certain of our products and processes.

On June 12, 2018, Phoenix Navigation Components, LLC (“Phoenix”) commenced an arbitration against EMCORE with the American Arbitration Association (“AAA”) in New York. On August 31, 2018, Phoenix filed a First Amended Demand for Arbitration, asserting the following claims: breach of contract, breach of the covenant of good faith and fair dealing, misappropriation of trade secrets (under the Defend Trade Secrets Act, 18 U.S.C. § 1836, and New York law), conversion, unjust enrichment, correction of inventorship relating to U.S. Patent No. 8,773,665, and declaratory relief, relating to EMCORE’s termination of certain agreements entered into between EMCORE and Phoenix related to the purported license of certain intellectual property related to fiber optic gyroscope technology and disputed royalty payments related thereto. On September 14, 2018, EMCORE filed an Answering Statement and Counterclaim, denying all of Phoenix’s claims and asserting counterclaims for breach of the implied covenant of good faith and fair dealing and declaratory relief. An arbitration hearing

Further, out of the original 97 trade secret subpart claims by Phoenix, the arbitrator found in the Interim Award that EMCORE had misappropriated a total of five trade secret subparts (the “Deemed Trade Secrets”), and found that at least one Deemed Trade Secret is currently used in seven EMCORE products (the “EMCORE Products”). The arbitrator found that as a result of the foregoing, royalties of 7.5% of the sale price are owed, to the extent not previously paid, on (i) sales through July 16, 2018 on all claims with the exceptionfiber optic gyroscopes sold by EMCORE, and (ii) sales from July 16, 2018 through May 31, 2019 of the patent claims was heldEMCORE Products whether standalone or incorporated into a larger product, in each case together with interest at the New York statutory rate of 9% simple interest. In the three and nine months ended June 30, 2019, we accrued an additional $0.1 million related to royalties and $0.1 million of related interest expense, in each case a result of the Interim Award. The additional royalty accrual of $0.1 million has been recorded as “Other” within “Accrued expenses and other current liabilities” on January 8 throughour Condensed Consolidated Balance Sheets as of June 30, 2019 and included in “cost of goods sold expense” on our Condensed Consolidated Statement of Operations and Comprehensive Loss for the three and nine months ended June 30, 2019.

On July 12, 2019, EMCORE submitted a proposed accounting of royalties owed to Phoenix of all FOG and closing arguments are currently scheduledIMU sales during the period of January 1, 2008 through May 31, 2019, reflecting that additional royalties and interest in an amount totaling approximately $0.7 million was payable to Phoenix, approximately $0.6 million of which was previously accrued for March 29,in EMCORE’s previously filed financial statements. On July 15, 2019 Phoenix submitted objections to the arbitrator regarding EMCORE’s proposed accounting and on July 30, 2019, Phoenix submitted further objections to EMCORE's proposed accounting, in each case, seeking, among other items, an award of additional royalties, attorneys’ fees and costs. On August 6, 2019, the arbitrator issued an order denying Phoenix's various claims for additional royalties and deferring a decision on Phoenix's requests related to attorneys' fees until conclusion of the AAA arbitration.

In addition, the arbitrator found in the Interim Award that Phoenix was the prevailing party, and Phoenix was awarded attorneys' fees and costs in the amount of approximately $3.7 million, which amount was reduced 10% from Phoenix’s attorneys’ fees request. The attorneys' fees and costs accrued of $3.7 million has been recorded as “Professional fees” within “Accrued expenses and other current liabilities” on our Condensed Consolidated Balance Sheets as of June 30, 2019 and has been included in “selling, general and administrative expenses” on our Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended June 30, 2019.

A second AAA arbitration hearing on the patent claimsPatent Claims has been setscheduled for July 29,November 2019. We believe that the claimsPatent Claims asserted by Phoenix are without merit and we intend to vigorously defend ourselves against them.

On June 21, 2018, Phoenix Navigation Components, LLC commenced a special proceeding against EMCORE in the New York Supreme Court, Commercial Division, Index No. 653128/2018. As part of the special proceeding, Phoenix filed an application for a preliminary injunction in aid of arbitration pursuant to CLPR 7502(c), in connection with the AAA arbitration proceeding in New York. On August 6, 2018, Phoenix’s application was resolved pursuant to a stipulation between EMCORE and Phoenix. This special proceeding remains open pending final resolution of the AAA arbitration.

The following table summarizes stock option activity under the Equity Plans for the threenine months ended December 31, 2018:June 30, 2019:

(*) Intrinsic value for stock options represents the “in-the-money” portion or the positive variance between a stock option's exercise price and the underlying stock price. For the threenine months ended December 31, 2017,June 30, 2018, the intrinsic value of options exercised was $13,000.$14,000.

As of December 31, 2018,June 30, 2019, there was approximately $44,000$27,000 of unrecognized stock-based compensation expense related to non-vested stock options granted under the Equity Plans which is expected to be recognized over an estimated weighted average life of 1.81.2 years.

There were no stock option grants for the threenine months ended December 31, 2018June 30, 2019 and 2017.2018.

As of December 31, 2018,June 30, 2019, there was approximately $4.1$4.0 million of remaining unamortized stock-based compensation expense associated with RSUs, which will be expensed over a weighted average remaining service period of approximately 2.73.0 years. The 0.80.9 million outstanding non-vested and expected to vest RSUs have an aggregate intrinsic value of approximately $3.4$3.0 million and a weighted average remaining contractual term of 1.61.2 years. For the threenine months ended December 31,June 30, 2019 and 2018, and 2017, the intrinsic value of RSUs vested was approximately $0.4$1.3 million and $0.3$2.3 million, respectively. For the threenine months ended December 31, 2017,June 30, 2018, the weighted average grant date fair value of RSUs granted was $6.73$5.81 per share.

As of December 31, 2018,June 30, 2019, there was approximately $39,000$28,000 of remaining unamortized stock-based compensation expense associated with RSAs, which will be expensed over a weighted average remaining service period of approximately 1.81.3 years.

Performance based restricted stock units (“PSUs”) and performance based shares of restricted stock (“PRSAs”) granted to employees under the 2012 Plan or 2019 Plan typically vest over 1 to 3 years and are subject to forfeiture in whole, if employment terminates, or in whole or in part, if specified vesting conditions are not satisfied, in each case prior to vesting. PSUs are not considered issued or outstanding common stock until they vest. PRSAs are considered issued and outstanding on the grant date (at 200% of the target number of shares) and are subject to forfeiture if specified vesting conditions are not satisfied. PSUs and PRSAs that are granted to our executive officers and key employees are provided as long-term incentive compensation that is based on relative total shareholder return, which measures our performance against that of our competitors.the Russell Microcap Index.

The following table summarizes the activity related to PSUs and PRSAs for the threenine months ended December 31, 2018:June 30, 2019:

As of December 31, 2018,June 30, 2019, there was approximately $1.2$2.0 million of remaining unamortized stock-based compensation expense associated with PSUs, which will be expensed over a weighted average remaining service period of approximately 1.72.1 years. The 0.20.5 million outstanding non-vested and expected to vest PSUs have an aggregate intrinsic value of approximately $1.0$1.6 million and a weighted average remaining contractual term of 1.72.1 years. ForThere were no PSUs vested in the three months ended December 31,June 30, 2019 and 2018. For the nine months ended June 30, 2019 and 2018, and 2017, the intrinsic value of PSUs vested was approximately $0.2 million and $1.4 million, respectively. For the threenine months ended December 31, 2017,June 30, 2018, the weighted average grant date fair value of PSUs granted was $7.62.

As of December 31, 2018,June 30, 2019, there was approximately $0.2$0.1 million of remaining unamortized stock-based compensation expense associated with PRSAs, which will be expensed over a weighted average remaining service period of approximately 0.80.3 years.

The effect of recording stock-based compensation expense was as follows:

Stock-based compensation within selling, general and administrative expense was lower for the threenine months ended December 31, 2018June 30, 2019 due to the reversal of previously recognized expense associated with the forfeiture of unvested RSUs and PSUs of our former CFO Jikun Kim.

We have a savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under this savings plan, participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. Since June 2015, all employer contributions are made in cash. Our matching contribution in cash for the three months ended June 30, 2019 and 2018 was approximately $0.2 million and $0.1 million, respectively . Our matching contribution in cash for each of the threenine months ended December 31,June 30, 2019 and 2018 and 2017 was approximately $0.1$0.4 million.

The following table sets forth the computation of basic and diluted net loss per share:

We maintain an Employee Stock Purchase Plan (“ESPP”) that provides employees an opportunity to purchase common stock through payroll deductions. The ESPP is a 6-month duration plan with new participation periods beginning on approximately February 25 and August 26 of each year. The purchase price is set at 85% of the average high and low market price of our common stock on either the first or last trading day of the participation period, whichever is lower, and annual contributions are limited to the lower of 10% of an employee's compensation or $25,000.

Future Issuances 

The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue: 

For the three months ended December 31, 2018,June 30, 2019, revenue slightly decreased 0.1%2.8% compared to the same period in the prior year, primarily driven by lower sales volume of our CATV systems and componentsChip Devices, partially offset by an increase in Chip Devices, RFoG productsCATV components within our Broadband product category and Navigation Systems product line revenue. The decreasedecline in CATV sales of our Chip Devices products during the three months ended June 30, 2019 was largely due to negative effects of the U.S. trade dispute with China.

Included in Navigation Systems product line revenue is $2.0 million of revenue from SDI for the period of June 7, 2019 through June 30, 2019. Navigation Systems revenue increased $4.0 million, or 252.3%, from the same period in the prior year, primarily due to one new nonrecurring engineering contract and the resultinclusion of a significant customer purchasing a large inventory accumulationSDI revenue for the period of June 7, 2019 through June 30, 2019 that did not exist in the three months ended December 31, 2017.June 30, 2018.

Our cost of revenue consists of raw materials, compensation expense including non-cash stock-based compensation expense, depreciation expense and other manufacturing overhead costs, expenses associated with excess and obsolete inventories, and product warranty costs. Historically, our cost of revenue as a percentage of revenue, which we refer to as our gross margin, has fluctuated significantly due to product mix, manufacturing yields and sales volumes, and inventory and specific product warranty charges.

Consolidated gross margins were 24.2%21.5% and 32.9%6.8% for the three months ended December 31,June 30, 2019 and 2018, and 2017, respectively.

Stock-based compensation expense within cost of revenue totaled approximately $0.1 million during each of the three months ended December 31, 2018June 30, 2019 and 2017.2018.

For the three months ended December 31, 2018,June 30, 2019, gross profit decreasedincreased by 26.6%209.2% when compared to the same period in the prior year. The decreaseincrease in gross profit for the three months ended December 31, 2018June 30, 2019 was primarily due to saleslower cost of lower margin products and a recorded reserve on non-current inventory. The decreasegoods sold in gross margin for the three months ended December 31, 2018 wasJune 30, 2019. The decrease in cost of goods sold is primarily due toa result of a favorable change in product mix. Duringmix, offset by $1.4 million of cost of goods sold of SDI for the period of June 7, 2019 through June 30, 2019 that did not exist in the three months ended December 31,June 30, 2018 we recorded a $0.4 million reserve on non-current inventory due to the decline in sales and future demand of the inventory..

SG&A consists primarily of compensation expense including non-cash stock-based compensation expense related to executive, finance, and human resources personnel, as well as sales and marketing expenses, professional fees, legal and patent-related costs, and other corporate-related expenses.

Stock-based compensation expense within SG&A totaled approximately $0.2$0.4 million and $0.6 million for the three months ended December 31,June 30, 2019 and 2018, and 2017, respectively.

SG&A expense for the three months ended December 31, 2018June 30, 2019 was higher than the amount reported in the same period in the prior year primarily due to an increasethe recording of $3.7 million of attorneys fees and costs arising from the arbitrator's interim award in expense for professional services as a result of the litigation proceedings with Phoenix Navigation Components, LLC, the inclusion of $0.4 million of expense relating to the acquisition of SDI for the period of June 7, 2019 through June 30, 2019 that did not exist in the three months ended June 30, 2018 and strategic planningacquisition related costs of $0.3 million, partially offset by a decrease in compensation expenses and the allowance for bad debt expenses.

As a percentage of revenue, SG&A expenses were 31.6%53.9% and 20.0%29.6% for the three months ended December 31,June 30, 2019 and 2018, and 2017, respectively. The increase in SG&A expense as a percentage of revenue in the three months ended December 31, 2018 compared to the prior year was due to the higher SG&A expense during the three months ended December 31, 2018.

R&D consists primarily of compensation expense including non-cash stock-based compensation expense, as well as engineering and prototype costs, depreciation expense, and other overhead expenses, as they relate to the design, development, and testing of our products. Our R&D costs are expensed as incurred. We believe that in order to remain competitive, we must invest significant financial resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide.

Stock-based compensation expense within R&D totaled approximately $0.2 million and $0.1 million during each of the three months ended December 31,June 30, 2019 and 2018, and 2017, respectively.

R&D expense for the three months ended December 31, 2018June 30, 2019 was higher than the amounts reported in the same period in 2017the prior year primarily due to an increase in compensation costs and project spending, primarily in navigation systems.systems, and the inclusion of 0.3 million of R&D expense relating to the acquisition of SDI for the period of June 7, 2019 through June 30, 2019 that did not exist in the three months ended June 30, 2018.

As a percentage of revenue, R&D expenses were 16.7%26.9% and 15.8%22.1% for the three months ended December 31,June 30, 2019 and 2018, and 2017, respectively. The increase in R&D expense as a percentage of revenue in the three months ended December 31, 2018 compared to the prior year is due to the higher R&D expense in the three months ended December 31, 2018.

Operating loss represents revenue less the cost of revenue and direct operating expenses incurred. Operating loss is a measure that executive management uses to assess performance and make decisions. As a percentage of revenue, our operating loss was (24.2)(59.3)% and (3.4)(44.9)% for the three months ended December 31,June 30, 2019 and 2018, and 2017, respectively. The increase in operating loss as a percentage of revenue in the three months ended December 31, 2018June 30, 2019 compared to the same period in the prior year is primarily due to the decline in gross profit and increase in SG&A and R&D expense partially offset by the increase in gross profit in the three months ended December 31, 2018.June 30, 2019.

During the three months ended December 31,June 30, 2019 and 2018, and 2017, we recorded $0.3$0.1 million and $0.2$0.3 million, respectively, of interest income earned on cash and cash equivalents balances, which was partially offset by interest expense and letter of credit fees related to our Credit Facility (as defined below). Interest income for the three months year ended December 31, 2018June 30, 2019 was higherlower than the amount reported in the prior year due to higher interest income earned onlower cash and cash equivalents balances.

Gains or losses from foreign currency transactions denominated in currencies other than the U.S. dollar, both realized and unrealized, are recorded as foreign exchange gain (loss) on our consolidated statements of operations and comprehensive income. The gain (losses) recorded relate to the change in value of the Yuan Renminbi relative to the U.S. dollar.

For the three months ended December 31,June 30, 2019, the Company recorded income tax expense of approximately $14,000. For the three months ended June 30, 2018, the Company recorded income tax expense of approximately $15,000. For$0. Income tax expense for the three months ended DecemberJune 30, 2019 is primarily comprised of state minimum tax expense.