UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q


	(Check One)

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

For the quarterly period ended ~~September 30, 2018~~March 31, 2019

oTRANSITION PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT

For the transition period from ______ to ______

	COMMISSION FILE NO. (0-16577)


CYBEROPTICS CORPORATION
(Exact name of registrant as specified in its charter)


Minnesota		41-1472057
(State or other jurisdiction of		~~(I.R.S. Employer~~
incorporation or organization)		(I.R.S. Employer Identification No.)

5900 Golden Hills Drive
MINNEAPOLIS, MINNESOTA		55416
(Address of principal executive offices)		(Zip Code)


	(763) 542-5000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	CYBE	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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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	☐	Accelerated Filer	☑
Non-Accelerated Filer	☐ ~~(Do not check if a smaller reporting company)~~	Smaller Reporting Company	☑
		Emerging Growth Company	☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. At April 30, 2019~~October 31, 2018~~, there were ~~7,078,190~~ 7,106,675 shares of the registrant’s Common Stock, no par value, issued and outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

CYBEROPTICS CORPORATION

(Unaudited)


(In thousands, except share information)	September 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
ASSETS
Cash and cash equivalents	$	7,633		$	6,944		$	9,315		$	9,248
Marketable securities	6,396			6,670			7,684			5,771
Accounts receivable, less allowance for doubtful accounts of $290 at September 30, 2018 and $473 at December 31, 2017	14,525			10,772
Accounts receivable, less allowances of $270 at March 31, 2019 and $314 at December 31, 2018							13,037			15,859
Inventories	13,935			14,393			17,582			16,163
Other current assets	2,314			1,593			1,652			2,096
Total current assets	44,803			40,372			49,270			49,137

Marketable securities, long-term	9,806			9,073			8,688			10,322
Equipment and leasehold improvements, net	2,326			2,307			3,362			2,861
Intangible assets, net	333			380			324			333
Goodwill	1,366			1,366			1,366			1,366
Right-of-use assets (operating leases)							2,338			—
Other assets	201			261			252			259
Deferred tax assets	5,546			5,742			5,332			5,422
Total assets	$	64,381		$	59,501		$	70,932		$	69,700

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	5,380		$	4,294		$	6,180		$	8,513
Advance customer payments	1,240			393			843			636
Accrued expenses	2,656			2,285			2,643			3,568
Current operating lease liabilities							254			—
Total current liabilities	9,276			6,972			9,920			12,717

Other liabilities	156			88			103			629
Long-term operating lease liabilities							3,591			—
Reserve for income taxes	159			159			143			143
Total liabilities	9,591			7,219			13,757			13,489

Commitments and contingencies

Stockholders’ equity:
Preferred stock, no par value, 5,000,000 shares authorized, none outstanding	—			—			—			—
Common stock, no par value, 25,000,000 shares authorized, 7,064,089 shares issued and outstanding at September 30, 2018 and 6,979,686 shares issued and outstanding at December 31, 2017	35,452			34,080
Common stock, no par value, 25,000,000 shares authorized, 7,106,675 shares issued and outstanding at March 31, 2019 and 7,100,825 shares issued and outstanding at December 31, 2018							35,940			35,637
Accumulated other comprehensive loss	(1,733		)	(1,409		)	(1,557		)	(1,690		)
Retained earnings	21,071			19,611			22,792			22,264
Total stockholders’ equity	54,790			52,282			57,175			56,211
Total liabilities and stockholders’ equity	$	64,381		$	59,501		$	70,932		$	69,700

SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

CYBEROPTICS CORPORATION

(Unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended March 31,
(In thousands, except per share amounts)	2018		2017			2018		2017			2019		2018
Revenues	$	16,683	$	11,828		$	46,657	$	40,157		$	14,976	$	14,120
Cost of revenues		9,247		6,236			25,738		21,434			7,950		7,901

Gross margin		7,436		5,592			20,919		18,723			7,026		6,219

Research and development expenses		2,162		1,947			6,585		5,892			2,293		2,180
Selling, general and administrative expenses		3,935		3,793			12,413		11,821			4,163		4,357
Amortization of intangibles		10		15			35		50

Income (loss) from operations		1,329		(163	)		1,886		960			570		(318	)

Interest income and other		35		(25	)		192		(141	)		59		62

Income (loss) before income taxes		1,364		(188	)		2,078		819			629		(256	)

Income tax expense (benefit)		297		(116	)		444		10			134		(83	)

Net income (loss)	$	1,067	$	(72	)	$	1,634	$	809		$	495	$	(173	)

Net income (loss) per share – Basic	$	0.15	$	(0.01	)	$	0.23	$	0.12		$	0.07	$	(0.02	)
Net income (loss) per share – Diluted	$	0.15	$	(0.01	)	$	0.23	$	0.11		$	0.07	$	(0.02	)

Weighted average shares outstanding – Basic		7,041		6,959			7,012		6,939			7,100		6,986
Weighted average shares outstanding – Diluted		7,299		6,959			7,176		7,041			7,322		6,986

SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CYBEROPTICS CORPORATION

1. INTERIM REPORTING:

The interim condensed consolidated financial statements of CyberOptics Corporation ("we", "us" or "our") presented herein as of ~~September 30, 2018~~March 31, 2019, and for the three ~~and nine~~ month periods ended ~~September 30, 2018~~March 31, 2019 and ~~2017~~2018, are unaudited but, in the opinion of management, include all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented.

The results of operations for the three ~~and nine~~ month periods ended ~~September 30, 2018~~March 31, 2019 do not necessarily indicate the results to be expected for the full year. The December 31, ~~2017~~2018 consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018.

2. ~~REVENUE RECOGNITION:~~RECENT ACCOUNTING DEVELOPMENTS:

~~Change in Revenue Accounting~~

~~Effective~~In February 2016, the Financial Accounting Standards Board (the "FASB") issued new lease accounting guidance, ASU 2016-02, Leases (also referred to as Topic 842) which we adopted on January 1, 2019. Under Topic 842, at the commencement date, lessees are required (a) to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and (b) to record a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. In July 2018, ~~we adopted~~the FASB issued ASU ~~No.~~ ~~2014~~-92018-11, Leases (Topic 842), “~~Revenue from Contracts~~Targeted Improvements, which gave companies the option of applying the new standard at the adoption date, rather than retrospectively to the earliest period presented in the financial statements, with ~~Customers~~~~” and the related amendments (“Topic~~ ~~606”) using the modified retrospective method.Topic~~ ~~606~~ ~~was applied to all uncompleted contracts by recognizing the cumulative effect~~recognition of ~~initially applying Topic~~ ~~606~~ ~~as an~~a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We choose the option to apply the new standard at ~~January 1, 2018.Therefore,~~ the ~~comparative~~adoption date, and therefore we were not required to restate the financial ~~information~~statements for prior periods, nor are we required to provide the ~~three and nine~~ ~~months ended~~ ~~September 30, 2017~~ ~~has not been adjusted and continues to be reported under~~disclosures required by Topic ~~605~~842~~, “~~~~Revenue Recognition~~”.

~~Accounting~~ for ~~contracts~~prior periods. Upon adoption, we recognized ~~over time involves~~an approximate $2.6 million right-of-use asset, and an approximate $3.2 million lease liability. Our previously recognized liability for lease incentives recorded under prior accounting standards was eliminated. The cumulative-effect adjustment to the ~~use~~opening balance of ~~various techniques~~retained earnings related to ~~estimate total contract revenue and costs. Contract estimates are based on various assumptions to project the outcome of future events that may span multiple years. We review and update~~ our ~~contract-related estimates regularly, and record adjustments as needed.~~

~~The~~ adoption of Topic ~~606~~ ~~caused changes for (~~1~~) the~~842 was inconsequential. Our adoption of Topic 842 did not impact ~~of volume discounts that represent~~our cash flows or have a material ~~right which will now be estimated and recognized over~~impact on our results of operations. We have expanded our consolidated financial statement disclosures to comply with the ~~contract life rather than on a prospective basis, and (~~2~~) revenue will be recognized over time as the products are manufactured under certain contracts where our product is customized rather than at shipment. These changes increased our revenues in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2018~~ ~~by $123,000 and $232,000, respectively, when compared to revenue recognition under~~requirements of Topic ~~605 (see Note~~ 16842).

~~Performance Obligations~~

~~Under Topic~~ ~~606~~In February 2018, the FASB issued ASU 2018-02, ~~revenue is measured based on consideration specified in~~Reclassification of Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"), which allows an entity to elect an option to reclassify the ~~contract with a customer.A performance obligation is a promise in a contract to transfer a distinct good or service~~stranded tax effects related to the ~~customer~~application of the Tax Cuts and ~~is the unit of account in Topic~~ ~~606. Revenue~~Jobs Act (the TCJA) from ~~all customers, including distributors, is recognized when a performance obligation is satisfied by transferring control of a product or service~~accumulated other comprehensive loss to ~~a customer. Amounts billed to customers for shipping~~retained earnings. ASU 2018-02 was effective January 1, 2019 and handling are included in revenue. Taxes collected from customers and remitted to governmental authorities are excluded from revenue on the net basis of accounting. Accounts receivable are due under normal trade terms, typically 90 days or less.

Sales involving multiple performance obligations typically include the sale of an inspection system or metrology product, installation and training, and in some cases, an extended warranty. When a sale involves multiple performance obligations, we account for individual products and services separately if the customer can benefit from the product or service on its own or with other resources that are readily available to the customer and the product or service are separately identifiable from other promises in the arrangement.~~The consideration is allocated between separate performance obligations in proportion to their estimated stand-alone selling price.If the stand-alone selling price is not directly observable, we use the cost plus margin approach to estimate stand-alone selling price. Costs related to products delivered are recognized~~be applied either in the period ~~revenue is recognized, including product warranties~~of adoption or retrospectively to all applicable periods.We did not elect to reclassify the stranded tax effects related to the application of the TCJA from accumulated other comprehensive loss to retained earnings.

In January 2017, the FASB issued guidance on simplifying the test for ~~periods ranging from~~goodwill impairment, ASU 12017 ~~to 3 years (see Note~~ -704, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). Under ASU 2017-04, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, but not in an amount in excess of the carrying value of goodwill. The new standard eliminates the requirement to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. ASU 2017-04 is to be applied prospectively to impairment tests beginning January 1, 2020, with early adoption permitted. We are currently evaluating when we will adopt ASU 2017-04 and do not expect the adoption to have a material impact on our consolidated financial statements.

3. REVENUE RECOGNITION:

Our revenue performance obligations are satisfied at a point in time or over time as work progresses. ~~Revenue from products and services transferred to customers at~~

The following is a ~~point in time~~summary of our revenue performance obligations in the three ~~and nine~~months ended ~~September 30, 2018~~ ~~totaled~~ $~~15.4~~ ~~million~~March 31, 2019 and ~~$43.4~~the ~~million, respectively, which represe~~three months ended March 31, 2018:


	Three Months Ended March 31, 2019				Three Months Ended March 31, 2018
(In thousands except percentages)	Revenues		Percent of Revenues		Revenues		Percent of Revenues
Revenue recognized over time	$	346	2	%	$	894	6	%
Revenue recognized at a point in time		14,630	98	%		13,226	94	%
	$	14,976	100	%	$	14,120	100	%

~~nted~~

93%See Note 10 for additional information regarding disaggregation of our total revenue in both periods. Revenue from these contracts is recognized when obligations under the terms of the contract with our customer are satisfied; generally with the transfer of control upon shipment. Sales of some products may require customer acceptance due to performance or other acceptance criteria that is considered more than a formality. For these product sales, revenue is recognized upon notification of customer acceptance.revenue.

~~Revenue from products and services transferred to customers over time in the~~ ~~three and ninemonths ended~~ ~~September 30, 2018~~ ~~totaled $~~1.2 million and $3.3 million, respectively, which represented 7% of our total revenue in both periods. Periodically, sensor product arrangements with our original equipment manufacturers (OEMs) will create an asset with no alternative use and include an enforceable right to payment for cost plus margin.For these arrangements, control is transferred over the manufacturing process; therefore, revenue is recognized over time utilizing an input method based on actual costs incurred in the manufacturing process to date relative to total expected production costs. For certain longer duration 3~~D scanning service projects, we progress bill as the services are performed.These arrangements create an asset with no alternative use and include an enforceable right to payment.~~For these arrangements, control is transferred over the hours incurred to complete the scanning project; therefore, revenue is recognized over time utilizing an input method based on actual hours incurred relative to total projected project hours. For maintenance and extended warranty contracts, revenue is recognized over time on a straight-line basis over the term of the contract as the customer simultaneously receives and consumes the benefits of the coverage.

Contract Balances

Contract assets consist of unbilled amounts from sales where we recognize the revenue over time and the revenue recognized exceeds the amount billed to the customer at a point in time. Accounts receivable are recorded when the right to payment becomes unconditional. Contract liabilities consist of payments received in advance of performance under the contract. Contract liabilities are recognized as revenue when we perform under the contract.

The following summarizes our contract assets and contract liabilities:


(In thousands)	March 31, 2019		December 31, 2018
Contract assets, included in other current assets	$	123	$	—
Contract liabilities, included in advance customer payments/other liabilities	$	336	$	366

(In thousands)

September 30,
2018

January 1,
2018
Contract assets, included in other current assets

$
170

$
—

Contract liabilities, included in advance customer payments/other liabilities

$
918

$
443

Changes in contract assets in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 resulted from unbilled amounts under sensor product arrangements and longer duration 3D scanning service projects in which revenue is recognized over time. Changes in contract liabilities primarily resulted from reclassification of beginning contract liabilities to revenue as performance obligations were satisfied or ~~for~~from cash received in advance and not recognized as revenue. ~~Amounts reclassified from beginning contract liabilities to revenue in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2018~~ ~~totaled $39,000 and $262,000, respectively.~~ See Note 78 for changes in contractual obligations related to deferred warranty revenue. Unsatisfied performance obligations are generally expected to be recognized as revenue over the ~~next~~next one to three years.There were no impairment losses for contract assets in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019. and 2018.

~~Practical Expedients~~

We generally expense the incremental costs of obtaining a contract when incurred because the amortization period for these costs would be less than one year. These costs primarily relate to sales commissions and are recorded in selling, general and administrative expense in our consolidated statements of operations.

We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. We do not adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

The following summarizes the amounts reclassified from beginning contract liabilities to revenue:


	Three Months Ended March 31,
(In thousands)	2019		2018
Amounts reclassified from beginning contract liabilities to revenue	$	30	$	57
Amounts reclassified from deferred warranty revenue	114		120
Total	$	144	$	177

3.4. MARKETABLE SECURITIES:

Our investments in marketable securities are classified as available-for-sale and consist of the following:


	September 30, 2018									March 31, 2019
(In thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value		Cost		Unrealized Gains		Unrealized Losses			Fair Value
Short-Term
U.S. government and agency obligations	$	3,611	$	—	$	(20	)	$	3,591	$	4,358	$	2	$	(14	)	$	4,346
Corporate debt securities and certificates of deposit	2,163		—		(8		)	2,155		2,265		6		(3		)	2,268
Asset backed securities	654		—		(4		)	650		1,073		—		(3		)	1,070
Marketable securities – short-term	$	6,428	$	—	$	(32	)	$	6,396	$	7,696	$	8	$	(20	)	$	7,684
Long-Term
U.S. government and agency obligations	$	6,399	$	—	$	(55	)	$	6,344	$	5,004	$	19	$	(8	)	$	5,015
Corporate debt securities and certificates of deposit	230		—		(3		)	227		389		1		—			390
Asset backed securities	3,184		—		(22		)	3,162		3,220		10		(6		)	3,224
Equity security	42		31		—			73		42		17		—			59
Marketable securities – long-term	$	9,855	$	31	$	(80	)	$	9,806	$	8,655	$	47	$	(14	)	$	8,688

December 31, 2017
(In thousands)

Cost

Unrealized
Gains

Unrealized
Losses

Fair Value
Short-Term

U.S. government and agency obligations

$
4,381

$
—

$
(13
)

$
4,368

Corporate debt securities and certificates of deposit

1,792

—

(4
)

1,788

Asset backed securities

515

—

(1
)

514

Marketable securities – short-term

$
6,688

$
—

$
(18
)

$
6,670

Long-Term

U.S. government and agency obligations

$
4,801

$
—

$
(33
)

$
4,768

Corporate debt securities and certificates of deposit

1,189

—

(10
)

1,179

Asset backed securities

3,045

—

(16
)

3,029

Equity security

42

55

—

97

Marketable securities – long-term

$
9,077

$
55

$
(59
)

$
9,073

In Unrealized Loss Position For
Less Than 12 Months

In Unrealized Loss Position For
Greater Than 12 Months
(In thousands)

Fair Value

Gross Unrealized
Losses
Fair Value
Gross Unrealized
Losses
September 30, 2018

U.S. government and agency obligations $ 5,185
$ (36 ) $ 4,327 $ (39 )
Corporate debt securities and certificates of deposit 628
(3 ) 1,324
(8
)
Asset backed securities 2,343
(14 ) 1,469
(12 )
Marketable securities $ 8,156
$ (53 ) $ 7,120 $ (59 )
December 31, 2017

U.S. government and agency obligations $ 5,593
$ (29 ) $ 3,543 $ (17 )
Corporate debt securities and certificates of deposit 478
(2 ) 1,991 (12 )
Asset backed securities 2,312
(9 ) 1,232 (8 )
Marketable securities $ 8,383
$ (40 ) $ 6,766 $ (37 )


	December 31, 2018
(In thousands)	Cost		Unrealized Gains		Unrealized Losses			Fair Value
Short-Term
U.S. government and agency obligations	$	3,377	$	—	$	(20	)	$	3,357
Corporate debt securities and certificates of deposit	1,787		3		(5		)	1,785
Asset backed securities	633		—		(4		)	629
Marketable securities – short-term	$	5,797	$	3	$	(29	)	$	5,771
Long-Term
U.S. government and agency obligations	$	6,114	$	10	$	(23	)	$	6,101
Corporate debt securities and certificates of deposit	754		1		(3		)	752
Asset backed securities	3,422		2		(15		)	3,409
Equity security	42		18		—			60
Marketable securities – long-term	$	10,332	$	31	$	(41	)	$	10,322


	In Unrealized Loss Position For Less Than 12 Months					In Unrealized Loss Position For Greater Than 12 Months
(In thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
March 31, 2019
U.S. government and agency obligations	$	149	$	—		$	4,618	$	(22	)
Corporate debt securities and certificates of deposit	—		—			932		(3		)
Asset backed securities	—		—			2,112		(9		)
Marketable securities	$	149	$	—		$	7,662	$	(34	)
December 31, 2018
U.S. government and agency obligations	$	1,548	$	(4	)	$	4,608	$	(39	)
Corporate debt securities and certificates of deposit	250		—			1,178		(8		)
Asset backed securities	1,023		(3		)	2,137		(16		)
Marketable securities	$	2,821	$	(7	)	$	7,923	$	(63	)

~~Effective January 1, 2018, we adopted ASU No. 2016-01,~~ ~~Recognition and Measurement of Financial Assets and Liabilities,~~ ~~which impacted the accounting for our marketable equity security (see Note 16)~~. Our investments in marketable debt securities all have maturities of less than five years. Net pre-tax unrealized ~~losses~~gains for marketable debt securities of $~~112,000~~4,000 at ~~September 30, 2018~~March 31, 2019 and ~~$22,000~~net pre-tax losses for marketable debt securities of $54,000 at December 31, ~~2017~~2018 have been recorded as a component of accumulated other comprehensive loss in stockholders’ equity. We have determined that the net pre-tax unrealized losses for marketable debt securities at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 were caused by fluctuations in interest rates and are temporary in nature. We review our marketable debt securities to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which the fair value of the investment has been less than the cost basis, the credit quality of the investment and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. No marketable securities were sold in the three months ended March 31, 2019.We received proceeds from sales of marketable securities ~~of $480,000, and recognized a $3,000 gain on the sales, in the three and nine months ended September 30, 2018. No~~o ~~marketable securities~~ f~~were sold~~ $70,000 in the ~~nine~~three months ended March 31, 2018~~September 30, 2017~~. No gains or losses were recognized on any of these sales.

Investments in marketable securities classified as cash equivalents of ~~$2.3~~$4.9 million at March 31, 2019~~September 30, 2018~~ and $~~1.6~~2.5 million atDecember 31, ~~2017~~2018 consist of corporate debt securities and certificates of deposit. There were no unrealized gains or losses ~~associated~~ with respect to any of these securities at ~~September 30, 2018~~March 31, 2019 or December 31, ~~2017~~2018.

Cash and marketable securities held by foreign subsidiaries totaled ~~$532,000~~$345,000 at March 31, 2019~~September 30, 2018~~ and ~~$187,000~~$362,000 at December 31, ~~2017~~2018.

45. FAIR VALUE MEASUREMENTS:

We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability ~~(i.e., the exit~~(exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with three levels of inputs, ~~to measure fair value,~~ of which the first two are considered observable and the last is considered ~~unobservable.~~unobservable, to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1). The next highest priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in non-active markets or other observable inputs (Level 2). The lowest priority is given to unobservable inputs (Level 3). The following ~~table~~ provides information regarding fair value measurements for our marketable securities as of ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 according to the three-level fair value hierarchy:

Fair Value Measurements at
September 30, 2018 Using
(In thousands)

Balance
September 30,
2018

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Marketable securities:

U.S. government and agency obligations

$
9,935

$
—

$
9,935

$
—

Corporate debt securities and certificates of deposit

2,382

—

2,382

—

Asset backed securities

3,812

—

3,812

—

Equity security

73

73

—

—

Total marketable securities

$
16,202

$
73

$
16,129

$
—

	Fair Value Measurements at March 31, 2019 Using
(In thousands)	Balance March 31, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Marketable securities:
U.S. government and agency obligations	$	9,361	$	—	$	9,361	$	—
Corporate debt securities and certificates of deposit	2,658		—		2,658		—
Asset backed securities	4,294		—		4,294		—
Equity security	59		59		—		—
Total marketable securities	$	16,372	$	59	$	16,313	$	—


	Fair Value Measurements at December 31, 2017 Using								Fair Value Measurements at December 31, 2018 Using
(In thousands)	Balance December 31, 2017		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance December 31, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Marketable securities:
U.S. government and agency obligations	$	9,136	$	—	$	9,136	$	—	$	9,458	$	—	$	9,458	$	—
Corporate debt securities and certificates of deposit	2,967		—		2,967		—		2,537		—		2,537		—
Asset backed securities	3,543		—		3,543		—		4,038		—		4,038		—
Equity security	97		97		—		—		60		60		—		—
Total marketable securities	$	15,743	$	97	$	15,646	$	—	$	16,093	$	60	$	16,033	$	—

During the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 and the year ended December 31, ~~2017~~2018, we owned no Level 3 securities, and there were no transfers ~~of assets between~~within the ~~different levels of the~~ ~~three-~~three level hierarchy. A significant transfer is recognized when the inputs used to value a security have been changed ~~sufficiently to~~which merit a transfer between the disclosed levels of the valuation hierarchy.

The fair value for our U.S. government and agency obligations, corporate debt securities and certificates of deposit and asset backed securities are determined based on valuations provided by external investment managers, which obtain the valuations from a variety of industry standard data providers. The fair value for our equity security is based on a quoted market price obtained from an active market.

The carrying amounts of financial instruments such as cash equivalents, accounts receivable, other assets, accounts payable, advance customer payments, accrued expenses and other liabilities are approximately equal to their related fair values due to their short-term maturities. Non-financial assets such as equipment and leasehold improvements, goodwill and intangible assets are subject to non-recurring fair value measurements if they are deemed impaired. We had no re-measurements of non-financial assets to fair value in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 or the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018.

56. ~~ACCOUNTING FOR STOCK-BASED~~SHARE-BASED COMPENSATION:

We have three ~~stock-based~~share-based compensation plans that are administered by the Compensation Committee of the Board of Directors. We have (1) an Employee Stock Incentive Plan for officers, other employees, consultants and independent contractors under which we have granted options and restricted stock units to officers and other employees, (2) an Employee Stock Purchase Plan under which shares of our common stock may be acquired by employees at discounted prices, and (3) a Non-Employee Director Stock Plan that provides for automatic grants of restricted shares of our common stock to non-employee directors. New shares of our common stock are issued upon stock option exercises, vesting of restricted stock units, issuances of shares to board members and issuances of shares under the Employee Stock Purchase Plan.

Employee Stock Incentive Plan

As of ~~September 30, 2018~~March 31, 2019, there were ~~336,489~~273,014 shares of common stock reserved in the aggregate for issuance pursuant to future awards under our Employee Stock Incentive Plan and ~~534,087~~540,378 shares of common stock reserved in the aggregate for issuance pursuant to outstanding awards under our Employee Stock Incentive Plan. Although our Compensation Committee has authority to issue options, restricted stock, restricted stock units, share grants and other share-based benefits under our Employee Stock Incentive Plan, to date only restricted stock units and stock options have been granted under the plan. Options have been granted at an option price per share equal to the market value of our common stock on the date of grant, vest over a four year period and expire seven years after the date of grant. Restricted stock units vest over a four year period and entitle the holders to one share of our common stock for each restricted stock unit. ~~Shares reserved for issuance under~~Reserved shares underlying outstanding awards, including options and restricted stock units, that are forfeited ~~become~~are available under the Employee Stock Incentive Plan for future ~~grants.~~grant.

Non-Employee Director Stock Plan

As of ~~September 30, 2018~~March 31, 2019, there were 60,000 shares of common stock reserved in the aggregate for issuance pursuant to future restricted share ~~awards~~grants under our Non-Employee Director Stock Plan and 16,000 shares of common stock reserved in the aggregate for issuance pursuant to outstanding stock option awards under our Non-Employee Director Stock ~~Plan.~~Plan (which previously authorized the granting of stock options to non-employee directors). Under the terms of the plan, each non-employee director ~~will automatically be granted~~receives annual restricted share grants of 2,000 shares of our common stock on the date of each annual meeting at which such director is elected to serve on the board. At our May 11, 2017 annual meeting, our shareholders, upon recommendation of the Board of Directors, approved amendments to the Non-Employee Director Stock Plan that eliminated annual stock option grants for non-employee directors and provided forThe annual restricted share grants of ~~2,000 shares of~~ common stock ~~which~~ vest in four equal quarterly installments during the year after the grant date, provided the non-employee director is still serving as a director on the applicable vesting date.

On the date of our 2018 annual meeting, we issued a total of 8,000 shares of our common stock to our non-employee ~~directors.~~directors, which were restricted as specified in the Non-Employee Director Stock Plan. The shares had an aggregate fair market value on the date of grant equal to $130,000 (grant date fair value of $16.25 per share). As of ~~September 30, 2018~~March 31, 2019, ~~2,000~~6,000 of these shares were vested. The aggregate fair value of the outstanding unvested shares based on the closing price of our common stock on ~~September 30, 2018~~March 31, 2019 was ~~$121,000.~~$34,000.

~~On the date of our~~ ~~2017~~ ~~annual meeting, we issued a total of~~ ~~8,000~~ ~~shares of our common stock to our non-employee directors. The shares had an aggregate fair market value on the date of grant equal to $167,000 (grant date fair value of $20.90 per share).~~

Stock Option Activity

The following is a summary of stock option activity in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019:


	Options Outstanding		Weighted Average Exercise Price Per Share		Options Outstanding		Weighted Average Exercise Price Per Share
Outstanding, December 31, 2017	568,525		$	10.24
Outstanding, December 31, 2018					523,042		$	11.48
Granted	—		—		—		—
Exercised	(55,000	)	8.20		(5,850	)	9.92
Expired	—		—		(5,000	)	8.50
Forfeited	(8,650	)	14.10		(7,350	)	16.67
Outstanding, September 30, 2018	504,875		$	10.39
Outstanding, March 31, 2019					504,842		$	11.45

Exercisable, September 30, 2018	311,813		$	8.61
Exercisable, March 31, 2019					350,718		$	9.40

The intrinsic value of an option is the amount by which the market price of the underlying common stock exceeds the option's exercise price. For options outstanding at ~~September 30, 2018~~March 31, 2019, the weighted average remaining contractual term of all outstanding options was 3.8 years and their aggregate intrinsic value was ~~$5.2~~$3.3 million. At ~~September 30, 2018~~March 31, 2019, the weighted average remaining contractual term of options that were exercisable was 3.0 years and their aggregate intrinsic value was ~~$3.7~~$2.9 million. The aggregate intrinsic value of stock options exercised in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 was ~~$572,000.~~$57,000. We received proceeds from stock option exercises of ~~$452,000~~$59,000 in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 and ~~$330,000~~$182,000 in the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018. The aggregate fair value of options that vested in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 was ~~$204,000.~~$5,000.

Restricted Shares and Restricted Stock Units

Restricted shares are granted under our Non-Employee Director Stock Plan. There were ~~8,000~~no restricted shares granted in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 ~~(weighted average grant date fair value of $16.25 per share)~~. Restricted stock units are granted under our Employee Stock Incentive Plan. No restricted stock units were granted in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019. The aggregate fair value of outstanding restricted shares and restricted stock units based on the closing share price of our common stock onas of ~~September 30, 2018~~March 31, 2019 was ~~$1.0 million.~~$915,000. The aggregate fair value of restricted shares and restricted stock units that vested, ~~in thenine months ended September 30, 2018~~ ~~was $177,000,~~ based on the closing price of our common stock on the vesting ~~date.~~date, was $43,000 in thethree months ended March 31, 2019.

AThe following is a summary of activity ~~for~~in non-vested restricted shares and restricted stock units in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 ~~is as follows:~~:


Non-vested restricted stock units and restricted shares	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Non-vested at December 31, 2017	54,212		$	14.86
Non-vested at December 31, 2018					56,411		$	17.59
Granted	8,000		16.25		—		—
Vested	(11,000	)	13.72		(2,000	)	16.25
Forfeited	—		—		(875	)	16.19
Non-vested at September 30, 2018	51,212		$	15.32
Non-vested at March 31, 2019					53,536		$	17.66

Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan available to eligible U.S. employees. Under the terms of the plan, eligible employees may designate from 1% to 10% of their compensation to be withheld through payroll deductions, up to a maximum of $6,500 in each plan year, for the purchase of common stock at 85% of the lower of the market price on the first or last day of the offering ~~period. There~~period (which begins on August 1st and ends on July 31st of each year). No shares were ~~16,403~~ ~~shares issued~~purchased under this plan in the ~~nine~~three months ended ~~September 30, 2018. At~~March 31, 2019. ~~our~~ ~~2018~~ ~~annual meeting, our shareholders adopted amendments to the plan increasing the number of shares authorized for issuance under the plan by~~ ~~150,000 and extending the expiration date of the plan to August 1, 2028.~~ As of ~~September 30, 2018~~March 31, 2019, 174,469 shares remain available for future ~~issuance~~purchase under the Employee Stock Purchase Plan.

~~Stock Based~~Share-Based Compensation Information

All ~~stock based~~share-based compensation awarded to our employees and non-employee directors, ~~representing~~including grants of ~~restricted shares,~~ stock options, ~~and~~ restricted stock units and restricted shares, are required to be recognized as an expense in our consolidated statement of operations based on the grant date fair value of the award. We utilize the straight-line method of expense recognition over the ~~vesting~~award's service period for our ~~options subject to time-based~~graded vesting ~~restrictions.~~options. The fair value of stock options ~~granted~~ has been determined using the Black-Scholes model. We have classified ~~equity-based~~employee share-based compensation ~~expenses~~ within our ~~statement~~statements of operations in the same manner as our ~~cash-based~~cash based employee compensation costs.

~~Stock-based~~Share-based compensation expense in the three months ended ~~September 30,~~March 31, 2019 totaled $244,000, and included $107,000 for stock options, $29,000 for our Employee Stock Purchase Plan, $76,000 for unvested restricted stock units and $32,000 for unvested restricted shares.

Share-based compensation expense in the three months ended March 31, 2018 totaled ~~$217,000,~~$259,000, and included ~~$94,000~~$125,000 for stock options, ~~$31,000~~$34,000 for our Employee Stock Purchase Plan, $59,000 for unvested restricted stock units and ~~$33,000~~$41,000 for unvested restricted shares.~~Stock-based compensation expense in the~~ ~~nine months ended September 30, 2018~~ ~~totaled $701,000, and included $328,000~~ ~~for stock options, $86,000 for our Employee~~ ~~Stock Purchase Plan, $176,000~~ ~~for unvested restricted stock units and $111,000~~ ~~for unvested restricted shares.~~

~~Stock-based compensation expense in the~~ ~~three months ended September 30, 2017~~ ~~totaled $240,000, and included $116,000 for stock options, $33,000 for our Employee Stock Purchase Plan, $49,000 for unvested restricted stock units and $42,000 for unvested restricted shares.~~ ~~Stock-based compensation expense in the~~ ~~nine months ended September 30, 2017~~ ~~totaled $640,000, and included $345,000~~ ~~for stock options, $85,000~~ ~~for our Employee Stock Purchase Plan, $145,000~~ ~~for unvested restricted stock units and $65,000 for unvested restricted shares.~~

At ~~September 30, 2018~~March 31, 2019, the total unrecognized compensation cost related to ~~outstanding~~ non-vested ~~stock-based~~share-based compensation arrangements was ~~$1.5~~$1.9 million and the related weighted average period over which ~~this~~such cost is expected to be recognized ~~was 2.36~~is 2.84 years.

67. CHANGES IN STOCKHOLDERS’ EQUITY:

A reconciliation of the changes in our stockholders' equity is as follows:

	Common Stock			Accumulated Other Comprehensive Loss			Retained Earnings		Total Stockholders’ Equity
(In thousands)	Shares	Amount		Accumulated Other Comprehensive Loss			Retained Earnings		Total Stockholders’ Equity
Balance, December 31, 2018	7,101	$	35,637	$	(1,690	)	$	22,264	$	56,211
Increase related to adoption of ASU 2016-02	—		—		—			33		33
Exercise of stock options	6		59		—			—		59
Share-based compensation	—		244		—			—		244
Other comprehensive income, net of tax	—		—		133			—		133
Net income	—		—		—			495		495
Balance, March 31, 2019	7,107	$	35,940	$	(1,557	)	$	22,792	$	57,175

Common Stock
Accumulated
Other Comprehensive
Loss

Retained
Earnings
Total Stockholders’
Equity
(In thousands) Shares Amount
Balance, December 31, 2017 6,980 $ 34,080 $ (1,409 ) $ 19,611 $ 52,282
Increase related to adoption of ASU 2016-01 — — (44 ) 44 —
Decrease related to adoption of ASU 2014-09
— —
— (218 ) (218 )
Exercise of stock options, vesting of restricted stock units and grants of restricted shares, net of shares exchanged as payment
68 452 — — 452
Stock-based compensation — 701 — — 701
Issuance of common stock under Employee Stock Purchase Plan 16 219 — — 219
Other comprehensive income, net of tax — — (280 ) — (280 )
Net income — — — 1,634 1,634
Balance, September 30, 2018 7,064 $ 35,452 $ (1,733 ) $ 21,071 $ 54,790

~~See Note 16 for further discussion regarding the impact of our adoption of ASU No. 2016-01,~~ ~~Recognition and Measurement of Financial Assets and Financial Liabilities,~~ ~~on our consolidated financial statements. See Note 2 and Note 16 for further discussion regarding the impact of our adoption of ASU No. 2014-09,~~ ~~Revenue from Contracts with Customers,~~~~on our consolidated financial statements.~~

	Common Stock			Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders’ Equity
(In thousands)	Shares	Amount		Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders’ Equity
Balance December 31, 2017	6,980	$	34,080	$	(1,409	)	$	19,611		$	52,282
Increase related to adoption of ASU 2016-01	—		—		(44	)		44			—
Decrease related to adoption of ASU 2014-09	—		—		—			(218	)		(218	)
Exercise of stock options, vesting of restricted stock units and grants of restricted shares, net of shares exchanged as payment	26		182		—			—			182
Stock-based compensation	—		259		—			—			259
Other comprehensive income, net of tax	—		—		189			—			189
Net loss	—		—		—			(173	)		(173	)
Balance, March 31, 2018	7,006	$	34,521	$	(1,264	)	$	19,264		$	52,521

7.8. OTHER FINANCIAL STATEMENT DATA:

~~The components~~Inventories consist of ~~our inventories were as follows:~~the following:


(In thousands)	September 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Raw materials and purchased parts	$	7,383	$	7,383	$	9,114	$	8,821
Work in process	1,633		1,666		2,489		2,446
Finished goods	4,919		5,344		5,979		4,896
Total inventories	$	13,935	$	14,393	$	17,582	$	16,163

~~The components~~Accrued expenses consist of ~~our accrued expenses were as follows:~~the following:


(In thousands)	September 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Wages and benefits	$	1,607	$	1,328	$	1,174	$	2,166
Warranty liability	713		713		795		758
Income tax payable					459		393
Other	336		244		215		251
	$	2,656	$	2,285	$	2,643	$	3,568

We provide for the estimated cost of product warranties, which cover products for periods ranging from 1one to 3three years, at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of components provided by suppliers, warranty obligations do arise. These obligations are affected by product failure rates, the costs of materials used and service delivery expenses incurred in correcting a product failure. If actual product failure rates and material or service delivery costs differ from our estimates, revisions to the estimated warranty liability are required and could be material. At the end of each reporting period, we revise our estimated warranty liability based on these factors. The current portion of our warranty liability is included as a component of accrued expenses. The long-term portion of our warranty liability is included as a component of other liabilities.

A reconciliation of the changes in our estimated warranty liability is as follows:

The current portion of our deferred warranty revenue is included as a component of advance customer payments. The long-term portion of our deferred warranty revenue is included as a component of other liabilities. A reconciliation of the changes in our deferred warranty revenue is as follows:

Amortization expense for our intangible assets in the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019 and the three months ended March 31, ~~2017~~2018 was as follows:

Amortization of patents has been classified as research and development expense in ~~our~~the accompanying consolidated statements of operations. Estimated aggregate future amortization expense based on current intangible assets ~~for the next~~ ~~five~~ ~~years~~ is expected to be as follows: ~~$38,000~~ $118,000 for the remainder of ~~2018~~; ~~$137,000 in~~ 2019; ~~$106,000~~$130,000 in 2020; ~~$32,000~~$55,000 in 2021; $10,000 in 2022; $9,000 in ~~2022~~2023; and ~~$9,000~~$2,000 in ~~2023~~2024.

Intangible and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when future undiscounted cash flows expected to result from use of the asset and its eventual disposition are less than the carrying amount.

~~10.~~11. NET INCOME (LOSS) PER SHARE:

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Common equivalent shares consist of common shares to be issued upon exercise of stock options, vesting of restricted stock units, vesting of restricted shares and from purchases of shares under our Employee Stock Purchase Plan, as calculated using the treasury stock method. Net income per diluted share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of common shares to be issued upon exercise of stock options, upon vesting of restricted stock units, upon vesting of restricted shares and from purchases of shares under our Employee Stock Purchase Plan, as calculated using the treasury stock method. All common equivalent shares ~~were~~are excluded from the calculation of net loss per diluted share due to their anti-dilutive effect. Common equivalent shares are excluded from the calculation of net income per diluted share if their effect is anti-dilutive. The components of net income (loss) per basic and diluted share were as follows:


(In thousands except per share amounts)	Net Income		Weighted Average Shares Outstanding	Per Share Amount		Net Income		Weighted Average Shares Outstanding	Per Share Amount
Three Months Ended September 30, 2018
Three Months Ended March 31, 2019
Basic	$	1,067	7,041	$	0.15	$	495	7,100	$	0.07
Dilutive effect of common equivalent shares	—		258	—		—		222	—
Dilutive	$	1,067	7,299	$	0.15	$	495	7,322	$	0.07

(In thousands except per share amounts)

Net Loss

Weighted Average
Shares Outstanding

Per Share Amount
Three Months Ended September 30, 2017

Basic

$
(72
)

6,959

$
(0.01
)
Dilutive effect of common equivalent shares

—

—

—
Dilutive

$
(72
)

6,959

$
(0.01
)

(In thousands except per share amounts)

Net Income

Weighted Average
Shares Outstanding

Per Share Amount
Nine Months Ended September 30, 2018

Basic

$
1,634

7,012

$
0.23
Dilutive effect of common equivalent shares

—

164

—
Dilutive

$
1,634

7,176

$
0.23

1514

(In thousands except per share amounts)

Net Income

Weighted Average
Shares Outstanding

Per Share Amount
Nine Months Ended September 30, 2017

Basic

$
809

6,939

$
0.12
Dilutive effect of common equivalent shares

—

102

(0.01
)
Dilutive

$
809

7,041

$
0.11


(In thousands except per share amounts)	Net Loss			Weighted Average Shares Outstanding	Per Share Amount
Three Months Ended March 31, 2018
Basic	$	(173	)	6,986	$	(0.02	)
Dilutive effect of common equivalent shares	—			—	—
Dilutive	$	(173	)	6,986	$	(0.02	)

Potentially dilutive shares excluded from the calculations of net income (loss) per diluted share due to their anti-dilutive effect were as follows: ~~118,000~~160,000 shares in the three months ended ~~September 30, 2018~~March 31, 2019; ~~285,000 shares in the~~ ~~nine months ended September 30, 2018~~;and ~~575,000~~615,000 shares in the three months ended ~~September 30, 2017~~March 31, 2018~~; and~~ ~~411,000 shares in the~~ ~~nine months ended September 30, 2017~~.

1112. OTHER COMPREHENSIVE ~~INCOME (LOSS):~~INCOME:

Reclassification adjustments are made to avoid double counting for items included in other comprehensive income ~~(loss)~~ that are also recorded as part of net ~~income.~~income (loss). ~~Other~~Reclassifications and taxes related to items of other comprehensive income ~~(loss) consisted of the following:~~are as follows:

	Three Months Ended September 30, 2018								Three Months Ended September 30, 2017							Three Months Ended March 31, 2019							Three Months Ended March 31, 2018
(In thousands)		Before Tax			Tax Effect		Net of Tax Amount			Before Tax		Tax Effect			Net of Tax Amount		Before Tax		Tax Effect			Net of Tax Amount		Before Tax			Tax Effect		Net of Tax Amount
Foreign currency translation adjustments	$	(50	)	$	—	$	(50	)	$	157	$	(35	)	$	122	$	87	$	—		$	87	$	220		$	—	$	220
Net changes related to available-for-sale securities:
Unrealized losses		3			—		3			—		—			—		58		(12	)		46		(40	)		9		(31	)
Reclassification adjustments for gain included in interest income and other		(3	)		—		(3	)		—		—			—
Reclassifications included in interest income and other																	—		—			—		—			—		—
Net changes related to available-for-sale securities		—			—		—			—		—			—		58		(12	)		46		(40	)		9		(31	)
Other comprehensive income (loss)	$	(50	)	$	—	$	(50	)	$	157	$	(35	)	$	122
Other comprehensive income																$	145	$	(12	)	$	133	$	180		$	9	$	189

Nine Months Ended September 30, 2018 Nine Months Ended September 30, 2017
(In thousands) Before Tax Tax Effect
Net of Tax
Amount Before Tax Tax Effect Net of Tax
Amount
Foreign currency translation adjustments $ (252 ) $ — $ (252 ) $ 587 $ (173 ) $ 414

Net changes related to available-for-sale securities:

Unrealized gains (losses)
(33 ) 8 (25 ) 31 (11 ) 20

Reclassification adjustments for gain
included in interest income and other
(3 )
—
(3 ) —
— —

Net changes related to available-for-sale securities (36
) 8
(28
) 31
(11 ) 20

Other comprehensive income (loss) $ (288 ) $ 8 $ (280
) $ 618
$ (184 ) $ 434

At ~~September 30, 2018~~March 31, 2019 and ~~September 30, 2017~~March 31, 2018, components of accumulated other comprehensive loss ~~were~~are as follows:


(In thousands)	Foreign Currency Translation Adjustments			Available- for-Sale Securities			Accumulated Other Comprehensive Loss			Foreign Currency Translation Adjustments			Available- for-Sale Securities			Accumulated Other Comprehensive Loss
Balances at December 31, 2017	$	(1,394	)	$	(15	)	$	(1,409	)
Decrease related to adoption of ASU 2016-01 (See Note 16)	—			(44		)	(44		)
Balances at December 31, 2018										$	(1,649	)	$	(41	)	$	(1,690	)
Other comprehensive income before reclassifications	(252		)	(25		)	(277		)	87			46			133
Amounts reclassified from accumulated other comprehensive loss	—			(3		)	(3		)	—			—			—
Total change for the period	(252		)	(72		)	(324		)	87			46			133
Balances at September 30, 2018	$	(1,646	)	$	(87	)	$	(1,733	)
Balances at March 31, 2019										$	(1,562	)	$	5		$	(1,557	)


(In thousands)	Foreign Currency Translation Adjustments			Available- for-Sale Securities			Accumulated Other Comprehensive Loss			Foreign Currency Translation Adjustments			Available- for-Sale Securities			Accumulated Other Comprehensive Loss
Balances at December 31, 2016	$	(1,928	)	$	(12	)	$	(1,940	)
Other comprehensive income before reclassifications	414			20			434
Balances at December 31, 2017										$	(1,394	)	$	(15	)	$	(1,409	)
Decrease related to adoption of ASU 2016-01										—			(44		)	(44		)
Other comprehensive income (loss) before reclassifications										220			(31		)	189
Amounts reclassified from accumulated other comprehensive loss	—			—			—			—			—			—
Total change for the period	414			20			434			220			(75		)	145
Balances at September 30, 2017	$	(1,514	)	$	8		$	(1,506	)
Balances at March 31, 2018										$	(1,174	)	$	(90	)	$	(1,264	)

~~In January 2017, the FASB issued guidance on simplifying the test for goodwill impairment, ASU No.~~ ~~2017~~-04, ~~Simplifying the Test for Goodwill Impairment~~. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit's carrying value exceeds its fair value, but not in an amount in excess of the carrying value of goodwill. The new guidance eliminates the requirement to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The new guidance is to be applied prospectively to impairment tests beginning January 1, 2020, with early adoption permitted. We are currently evaluating when we will adopt the new guidance.

~~In February 2018, the FASB issued ASU~~ ~~2018~~-02, ~~Reclassification of Tax Effects from Accumulated Other Comprehensive Income,~~ which allows entities to elect an option to reclassify the stranded tax effects related to the application of the Tax Cuts and Jobs Act from accumulated other comprehensive loss to retained earnings. The guidance is effective January 1, 2019 with early adoption permitted, and can be applied either in the period of adoption or retrospectively to all applicable periods. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

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

The following management’s discussion and analysis of the financial condition and results of operations of CyberOptics Corporation ("we", "us" and "our") contains a number of estimates and predictions that are forward looking statements rather than statements based on historical fact. Among other matters, we discuss (i) our level of anticipated revenues, gross margins, and expenses; (ii) the timing of orders and shipments of our existing products, particularly the SQ3000, our 3D automated optical inspection ("AOI") system; (iii) the timing of initial revenue and projected improvements in gross margins from sales of new products that have been recently introduced, that we have under development or that we anticipate introducing in the future; (iv) the amount of anticipated revenue and potential revenue opportunity from recently introduced new products or potential new products we may launch in the future; and (v) our assessment of trends in the general economy and their impact on the markets for our products. Although we have made these statements based on our experience and expectations regarding future events, there may be events or factors that we have not anticipated, and the accuracy of our forward-looking statements and estimates are subject to a number of risks, including those risks identified in our Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018.

As a leading global developer and manufacturer of high precision 3D sensors, our strategy is to leverage our 3D sensor technologies in our three key vertical ~~markets that consist of the~~markets: surface mount technology ("SMT")~~, semiconductor~~; semiconductor; and ~~metrology markets.~~metrology. A key element in our strategy is the continued development and sale of new high precision3D sensors based on our proprietary multi-reflection suppression ("MRS") technology. We believe that MRS is a break-through optical technology for high precision inspection and metrology, with the potential to expand our markets in the future. ~~Unlike competing technologies, our MRS technology has the ability to inhibit reflections and provide microscopic quality images at production line speeds.~~

Manufacturing yield challenges as electronics and semiconductors become more complex are driving the need for more precise inspection and metrology. As a result, we believe 3D inspection and metrology represent high-growth segments in both the SMT and semiconductor capital equipment markets. We expect a growing number of opportunities in the markets for SMT and semiconductor inspection and metrology, because our 3D MRS technology platform is well suited for many ofapplications in these ~~applications,~~markets, particularly with respect to complex circuit boards and semiconductor back-end, mid-end ~~back-end~~ and advanced packaging inspection and metrology applications. We are taking advantage of ~~these~~current market trends by deploying our 3D MRS sensor technology in the following products:

Revenues from sales of high precision 3D and 2D sensors ~~increased~~decreased by $~~1.4~~1.3 million or ~~34%~~26% to $3.7 million in the three months ended March 31, 2019, from $5.1 million in the three months ended ~~September 30,~~March 31, 2018~~, when compared to~~. In the three months ended ~~September 30, 2017~~. ~~Revenues from sales of~~March 31, 2019, OEM customers for high precision3D 3D and 2D sensors reduced their purchases of sensors in response to weak ~~increasedby $2.1~~ ~~million or16%~~conditions in the~~nine months ended September 30, 2018, when compared to thenine months ended September 30, 2017~~ global SMT and semiconductor markets.~~The revenue increases primarily resulted from higher sales of 3D MRS-enabled sensors.~~ Sales of 3D MRS-enabled sensors ~~increased~~decreased by ~~$710,000~~$376,000 or ~~64%~~18% to ~~$1.8~~$1.7 million in thethree months ended ~~September 30, 2018~~March 31, 2019, when compared to the three months ended ~~September 30, 2017~~March 31, 2018. S~~ales of~~ 3~~D MRS-enabled sensors increased by $2.1 million or 61% to $5.5 million in the~~ ~~nine months ended September 30, 2018, when compared to the~~ ~~nine months ended September 30, 2017~~. Sales of legacy 2D LaserAlign sensors ~~were also higher~~decreased by $930,000 or 32% to $2.0 million in the three months ended ~~September 30, 2018,~~March 31, 2019, when compared to the same period last year. Sales of high precision 3D and 2D sensors are dependent on the success of our OEM customers selling products that incorporate our sensors. Weakness in high precision 3D and 2D sensor sales is expected to persist, resulting in a significant year-over-year decline in sensor sales in the second quarter of 2019. Sales of high precision 3D and 2D sensors are expected to rebound during the second half of 2019 as SMT and semiconductor markets begin to improve. We believe sales of our new 3D MRS enabled sensors will represent an increasing percentage of our total high precision 3D and 2D sensor sales in the future. However, quarterly sales of high precision 3D and 2D sensors are prone to significant fluctuations, both sequentially and on a year-over-year basis.

Revenues from sales of semiconductor sensors, principally our WaferSense product line, increased by $~~1.2~~ ~~million~~$975,000 or ~~55%~~31% to $4.1 million in the three months ended ~~September 30, 2018~~March 31, 2019, ~~when compared to~~from $3.2 million in the three months ended ~~September 30, 2017~~March 31, 2018. ~~Revenues from sales of semiconductor sensors~~ ~~increased~~ ~~by $2.9~~ ~~million~~ or ~~37%~~ ~~in thenine months ended September 30, 2018, when compared to the~~ ~~nine months ended September 30, 2017~~. The revenue ~~increases reflect favorable conditions~~increase was driven by orders received from advanced Asian semiconductor manufacturing facilities commissioned in 2018 that have deployed our WaferSense sensors to improve yield. Sales of WaferSense sensors are forecasted to be essentially flat on a year-over-year basis in the ~~markets for~~second quarter of 2019 due to short-term weakness in the semiconductor ~~equipment and manufacturing,~~market. We anticipate that the benefits from growing ~~acceptance~~market awareness of our WaferSenseproducts, ~~as important productivity enhancement tools by semiconductor manufacturers, and~~ improved account penetration at major semiconductor manufacturers and capital equipment ~~suppliers. We anticipate that the benefits from growing market awareness~~suppliers and new product introductions will lead to additional WaferSense product sales in future periods.

Revenues from sales of inspection and metrology systems increased by $~~2.3~~1.2 million or ~~41%~~20% to $7.1 million in the three months ended ~~September 30, 2018~~March 31, 2019, ~~when compared to~~from $5.9 million in the three months ended ~~September 30, 2017~~March 31, 2018.~~Revenues from sales of inspection and metrology systems~~ ~~increased~~ ~~by $1.5~~ ~~million or~~ 8% ~~in the~~ ~~nine months ended September 30, 2018, when compared to the~~ ~~nine months ended September 30, 2017~~. The revenue ~~increases primarily~~increase resulted from higher sales of 3D MRS-enabled SQ3000 3D AOI systems, including the new ~~SQ3000~~SQ3000™ 3D CMM system, and $1.6 million of revenue from sales of MX600 memory module inspection systems. Sales of SQ3000 systems increased by ~~$2.1 million~~$274,000 or ~~92%~~12% to ~~$4.3~~$2.5 million in the three months ended ~~September 30, 2018~~March 31, 2019, when compared to the three months ended ~~September 30, 2017~~March 31, 2018. Sales of ~~SQ3000~~legacy 2D AOI and solder paste inspection systems ~~increased by $1.9 million or 28% to $8.7 million~~were lower in the ~~nine~~three months ended ~~September 30, 2018~~,March 31, 2019, when compared to the ~~nine~~three months ended ~~September 30, 2017~~.March 31, 2018. There were no sales of MX600 memory module inspection systems in the three months ended March 31, 2018. Consistent with the customer's current installation schedule, we expect to recognize $1.1 million of MX600 sales in the second quarter of 2019. Sales of inspection and metrology systems are forecasted to grow strongly in the second quarter of 2019, driven by strong demand for SQ3000 3D AOI systems and the MX600 sales described above.

We believe a growing number of companies are transitioning from 2D AOI to 3D AOI systems to meet the increasingly demanding product inspection requirements in the semiconductor, electronics and industrial markets. As a result, ~~we believe~~ demand for 3D AOI systems is growing rapidly. We anticipate sales of ~~our~~ 3D MRS enabled SQ3000 3D AOI systems, including the new SQ3000™ 3D CMM system, will represent an increasing percentage of our total inspection and metrology system sales in the future. Also, we expect that the competitive advantages of our unique 3D MRS technology will provide us with an opportunity to capture significant market share in the 3D AOI systems market.

Export ~~revenue~~revenues totaled $~~11.9~~10.6 million or 71% of our total ~~revenue~~revenues in the three months ended ~~September 30, 2018~~March 31, 2019, compared to $~~7.8~~ ~~million or~~ 66~~% of total revenue in the~~ ~~three months ended September 30, 2017. Export revenue totaled $33.4~~10.2 million or 72% of total ~~revenue in the~~ ~~nine months ended September 30, 2018, compared to $29.3~~ ~~million or~~ 73~~% of total revenue in the~~ ~~nine months ended September 30, 2017. The higher percentage of export revenue~~revenues in the three months ended ~~September 30,~~March 31, 2018. There was no significant change in export revenues as a percentage of total revenues in the three months ended March 31, 2019, when compared to the three months ended ~~September 30, 2017~~, was due to the increase in sales of 3D MRS-enabled sensors and SQ3000 3D AOI systems, a higher proportion of which are generally sold outside the United States. There was no significant change in export revenue as a percentage of total revenue in the ~~nine months ended September 30,~~March 31, 2018~~, when compared to the~~ ~~nine months ended September 30, 2017~~.

Cost of revenues increased by $~~3.0~~ ~~million~~$49,000 or 481% to $~~9.2~~8.0 million in the three months ended ~~September 30, 2018~~March 31, 2019, from $~~6.2~~7.9 million in the three months ended ~~September 30, 2017. Cost of revenues~~ ~~increased~~ ~~by $4.3~~ ~~million or~~ 20~~% to $25.7~~ ~~million in the~~ ~~nine months ended September 30,~~March 31, 2018~~, from $21.4~~ ~~million in the~~ ~~nine months ended September 30, 2017~~. The slight in~~creases~~crease in cost of revenues in the three months ended March 31, 2019 ~~were mainly~~was due to the corresponding ~~revenue increases~~6% increase in ~~both periods. Revenues increased~~revenues, mostly offset by ~~41%~~a change in ~~the~~ ~~three months ended September 30, 2018, when compared to the~~ ~~three months ended September 30, 2017. Revenues increased by 16% in the~~ ~~nine months ended September 30, 2018, when compared to the~~ ~~nine months ended September 30, 2017~~. ~~Revenue~~product mix, ~~in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2018~~ ~~also contributed to the changes in~~as sales of lower cost, higher gross margin products constituted a greater percentage of our total revenues. Items included in cost of revenues that fluctuate with the level of sales include raw materials, direct labor and factory overhead costs.

Total gross margin as a percentage of revenue was 4547% in ~~both~~ the three ~~and nine~~ months ended ~~September 30, 2018~~March 31, 2019, compared to 4744% in ~~both~~ the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018. The ~~reduction~~increase in gross margin percentage ~~in both periods~~ was ~~mainly~~ due to ~~pricing pressures on~~ 2Dsales of higher margin semiconductor sensors representing a greater percentage of our total revenues. In addition, there were fewer sales of 2D and 3D3D inspection systems in the broader SMT market, ~~offset~~which tend to have lower gross margins due to competitive pricing pressures. We anticipate that our gross margin percentage in ~~part by~~the second quarter of 2019 will be down slightly on a ~~change~~year-over-year basis from the second quarter of 2018, principally due to expected changes in product mix, including more sales of ~~products sold.~~ inspection systems in the lower margin general purpose SMT market and an x-ray system sale.

Our markets are highly price competitive, particularly in the electronic assembly ~~market.~~and SMT markets. As a result, we have experienced ~~continual~~ongoing pressure on our gross margins. We compensate for this pressure to reduce the price of our products by introducing new products with more features and improved performance and through manufacturing cost reduction programs. Sales of many products that we have recently introduced or are about to introduce, including our current and future SQ3000 3D AOI systems, 3D MRS sensors and WaferSense products, have, or are expected to have, more favorable gross margins than many of our existing products. Our next generation 3D MRS-enabled sensor and system products are being designed for more complex and demanding inspection applications in the SMT and semiconductor markets. Sales prices and gross profit margins of products for these applications tend to be higher ~~when compared to~~than margins for products sold in the broader SMT market.

Research and development ("R&D") expenses were $~~2.2~~2.3 million or ~~13%~~15% of ~~revenue~~revenues in the three months ended ~~September 30, 2018~~March 31, 2019, compared to $~~1.9~~ ~~million or~~ 16~~% of revenue in the~~ ~~three months ended September 30, 2017. Research and development expenses were $6.6~~ ~~million or~~ 14~~% of revenue in the~~ ~~nine months ended September 30, 2018, compared to $5.9~~2.2 million or 15% of ~~revenue~~revenues in the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018. The ~~increases~~increase in ~~research and development~~R&D expenses ~~were~~was the result of higher compensation costs due to hiring of ~~additional~~ employees and pay increases for existing employees ~~and bonus accruals for employees who work~~working in ~~research and development.~~our R&D department. Current ~~research and development~~R&D expenditures are primarily focused on continued development of our MRS technology, including 3D sensor subsystems and commercialization of our next generation ultra-high resolution 3-micron pixel sensor, and ongoing development of new applications for our WaferSense product line.

Selling, general and administrative ("S,G&A") expenses were $~~3.9~~4.2 million or ~~24%~~28% of ~~revenue~~revenues in the three months ended ~~September 30, 2018~~March 31, 2019, compared to $~~3.8~~4.4 million or 3231% of ~~revenue~~revenues in the three months ended ~~September 30, 2017. Selling, general and administrative expenses were $12.4~~ ~~million or~~ ~~27%~~ ~~of revenue in the~~ ~~nine months ended September 30,~~March 31, 2018~~, compared to $11.8~~ ~~million or~~ 29~~% of revenue in the~~ ~~nine months ended September 30, 2017~~. The ~~increases~~decrease in ~~selling, general and administrative~~S,G&A expenses ~~were~~was due to ~~higher bonus accruals~~lower compensation costs from voluntary employee departures, a small reduction due to foreign currency impacts and ~~commissions paid to outside sales channel partners, resulting from increases in our sales and profitability in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2018, when compared to the same periods of~~ ~~2017. Selling, general and administrative expenses in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2018~~ ~~were decreased by an approximately $200,000~~a small reduction in our allowance for doubtful ~~accounts, primarily resulting from collection~~accounts.

Total operating expenses in the second quarter of 2019 are expected to be up slightly on a ~~receivable that had been fully reserved for in a prior period. We do not expect further large reductions in our allowance for doubtful accounts in future periods.~~year-over-year basis when compared to the second quarter of 2018.

Interest income and other includes interest earned on investments and gains and losses ~~from~~associated with foreign currency transactions, ~~including~~primarily intercompany financing transactions associated with our subsidiaries in the United Kingdom, Singapore and China. We recognized losses from foreign currency transactions ~~primarily intercompany financing transactions,~~ of $~~37,000~~18,000 in the three months ended ~~September 30, 2018~~March 31, 2019, compared to ~~losses~~gains from foreign currency transactions of $~~38,000~~43,000 in the three months ended ~~September 30, 2017. We recognized gains from foreign currency transactions, primarily intercompany financing transactions, of $102,000~~ ~~in the~~ ~~nine months ended September 30,~~March 31, 2018~~, compared to losses from foreign currency transactions of $194,000~~ ~~in the~~ ~~nine months ended September 30, 2017~~.

Backlog totaled ~~$19.7~~$11.6 million at ~~September 30, 2018~~March 31, 2019, ~~an increase~~a decrease from ~~$13.8~~$13.6 million at ~~June 30,~~December 31, 2018 and ~~$11.2~~$12.1 million at ~~September 30, 2017~~March 31, 2018. Our products are typically shipped two weeks to two months after receipt of an order. ~~Backlog~~ ~~at September 30, 2018 included $4.4 million of orders for MX600 systems, which are expected to be recognized as revenue in the first half of 2019.~~ Sales of some inspection system products may require customer acceptance due to performance or other acceptance criteria included in the terms of sale. For these product sales, revenue is recognized at the time of customer acceptance. Our backlog at any time may vary significantly based on the timing of orders from OEM customers. In some instances, our OEM customers may place orders for shipment of products covering periods of nine months or longer. Accordingly, backlog may not be an accurate indicator of performance in the future.

Our cash and cash equivalents increased by $~~689,000~~67,000 in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019. ~~Cash provided by~~Proceeds of $440,000 from operating activities, proceeds of $~~1.7~~1.1 million ~~cash~~ from ~~sales and~~ maturities of marketable securities, ~~totaling~~and proceeds of $~~6.5~~59,000 ~~million and proceeds~~ from the exercise of stock options added to our cash and ~~share purchases under our Employee Stock Purchase Plan~~cash equivalents. These sources of $~~671,000~~,cash were mostly offset ~~in part~~ by purchases of marketable securities oftotaling $~~7.0~~1.3 million and purchases of fixed asset ~~purchases~~ and payment of capitalized patent costs totaling $~~1.2~~ ~~million.~~$215,000. Our cash and cash equivalents fluctuate in part because of sales and maturities of marketable securities and investment of cash balances in marketable ~~securities.~~securities, and from other sources of cash. Accordingly, we believe the combined balances of cash and marketable securities provide a more reliable indication of our available liquidity than cash balances alone. Combined balances of cash and marketable securities increased by approximately $~~1.1~~ ~~million~~$400,000 to $~~23.8~~25.7 million as of ~~September 30, 2018~~March 31, 2019 from $~~22.7~~25.3 million as of December 31, ~~2017~~2018.

Operating activities provided $~~1.7~~$440,000 ~~million~~ of cash in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019. The amount of cash provided by operations was favorably impacted by our net income of ~~$1.6 million~~$495,000. Net income was affected by non-cash expenses totaling $~~2.6~~1.0 million for depreciation and amortization, provision for doubtful accounts, deferred income taxes, non-cash ~~gains~~losses from foreign currency transactions, ~~stock-based~~share-based compensation costs and ~~gains and losses~~an unrealized loss on our available-for-sale ~~securities.~~equity security. Changes in operating assets and liabilities providing cash in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019, included ~~an increase~~a decrease in accounts ~~payable~~receivable of $~~1.1~~$2.9 million, a decrease in other assets of $445,000 and an increase in advance customer payments of $~~638,000~~$207,000. ~~and~~ ~~an increase~~ ~~in accrued expenses of $382,000~~. Changes in operating assets and liabilities using cash in the ~~nine~~three months ended ~~September 30, 2018~~ ~~included~~ ~~an increase~~ ~~in accounts receivable of $3.6~~March 31, 2019 ~~million,~~, included an increase in inventories of $~~387,000~~$1.6 million, ~~and~~ ~~an increase~~a decrease in ~~other assets~~accounts payable of $~~692,000~~$2.4 million and a decrease in accrued expenses of $600,000. Accounts ~~payable~~receivable decreased due to lower sales in the first quarter of 2019 when compared to the fourth quarter of 2018. Other assets decreased because deposits previously paid to a key supplier of materials were used to purchase inventories. Advance customer payments increased due to receipt of a customer deposit for a metrology product we expect to ship in the second quarter of 2019. Inventories increased because materials were purchased to support higher sales levels that were originally anticipated for the first quarter of 2019. Sales were lower than initially anticipated due to sluggish conditions in the global SMT and semiconductor markets. The purchase of additional materials for MX600 memory module inspection systems also contributed to the increase in inventories. Accounts payable decreased due to timing of inventory purchases, with more materials being acquired in the ~~later~~fourth quarter of 2018 and the early part of the ~~third~~first quarter of ~~2018. The timing~~2019. These materials were subsequently paid for in the first quarter of ~~these purchases resulted~~2019, resulting in ~~a higher~~the lower accounts payable ~~balance at~~ ~~September 30, 2018. Advance customer payments increased~~balance. Accrued expenses decreased due to ~~receipt~~payment of ~~deposits from customers for metrology products we expect to ship~~2018 bonuses in the ~~fourth~~first quarter of ~~2018. Accrued expenses were up due to 2018 bonus accruals that we expect to pay in~~ 2019. ~~Accounts receivable increased due to the higher sales level in the~~ ~~third~~ ~~quarter~~ of ~~2018, when compared to the fourth quarter of~~ ~~2017. Inventories increased slightly in 2018 due to changes in anticipated product sales mix. Other assets were up due to payments for supplier deposits.~~

Investing activities used $~~1.7~~ ~~million~~$426,000 of cash in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019. Changes in the level of investment in marketable securities, resulting from purchases, sales and maturities of those securities, used $~~508,000~~211,000 of cash in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019. We ~~also~~ used $~~1.2~~ ~~million~~$215,000 of cash in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 tofor the purchase of fixed assets and ~~to fund~~ capitalized patent costs.

Financing activities from the exercise of stock options ~~and share purchases under our Employee Stock Purchase Plan~~ provided $~~671,000~~59,000 of cash in the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019.

At ~~September 30, 2018~~March 31, 2019, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. These entities ~~(which~~ are ~~used to establish~~established by some companies for the purpose of establishing off-balance sheet ~~arrangements).~~

We lease a 50,724 square foot mixed office and warehouse facility built to our specifications in Golden Valley, Minnesota, which functions as our corporate headquarters and primary manufacturing facilityarrangements or for ~~our sensor and semiconductor products. We also lease a 10,165~~other contractually narrow or limited purposes. square foot facility in Bloomington, Minnesota, the term of which expires on December 31, 2018. In May 2018, we finalized an amendment to the lease for our current Golden Valley, Minnesota facility that will become effective on January 1, 2019. The amendment provides that we will lease 61,208 square feet of space in our current facility in Golden Valley, Minnesota through July 31, 2026 (prior to the amendment, the lease provided for an expiration date of December 31, 2018). The increase in the size of the facility will allow us to conduct the operations currently carried out at our Bloomington, Minnesota facility in our current Golden Valley, Minnesota location. Future lease payments due under the amended lease for the period from January 1, 2019 through July 31, 2026, are approximately $7.9 million. We anticipate that our annual rental payments will increase by approximately $200,000 when the lease amendment becomes effective in January 2019.

~~In October 2017, our Board of Directors adopted a program authorizing the purchase of up to $3.0~~ ~~million of shares of our common stock. The program expired on September 30, 2018. During the~~ ~~nine months ended September 30, 2018, no shares were repurchased under this program.~~

Our cash, cash equivalents and marketable securities totaled $~~23.8~~25.7 million at ~~September 30, 2018~~March 31, 2019. We believe that ~~our~~on-hand cash, cash equivalents and marketable securities, coupled with anticipated future cash flow from operations, will be adequate to fund our cash flow needs for the foreseeable future.

The preparation of the financial information contained in this Form 10-Q requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those estimates related to revenue recognition, bad debts, warranty obligations, inventory valuation, intangible assets and income taxes. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. These critical accounting policies are discussed in more detail in the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended ~~December 31, 2017~~.

~~Effective January 1, 2018, we adopted ASU No.~~ ~~2014~~-9~~, “~~~~Revenue from Contracts with Customers~~~~” and the related amendments (“Topic~~ ~~606”) using the modified retrospective method.Topic~~ ~~606~~ ~~was applied to all uncompleted contracts by recognizing the cumulative effect of initially applying Topic~~ ~~606~~ ~~as an adjustment to the opening balance of equity at January 1, 2018.Therefore, the comparative financial information for the three and~~ ~~nine months ended September 30, 2017~~ ~~has not been adjusted and continues to be reported under Topic~~ ~~605, “~~~~Revenue Recognition~~”.

Accounting for contracts recognized over time involves the use of various techniques to estimate total contract revenue and costs. Contract estimates are based on various assumptions to project the outcome of future events that may span multiple years. We review and update our contract-related estimates regularly, and record adjustments as needed.

~~The adoption of Topic~~ ~~606~~ ~~caused changes for (~~1~~) the impact of volume discounts that represent a material right which will now be estimated and recognized over the contract life rather than on a prospective basis, and (~~2~~) revenue will be recognized over time as the products are manufactured under certain contracts where our product is customized rather than at shipment. These changes increased our revenues in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2018~~ ~~by $123,000 and $232,000, respectively, when compared to revenue recognition under Topic~~ ~~605~~ ~~(see Note~~ 16~~). Adoption of Topic 606 increased our net income in the three and nine months ended September 30, 2018 by $35,000 and $85,000, respectively, or approximately $0.01 per share in both periods.~~

~~Under Topic~~ ~~606, revenue is measured based on consideration specified in the contract with a customer.A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic~~ ~~606~~. Revenue from all customers, including distributors, is recognized when a performance obligation is satisfied by transferring control of a product or service to a customer. Amounts billed to customers for shipping and handling are included in revenue. Taxes collected from customers and remitted to governmental authorities are excluded from revenue on the net basis of accounting. Accounts receivable are due under normal trade terms, typically 90 ~~days or less.~~

Sales involving multiple performance obligations typically include the sale of an inspection system or metrology product, installation and training, and in some cases, an extended warranty. When a sale involves multiple performance obligations, we account for individual products and services separately if the customer can benefit from the product or service on its own or with other resources that are readily available to the customer and the product or service are separately identifiable from other promises in the arrangement.~~The consideration is allocated between separate performance obligations in proportion to their estimated stand-alone selling price.~~If the stand-alone selling price is not directly observable, we use the cost plus margin approach to estimate stand-alone selling price. Costs related to products delivered are recognized in the period revenue is recognized; including product warranties for periods ranging from 1 to 3 ~~years (see Note~~ 7).

~~Our performance obligations are satisfied at a point in time or over time as work progresses. Revenue from products and services transferred to customers at a point in time in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2018~~ totaled $15.4 million and $43.4 million, respectively, which represented 93% of our total revenue in both periods. Revenue from these contracts is recognized when obligations under the terms of the contract with our customer are satisfied; generally with the transfer of control upon shipment. Sales of some products may require customer acceptance due to performance or other acceptance criteria that is considered more than a formality. For these product sales, revenue is recognized upon notification of customer acceptance.

~~Revenue from products and services transferred to customers over time in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2018~~ totaled $1.2 million and $3.3 million, respectively, which represented 7% of our total revenue in both periods. Periodically, sensor product arrangements with our original equipment manufacturers (OEM's) will create an asset with no alternative use and include an enforceable right to payment.For these arrangements control is transferred over the manufacturing process; therefore, revenue is recognized over time utilizing an input method based on actual costs incurred in the manufacturing process to date relative to total expected production costs. For certain longer duration 3~~D scanning service projects, we progress bill as the services are performed.These arrangements create an asset with no alternative use and include an enforceable right to payment.~~For these arrangements, control is transferred over the hours incurred to complete the scanning project; therefore, revenue is recognized over time utilizing an input method based on actual hours incurred relative to total projected project hours. For maintenance and extended warranty contracts, revenue is recognized over time on a straight-line basis over the term of the contract as the customer simultaneously receives and consumes the benefits of the coverage.

a. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.

b. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018, which could materially affect our business, financial condition or future results.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

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


	Nine Months Ended September 30,						Three Months Ended March 31,
(In thousands)	2018			2017			2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,634		$	809
Net income (loss)							$	495		$	(173	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	1,876			1,659			663			625
Provision for doubtful accounts	(159		)	(15		)
Provision (recovery) for doubtful accounts							(44		)	17
Deferred taxes	261			(27		)	71			(139		)
Foreign currency transaction (gains) losses	(140		)	139			70			(34		)
Stock based compensation	701			640
Share-based compensation							244			259
Unrealized loss on available-for-sale equity security	24			—			1			14
Realized gain on available-for-sale marketable securities	(3		)	—
Changes in operating assets and liabilities:
Accounts receivable	(3,594		)	(1,022		)	2,866			(1,357		)
Inventories	(387		)	(5,260		)	(1,625		)	(239		)
Other assets	(692		)	(133		)	445			(229		)
Accounts payable	1,124			866			(2,353		)	1,579
Advance customer payments	638			(3		)	207			130
Accrued expenses	382			(1,906		)	(600		)	36
Net cash provided by (used in) operating activities	1,665			(4,253		)
Net cash provided by operating activities							440			489

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of available-for-sale marketable securities	6,018			5,187			1,052			2,162
Proceeds from sales of available-for-sale marketable securities	480			—			—			70
Purchases of available-for-sale marketable securities	(7,006		)	(5,604		)	(1,263		)	(2,621		)
Additions to equipment and leasehold improvements	(1,079		)	(851		)	(183		)	(348		)
Additions to patents	(76		)	(107		)	(32		)	(22		)
Net cash used in investing activities	(1,663		)	(1,375		)	(426		)	(759		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	452			330			59			182
Proceeds from issuance of common stock under Employee Stock Purchase Plan	219			258
Net cash provided by financing activities	671			588			59			182

Effects of exchange rate changes on cash and cash equivalents	16			(7		)	(6		)	(8		)

Net increase (decrease) in cash and cash equivalents	689			(5,047		)	67			(96		)

Cash and cash equivalents – beginning of period	6,944			10,640			9,248			6,944
Cash and cash equivalents – end of period	$	7,633		$	5,593		$	9,315		$	6,848


	Nine Months Ended September 30,						Three Months Ended March 31,
(In thousands)	2018			2017			2019			2018
Balance at beginning of period	$	767		$	790		$	789		$	767
Accrual for warranties	399			362			174			103
Warranty revision	(30		)	(23		)	17			(26		)
Settlements made during the period	(368		)	(413		)	(154		)	(101		)
Balance at end of period	768			716			826			743
Current portion of estimated warranty liability	(713		)	(691		)	(795		)	(690		)
Long-term estimated warranty liability	$	55		$	25		$	31		$	53


	Nine Months Ended September 30,						Three Months Ended March 31,
(In thousands)	2018			2017			2019			2018
Balance at beginning of period	$	259		$	346		$	218		$	259
Revenue deferrals	289			321			87			111
Amortization of deferred revenue	(310		)	(325		)	(114		)	(120		)
Total deferred warranty revenue	238			342			191			250
Current portion of deferred warranty revenue	(228		)	(301		)	(186		)	(231		)
Long-term deferred warranty revenue	$	10		$	41		$	5		$	19


	September 30, 2018							December 31, 2017							March 31, 2019							December 31, 2018
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Patents	$	2,727	$	(2,515	)	$	212	$	2,687	$	(2,463	)	$	224	$	2,785	$	(2,564	)	$	221	$	2,754	$	(2,533	)	$	221
Software	206		(134		)	72		206		(111		)	95		206		(148		)	58		206		(141		)	65
Marketing assets and customer relationships	101		(52		)	49		101		(45		)	56		101		(56		)	45		101		(54		)	47
Non-compete agreements	101		(101		)	—		101		(96		)	5		101		(101		)	—		101		(101		)	—
	$	3,135	$	(2,802	)	$	333	$	3,095	$	(2,715	)	$	380	$	3,193	$	(2,869	)	$	324	$	3,162	$	(2,829	)	$	333

	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2018		2017		2018		2017
High Precision 3D and 2D Sensors	$	5,388	$	4,030	$	15,696	$	13,569
Semiconductor Sensors		3,463		2,228		10,564		7,698
Inspection and Metrology Systems		7,832		5,570		20,397		18,890
Total	$	16,683	$	11,828	$	46,657	$	40,157


	Fair Value Measurements at September 30, 2018 Using
(In thousands)	Balance September 30, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Marketable securities:
U.S. government and agency obligations	$	9,935	$	—	$	9,935	$	—
Corporate debt securities and certificates of deposit	2,382		—		2,382		—
Asset backed securities	3,812		—		3,812		—
Equity security	73		73		—		—
Total marketable securities	$	16,202	$	73	$	16,129	$	—

	Nine Months Ended September 30, 2018								Nine Months Ended September 30, 2017
(In thousands)		Before Tax			Tax Effect		Net of Tax Amount			Before Tax		Tax Effect			Net of Tax Amount
Foreign currency translation adjustments	$	(252	)	$	—	$	(252	)	$	587	$	(173	)	$	414
Net changes related to available-for-sale securities:
Unrealized gains (losses)		(33	)		8		(25	)		31		(11	)		20
Reclassification adjustments for gain included in interest income and other		(3	)		—		(3	)		—		—			—
Net changes related to available-for-sale securities		(36	)		8		(28	)		31		(11	)		20
Other comprehensive income (loss)	$	(288	)	$	8	$	(280	)	$	618	$	(184	)	$	434


Component	(In thousands)
Operating lease cost	$	180
Variable lease cost	67
Short-term lease cost	2
Total	$	249


Twelve months ending March 31,	(In thousands)
2020	$	688
2021	711
2022	615
2023	630
2024	646
2025 & Thereafter	1,571
Total lease payments		4,861
Less: amount representing interest	1,016
Present value of operating lease liabilities	$	3,845


•	SQ~~3000.~~ ~~Our~~ 3~~D AOI system, the SQ3000,~~ iswhich are designed to expand our presence in SMT and semiconductor markets requiring high precision measurement and inspection. In these markets, identifying defects ~~in products~~ has become highly challenging and critical due to smaller and more complex electronics packaging and increasing component density on circuit boards.


31.1:		Certification of Chief Executive Officer pursuant to Rule 15d-14(a) (17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes Oxley Act of 2002
31.2:		Certification of Chief Financial Officer pursuant to Rule 15d-14(a) (17 CFR 240.15d-14(a)) and Section 302 of the Sarbanes Oxley Act of 2002
32:		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
101:		Financial statements formatted in Inline Extensible Business Reporting Language: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statement of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to the Interim Condensed Consolidated Financial Statements


	CYBEROPTICS CORPORATION

	/s/ Subodh Kulkarni
	By Subodh Kulkarni, President and Chief Executive Officer
	(Principal Executive Officer and Duly Authorized Officer)

	/s/ Jeffrey A. Bertelsen
	By Jeffrey A. Bertelsen, Vice President, Chief Financial Officer and Chief Operating Officer
	(Principal Accounting Officer and Duly Authorized Officer)