INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

CYBEROPTICS CORPORATION

(Unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands, except per share amounts)	2018		2017			2018		2017			2019			2018		2019		2018
Revenues	$	16,683	$	11,828		$	46,657	$	40,157		$	12,391		$	16,683	$	42,411	$	46,657
Cost of revenues		9,247		6,236			25,738		21,434			6,885			9,247		23,290		25,738

Gross margin		7,436		5,592			20,919		18,723			5,506			7,436		19,121		20,919

Research and development expenses		2,162		1,947			6,585		5,892			2,408			2,162		6,950		6,585
Selling, general and administrative expenses		3,935		3,793			12,413		11,821			3,855			3,945		11,779		12,448
Amortization of intangibles		10		15			35		50

Income (loss) from operations		1,329		(163	)		1,886		960			(757	)		1,329		392		1,886

Interest income and other		35		(25	)		192		(141	)		170			35		306		192

Income (loss) before income taxes		1,364		(188	)		2,078		819			(587	)		1,364		698		2,078

Income tax expense (benefit)		297		(116	)		444		10			(234	)		297		92		444

Net income (loss)	$	1,067	$	(72	)	$	1,634	$	809		$	(353	)	$	1,067	$	606	$	1,634

Net income (loss) per share – Basic	$	0.15	$	(0.01	)	$	0.23	$	0.12		$	(0.05	)	$	0.15	$	0.09	$	0.23
Net income (loss) per share – Diluted	$	0.15	$	(0.01	)	$	0.23	$	0.11		$	(0.05	)	$	0.15	$	0.08	$	0.23

Weighted average shares outstanding – Basic		7,041		6,959			7,012		6,939			7,117			7,041		7,108		7,012
Weighted average shares outstanding – Diluted		7,299		6,959			7,176		7,041			7,117			7,299		7,245		7,176

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CYBEROPTICS CORPORATION

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2018			2017			2018			2017			2019			2018			2019			2018
Net income (loss)	$	1,067		$	(72	)	$	1,634		$	809		$	(353	)	$	1,067		$	606		$	1,634

Other comprehensive income, before tax:
Other comprehensive loss, before tax:
Foreign currency translation adjustments		(50	)		157			(252	)		587			(269	)		(50	)		(199	)		(252	)

Unrealized gains (losses) on available-for-sale securities:
Unrealized gains (losses)		3			—			(33	)		31			1			3			129			(33	)
Reclassification adjustment for gains included in net income		(3	)		—			(3	)		—			—			(3	)		—			(3	)
Total unrealized gains (losses) on available-for-sale securities		—			—			(36	)		31			1			—			129			(36	)

Other comprehensive income (loss), before tax		(50	)		157			(288	)		618
Income tax provision (benefit), other comprehensive income		—			(35	)		8			(184	)
Other comprehensive income (loss), net of tax		(50	)		122			(280	)		434
Total comprehensive income	$	1,017		$	50		$	1,354		$	1,243
Other comprehensive loss before income taxes														(268	)		(50	)		(70	)		(288	)
Income tax (provision) benefit														—			—			(26	)		8
Other comprehensive loss after income taxes														(268	)		(50	)		(96	)		(280	)
Total comprehensive income (loss)													$	(621	)	$	1,017		$	510		$	1,354

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

CYBEROPTICS CORPORATION

(Unaudited)


	Nine Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2018			2017			2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,634		$	809		$	606		$	1,634
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	1,876			1,659			2,102			1,876
Provision for doubtful accounts	(159		)	(15		)
Recovery for doubtful accounts							(31		)	(159		)
Deferred taxes	261			(27		)	107			261
Foreign currency transaction (gains) losses	(140		)	139
Stock based compensation	701			640
Foreign currency transaction gains							(112		)	(140		)
Share-based compensation							737			701
Unrealized loss on available-for-sale equity security	24			—			10			24
Realized gain on available-for-sale marketable securities	(3		)	—			—			(3		)
Changes in operating assets and liabilities:
Accounts receivable	(3,594		)	(1,022		)	2,568			(3,594		)
Inventories	(387		)	(5,260		)	(1,123		)	(387		)
Other assets	(692		)	(133		)	235			(692		)
Accounts payable	1,124			866			(3,538		)	1,124
Advance customer payments	638			(3		)	(50		)	638
Accrued expenses	382			(1,906		)	(1,077		)	382
Net cash provided by (used in) operating activities	1,665			(4,253		)
Operating lease assets and liabilities							482			—
Net cash provided by operating activities							916			1,665

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of available-for-sale marketable securities	6,018			5,187			6,144			6,018
Proceeds from sales of available-for-sale marketable securities	480			—			—			480
Purchases of available-for-sale marketable securities	(7,006		)	(5,604		)	(7,080		)	(7,006		)
Additions to equipment and leasehold improvements	(1,079		)	(851		)	(1,065		)	(1,079		)
Additions to patents	(76		)	(107		)	(88		)	(76		)
Net cash used in investing activities	(1,663		)	(1,375		)	(2,089		)	(1,663		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	452			330			173			452
Proceeds from issuance of common stock under Employee Stock Purchase Plan	219			258
Repurchase of common stock							(353		)	—
Proceeds from issuance of common stock under employee stock purchase plan							203			219
Net cash provided by financing activities	671			588			23			671

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

Net increase (decrease) in cash and cash equivalents	689			(5,047		)	(1,144		)	689

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		$	8,104		$	7,633

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~~2019, and for the three and nine month periods ended September 30, ~~2018~~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~~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.~~America ("U.S. GAAP"). 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 chose the option to apply the new standard at the adoption date, and therefore we were not required to restate the financial statements for prior periods, nor are we required to provide the disclosures required by Topic 842 for prior periods. Upon adoption of Topic 842, we recognized 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 opening balance of retained earnings related to our adoption of Topic 842 was inconsequential. Our adoption of Topic 842 did not impact our cash flows or have a material impact on our results of operations. We have expanded our consolidated financial statement disclosures to comply with the requirements of Topic 842.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"), which allows an entity to elect an option to reclassify the stranded tax effects related to the application of the Tax Cuts and Jobs Act (the "TCJA") from accumulated other comprehensive income or loss to retained earnings. ASU 2018-02 was effective January 1, ~~2018.~~2019 and could be applied either in the period of adoption or retrospectively to all applicable periods. ~~Therefore,~~We did not elect to reclassify the ~~comparative~~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 goodwill impairment, ASU 2017-04, 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 ~~information for~~statements.

6

3. REVENUE RECOGNITION:

Our revenue performance obligations are primarily satisfied at a point in time and limited revenue streams are satisfied over time as work progresses.

The following is a summary of our revenue performance obligations in the three and nine months ended September 30, ~~2017~~2019 ~~has not been adjusted~~ and ~~continues to be reported under Topic~~the ~~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~~:


	Three Months Ended September 30, 2019				Three Months Ended September 30, 2018
(In thousands except percentages)	Revenues		Percent of Revenues		Revenues		Percent of Revenues
Revenue recognized over time	$	403	3	%	$	1,241	7	%
Revenue recognized at a point in time		11,988	97	%		15,442	93	%
	$	12,391	100	%	$	16,683	100	%


	Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018
(In thousands except percentages)	Revenues		Percent of Revenues		Revenues		Percent of Revenues
Revenue recognized over time	$	1,041	2	%	$	3,262	7	%
Revenue recognized at a point in time		41,370	98	%		43,395	93	%
	$	42,411	100	%	$	46,657	100	%

See Note 1610). for additional information regarding disaggregation of revenue.

~~Performance Obligations~~

~~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.

6

~~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)	September 30, 2019		December 31, 2018
Contract assets, included in other current assets	$	6	$	—
Contract liabilities - advance customer payments	$	427	$	366
Contract liabilities - deferred warranty revenue	$	235	$	218

(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 months ended September 30, 2019 and the nine months ended September 30, 2018 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 no0 impairment losses for contract assets in the nine months ended September 30, 2019 or the nine months ended September 30, 2018.

~~Practical Expedients~~

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2019		2018			2019		2018
Amounts reclassified from beginning contract liabilities to revenue	$	342	$	39	$	401	$	262
Amounts reclassified from deferred warranty revenue		111		99	334		310
Total	$	453	$	138	$	735	$	572

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.

7

3.4. MARKETABLE SECURITIES:

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


	September 30, 2018									September 30, 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	$	5,138	$	11	$	(2	)	$	5,147
Corporate debt securities and certificates of deposit	2,163		—		(8		)	2,155		1,170		1		—			1,171
Asset backed securities	654		—		(4		)	650		1,469		5		—			1,474
Marketable securities – short-term	$	6,428	$	—	$	(32	)	$	6,396	$	7,777	$	17	$	(2	)	$	7,792
Long-Term
U.S. government and agency obligations	$	6,399	$	—	$	(55	)	$	6,344	$	5,646	$	32	$	(1	)	$	5,677
Corporate debt securities and certificates of deposit	230		—		(3		)	227		1,602		12		—			1,614
Asset backed securities	3,184		—		(22		)	3,162		2,035		17		—			2,052
Equity security	42		31		—			73		42		7		—			49
Marketable securities – long-term	$	9,855	$	31	$	(80	)	$	9,806	$	9,325	$	68	$	(1	)	$	9,392


	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
September 30, 2019
U.S. government and agency obligations	$	1,057	$	(2	)	$	2,282	$	(1	)
Corporate debt securities and certificates of deposit	20		—			80		—
Asset backed securities	50		—			733		—
Marketable securities	$	1,127	$	(2	)	$	3,095	$	(1	)
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	)

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 )

8

~~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~~The marketable debt securities in which we have invested all have maturities of less than five years. Net pre-tax unrealized gains for marketable debt securities of $75,000 at September 30, 2019 and net pre-tax losses for marketable debt securities of~~$112,000~~ $54,000 at ~~September 30, 2018~~ ~~and $22,000 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~~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. ~~We received~~NaN marketable securities were sold in the three or nine months ended September 30, 2019. In the three and nine months ended September 30, 2018, proceeds from sales of marketable securities oftotaled $410,000 and $480,000, ~~and recognized a $3,000 gain on the sales, in~~respectively. In both the three and nine months ended September 30, 2018,~~. No~~ ~~marketable securities~~ gains of $3,000 were ~~sold in~~recognized on the ~~nine~~ ~~months ended~~ ~~September 30, 2017~~. sales.

Investments in marketable securities classified as cash equivalents of ~~$2.3~~$3.9 million at September 30, ~~2018~~2019 and $~~1.6~~2.5 million atDecember 31, ~~2017~~2018 consist of corporate debt securities and certificates of deposit. There were no0 unrealized gains or losses ~~associated~~ with respect to any of these securities at September 30, ~~2018~~2019 or December 31, ~~2017~~2018.

Cash and marketable securities held by foreign subsidiaries totaled ~~$532,000~~$405,000 at September 30, ~~2018~~2019 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~~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 September 30, 2019 Using
(In thousands)	Balance September 30, 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	$	10,824	$	—	$	10,824	$	—
Corporate debt securities and certificates of deposit	2,785		—		2,785		—
Asset backed securities	3,526		—		3,526		—
Equity security	49		49		—		—
Total marketable securities	$	17,184	$	49	$	17,135	$	—


	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	$	—

9

During the nine months ended September 30, ~~2018~~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 and goodwill and other intangible assets are subject to non-recurring fair value measurements if they are deemed impaired. We had no0 re-measurements of non-financial assets to fair value in the nine months ended September 30, 2019 or the nine months ended September 30, 2018 ~~or the~~ ~~nine months ended September 30, 2017~~.

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

We have ~~three~~3 ~~stock-based~~share-based compensation plans that are administered by the Compensation Committee of the Board of Directors. We have (1)(a) 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)(b) an Employee Stock Purchase Plan under which shares of our common stock may be acquired by employees at discounted prices, and (3)(c) 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~~2019, there were ~~336,489~~273,764 shares of common stock reserved in the aggregate for issuance pursuant to future awards under our Employee Stock Incentive Plan and ~~534,087~~524,428 shares of common stock reserved in the aggregate for issuance pursuant to outstanding awards under ~~our Employee Stock Incentive Plan.~~such 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~~1 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~~2019, there were ~~60,000~~52,000 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~~4 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~~2019 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~~$138,000 (grant date fair value of ~~$16.25~~$17.26 per share). As of September 30, ~~2018~~2019, 2,000 of these shares were vested. The aggregate fair value of the ~~outstanding~~6,000 unvested shares based on the closing price of our common stock on September 30, ~~2018~~2019 was ~~$121,000.~~$86,000.

~~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).~~

10

Stock Option Activity

The following is a summary of stock option activity in the nine months ended September 30, ~~2018~~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		(21,050	)	8.23
Expired	—		—		(5,750	)	10.83
Forfeited	(8,650	)	14.10		(7,350	)	16.67
Outstanding, September 30, 2018	504,875		$	10.39
Outstanding, September 30, 2019					488,892		$	11.55

Exercisable, September 30, 2018	311,813		$	8.61
Exercisable, September 30, 2019					334,768		$	9.45

67. CHANGES IN STOCKHOLDERS’ EQUITY:

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

Three months ended September 30, 2019:

	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, June 30, 2019	7,115		$	36,189		$	(1,518	)	$	23,256		$	57,927
Exercise of stock options	15			114			—			—			114
Share-based compensation	—			244			—			—			244
Issuance of common stock under Employee Stock Purchase Plan	18			203			—			—			203
Repurchase of common stock	(26	)		(353	)		—			—			(353	)
Other comprehensive loss, net of tax	—			—			(268	)		—			(268	)
Net loss	—			—			—			(353	)		(353	)
Balance, September 30, 2019	7,122		$	36,397		$	(1,786	)	$	22,903		$	57,514

Nine months ended September 30, 2019:

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

	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	21			173			—			—		173
Share issuances for director compensation	8			—			—			—		—
Share-based compensation	—			737			—			—		737
Issuance of common stock under Employee Stock Purchase Plan	18			203			—			—		203
Repurchase of common stock	(26	)		(353	)		—			—		(353	)
Other comprehensive loss, net of tax	—			—			(96	)		—		(96	)
Net income	—			—			—			606		606
Balance, September 30, 2019	7,122		$	36,397		$	(1,786	)	$	22,903	$	57,514

~~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.~~

~~7. OTHER FINANCIAL STATEMENT DATA:~~

~~The components of our inventories were as follows:~~

(In thousands)

September 30, 2018

December 31, 2017
Raw materials and purchased parts

$
7,383

$
7,383

Work in process

1,633

1,666

Finished goods

4,919

5,344

Total inventories

$
13,935

$
14,393

12

Three months ended September 30, 2018:

	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, June 30, 2018	7,024	$	34,815	$	(1,683	)	$	20,004	$	53,136
Exercise of stock options	24		201		—			—		201
Share-based compensation	—		217		—			—		217
Issuance of common stock under Employee Stock Purchase Plan	16		219		—			—		219
Other comprehensive loss, net of tax	—		—		(50	)		—		(50	)
Net income	—		—		—			1,067		1,067
Balance, September 30, 2018	7,064	$	35,452	$	(1,733	)	$	21,071	$	54,790

~~The components~~Nine months ended September 30, 2018:

	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 and vesting of restricted stock units	60		452		—			—			452
Share issuances for director compensation	8		—		—			—			—
Share-based compensation	—		701		—			—			701
Issuance of common stock under Employee Stock Purchase Plan	16		219		—			—			219
Other comprehensive loss, 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

8. OTHER FINANCIAL STATEMENT DATA:

Inventories consist of ~~our accrued expenses were as follows:~~the following:

(In thousands)

September 30, 2018

December 31, 2017
Wages and benefits

$
1,607

$
1,328

Warranty liability

713

713

Other

336

244

$
2,656

$
2,285


(In thousands)	September 30, 2019		December 31, 2018
Raw materials and purchased parts	$	10,352	$	8,821
Work in process	1,426		2,446
Finished goods	4,582		4,896
Total inventories	$	16,360	$	16,163

Accrued expenses consist of the following:


(In thousands)	September 30, 2019		December 31, 2018
Wages and benefits	$	1,038	$	2,166
Warranty liability	843		758
Income taxes payable	257		393
Other	212		251
	$	2,350	$	3,568

13

Warranty costs:

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 to us by suppliers, warranty obligations do arise. These obligations are affected by product failure rates, the ~~costs~~cost of materials used in correcting product failures and service delivery expenses incurred ~~in correcting a product failure.~~to make these corrections. 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:


	Nine Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2018			2017			2019			2018
Balance at beginning of period	$	767		$	790		$	789		$	767
Accrual for warranties	399			362			713			399
Warranty revision	(30		)	(23		)	(7		)	(30		)
Settlements made during the period	(368		)	(413		)	(626		)	(368		)
Balance at end of period	768			716			869			768
Current portion of estimated warranty liability	(713		)	(691		)	(843		)	(713		)
Long-term estimated warranty liability	$	55		$	25		$	26		$	55

13

9. 10. REVENUE CONCENTRATIONS, SIGNIFICANT CUSTOMERS AND GEOGRAPHIC ~~AREAS:~~AREAS:

The following ~~table~~ summarizes our revenue by product line:

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

14

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2019		2018		2019		2018
High Precision 3D and 2D Sensors	$	3,170	$	5,388	$	8,923	$	15,696
Semiconductor Sensors		3,676		3,463		10,934		10,564
Inspection and Metrology Systems		5,545		7,832		22,554		20,397
Total	$	12,391	$	16,683	$	42,411	$	46,657

Export sales as a percentage of total sales in the three and nine months ended September 30, 2019 were 77% and 73%, respectively. Export sales as a percentage of total sales in the three and nine months ended September 30, 2018 were ~~71%~~71% and 72%, ~~respectively. Export sales as a percentage of total sales in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2017~~ ~~were 66% and 73%,~~ ~~respectively~~.respectively. Virtually all of our export sales are negotiated, invoiced and paid in U.S. dollars. Export sales by geographic area are summarized below:

Three Months Ended September 30,

Nine Months Ended September 30,
(In thousands)

2018

2017

2018

2017
Americas

$
355

$
159

$
568

$
976

Europe

4,093

2,543

9,360

9,114

Asia

7,090

4,959

22,948

18,933

Other

348

103

548

247

Total export sales

$
11,886

$
7,764

$
33,424

$
29,270

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2019		2018		2019		2018
Americas	$	418	$	355	$	994	$	568
Europe		1,926		4,093		6,189		9,360
China		2,135		2,354		8,469		7,750
Taiwan		842		794		3,986		1,635
Other Asia		4,005		3,942		10,824		13,563
Other		248		348		632		548
Total export sales	$	9,574	$	11,886	$	31,094	$	33,424

In the nine months ended September 30, ~~2018~~2019, sales to significant customer A accounted for ~~11% of our total revenue and sales to significant customer B accounted for 10%~~12% of our total revenue. As of September 30, ~~2018~~2019, accounts receivable from significant customer A were ~~$677,000 and accounts receivable from significant customer B were $1.2~~ $1.5 million.

15

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

Basic net income (loss) per share for a period 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 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
Three Months Ended September 30, 2018

Basic

$
1,067

7,041

$
0.15
Dilutive effect of common equivalent shares

—

258

—
Dilutive

$
1,067

7,299

$
0.15

(In thousands except per share amounts)	Net Loss			Weighted Average Shares Outstanding	Per Share Amount
Three Months Ended September 30, 2019
Basic	$	(353	)	7,117	$	(0.05	)
Dilutive effect of common equivalent shares	—			—	—
Dilutive	$	(353	)	7,117	$	(0.05	)

(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
Three Months Ended September 30, 2018
Basic	$	1,067	7,041	$	0.15
Dilutive effect of common equivalent shares	—		258	—
Dilutive	$	1,067	7,299	$	0.15

(In thousands except per share amounts)	Net Income		Weighted Average Shares Outstanding	Per Share Amount
Nine Months Ended September 30, 2019
Basic	$	606	7,108	$	0.09
Dilutive effect of common equivalent shares	—		137	(0.01		)
Dilutive	$	606	7,245	$	0.08

(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

15

(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

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~~567,000 shares in the three months ended September 30, ~~2018~~2019; ~~285,000~~309,000 shares in the nine months ended September 30, 2019;118,000 shares in the three months ended September 30, 2018; and 285,000 shares in the nine months ended September 30, 2018; ~~575,000~~ ~~shares in the~~ ~~three months ended September 30, 2017; and~~ ~~411,000 shares in the~~ ~~nine months ended September 30, 2017~~.

16

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

LOSS:

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

	Three Months Ended September 30, 2019								Three Months Ended September 30, 2018
(In thousands)	Before Tax			Tax Effect		Net of Tax Amount			Before Tax			Tax Effect		Net of Tax Amount
Foreign currency translation adjustments	$	(269	)	$	—	$	(269	)	$	(50	)	$	—	$	(50	)
Net changes related to available-for-sale securities:
Unrealized gains		1			—		1			3			—		3
Reclassifications included in interest income and other		—			—		—			(3	)		—		(3	)
Net changes related to available-for-sale securities		1			—		1			—			—		—
Other comprehensive loss	$	(268	)	$	—	$	(268	)	$	(50	)	$	—	$	(50	)

	Three Months Ended September 30, 2018								Three Months Ended September 30, 2017							Nine Months Ended September 30, 2019									Nine Months Ended September 30, 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	$	(199	)	$	—		$	(199	)	$	(252	)	$	—	$	(252	)
Net changes related to available-for-sale securities:
Unrealized losses		3			—		3			—		—			—
Reclassification adjustments for gain included in interest income and other		(3	)		—		(3	)		—		—			—
Unrealized gains (losses)																	129			(26	)		103			(33	)		8		(25	)
Reclassifications included in interest income and other																	—			—			—			(3	)		—		(3	)
Net changes related to available-for-sale securities		—			—		—			—		—			—		129			(26	)		103			(36	)		8		(28	)
Other comprehensive income (loss)	$	(50	)	$	—	$	(50	)	$	157	$	(35	)	$	122
Other comprehensive loss																$	(70	)	$	(26	)	$	(96	)	$	(288	)	$	8	$	(280	)

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

16

At September 30, ~~2018~~2019 and September 30, ~~2017~~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
Balances at December 31, 2017

$
(1,394
)

$
(15
)

$
(1,409
)
Decrease related to adoption of ASU 2016-01 (See Note 16)

—

(44
)
(44
)
Other comprehensive income before reclassifications

(252
)

(25
)
(277
)
Amounts reclassified from accumulated other comprehensive loss

—

(3
)

(3
)
Total change for the period

(252
)

(72
)

(324
)
Balances at September 30, 2018

$
(1,646
)

$
(87
)

$
(1,733
)

(In thousands)	Foreign Currency Translation Adjustments			Available- for-Sale Securities			Accumulated Other Comprehensive Loss
Balances at December 31, 2018	$	(1,649	)	$	(41	)	$	(1,690	)
Other comprehensive income (loss) for the nine months ended September 30, 2019	(199		)	103			(96		)
Balances at September 30, 2019	$	(1,848	)	$	62		$	(1,786	)

(In thousands)

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

Amounts reclassified from accumulated other comprehensive loss

—

—

—

Total change for the period

414

20

434

Balances at September 30, 2017

$
(1,514
)

$
8

$
(1,506
)

(In thousands)	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	—			(44		)	(44		)
Other comprehensive loss for the nine months ended September 30, 2018	(252		)	(25		)	(277		)
Amounts reclassified from accumulated other comprehensive loss	—			(3)			(3)
Total change for the period	(252		)	(72		)	(324		)
Balances at September 30, 2018	$	(1,646	)	$	(87	)	$	(1,733	)

17

1213. INCOME TAXES:

We recorded an income tax ~~expense~~benefit of ~~$297,000~~$234,000 in the three months ended September 30, ~~2018~~,2019, compared to an income tax ~~benefit~~expense of $~~116,000~~297,000 in the three months ended September 30, ~~2017~~2018.. We recorded income tax expense of ~~$444,000~~ $92,000in thenine months ended September 30, ~~2018~~2019,compared to income tax expense of $444,000~~10,000~~ ~~in the~~ ~~nine months ended September 30, 2017~~. ~~Our income tax provision~~ in the nine months ended September 30, 2018. Our income tax benefit in the three months ended September 30, 2019 reflectedan effective ~~income~~ tax rate of approximately ~~21%. Our~~40%, compared to an effective tax rate ofapproximately 22% in the three months ended September 30, 2018. Our income tax expense in the nine months ended September 30, 2019 reflected an effective tax rate of approximately 13%, compared to an effective tax rate of approximately 21% in the nine months ended September 30, 2018 ~~was~~. Fluctuations in our effective tax rate in both the three and nine months ended September 30, 2019 are related to a non-cash income benefit resulting from the completion of an audit of our income taxes in the Singapore tax jurisdiction. In the nine months ended September 30, 2019 and 2018, excess tax benefits related to employee share based payments totaled $11,000 and $70,000, respectively. On a recurring basis, our effective income tax rate is significantly impacted by Global Intangible Low Tax Income ~~(GILTI), U.S~~and U.S. federal R&D tax ~~credits and $70,000~~ ~~of excess tax benefits from employee share-based payments. Our income tax provision in the~~ ~~nine months ended September 30, 2017~~ ~~reflected an~~ ~~effective income tax rate of approximately 1%. Our effective tax rate in the nine months ended September 30, 2017 differed from the U.S. statutory tax rate of~~ ~~34%, primarily due to $207,000~~ ~~of excess tax benefits from employee share-based payments.~~ ~~We recognized $37,000 of excess tax benefits in the~~ ~~three months ended September 30, 2018~~. ~~Excess tax benefits recognized in the~~ ~~three months ended September 30, 2017~~ ~~were inconsequential.~~credits.

We have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research and development tax credit carry forwards and federal, state and foreign net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our consolidated financial statements become deductible for income tax purposes, when net operating loss carry forwards could be applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards.

Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives. In analyzing the need for valuation allowances, we first considered our history of cumulative operating results for income tax purposes over the past three years in each of the tax jurisdictions in which we operate, our financial performance in recent quarters, statutory ~~carry forward~~carry-forward periods and tax planning alternatives. In addition, we considered both our near-term and long-term financial outlook. After considering all available evidence (both positive and negative), we concluded that recognition of valuation allowances for substantially all of our U.S. and Singapore deferred tax assets was not required.

14. OPERATING LEASES:

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and long-term operating lease liabilities in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The operating lease ROU assets exclude lease incentives. As our leases do not provide an implicit rate, we use our incremental borrowing rate to determine the present value of lease payments. Our leases may include renewal options to extend the lease term, the exercise of which are at our sole discretion. In our accounting treatment of leases, the lease terms used do not include any option to extend the lease, because it is not reasonably certain that we will exercise the option. Lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components (e.g., common-area or other maintenance costs) which are generally accounted for separately and expensed monthly. We do not recognize a ROU asset and lease liability for leases having a term of 12 months or less at the effective date.

We lease a 61,208 square foot mixed-use office and warehouse facility in Golden Valley, Minnesota. The lease has a term of 91 months and expires on July 31, 2026. The lease contains a rent escalation clause, 1 three year renewal option and incentives. Rental expense, including the effects of lease incentives, is recognized on a straight-line basis over the term of the lease. We are also required atto pay insurance, property taxes and other operating expenses related to the leased facility, which are not fixed or tied to an index.

We lease a 19,805 square foot mixed-use office and warehouse facility in Singapore. The lease expires in July 2020, contains a rent escalation clause and 1 three year renewal option. We also have operating leases for sales offices in the United Kingdom and China, which expire in May 2023 and November 2020, respectively. We did not enter into any new leases in the nine months ended September 30, 2019.

18

The components of our costs for operating leases in the three and nine months ended September 30, 2019 are as follows:


	Three Months Ended		Nine Months Ended
Component (in thousands)	September 30, 2019		September 30, 2019
Operating lease cost	$	179	$	538
Variable lease cost		67	202
Short-term lease cost		2	5
Total	$	248	$	745

Variable lease costs generally consists of real estate taxes and insurance for leased facilities, which are paid based on actual costs incurred by the lessor.

At September 30, ~~2018~~2019, the future maturities of lease liabilities are as follows:


Twelve months ending September 30,	(In thousands)
2020	$	801
2021	607
2022	622
2023	638
2024	654
2025 and thereafter	1,242
Total lease payments		4,564
Less: amount representing interest	700
Present value of operating lease liabilities	$	3,864

At September 30, 2019, the weighted average remaining term for our operating leases is 6.24 years, and the weighted average discount rate applied to our operating leases was 5.74%.

Cash paid for amounts included in the measurement of operating lease liabilities in the nine months ended September 30, 2019 was $389,000. Incentives recorded as leasehold improvements in the nine months ended September 30, 2019 were $783,000.

~~The Inland Revenue Authority~~

Because we have not restated prior year information for our adoption of ~~Singapore is reviewing~~Topic 842, the following presents our ~~2016~~ ~~and~~ ~~2015~~ ~~income tax returns. We do not presently anticipate that~~future minimum lease payments for operating leases under ASC Topic 840. These amounts include common-area or other maintenance costs under ASC Topic 840 (which was replaced by Topic 842). At December 31, 2018, the ~~outcome of these audits will have a significant impact on our financial position or results of operations.~~future minimum lease payments required under noncancelable operating lease agreements were as follows:


Year ending December 31,	(In thousands)
2019	$	1,095
2020	1,298
2021	1,049
2022	1,064
2023	1,080
2024 & Thereafter	3,049
Total	$	8,635

1315. SHARE ~~REPURCHASE:~~ REPURCHASES:

In ~~October 2017,~~July 2019, our Board of Directors ~~adopted~~authorized a ~~program authorizing the purchase of up to~~ $3.0 million ofshare repurchase program. Our common stock may be acquired from time to time in open market transactions, block purchases and other transactions complying with the Securities and Exchange Commission's Rule 10b-18. In the three and nine months ended September 30, 2019, we spent $353,000 to repurchase 25,985 shares of our common stock. The share repurchase program ~~expired~~will terminate on ~~September~~June 30, ~~2018. During the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2018, no shares were repurchased under~~2020. See Item 2 of Part II of this ~~program.~~

report.

1719

14~~. NEW LEASE OBLIGATION:~~

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 facility for our sensor and semiconductor products. We also lease a 10,165 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~~ $~~200,000when the lease amendment becomes effective in January 2019.~~

1516. CONTINGENCIES:

We are periodically a defendant in miscellaneous lawsuits, claims and disputes in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, management presently believes the disposition of these matters will not have a material effect on our financial position, results of operations or cash flows.

In the normal course of business to facilitate sales of our products and services, we at times indemnify other parties, including customers, with respect to certain matters. In these instances, we have agreed to hold the other parties harmless against losses arising out of intellectual property infringement or other types of claims. These agreements may limit the time within which an indemnification claim can be made, and almost always ~~limit~~limits the amount of the claim. It is not possible to determine the maximum potential ~~liability~~amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made, if any, under these agreements have not had a material impact on our operating results, financial position or cash flows.

~~16. RECENT ACCOUNTING DEVELOPMENTS:~~

~~In May 2014,~~ However, there can be no assurance that intellectual property infringement and other claims against us or parties we have indemnified will have the ~~Financial Accounting Standards Board (the "FASB") issued Topic 606, which provided guidance on the recognition of revenue from contracts with customers~~. Revenue recognition depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Topic 606 also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We performed a review of the requirements of the new guidance and identified which of our revenue streams are within the scope of Topic 606. We applied the ~~five~~-step model of the new standard to a selection of contracts within each of our revenue streams, and compared the results to our current accounting practices. We also performed detailed contract reviews to complete necessary adjustments to our existing accounting policies, and implemented changes to our processes and internal controls to capture new data and address changes in financial reporting. We expanded our consolidated financial statement disclosures to comply with the requirements of Topic ~~606. We adopted the new standard using the modified retrospective method, with the cumulative effect of initially applying the guidance recognized at the date of initial application.~~ ~~Our adoption of Topic~~ ~~606~~ ~~on January 1, 2018 resulted in~~ ~~a $218,000 decrease in retained earnings to record the cumulative effect adjustment. Adoption of Topic~~ ~~606~~ ~~increased our revenues~~same impact 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. 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.~~

~~In January 2016, the FASB issued ASU No.~~ ~~2016~~-01, ~~Recognition and Measurement of Financial Assets and Liabilities,~~ ~~which revised the accounting related to (~~1~~) the classification and measurement of investments in equity securities and (~~2) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU No. 2016-01 also amended certain disclosure requirements associated with the fair value of financial instruments. The new guidance requires the fair value measurement of investments in equity securities and other ownership interests in an entity that do not result in consolidation and are not accounted for under the equity method. Entities will need to measure these investments and recognize changes in fair value in net income. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities they classify under current guidance as available-for-sale in other comprehensive income. ASU No. 2016-01 was effective beginning January 1, 2018 and resulted in a cumulative-effect adjustment to beginning retained earnings, except for guidance relative to equity securities without readily determinable fair values which is applied prospectively. Our adoption of ASU ~~2016~~-01 ~~on January 1, 2018 resulted in a $44,000 increase in retained earnings and accumulated other comprehensive loss.~~future.

1820

~~In February 2016, the FASB issued new lease accounting guidance, ASU No.~~ ~~2016~~-02, ~~Leases.~~ Under the new guidance, at the commencement date, lessees will be 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. The new guidance is not applicable for leases with a term of 12 ~~months or less. Lessor accounting is largely unchanged. U.S. public companies are required to apply the amendments in ASU No.~~ ~~2016~~-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. As issued, ASU No. 2016-02 requires reporting companies to adopt the new standard using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, ~~Leases (Topic 842), Targeted Improvements~~, which gives companies the option of applying the standard at the adoption date, rather than retrospectively to the earliest period presented in the financial statements, and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under the new option afforded by ASU 2018-11, companies will not be required to restate the financial statements of prior periods, nor will they be required to provide the disclosures required by ASC 842 for those prior periods. We anticipate that we will adopt ASU 2016-02 by utilizing the new option afforded by ASU 2018-11. We are currently evaluating the impact of the new standard on our consolidated financial statements. When implemented, the standard is expected to have a material impact as operating leases will be recognized on our consolidated balance sheet, with an increase to both assets and liabilities. We presently do not believe the standard will have a material impact on our results of operations. The impact of this ASU is non-cash in nature and will not affect our cash flows.

~~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.

19

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

FORWARD LOOKING STATEMENTS:

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 economy in general ~~economy~~and, the surface mount technology ("SMT") and semiconductor capital equipment markets in particular, and their impact on the markets for our ~~products.~~products; and (vi) changes in the level of tariffs and other trade policies of the United States. 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.

RESULTS OF OPERATIONS

General

As a leading global developer and manufacturer of high precision 3D3D sensors, our strategy is to leverage our 3D3D sensor technologies in ~~our key vertical markets that consist of~~ the ~~surface mount technology ("SMT"),~~SMT and semiconductor ~~and metrology~~capital equipment markets. 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. Our operating results in the three and nine months ended September 30, 2019 were affected by the cyclical, industry-wide slowdown in demand for SMT and semiconductor capital equipment as well as uncertainty surrounding the global trade environment. We believe the three months ended September 30, 2019 marked the trough of the downturn in the SMT and semiconductor capital equipment markets, and that industry conditions will strengthen moving forward. Over the longer-term (i.e. the next several years), we expect a growing number of opportunities in the markets for SMT and semiconductor inspection and metrology, ~~with~~and we believe MRS has the potential to expand our ~~markets~~presence in the ~~future. Unlike competing technologies, our MRS technology has the ability to inhibit reflections~~markets for SMT and ~~provide microscopic quality images at production line speeds.~~semiconductor capital equipment.

Manufacturing yield challenges as electronics and semiconductors become more complex are driving the need for more precise inspection and metrology. ~~As a result, we~~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, because~~believe our 3D3D MRS technology platform is well suited for many ofapplications in these ~~applications,~~markets, particularly with respect to complex circuit boards and semiconductor ~~mid-end, back-end~~wafer level 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:

•

~~High-precision~~Our SQ3000 and SQ3000™ 3D ~~sensor subsystems~~. We have entered into a mutually exclusive agreement to supply KLA-Tencor with high-precision 3D sensor subsystems for its back-end semiconductor packaging inspection systems. We also have entered into an agreement to supply Nordson-YESTECH with high precision 3~~D sensor subsystems for its inspection~~CMM AOI systems, ~~serving the SMT market.~~


•	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.

•

The SQ3000™ 3D ~~CMM.~~ ~~The SQ3000™ 3D~~ CMM ~~which~~ ~~was launched in the second half of 2017,~~AOI system combines automated optical inspection and metrology functionality in a single product. Manufacturers in a variety of industries, including SMT and semiconductor ~~and consumer electronics,~~manufacturers, can use the ~~SQ3000™ 3D~~SQ3000™ 3D CMM AOI system as an in-line or off-line metrology tool to help solve complex manufacturing and product quality challenges.


•	Our high-precision 3D MRS sensors, which we sell to original equipment manufacturers ("OEMs") and system integrators, that produce inspection and metrology equipment for the SMT and semiconductor industries.

•

Our next generation ultra-high resolution three micron pixel 3D NanoResolution MRS sensor is capable of measuring feature sizes down to 25 microns accurately and at high speeds, and is suitable for many semiconductor wafer level and advanced packaging inspection and metrology applications. We are targeting one micron, three-sigma accuracy, at speeds that would inspect more than 25300-millimeter wafers in an hour. We have received initial purchase orders for our 3D NanoResolution MRS sensor from three OEM customers, and are currently demonstrating this technology to other OEMs, system integrators and directly to semiconductor manufacturers. We believe sales of 3D MRS-enabled sensors and systems for semiconductor wafer level and advanced packaging inspection and metrology applications represent compelling long-term growth opportunities.

21

~~Revenue~~While we are optimistic about the future sales of MRS-based products, revenue from ~~MRS based~~all MRS-based products ~~increased by $4.5~~totaled $14.9 million ~~or 43% to~~in the nine months ended September 30, 2019, a decrease of approximately 1% from $15.0 million in the nine months ended September 30, 2018~~, from $10.5 million~~. Sales of 3D MRS sensors decreased 25% on a year-over-year basis in the nine months ended September 30, ~~2017~~2019~~. We believe we will be able~~ to ~~increase~~$4.1 million, as OEM customers reduced their orders due to sluggish market conditions in the global SMT and semiconductor capital equipment markets. Despite the weak market conditions, sales of ~~products based~~3D MRS-enabled SQ3000 and SQ3000™ 3D CMM AOI systems increased 14% on ~~our MRS technology~~a year-over-year basis in the ~~SMT, semiconductor and metrology markets, including~~nine months ended September 30, 2019 to $10.4 million. In the ~~markets for semiconductor mid-end and advanced packaging inspection applications.~~ Wefuture, we anticipate increasing sales of ~~these~~MRS-based products in the SMT and semiconductor capital equipment markets by utilizing new ~~original equipment manufacturer ("OEM")~~OEM customers and system integrators and by expanding direct sales to end-user customers. ~~Revenue from MRS based products is forecasted to grow significantly on a year-over-year basis in the fourth quarter of 2018.~~

20

~~We have significantly advanced our MRS-enabled~~
3~~D sensor technology as part of a research initiative aimed at applying our~~3D MRS technology to semiconductor mid-end and advanced packaging inspection applications. Sales of SQ3000 systems for these applications have started using our high resolution 7-micron pixel sensor. Many customers for these applications are evaluating our next generation ultra-high resolution 3-micron pixel sensor capable of measuring feature sizes down to 30 microns accurately and at high speeds. We are targeting one micron, three-sigma accuracy, at speeds that would inspect more than 20 300 mm wafers per hour. We believe sales of MRS-enabled 3D optical sensors and systems for semiconductor mid-end and advanced packaging inspection applications represent significant long-term growth opportunities for us, and we expect sales of these sensors and systems to ramp up in 2019 and beyond.

A $2.8 million order for MX600 memory module inspection systems was received in the third quarter of 2018, and our order backlog for MX600 systems at September 30, 2018 was $4.4 million. We presently anticipate that our MX600 order backlog will be recognized as revenue during the first half of 2019. We are pursuing other MX600 opportunities, but revenues from any new orders most likely will not be realized until the second half of 2019 at the earliest.

We have continued to invest in our semiconductor sensors, principally consisting of our WaferSense® family of products, because fabricators of semiconductors and other customers view these products as valuable tools for improving yields and productivity. Additional WaferSense® applications are currently under ~~development, and we believe WaferSense products will account~~development. Over the longer-term, strong future sales growth is anticipated for ~~a growing proportion~~our WaferSense® family of ~~our total revenue over the next few years.~~products.

~~Over~~Our backlog was $14.4 million at September 30, 2019, up from $13.0 million at June 30, 2019, but down from $19.7 million at September 30, 2018. Our backlog at September 30, 2019 includes a large order for 3D MRS sensors from an existing OEM customer which are scheduled mostly for delivery after 2019. We are forecasting total sales of $13.5 to $15.0 million for the ~~longer term, we~~fourth quarter of 2019, down from $18.1 million in the fourth quarter of 2018, but up from $12.4 million in the third quarter of 2019. We believe that ~~anticipated sales growth of our 3D MRS-enabled products~~conditions in the SMT and ~~WaferSense sensors should increase our revenues and net income.~~ semiconductor capital equipment markets will strengthen as we progress through 2020. We believe that we have the resources required to attain our growth objectives, given our available cash and marketable securities balances totaling ~~$23.8~~$25.3 million at September 30, ~~2018~~2019.

Revenues

Our revenues ~~increased~~decreased by ~~41%~~26% to $~~16.7~~12.4 million in the three months ended September 30, ~~2018~~2019, from $~~11.8~~16.7 million in the three months ended September 30, ~~2017~~2018. Our revenues ~~increased~~decreased by ~~16%~~9% to $~~46.7~~$42.4 million in the nine months ended September 30, 2019 from $46.7 million in the nine months ended September 30, 2018~~, from $40.2~~ ~~million in the~~ ~~nine months ended September 30, 2017~~. The following table sets forth revenues by product line for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018:

	Three Months Ended September 30,					Nine Months Ended September 30,					Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands)	2018		2017		% Change	2018		2017		% Change	2019		2018		% Change				2019		2018		% Change
High Precision 3D and 2D Sensors	$	5,388	$	4,030	34%	$	15,696	$	13,569	16%	$	3,170	$	5,388		(41	)	%	$	8,923	$	15,696		(43	)	%
Semiconductor Sensors		3,463		2,228	55%	10,564		7,698		37%		3,676		3,463		6		%		10,934		10,564		4		%
Inspection and Metrology Systems		7,832		5,570	41%	20,397		18,890		8%		5,545		7,832		(29	)	%		22,554		20,397		11		%
Total	$	16,683	$	11,828	41%	$	46,657	$	40,157	16%	$	12,391	$	16,683		(26	)	%	$	42,411	$	46,657		(9	)	%

Revenues from sales of high precision 3D and 2D sensors ~~increased~~decreased by $~~1.4~~2.2 million or ~~34%~~41% to $3.2 million in the three months ended September 30, 2019, from $5.4 million in the three months ended September 30, 2018~~, when compared to the~~ ~~three months ended September 30, 2017~~. Revenues from sales of high precision3D and 2D2D sensors~~increased~~ decreased by $~~2.1~~6.8 million or43% to $8.9~~16%~~ million in thenine months ended September 30, ~~2018~~2019, ~~when compared to thenine months ended September 30, 2017~~. ~~The revenue increases primarily resulted~~ from ~~higher sales of 3D MRS-enabled sensors. Sales of 3D MRS-enabled sensors increased by $710,000 or 64% to $1.8 million in the~~ $15.7~~three months ended September 30, 2018, when compared to the~~ ~~three months ended September 30, 2017. Sales 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~~. OEM customers reduced their purchases of high precision 3D and 2D sensors in the three and nine months ended September 30, ~~2017~~2019 in response to weak~~. Sales of legacy 2D LaserAlign sensors were also higher~~ conditions in the ~~three months ended September 30, 2018, when compared to the same period last year.~~ global SMT and semiconductor capital equipment markets. Sales of high precision 3D and 2D sensors are dependent on the success of our OEM customers selling products that incorporate our sensors. Due to ongoing market weakness, our 3D and 2D sensor sales are forecasted to decline in the fourth quarter of 2019, both sequentially and on a year-over-year basis. However, we believe sales of 3D MRS-enabled sensors will rebound, starting in early 2020. We believe sales of older 2D legacy sensors will also rebound, but recovery may not happen until later in 2020. We believe sales of our new 3D MRS enabled sensors will represent an increasing percentage of our total high precision 3D3D and 2D2D sensor sales in the future. ~~However, q~~Quarterly~~uarterly~~ sales of high precision 3D and 2D sensors, including 3D MRS enabled sensors, are prone to significant fluctuations ~~both sequentially and on a year-over-year basis.~~due to variations in market demand.

Revenues from sales of semiconductor sensors, principally our WaferSense product line, increased by $~~1.2~~213,000 or 6% to $3.7 million orin the ~~55%~~three months ended September 30, 2019, from $3.5 million in the three months ended September 30, 2018~~, when compared to the~~ ~~three months ended September 30, 2017~~. ~~Revenues~~Revenue from sales of semiconductor sensors increased by $~~2.9~~ ~~million~~370,000 or ~~37%~~4 ~~in the~~% to $10.9 ~~nine months ended September 30, 2018, when compared to~~million in the nine months ended September 30, ~~2017~~2019, from $10.6 million in the nine months ended September 30, 2018. ~~The revenue increases reflect favorable conditions~~We believe higher sales of semiconductor sensors in the ~~markets for~~three months ended September 30, 2019 are due to initial signs of improvement in the global semiconductor capital equipment market, particularly with respect to foundry customers. In the nine months ended September 30, 2019, higher sales of semiconductor sensors are due to the recent improvement in market conditions, and incremental sales of WaferSense products in the first quarter of 2019 to Asian semiconductor manufacturing facilities commissioned in 2018. Sales of semiconductor sensors are forecasted to increase by more than 10% in the fourth quarter of 2019 on a year-over-year basis. Over the longer-term, we anticipate that the benefits from growing ~~acceptance~~market awareness of our WaferSense products, ~~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.~~
sales.

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Revenues from sales of inspection and metrology systems decreased by $2.3 million or 29% to $5.5 million in the three months ended September 30, 2019, from $7.8 million in the three months ended September 30, 2018.Revenues from sales of inspection and metrology systems increased by $~~2.3~~2.2 million or ~~41%~~11% to $22.6 million in the ~~three months ended September 30, 2018, when compared to the~~ ~~three months ended September 30, 2017~~. ~~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 resulted from higher sales of 3D MRS-enabled SQ3000 3D AOI systems, including the new~~ ~~SQ3000~~™ 3~~D CMM system. Sales of SQ3000 systems increased by $2.1 million or 92% to $4.3 million in the~~ ~~three months ended September 30, 2018~~2019, ~~when compared to the~~ from $~~three months ended September 30, 2017~~20.4~~. Sales of SQ3000 systems increased by $1.9 million or 28% to $8.7~~ million in the nine months ended September 30, 2018. The revenue decrease in the three months ended September 30, 2019 was caused by sluggish market conditions in the global SMT and semiconductor capital equipment markets, resulting in lower year-over-year sales of both MRS-enabled SQ3000 3D AOI systems and legacy inspection systems. The revenue increase in the nine months ended September 30, 2019 resulted from higher sales of MRS-enabled SQ30003D AOI systems and sales of MX600 memory module inspection systems. Sales of MRS-enabled SQ3000 3D AOI systems increased by $1.2 million or 14% to $10.4 million in the nine months ended September 30, 2019, when compared to the nine months ended September 30, 2018. Strong year-over-year sales growth is forecasted for MRS-enabled SQ3000 3D AOI systems in the fourth quarter of 2019, due in part to the competitive advantages offered by our MRS technology. Sales of MX600 memory module inspection systems were approximately $600,000 and $3.3 million in the three and nine months ended September 30, 2019, respectively. There were no sales of MX600 memory module inspection systems in the three and nine months ended September 30, 2018.Sales of legacy 2D AOI and solder paste inspection systems were lower in the three and nine months ended September 30, 2019, when compared to the three and nine months ended September 30, ~~2017~~2018. Despite the anticipated sales growth for MRS-enabled SQ3000 AOI systems, slow sales of legacy products are expected to result in lower year-over-year sales of inspection and metrology systems in this year's fourth quarter.

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 3D3D AOI systems is growing rapidly. We anticipate sales of ~~our~~ 3D MRS enabled ~~SQ3000 3D~~SQ30003D 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 $9.6 million or 77% of our total revenues in the three months ended September 30, 2019, compared to $11.9 million or 71% of ~~our~~ total ~~revenue~~revenues in the three months ended September 30, 2018, . Export revenues totaled $31.1 million or 73% of our total revenues in the nine months ended September 30, 2019compared to $~~7.8~~33.4 million or 6672% of total revenues in the nine months ended September 30, 2018. Export revenue as a percentage of total revenue was higher in the three months ended September 30, ~~2017. Export revenue totaled $33.4~~ ~~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 in the~~ ~~three months ended September 30, 2018~~2019, when compared to the three months ended September 30, ~~2017~~2018, ~~was~~primarily due to ~~the increase in~~lower sales of ~~3D MRS-enabled sensors~~general industrial metrology systems and ~~SQ3000 3D AOI systems, a higher proportion of~~services, which are ~~generally~~primarily sold ~~outside~~in the United States. There was no significant change in export ~~revenue~~revenues as a percentage of total ~~revenue~~revenues in the nine months ended September 30, 2019, when compared to the nine months ended September 30, 2018~~, when compared to the~~ ~~nine months ended September 30, 2017~~.

.

Cost of Revenues and Gross Margin

Cost of revenues ~~increased~~decreased by $~~3.0~~$2.4 million or 4826% to $~~9.2~~6.9 million in the three months ended September 30, ~~2018~~2019, from $~~6.2~~9.2 million in the three months ended September 30, ~~2017~~2018. Cost of revenues ~~increased~~decreased by $~~4.3~~$2.4 million or 10% to $23.320million in the nine months ended September 30, 2019, from $25.7 million in the nine months ended September 30, 2018. The decrease in cost of revenues in both periods was due to a corresponding decrease in revenues. In the three and nine months ended September 30, 2019, revenues decreased by 26% and 9%, respectively.

Total gross margin as a percentage of revenues was 44% in the three months ended September 30, 2019, compared to $~~25.7~~45% in the three months ended September 30, 2018. Total gross margin as a percentage of revenues was 45% in both the nine months ended September 30, 2019 ~~million in~~and the nine months ended September 30, 2018~~, from $21.4~~ ~~million in the~~ ~~nine months ended September 30, 2017~~. The in~~creases~~small reduction in ~~cost of revenues~~ ~~were mainly due to the corresponding revenue increases in both periods. Revenues increased by 41%~~gross margin percentage in the three months ended September 30, ~~2018~~2019 was due to incremental expenses for inventory obsolescence and warranty costs, offset in part by a more favorable product mix. Sales of higher margin semiconductor sensors represented a larger percentage of our total revenues in the three months ended September 30, 2019, when compared to the three months ended September 30, ~~2017~~2018. ~~Revenues increased by 16% in the~~ ~~nine months ended September 30, 2018, when compared~~Due to ~~the~~ ~~nine months ended September 30, 2017~~. ~~Revenue~~a more favorable product mix, ~~in the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2018~~ ~~also contributed to the changes in cost of revenues.~~ ~~Items included in cost of revenues that fluctuate with the level of sales include raw materials, direct labor and factory overhead costs.~~

~~Total~~total gross ~~margin~~margins as a percentage of ~~revenue was~~ 45% ~~in both the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2018, compared to~~ 47~~% in both the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2017. The reduction in gross margin percentage in both periods was mainly due to pricing pressures on~~ 2~~D and~~ 3~~D inspection systems~~revenues in the ~~broader SMT market, offset in part by~~fourth quarter of 2019 are expected to be higher on a ~~change in mix of products sold.~~ year-over-year basis and higher to a lesser extent on a sequential quarterly basis.

Our markets are highly price competitive, particularly insegments of the ~~electronic assembly market.~~SMT market that have less demanding inspection requirements. As a result, we have experienced continual pressure on our gross margins. We compensate for the 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 MRS-enabled SQ30003D AOI ~~systems~~,products, 3D MRS sensors and WaferSense sensor products, have, or are expected to have, more favorable gross margins than many of our existing products. O~~ur 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 for these applications tend to be higher, when compared to the broader SMT market.

Operating Expenses

Research and development ("R&D") expenses were $2.4 million or 19% of revenues in the three months ended September 30, 2019, compared to $2.2 million or ~~13%~~13% of ~~revenue~~revenues in the three months ended September 30, 2018~~, compared to~~. R&D expenses were $~~1.9~~7.0 million or 16% of ~~revenue~~revenues in the ~~three~~nine months ended September 30, ~~2017~~2019~~. Research and development expenses were~~, compared to $6.6 million or 14% of ~~revenue~~revenues in the nine months ended September 30, 2018~~, compared to $5.9~~ ~~million or~~. 15~~% of revenue~~The increases in R&D expenses in both the three and nine months ended September 30, ~~2017. The increases in research and development expenses~~2019 were the result of higher compensation costs ~~due~~for new and existing R&D employees, and expenses related to ~~hiring~~development of ~~additional employees, pay increases for existing employees and~~our next generation 3D NanoResolution MRS sensor, offset in part by lower 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 3D MRS technology, including 3D sensor subsystems and ~~commercialization of our~~the next generation ~~ultra-high resolution 3-micron pixel~~NanoResolution sensor, and ~~ongoing~~ development of new applications and products for ~~our WaferSense product line.~~3D wafer level, advanced packaging and memory module inspection.

2223

Selling, general and administrative ("S,G&A") expenses were $3.9 million or 31% of revenues in the ~~24%~~three months ended September 30, 2019, compared to $3.9 million or 24% of ~~revenue~~revenues in the three months ended September 30, 2018~~, compared to~~. S,G&A expenses were $~~3.8~~11.8 million or 3228% of ~~revenue~~revenues in the ~~three~~nine months ended September 30, ~~2017~~2019~~. Selling, general and administrative expenses were~~, compared to $12.4 million or ~~27%~~27% of ~~revenue~~revenues in the nine months ended September 30, 2018~~, compared to $11.8~~ ~~million or~~ 29%. The increases in S,G&A expenses as a percentage of revenues reflected our lower revenue levels. However, S,G&A expenses in the three and nine months ended September 30, ~~2017. The increases in selling, general~~2019 were favorably impacted by lower compensation costs resulting from employee departures and ~~administrative expenses were due to higher~~lower bonus accruals and ~~commissions paid to outside~~ sales ~~channel partners,~~commissions resulting from ~~increases~~the declines in our ~~sales~~revenues and ~~profitability in the~~financial performance. In addition, ~~three and nine~~ ~~months ended~~ ~~September 30, 2018, when compared to the same periods of~~ ~~2017. Selling, general and administrative~~S,G&A expenses in the three and nine months ended September 30, 2018 were decreased by an approximately $200,000 reduction in our allowance for doubtful accounts, ~~primarily~~ resulting from collection of a receivable that had been fully reserved for in a prior period. ~~We do not expect further large reductions~~

Total operating expenses in ~~our allowance for doubtful accounts in future periods.~~the fourth quarter of 2019 are expected to be virtually unchanged on both a year-over-year and quarterly sequential basis.

Interest Income and Other

Interest ~~income~~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. WeIn the three months ended September 30, 2019 and 2018, we recognized ~~losses~~gains from foreign currency transactions ~~primarily intercompany financing~~of $71,000 and $37,000 respectively. In the nine months ended September 30, 2019 and 2018, we recognized gains from foreign currency transactions of $45,000 and $102,000, respectively.

Income Taxes

We recorded an income tax benefit of $~~37,000~~234,000 in the three months ended September 30, 2019, compared to income tax expense of $297,000 in thethree months ended September 30, 2018~~, compared to~~. ~~losses from foreign currency transactions~~We recorded income tax expense of $~~38,000~~92,000 in the~~three~~ nine months ended September 30, ~~2017~~2019~~. We recognized gains from foreign currency transactions, primarily intercompany financing transactions,~~, compared to income tax expense of $~~102,000~~444,000 in the nine months ended September 30, 2018. Our income tax benefit in the three months ended September 30, 2019 reflectedan effectivetax rate of approximately 40%, compared to an effective tax rate ofapproximately 22% in the three months ended September 30, 2018. Our income tax expense in the nine months ended September 30, ~~2018~~2019~~, compared to losses from foreign currency transactions~~reflectedan effectivetax rate of $~~194,000~~ ~~in the~~ ~~nine months ended September 30, 2017~~.

~~Income Taxes~~

~~We recorded income tax expense of $297,000~~ ~~in the~~ ~~three months ended September 30, 2018~~approximately 13%, compared to an ~~income~~effective tax ~~benefit~~rate of $~~116,000~~approximately 21% in the~~three months ended September 30, 2017~~. ~~We recorded income tax expense of $444,000in the~~ nine months ended September 30, 2018, ~~compared to income tax expense of $10,000~~. Fluctuations in ~~the~~ ~~nine months ended September 30, 2017~~. ~~Our income tax provision in thenine months ended September 30, 2018~~ ~~reflected~~ ~~an effective~~ ~~income tax rate of approximately 21%.~~ ~~Our~~our effective tax rate in the nine months ended September 30, 2018 was impacted by Global Intangible Low Tax Income (GILTI), U.S. federal R&D tax credits and $70,000 of excess tax benefits from employee share-based payments. Our income tax provision in the ~~nine months ended September 30, 2017~~ ~~reflected an~~ ~~effective income tax rate of approximately 1%. Our effective tax rate in the nine months ended September 30, 2017 differed from the U.S. statutory tax rate of 34%, primarily due to $207,000~~ ~~of excess tax benefits from employee share-based payments. We recognized $37,000 of excess tax benefits in the three months ended September 30, 2018.~~ ~~Excess tax benefits recognized in the three months ended September 30, 2017 were inconsequential. Fluctuations in tax expense and the rate of taxation in~~both the three and nine months ended September 30, ~~2018, when compared~~2019 are related to a non-cash income benefit resulting from the ~~same periods~~completion of ~~2017, are mainly due to increases in pre-tax~~an audit of our income ~~offset in part by the new lower tax rates provided for~~taxes in the ~~Tax Cuts~~Singapore tax jurisdiction. In the nine months ended September 30, 2019 and ~~Jobs Act passed by the U.S. Congress in December 2017. We anticipate that our future effective tax rate will be approximately 25%, excluding any~~2018, excess tax benefits ~~from~~related to employee ~~share-based payments.~~share based payments totaled $11,000 and $70,000, respectively. On a recurring basis, our effective income tax rate is significantly impacted by Global Intangible Low Tax Income and U.S. federal R&D tax credits.

We have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research and development tax credit carry forwards and federal, state and foreign net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our consolidated financial statements become deductible for income tax purposes, when net operating loss carry forwards could be applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards.

Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives. In analyzing the need for valuation allowances, we first considered our history of cumulative operating results for income tax purposes over the past threeyears in each of the tax jurisdictions in which we operate, our financial performance in recent quarters, statutory ~~carry forward~~carry-forward periods and tax planning alternatives. In addition, we considered both our near-term and long-term financial outlook. After considering all available evidence (both positive and negative), we concluded that recognition of valuation allowances for substantially all of our U.S. and Singapore deferred tax assets was not ~~required at~~ ~~September 30, 2018~~.required.

The Inland Revenue Authority of Singapore is reviewing our 2016 and 2015 income tax returns. We do not presently anticipate that the outcome of these audits will have a significant impact on our financial position or results of operations.Backlog

~~Backlog~~

Backlog totaled ~~$19.7~~$14.4 million at September 30, 2019, an increase from $13.6 million at December 31, 2018, but down from $19.7 million at September 30, 2018~~, an increase from $13.8 million at June 30, 2018 and $11.2 million at~~ ~~September 30, 2017~~. 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.

2324

Liquidity and Capital Resources

Our cash and cash equivalents ~~increased~~decreased by $~~689,000~~$1.1 million in the nine months ended September 30, ~~2018~~2019. Cash provided by operating activities of $916,000 and proceeds of $~~1.7~~6.1 million ~~cash~~ from ~~sales and~~ maturities of marketable securities were more than offset by purchases of marketable securities totaling $~~6.5~~7.1 million and ~~proceeds from the exercise of stock options and share purchases under our Employee Stock Purchase Plan of $671,000, were offset in part by~~ purchases of ~~marketable securities of $7.0~~ ~~million and~~ fixed ~~asset purchases~~assets and capitalized patent costs totaling $1.2 million. 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~~were $~~1.1~~ ~~million to $23.8~~25.3 million as of both September 30, ~~2018~~ ~~from $22.7~~ ~~million as of~~2019 and December 31, ~~2017~~2018.

Operating activities provided $~~1.7~~$916,000 ~~million~~ of cash in the nine months ended September 30, ~~2018~~2019. The amount of cash provided by operations was favorably impacted by ~~our~~ net income of ~~$1.6 million~~$606,000. Net income was affected by non-cash expenses totaling $2.8~~2.6~~ ~~milli~~onmillion 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 months ended September 30, ~~2018~~2019, included ~~an increase~~a decrease in accounts ~~payable~~receivable of $~~1.1~~$2.6 million, ~~million,~~ ~~an increase~~a decrease in ~~advance customer payments~~other assets of $~~638,000~~235,000 and an increase in ~~accrued expenses~~operating lease assets and liabilities of $~~382,000~~.$482,000. Changes in operating assets and liabilities using cash in the nine months ended September 30, ~~2018~~2019 included an increase ~~in accounts receivable of $3.6~~ ~~million,~~ ~~an increase~~ in inventories of $~~387,000~~1.1 million, a decrease in accounts payable of $3.5 million and ~~an increase~~a decrease in ~~other assets~~accrued expenses of $~~692,000~~$1.1 million. Accounts receivable decreased due to lower sales in the third quarter of 2019, compared to the fourth quarter of 2018, offset in part by slower collection of accounts receivable. Sales of inspection and metrology systems, which typically have longer collection periods than sales of our sensor products, have constituted a larger portion of our revenues in recent quarters. Other assets decreased because deposits previously paid to a key supplier of materials were used to purchase inventories. The increase in operating lease assets and liabilities resulted from lease incentives, including free rent and facility operating costs, and the effects of straight-line rent expense. Inventories increased due to sluggish conditions in the global SMT and semiconductor capital equipment markets, with a corresponding negative impact on sales, causing inventory levels to rise. Accounts payable ~~increased~~decreased in the third quarter of 2019 due to the timing of inventory purchases, with more raw materials being acquired in the ~~later part~~fourth quarter of 2018 and the first half of 2019. These materials were subsequently paid for prior to September 30, 2019, resulting in a lower accounts payable balance. Accrued expenses decreased due to lower compensation accruals at September 30, 2019, resulting from payment of 2018 bonuses in early 2019, and payment of employee wages near the end of the third ~~quarter of 2018. The timing of these purchases resulted in a higher accounts payable balance at~~ ~~September 30, 2018~~. Advance customer payments increased due to receipt of deposits from customers for metrology products we expect to ship in the fourth 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.~~ quarter.

Investing activities used $~~1.7~~$2.1 million of cash in the nine months ended September 30, ~~2018~~2019. Changes in the level of investment in marketable securities, resulting from purchases ~~sales~~ and maturities of those securities, used $~~508,000~~936,000 of cash in the nine months ended September 30, ~~2018~~2019. We ~~also~~ used $1.2 million of cash in the nine months ended September 30, ~~2018~~2019 tofor the purchase of fixed assets and ~~to fund~~ capitalized patent costs.

Financing activities provided $23,000 of cash in the nine months ended September 30, 2019. Proceeds from the exercise of stock options and share purchases under our ~~Employee Stock Purchase Plan~~employee stock purchase plan provided $~~671,000~~$376,000 of cash in the nine months ended September 30, ~~2018~~2019. In July 2019, our Board of Directors authorized a $3.0. million share repurchase program through June 30, 2020. Share repurchases under this program used $353,000 of cash in the nine months ended September 30, 2019.

At September 30, ~~2018~~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).~~arrangements or for other contractually narrow or limited purposes.

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 facility for our sensor and semiconductor products. We also lease a 10,165 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~~ ~~million at~~ ~~September 30, 2018. 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.

24

~~CRITICAL ACCOUNTING POLICIES AND ESTIMATES:~~

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~~.

~~Change in Revenue Accounting~~

~~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.~~

~~Performance Obligations~~

~~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.

25

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4 – CONTROLS AND PROCEDURES

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.

26

PART II. OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

None.

ITEM 1A – RISK FACTORS

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

~~None.~~In July 2019, our Board authorized the repurchase of up to $3.0 million of shares of our common stock. The common stock will be acquired from time to time in open market transactions, block purchases and other transactions complying with Rule 10b-18 of the Securities and Exchange Commission.

Company Repurchase of Equity Securities

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Program		(d) Approximate Value of Shares that May Yet Be Purchased Under the Program
July 1, 2019 to July 31, 2019	8,575	$	13.61	8,575	$	2,883,316

August 1, 2019 to August 31, 2019	17,410	$	13.60	17,410	$	2,646,592

September 1, 2019 to September 30, 2019	—	$	—	—	$	2,646,592

Total	25,985	$	13.60	25,985	$	2,646,592

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

None.

ITEM 5 – OTHER INFORMATION

None.

27

ITEM 6 – EXHIBITS


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~~Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to the Interim Condensed Consolidated Financial Statements

2728

SIGNATURES

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.


	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)

Dated: November 6, ~~2018~~2019

2829

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~~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

Large Accelerated Filer	☐	Accelerated Filer	☑
Non-Accelerated Filer	☐ ~~(Do not check if a smaller reporting company)~~	Smaller Reporting Company	☑
		Emerging Growth Company	☐


(In thousands, except share information)	September 30, 2018			December 31, 2017			September 30, 2019			December 31, 2018
ASSETS
Cash and cash equivalents	$	7,633		$	6,944		$	8,104		$	9,248
Marketable securities	6,396			6,670			7,792			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 $283 at September 30, 2019 and $314 at December 31, 2018							13,322			15,859
Inventories	13,935			14,393			16,360			16,163
Other current assets	2,314			1,593			1,819			2,096
Total current assets	44,803			40,372			47,397			49,137

Marketable securities, long-term	9,806			9,073			9,392			10,322
Equipment and leasehold improvements, net	2,326			2,307			3,546			2,861
Intangible assets, net	333			380			295			333
Goodwill	1,366			1,366			1,366			1,366
Right-of-use assets (operating leases)							1,985			—
Other assets	201			261			249			259
Deferred tax assets	5,546			5,742			5,276			5,422
Total assets	$	64,381		$	59,501		$	69,506		$	69,700

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	5,380		$	4,294		$	4,945		$	8,513
Advance customer payments	1,240			393			528			636
Accrued expenses	2,656			2,285			2,350			3,568
Current operating lease liabilities							686			—
Total current liabilities	9,276			6,972			8,509			12,717

Other liabilities	156			88			162			629
Long-term operating lease liabilities							3,178			—
Reserve for income taxes	159			159			143			143
Total liabilities	9,591			7,219			11,992			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
Preferred stock, no par value, 5,000,000 shares authorized, NaN outstanding							—			—
Common stock, no par value, 25,000,000 shares authorized, 7,121,671 shares issued and outstanding at September 30, 2019 and 7,100,825 shares issued and outstanding at December 31, 2018							36,397			35,637
Accumulated other comprehensive loss	(1,733		)	(1,409		)	(1,786		)	(1,690		)
Retained earnings	21,071			19,611			22,903			22,264
Total stockholders’ equity	54,790			52,282			57,514			56,211
Total liabilities and stockholders’ equity	$	64,381		$	59,501		$	69,506		$	69,700

	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


	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	$	—


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		8,000		17.26
Vested	(11,000	)	13.72		(6,000	)	16.59
Forfeited	—		—		(875	)	16.19
Non-vested at September 30, 2018	51,212		$	15.32
Non-vested at September 30, 2019					57,536		$	17.67

	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