SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Corporate Organization

The KeyW Holding Corporation (Holdco or KeyW) was incorporated in Maryland in December 2009. Holdco is a holding company and conducts its operations through The KeyW Corporation (Opco) and its wholly owned subsidiaries. As used herein, the terms “KeyW”, the “Company”, and “we”, “us” and “our” refer to Holdco and, unless the context requires otherwise, its subsidiaries, including Opco.

KeyW is an innovative national security solutions provider to the Intelligence, Cyber, and Counterterrorism communities. KeyW’s advanced technologies in cyber; intelligence, surveillance and reconnaissance; and analytics span the full spectrum of customer missions and enhanced capabilities. The Company’s highly skilled workforce solves complex customer challenges such as preventing cyber threats, transforming data to actionable intelligence, and building and deploying sensor packages into any domain. The Company's core capabilities include: advanced cyber operations and training; geospatial intelligence; cloud and data analytics; engineering; and intelligence analysis and operations. Other KeyW offerings include a suite of advanced Intelligence, Surveillance, and Reconnaissance (ISR) technology solutions, proprietary products-including electro-optical, hyperspectral, and synthetic aperture radar sensors-and other products that the Company manufactures and integrates with hardware and software to meet unique and evolving intelligence mission requirements.

KeyW's solutions focus on Intelligence Community (IC) customers, including the Federal Bureau of Investigation (FBI), Department of Homeland Security (DHS), National Security Agency (NSA), the National Geospatial Intelligence Agency (NGA), the Army Geospatial Center (AGC) and other agencies within the IC and Department of Defense (DoD). In addition, the Company provides products and services to U.S. federal, state, and local law enforcement agencies, foreign governments and other entities in the Cyber and Counterterrorism markets. Management believes the combination of the Company's advanced solutions, understanding of its customers’ missions, longstanding and successful customer relationships, operational capabilities, and highly skilled, cleared workforce will help expand its footprint in its core markets.

Principles of Consolidation

The consolidated financial statements include the transactions of KeyW, Opco and their wholly owned subsidiaries from the date of their acquisition. All intercompany accounts and transactions have been eliminated. Certain prior period amounts in Consolidated Balance Sheets and Consolidated Statements of Cash Flows have been reclassified to conform with current year presentation.

Prior Period Financial Statement Correction of Immaterial Errors

During the second quarter of 2018, management identified errors related to the accounting for self-constructed assets dating back to 2014. These errors resulted in an overstatement of property and equipment, net and an understatement of accumulated deficit. Specifically, management determined that certain selling, general and administrative and overhead costs should not have been capitalized as part of self-constructed assets and that depreciation expense was not recognized in a timely basis on certain self-constructed assets that were placed into service in prior periods. Additionally, management identified certain self-constructed assets previously presented as property and equipment, net which should have been classified as inventory.

The Company assessed the materiality of these errors on the financial statements for prior periods in accordance with the SEC Staff Accounting Bulletin (SAB) No. 99, Materiality, codified in Accounting Standards Codification (ASC) 250, Presentation of Financial Statements, and concluded that they were not material to any prior annual or interim periods. However, the aggregate amount of the prior period corrections of immaterial errors through December 31, 2017 was an approximately $3.5 million increase to accumulated deficit and would have been material to the amounts within the current Consolidated Statements of Operations. Consequently, in accordance with ASC 250 (specifically SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements), the Company have corrected these errors for all prior periods presented by revising the consolidated financial statements and other financial information included herein. The Company also corrected the timing of immaterial previously recorded out-of-period adjustments and reflected them in the revised prior period consolidated financial statements, where applicable.

The effects of the correction of immaterial errors on the Consolidated Balance Sheets were as follows (in thousands):



	December 31, 2017
	As Previously Reported			Adjustment			As Revised
Inventories, net	$	20,496		$	3,841		$	24,337
Property and equipment, net	43,283			(7,142		)	36,141
TOTAL ASSETS	686,907			(3,301		)	683,606
Deferred tax liability, net	19,174			193			19,367
TOTAL LIABILITIES	375,895			193			376,088
Accumulated deficit	(111,939		)	(3,494		)	(115,433		)
TOTAL STOCKHOLDERS' EQUITY	$	311,012		$	(3,494	)	$	307,518



	December 31, 2016
	As Previously Reported			Adjustment			As Revised
Inventories, net	$	15,178		$	633		$	15,811
Property and equipment, net	40,615			(1,694		)	38,921
TOTAL ASSETS	445,453			(1,061		)	444,392
Deferred tax liability, net	30,409			(5		)	30,404
TOTAL LIABILITIES	212,517			(5		)	212,512
Accumulated deficit	(100,988		)	(1,056		)	(102,044		)
TOTAL STOCKHOLDERS' EQUITY	$	232,936		$	(1,056	)	$	231,880

The effects of the correction of immaterial errors on the Consolidated Statements of Operations were as follows (in thousands):



	Year ended December 31, 2017
	As Previously Reported			Adjustment			As Revised
Cost of revenue, excluding amortization	$	331,629		$	1,087		$	332,716
Operating expenses	103,973			1,153			105,126
Operating loss	(5,432		)	(2,240		)	(7,672		)
Loss before income taxes from continuing operations	(22,011		)	(2,240		)	(24,251		)
Income tax (benefit) expense, net on continuing operations	(11,060		)	198			(10,862		)
Net loss from continuing operations	(10,951		)	(2,438		)	(13,389		)
Net loss	(10,951		)	(2,438		)	(13,389		)

Basic net loss per share from continuing operations	$	(0.22	)	$	(0.05	)	$	(0.27	)
Basic net loss per share	$	(0.22	)	$	(0.05	)	$	(0.27	)
Diluted net loss per share from continuing operations	$	(0.22	)	$	(0.05	)	$	(0.27	)
Diluted net loss per share	$	(0.22	)	$	(0.05	)	$	(0.27	)



	Year ended December 31, 2016
	As Previously Reported			Adjustment			As Revised
Cost of revenue, excluding amortization	$	196,772		$	136		$	196,908
Operating expenses	71,434			382			71,816
Operating income (loss)	13,708			(518		)	13,190
Income (loss) before income taxes from continuing operations	4,322			(518		)	3,804
Income tax expense (benefit), net on continuing operations	2,457			(5		)	2,452
Net income (loss) from continuing operations	1,865			(513		)	1,352
Net loss	(25,728		)	(513		)	(26,241		)

Basic net earnings (loss) per share from continuing operations	$	0.05		$	(0.02	)	$	0.03
Basic net loss per share	$	(0.64	)	$	(0.01	)	$	(0.65	)
Diluted net earnings (loss) per share from continuing operations	$	0.05		$	(0.02	)	$	0.03
Diluted net loss per share	$	(0.63	)	$	(0.01	)	$	(0.64	)

The effects of the correction of immaterial errors on the Consolidated Statements of Cash Flows were as follows (in thousands):



	Year ended December 31, 2017
	As Previously Reported			Adjustment			As Revised
Net loss	$	(10,951	)	$	(2,438	)	$	(13,389	)
Depreciation and amortization expense	20,363			1,747			22,110
Deferred taxes	(11,093		)	198			(10,895		)
Inventory, net	(5,318		)	(3,209		)	(8,527		)
Net cash provided (used) by operating activities	10,202			(3,702		)	6,500
Purchase of property and equipment	(10,121		)	3,702			(6,419		)
Net cash (used) provided in investing activities	$	(245,977	)	$	3,702		$	(242,275	)



	Year ended December 31, 2016
	As Previously Reported			Adjustment			As Revised
Net loss	$	(25,728	)	$	(513	)	$	(26,241	)
Depreciation and amortization expense	13,578			277			13,855
Deferred taxes	1,967			(5		)	1,962
Inventory, net	(663		)	(633		)	(1,296		)
Net cash provided (used) by operating activities	23,095			(874		)	22,221
Purchase of property and equipment	(18,410		)	874			(17,536		)
Net cash (used) provided in investing activities	$	(4,688	)	$	874		$	(3,814	)

Revenue Recognition

Effective January 1, 2018, the Company adopted the requirements of Accounting Standards Update (ASU) 2014-09 and related amendments, Revenue from Contracts with Customers (ASC 606), which superseded all prior revenue recognition methods and industry-specific guidance.

The majority of the Company's revenues are from long-term contracts with the U.S. Government that can span several years. The Company performs under various types of contracts including cost reimbursement (cost-plus-fixed-fee, cost-plus-award-fee), time-and-materials, fixed-price-level-of-effort, and firm-fixed-price contracts.

Under the guidance of ASC 606, the Company evaluated whether it has an enforceable contract with a customer with rights of the parties and payment terms identified, and collectability is probable. The Company also evaluated if a contract has multiple promises and if each promise should be accounted for as separate performance obligations or as a single performance obligation. Multiple promises in a contract are typically separated if they are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined into a single performance obligation.

Contract modifications are evaluated to determine whether they should be accounted for as part of the original contract or as a separate contract. Management considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications are accounted for as a separate contract if the modification adds distinct goods or services and increases the contract value by its standalone selling price. Modifications that are not determined to be a separate contract are accounted for either as a prospective adjustment to the original contract if the goods or services in the modification are distinct from those transferred before the modification or as a cumulative adjustment if the goods and services are not distinct and are part of a single performance obligation that is partially satisfied. The Company’s services contracts frequently provide customers an option to renew for an additional period of time under the same terms and conditions as the original contract. The renewal options typically do not provide the customer any material rights under the contract, therefore are treated as separate contracts when they include distinct goods or services at standalone selling prices.

Transaction prices for contracts with the U.S. Government are typically determined through a competitive procurement process and are based on estimated or actual costs of providing the goods or services in accordance with applicable regulations. Transaction prices for non-U.S. government customers are based on specific negotiations with each customer. In certain instances, the contracts contain award fees, incentive fees, or other provisions that can either increase or decrease the transaction price. The variable amounts generally are awarded upon achievement of certain performance metrics or program milestones and can be based upon customer discretion. The Company estimates variable consideration at the most likely amount to which it expects to be entitled without a significant reversal in revenue recognized. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available to the Company and the potential of a significant reversal of revenue. The Company excludes any taxes collected or imposed when determining the transaction price.

A contract’s transaction price is allocated to each distinct performance obligation and recognized when, or as, the performance obligation is satisfied. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good or service in the contract. Substantially none of the Company’s contracts contain a significant financing component, which would require an adjustment to the transaction price of the contract.

The Company recognizes revenue on a majority of its contracts over time as there is continuous transfer of control to the customer over the contract's period of performance. Continuous transfer of control is typically supported by contract clauses which allow the Company's customers to unilaterally terminate a contract for convenience, pay for costs incurred plus a reasonable profit, and take control of work-in-process. Revenue recognized over time is generally based on the extent of progress towards completion of the related performance obligations. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services provided. In certain instances, typically for firm-fixed-price contracts, the Company uses the cost-to-cost measure of progress for its contracts because it best depicts the transfer of control to the customer which occurs as costs on the contracts are incurred. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill generally include direct labor, materials and subcontractors’ costs, other direct costs and an allocation of indirect costs. In other instances, generally for cost reimbursable, time-and-materials, and fixed-price-level-of-effort contracts, revenue is recognized based on a right to invoice practical expedient as the Company is able to invoice the customer in an amount that corresponds directly with the value received by a customer for the Company’s performance completed to date. In some instances, typically for the sale of products that have an alternative use, the Company recognizes revenue at a point in time using a rate per unit as units are delivered and the customer obtains legal title of the asset.

Changes in estimates related to contracts accounted for using the cost-to-cost method of accounting are recognized in the period in which such changes are made on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation's percentage of completion. A significant change in one or more estimates could affect the profitability of one or more of our performance obligations. When estimates of total costs to be incurred on a performance obligation exceed total estimates of revenue to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined. For the years ended December 31, 2018, 2017 and 2016 there were no material adjustments recorded related to revised contract estimates.

Cost of Revenues

Cost of revenues consists primarily of compensation expenses for program personnel, the fringe benefits associated with this compensation and other direct expenses incurred to complete programs, including cost of materials, depreciation and subcontract efforts.

Inventories

Inventories are valued at the lower of cost or net realizable value. The Company's inventory consists of specialty products that are manufactured on a limited quantity basis for its customers. As of December 31, 2018 and 2017, the inventory reserve balances were $1.1 million and $0.9 million, respectively, for certain products where the market has not developed as expected.

Accounts Receivable and Unbilled Receivables

Receivables consist of amounts billed and currently due from customers (accounts receivable) and amounts currently due from customers that are not yet billed (unbilled receivables). Receivables are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based on its assessment of the status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written-off through a charge to the allowance and a credit to accounts receivable.

Assets Held for Sale

Assets held for sale represent fixed assets that have met the criteria of “held for sale” accounting, as specified by ASC 360, Property, Plant, and Equipment. As of December 31, 2018, assets held for sale were comprised of certain aircraft and plant, property and equipment that are being marketed for sale. The Company intends to complete the sale of these assets within fiscal year 2019. See Note 19 - Assets Held for Sale, Discontinued Operations and Dispositions.

Property and Equipment

All property and equipment are stated at acquisition cost or in the case of self-constructed assets, the cost of labor and a reasonable allocation of overhead costs (no general and administrative costs are included). The cost of maintenance and repairs, which do not significantly improve or extend the life of the respective assets, are charged to operations as incurred.

Provisions for depreciation and amortization are computed on either a straight-line method or accelerated methods acceptable under accounting principles generally accepted in the United States of America (U.S. GAAP) over the estimated useful lives of between three and seven years. Leasehold improvements are amortized over the lesser of the terms of the underlying leases or the estimated useful lives of the assets.

Lease Incentives

As part of entering into certain building leases, the lessors have provided the Company with tenant improvement allowances. Typically, such allowances represent reimbursements to the Company for tenant improvements made to the leased space. These improvements are capitalized as property and equipment, and the allowances are classified as a deferred lease incentive liability. This incentive is considered a reduction of rental expense by the lessee over the term of the lease and is recognized on a straight-line basis over the same term.

Long-Lived Assets (Excluding Goodwill and Intangibles)

The Company follows the provisions of FASB ASC topic 360-10-35, Impairment or Disposal of Long-Lived Assets in accounting for long-lived assets such as property and equipment and intangible assets subject to amortization. The guidance requires that long-lived assets be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. The possibility of impairment exists if the sum of the long-term undiscounted cash flows is less than the carrying amount of the long-lived asset being evaluated. Impairment losses are measured as the difference between the carrying value of long-lived assets and their fair market value based on discounted cash flows of the related assets. Impairment losses are treated as permanent reductions in the carrying amount of the assets. During the year ended December 31, 2018, the Company recognized an impairment charge of $2.6 million for write-downs associated with certain aircraft and plant, property and equipment classified as held for sale. See Note 19 - Assets Held for Sale, Discontinued Operations and Dispositions.

Goodwill

Purchase price in excess of the fair value of tangible assets and identifiable intangible assets acquired and liabilities assumed in a business combination is recorded as goodwill. The Company tests for impairment at least annually, during the beginning of the fourth quarter, or more frequently if impairment indicators arise. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit.

The Company may elect to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. When performing a qualitative assessment, the Company considers factors including, but not limited to, current macroeconomic conditions, industry and market conditions, cost factors, financial performance and other events relevant to the entity or reporting unit under evaluation to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, based on management review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value (or if the Company elected to bypass assessing the qualitative factors), the Company would perform a quantitative impairment test to identify goodwill impairment and measures the amount of goodwill impairment loss to be recognized (if any) by comparing the fair value of its reporting unit with its carrying amount, using a combination of income and market approaches. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. As a result of the adoption of ASU 2017-04, Intangibles - Goodwill and Other, if management determines that the goodwill is impaired, it is no longer required to compare the implied fair value of the reporting unit goodwill associated with the carrying amount of that goodwill, which is commonly referred to as Step 2.

If the quantitative impairment test were to be performed, determining the fair value of a reporting unit is a judgment involving significant estimates and assumptions. These estimates and assumptions include revenue growth rates, operating margins and working capital requirements used to calculate projected future cash flows, risk-adjusted discount rates, selected multiples, control premiums and future economic and market conditions. The Company would base the fair value estimates on assumptions that the management believes to be reasonable, but actual future events may differ from these assumptions.

The Company evaluates goodwill for impairment at the beginning of the fourth quarter. Based on the assessment of qualitative factors performed during the annual impairment evaluation for fiscal 2018, it was determined that it is not more likely than not that the fair value of the reporting unit was less than its carrying value, and as a result, a quantitative step one analysis was not necessary. The Company did not recognize any goodwill impairments during 2018, 2017 and 2016. See Note 19 - Assets Held for Sale, Discontinued Operations and Dispositions for discussion of goodwill impairments associated with the Company's discontinued operations.

As further described in Note 2 - Acquisitions, during the second quarter of 2017, the Company completed the acquisition of Sotera. The goodwill related to the Sotera acquisition represents all the 2017 additions to goodwill. A summary of the changes to goodwill is as follows (in thousands):



Goodwill as of December 31, 2016	$	290,710
Acquisition	164,487
Goodwill as of December 31, 2017	$	455,197
Goodwill as of December 31, 2018	$	455,197

Intangibles

Acquired intangible assets with finite lives are amortized using the method that best reflects how their economic benefits are utilized, or, if a pattern of economic benefits cannot be reliably determined, on a straight-line basis over their estimated useful lives. Intangible assets with finite lives are amortized over a period ranging from one to sixteen years. Intangible assets are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. See Note 10 - Intangible Assets for impairment charges recognized during the year ended December 31, 2018.

Concentrations of Credit Risk

The Company maintains cash balances that, at times, during the years ended December 31, 2018 and 2017 exceeded the federally insured limit on a per financial institution basis. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk related to cash. In addition, the Company has credit risk associated with the receivables that arise in the ordinary course of business. In excess of 90% of the total revenue is derived from contracts where the end customer is the U.S. Government and any disruption to cash payments from the end customer could put the Company at risk.

Use of Estimates

Management uses estimates and assumptions in preparing these consolidated financial statements in accordance with U.S. GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Significant estimates include amortization lives, depreciation lives, proportional performance revenue, inventory obsolescence reserves, income taxes and stock compensation expense. Actual results could vary from the estimates that were used.

Cash and Cash Equivalents

Management considers all highly liquid investments purchased with original maturities of three months or less, when purchased, to be cash equivalents.

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, management considers the principal or most advantageous market in which the asset or liability would transact, and if necessary, consider assumptions that market participants would use when pricing the asset or liability.

The accounting guidance for fair value measurements establishes a three-level fair value hierarchy that prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions (Level 3). Assets and liabilities are classified in their entirety within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement. See Note 5 - Fair Value Measurements for additional information on the Company’s fair value measurements.

Derivative Instruments

Derivative instruments designated as cash flow hedges are recorded on the Consolidated Balance Sheets at fair value as of the reporting date, and the effective portion of the hedge is recorded in other comprehensive (loss) income on the Consolidated Statements of Comprehensive Income and reclassified to earnings in the period that the hedged items affect earnings. Management reviews the effectiveness of the hedges on a quarterly basis.

Research and Development

Internally funded research and development costs are expensed as incurred and are included in cost of operations in the accompanying Consolidated Statements of Operations. In accordance with FASB ASC Topic 730, Research and Development, such costs consist primarily of payroll, materials, subcontractor and an allocation of overhead costs related to product development. Research and development costs totaled $1.8 million, $3.7 million and $4.6 million for years ended December 31, 2018, 2017 and 2016, respectively, and are included as operating expenses in the Consolidated Statement of Operations.

Income Taxes

Income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enacted date. In evaluating the Company ability to realize our deferred tax assets, management considers all available positive and negative evidence, including cumulative historic earnings, reversal of deferred tax liabilities, projected taxable income, and tax planning strategies. The assumptions utilized in evaluating both positive and negative evidence require the use of significant judgment concerning the Company's business plans.

For a tax position that meets the more-likely-than-not recognition threshold, the Company initially and subsequently measures the tax liability or benefit as the largest amount that it judges to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. The effective tax rate includes the net impact of changes in the liability for unrecognized tax obligations or benefits and subsequent adjustments as considered appropriate by management. The Company's policy is to record interest and penalties as an increase in the liability for uncertain tax obligations or benefits and a corresponding increase to the income tax provision.

(Loss) Earnings per Share

Basic net (loss) earnings per share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted (loss) earnings per share is calculated by dividing net (loss) income by the diluted weighted average common shares, which reflects the potential dilution of stock options, warrants, and contingently issuable shares that could share in our (loss) income if the securities were exercised.

The following table presents the calculation of basic and diluted net loss per share (in thousands except per share amounts):



	December 31, 2018			December 31, 2017			December 31, 2016
Net (loss) income from continuing operations	$	(22,280	)	$	(13,389	)	$	1,352
Net loss on discontinued operations	—			—			(27,593		)
Net loss	$	(22,280	)	$	(13,389	)	$	(26,241	)

Weighted-average shares – basic	49,833			48,921			40,501
Effect of dilutive potential common shares	—			—			511
Weighted-average shares – diluted	49,833			48,921			41,012

Net (loss) income per share from continuing operations – basic	$	(0.45	)	$	(0.27	)	$	0.03
Net loss per share from discontinued operations – basic	—			—			(0.68		)
Net loss per share – basic	$	(0.45	)	$	(0.27	)	$	(0.65	)

Net (loss) income per share from continuing operations – diluted	$	(0.45	)	$	(0.27	)	$	0.03
Net loss per share from discontinued operations – diluted	—			—			(0.67		)
Net loss per share – diluted	$	(0.45	)	$	(0.27	)	$	(0.64	)

Anti-dilutive share-based awards, excluded	3,647			2,543			2,499

Employee equity share options, restricted shares and warrants granted by the Company are treated as potential common shares outstanding in computing diluted earnings (loss) per share. Diluted shares outstanding include the dilutive effect of in-the-money options and in-the-money warrants and unvested restricted stock. The dilutive effect of such equity awards is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury-stock method, the amount the employee must pay for exercising stock options and the amount of compensation cost for future service that the Company has not yet recognized are collectively assumed to be used to repurchase shares. As the Company incurred a net loss from continuing operations for the years ended December 31, 2018 and 2017, none of the outstanding dilutive share-based awards were included in the diluted share calculation as they would have been anti-dilutive.

The Company uses the if-converted method for calculating any potential dilutive effect of the conversion spread of our Convertible Senior Notes due 2019 (the "Notes") on diluted earnings per share, if applicable. The conversion spread will have a dilutive impact on diluted earnings per share of common stock when the average market price of our common stock for a given period exceeds the Notes' conversion price of $14.83. For the years ended December 31, 2018, 2017 and 2016 approximately 1.5 million, 10.1 million and 10.1 million shares, respectively, related to the Notes have been excluded from the computation of diluted earnings per share as the effect would be anti-dilutive since the conversion price of the Notes exceeded the average market price of the Company's common shares.

Share Based Compensation

As a result of the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, and as further discussed in Note 13 - Share-Based Compensation, the Company applies the fair value method that requires all share-based payments to employees and non-employee directors be expensed over their requisite service period based on their fair value at the grant date, using a prescribed option-pricing model. The expense recognized is based on the straight-line amortization of each individually vesting piece of a grant. The Company has elected to account for forfeitures related to share-based awards when they occur.

The following assumptions were used for share-based awards granted.

Dividend Yield—The Company has never declared or paid dividends on its common stock and has no plans to do so in the foreseeable future.

Risk-Free Interest Rate—Risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term approximating the expected life of the share-based award term assumed at the date of grant.

Expected Volatility—Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company's expected volatility is based on its historical volatility for a period that approximates the estimated life of the share-based awards.

Expected Term of the Share-based Awards—This is the period of time that the share-based awards granted are expected to remain unexercised. The Company estimates the expected life of the share-based award term based on the expected tenure of employees and historical experience.

Segment Reporting

FASB ASC Section 280, Segment Reporting, establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that these enterprises report selected information about operating segments in interim financial reports. The guidance also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company defines its reportable segments based on the way the chief operating decision maker (CODM), currently its chief executive officer, manages the operations of the Company for allocating resources and assessing performance. The Company had historically operated two segments, Government Solutions and Commercial Cyber Solutions. The Company disposed of the assets and liabilities of its Commercial Cyber Solutions during the second quarter of 2016, (see Note 19 - Assets Held for Sale, Discontinued Operations and Dispositions). Therefore, the Company reclassified the results of the Hexis business, which comprised of the entire Commercial Cyber Solutions reportable segment, as discontinued operations for all periods presented in the consolidated financial statements. As a result of the acquisition of Sotera Holdings Inc., a Delaware corporation and its wholly owned subsidiary Sotera Defense Solutions Inc., a Delaware corporation (Sotera) during the second quarter of 2017, there was no change in operating or reporting segments. The Company conducts business as one operating and reporting segment.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09 and related amendments, Revenue from Contracts with Customers (ASC 606), an accounting pronouncement related to revenue recognition. ASC 606 supersedes the guidance in former ASC Topic 605, Revenue Recognition, and provides a single, comprehensive revenue recognition model for all contracts with customers. This standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The entity will recognize revenue to reflect the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. ASC 606 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.

Effective January 1, 2018, the Company adopted ASC 606 using the modified retrospective method. ASC 606 was not applied to contracts that were complete at December 31, 2017, and comparative information for the prior fiscal year has not been retrospectively adjusted. For contracts that were modified before the effective date, the Company elected the practical expedient which enabled the Company to reflect the aggregate effect of all modifications when identifying performance obligations and allocating the transaction price. The adoption of ASC 606 did not have a material impact on the Company’s consolidated financial statements. The Company recorded a $1.0 million increase to accumulated deficit on January 1, 2018, as the accumulative impact of ASC 606 adoption. The primary impact related to certain contracts (or contract components) that were previously recognized on a separate basis which are now combined under ASC 606 into a single performance obligation, as they are not capable of being distinct under the new guidance. The adoption of ASC 606 did not have a significant impact on the Company’s revenue recognition policy as revenues on a majority of the Company’s contracts continue to be recognized over time.

As a result of applying the modified retrospective method to adopt the new guidance, the following adjustments were made on the Consolidated Balance Sheets as of January 1, 2018:



	Year ended						Adjusted
	December 31, 2017			Adjustments			January 1, 2018
	(in thousands)
Assets:
Unbilled receivables, net	$	37,785		$	1,166		$	38,951
Inventories, net	24,337			(292		)	24,045
Prepaid expenses	2,266			(403		)	1,863
Liabilities:
Accrued expenses	$	15,545		$	49		$	15,594
Deferred revenue	6,090			1,743			7,833
Deferred tax liability, net	19,367			(325		)	19,042
Equity:
Accumulated deficit	$	(115,433	)	$	(996	)	$	(116,429	)

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends the application of hedge accounting and improves financial reporting of hedging relationships to more accurately present the economic effects of risk management activities in the financial statements. The ASU is effective for public companies for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company early adopted the provisions of ASU 2017-12 during the quarter ended September 30, 2018, using the modified retrospective method. The adoption did not have an impact on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842) which superseded existing lease guidance under ASC 840 and made several changes such as requiring an entity to recognize a right-of-use asset and corresponding lease obligation on the balance sheet. The ASU also requires enhanced disclosures of key information about leasing arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases (Topic 842): Targeted Improvements, to clarify certain guidance in ASU 2016-02 and allows companies to elect an optional transition method to apply the new lease standard through a cumulative-effect adjustment in the period of adoption. The Company adopted the standard on January 1, 2019 using the optional transition method. The Company has made substantial progress in executing the implementation plan including revising various controls and processes to address the lease standard. The Company has elected to adopt certain practical expediencies provided under ASC 842, including the option to not apply lease recognition for short-term leases, reassessment of whether expired or existing contracts contain leases, reassessment of lease classification for expired or existing leases, reassessing initial direct costs and combining lease and non-lease components in revenue arrangements. The Company expects adoption of the standard will result in the recognition of approximately $28 million and $38 million of right-of-use assets and lease liabilities, respectively, on the Consolidated Balance Sheets for its operating leases. The Company does not expect ASU 2016-02 to have a material impact on the annual Consolidated Statements of Operations and Consolidated Statements of Cash Flows. ASU 2016-02 also requires expanded disclosure regarding the amounts, timing and uncertainties of cash flows related to a company’s lease portfolio. Management is evaluating these disclosure requirements and are incorporating the collection of relevant data into its processes in preparation for disclosure in fiscal year 2019.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which provides the option to reclassify certain income tax effects related to the Tax Cuts and Jobs Act passed in December of 2017 between accumulated other comprehensive income and retained earnings and also requires additional disclosures. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. Adoption of this ASU is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax laws or rates were recognized. Management is currently analyzing the impact of this ASU and, at this time, have not yet determined whether the Company will elect to make this optional reclassification. The adoption of ASU 2018-02 is not expected to have a material effect of the Company’s financial statements and related disclosures.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (ASU 2015-17), amending the accounting for income taxes and requiring all deferred tax assets and liabilities to be classified as non-current on the Consolidated Balance Sheets. The ASU is effective for reporting periods beginning after December 15, 2016. The Company adopted ASU 2015-17 as of January 1, 2017 on a retrospective basis and as of December 31, 2016, reclassified $1.2 million current deferred tax liability to non-current deferred tax liability on our Consolidated Balance Sheets.