710

T a b l e o f C o n t e n t sTable of Contents

Recently Adopted Accounting Pronouncements

~~In January 2017, the FASB issued ASU 2017-04~~ ~~Simplifying the Test for Goodwill Impairment~~, which simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test which previously measured a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount. We adopted ASU 2017-04, effective January 1, 2020. As a result of adopting the new rules, we compare the estimated fair value of our reporting segments to their respective carrying values when evaluating the recoverability of goodwill. If the carrying value of a reporting unit exceeds its fair value, an impairment charge will be recognized for the amount by which its carrying value exceeds the reporting unit's fair value; however, the loss recognized will not exceed the goodwill allocated to the reporting unit. The adoption of ASU 2017-04 did not have a significant impact on our consolidated financial statements.

~~In August 2018, the FASB issued ASU No. 2018-13~~ ~~Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement,~~ which amends the disclosure requirements in ASC 820 by adding, changing, or removing certain disclosures. The ASU applies to all entities that are required under this guidance to provide disclosures about recurring or nonrecurring fair value measurements. We adopted these amendments, effective January 1, 2020. The adoption of ASU 2018-13 did not have a significant impact on our consolidated financial statements.

~~In August 2018, the FASB issued ASU 2018-15~~ ~~Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract,~~ which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted ASU 2018-15, effective January 1, 2020. The adoption of ASU 2018-15 did not have a significant impact on our consolidated financial statements.

~~Recently Issued Pronouncements, not yet adopted~~

In December 2019, the FASB issued ASU 2019-12 Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles of the accounting for income taxes and also improves consistent application of and simplification of other areas when accounting for income taxes. The guidance is effective for us beginning in the first quarter of fiscal year ~~2021, while early adoption is permitted.~~2021. We ~~are currently in the process of evaluating the impact of~~adopted ASU 2019-12, effective January 1, 2021. The adoption of ASU 2019-12 ~~but we do~~did not ~~expect the adoption of these new accounting rules to~~ have a significant impact on our consolidated financial statements.

Recently Issued Pronouncements, Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, which requires companies to measure financial assets at an amortized cost basis to be presented at the net amount expected to be collected. The new accounting rules eliminate the probable initial recognition threshold and, instead, reflect an entity's current estimate of all expected credit losses. ASU 2016-13 is applicable to our trade receivables. This pronouncement was amended under ASU 2019-10 to allow an extension on the adoption date for entities that qualify as a small reporting company. We have elected this extension and the effective date for us to adopt this standard will be for fiscal years beginning after December 15, 2022. We are currently in the process of evaluating the impact of ASU 2016-13, but we do not expect the adoption of ~~these~~this new accounting ~~rules~~rule to have a significant impact on our consolidated financial statements.

2. ~~Discontinued Operations~~Business Acquisitions

OptaSense Holdings Limited

On ~~August 9, 2017,~~December 3, 2020, we ~~completed~~entered into and closed a Share Purchase Agreement (the “Share Purchase Agreement”) with QinetiQ Holdings Limited (“QinetiQ”) for the ~~sale~~purchase of all of the shares of OptaSense, a recognized market leader in fiber optic distributed monitoring solutions for pipelines, oilfield services, security, highways and railways, as well as power and utilities monitoring systems. Pursuant to the Share Purchase Agreement, we acquired all outstanding shares of OptaSense for aggregate consideration of $38.9 million (£29.0 million) subject to adjustment as described in the Share Purchase Agreement (the “Transaction”). The acquisition of OptaSense provides us with important distributed acoustic sensing ("DAS") intellectual property and products. OptaSense's technology and products and geographic footprint are highly complementary to Luna, which we believe will accelerate our ~~high speed optical receivers ("HSOR"~~technology and overall growth roadmap.

The Share Purchase Agreement and a Tax Deed entered into between QinetiQ and us (the “Tax Deed”) ~~business, which was~~in connection with the Share Purchase Agreement contain customary representations and warranties and indemnities. In addition, at closing of the acquisition, we obtained a warranty and indemnity insurance policy from Liberty Mutual Insurance Europe SE (LMIE) in connection with the Share Purchase Agreement and the Tax Deed.

New Ridge Technologies

On October 29, 2020, we acquired New Ridge Technologies, a small company that develops and manufactures fiber optic test and measurement equipment and advanced fiber optic subsystems primarily for telecommunication and radio-over-fiber applications. New Ridge's acquired operations will be integrated into, and reported as a part of, our Lightwave ~~segment (and~~segment. This acquisition supports our growth strategy in the communications test arena. The total consideration was $0.6 million which ~~was previously included in our Products~~consisted of $0.4 million paid at closing and ~~Licensing segment in prior periods),~~$0.2 million of contingent consideration related to an ~~unaffiliated third party for an initial purchase price of $33.5~~earn-out provision. We recorded $0.02 million of ~~which $29.5~~goodwill upon the completion of the purchase consideration allocation. Depending on the achievement of certain metrics during the two years following closing, we may pay the seller up to $0.2 million in ~~cash was received, and $4.0 million was placed into escrow until December 15, 2018 for possible working capital adjustments~~contingent consideration related to the earn-out provision.

These acquisitions have been accounted for under the acquisition method of accounting in accordance with ASC 805 - Business Combinations. Under ASC 805, the total estimated purchase ~~price~~consideration is allocated to the acquired tangible and ~~potential satisfaction of certain post-closing indemnification obligations (the "Transaction"). As of December 31, 2019, $1.5 million~~intangible assets and assumed liabilities based on their estimated fair values as of the escrow had been received with $2.5 million remaining in escrow pending resolution of a dispute. In March 2020, we settled the dispute resulting in us receiving $0.6 million and the buyer receiving $1.9 million. We have recorded a loss from discontinued operations of $1.4 million, net of tax benefit, for the nine months ended September 30, 2020, to reflect the settlementacquisition date. Any excess of the ~~dispute. There were no results from discontinued operations for~~fair value of the ~~three months ended September 30, 2020~~acquisition consideration over the identifiable assets acquired and ~~2019 or for the nine months ended September 30, 2019.~~

liabilities assumed is recognized as goodwill.

T a b l e o f C o n t e n t sTable of Contents

The following table ~~presents a summary~~summarizes the preliminary allocation of the ~~transactions related to the sale~~purchase consideration of the ~~HSOR business for the nine months ended September 30, 2020:~~OptaSense acquisition (excluding cash of $5.2 million):


	~~Nine Months Ended September 30, 2020~~(in thousands)
Accounts receivable	$	4,534
Contract assets	1,513
Inventory	12,793
Other current assets	1,026
Property and equipment	1,247
Identifiable intangible assets	11,263
Goodwill	8,520
Right of use assets	2,151
Other long-term assets	22
Accounts payable and accrued expenses	(3,925)
Contract liabilities	(3,259)
Other current liabilities	(862)
Long-term operating lease liability	(1,335)
Total purchase consideration	$	33,688

During the three months ended June 30, 2021, we obtained new information about facts and circumstances that existed as of the acquisition date that resulted in a change in the fair value of assets and liabilities recognized. Accordingly, the fair values of assets and liabilities have been revised as of the acquisition date, resulting in an increase in goodwill of $0.9 million, which was primarily related to an adjustment of accounts receivable.

The identifiable intangible assets and their estimated useful lives were as follows:

Estimated

(in thousands)

Useful Life

OptaSense

~~Settlement of HSOR receivable~~Developed technology

10 years

~~1,900~~7,379

Trade names and trademarks

15 years

2,580

Backlog

3 years

699

Customer relationships

5 years

605

~~Loss on sale~~$

~~1,900~~11,263

~~Allocated income tax benefit~~

~~(464)~~

~~Loss from discontinued operations, net of related income tax~~

~~1,436~~

OptaSense's developed technology primarily consists of its DAS product solutions that deliver superior measurements for a wide range of applications from advanced industrial monitoring through high performance geophysical measurements. The developed technologies were valued using the "multi-period excess earnings" method, under the income approach. The multi-period excess earnings method reflects the present value of the projected cash flows that are expected by the developed technologies less charges representing the contribution of other assets to those cash flows. A discount rate of 17.5% was used to discount the cash flows to the present value.

Trade names and trademarks are considered a type of guarantee of a certain level of recognizability, quality or performance represented by the OptaSense brand. Trade names and trademarks were valued using the "relief from royalty" method under the income approach. This method is based on the assumption that in lieu of ownership, a market participant would be willing to pay a royalty in order to exploit the related benefits of these assets. A discount rate of 17.5% was used to discount the cash flows to the present value.

Backlog arises from unfulfilled purchase or sales order contracts. The value of OptaSense's backlog as of the acquisition date was calculated using the income approach. A discount rate of 16.5% was used to discount the cash flows attributable solely to the backlog to the present value.

Table of Contents

Customer relationships represent the fair value of either (i) the avoidance of cost associated with the creation of a new customer relationship or (ii) the projected cash flows that will be derived from the sale of products to existing customers as of the acquisition date. OptaSense's customer relationships were valued using the cost approach based on the expected time to re-build the customer base. A discount rate of 17.5% was used to discount these cash flows to the present value.

Goodwill represents the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed in connection with the acquisition. Goodwill generated from our business acquisitions was primarily attributable to expected synergies from future customer and sales growth. The purchase price allocation is preliminary mainly due to the finalization of income tax considerations.

Pro forma consolidated results of operations

The following unaudited pro forma financial information presents combined results of operations for the period presented as if the acquisition of OptaSense had been completed on January 1, 2019. The pro forma information includes adjustments to amortization expense for the intangible assets acquired and interest expense for the additional debt used to partially fund the acquisition price.

The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations or the combined business had the acquisition of OptaSense occurred on January 1, 2019, or the results of future operations of the combined business. For instance, planned or expected operational synergies following the acquisition are not reflected in the pro forma information. Consequently, actual results will differ from the unaudited pro forma information presented below.


	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020
(in thousands)
Revenue	$	22,847	$	47,713

Loss from continuing operations	$	(1,507)	$	(177)

3. Intangible assets, net

Intangible assets, net at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 consisted of the following:


		September 30, 2020		December 31, 2019			Estimated Life	June 30, 2021		December 31, 2020
(in thousands)	(in thousands)					(in thousands)
Patent costs	Patent costs	$	5,582	$	5,291	Patent costs	1 - 18 years	$	5,797	$	5,702
Developed technology	Developed technology	9,800		9,800		Developed technology	5 - 10 years	17,608		17,344
In-process research & development	In-process research & development	1,580		1,580		In-process research & development	N/A	1,580		1,580
Customer base	Customer base	700		700		Customer base	5-7 years	1,307		1,302
Trade names and trademarks		550		550
Trade names						Trade names	3 - 15 years	3,138		3,122
Backlog						Backlog	3 years	701		696
		18,212		17,921				30,131		29,746
Accumulated amortization	Accumulated amortization	(9,019)		(7,727)		Accumulated amortization		(11,244)		(9,637)
		$	9,193	$	10,194			$	18,887	$	20,109

Table of Contents

Amortization expense for the each of the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 was ~~$0.4~~$0.8 million and ~~$1.3~~$1.6 million, respectively. Estimated aggregate amortization, based on the net value of intangible assets at ~~September~~June 30, ~~2020,~~2021, for each of the next five years and beyond is as follows (amounts in thousands):


Year Ending December 31,	Year Ending December 31,			Year Ending December 31,
2020 - remaining 3 months		$	425
2021		1,689
2021 - remaining 6 months				2021 - remaining 6 months	$	1,695
2022	2022	1,539		2022	2,924
2023	2023	1,466		2023	2,827
2024	2024	1,276		2024	2,416
2025 & beyond		2,798
2025				2025	2,082
2026 & beyond				2026 & beyond	6,943
Total	Total	$	9,193	Total	$	18,887

~~14. Subsequent Event~~

On October 8, 2020, we entered into an Amended and Restated Loan and Security Agreement (the “A&R Loan Agreement”) with SVB, which amended and restated in its entirety our previous Loan and Security Agreement dated as of October 10, 2019, as amended (see Note 7). Under the A&R Loan Agreement, SVB agreed to make advances available up to $10.0 million (the “A&R Revolving Line”). If we borrow from the A&R Revolving Line, such borrowing would carry a floating annual interest rate equal to the greater of (i) the Prime Rate (as defined in the Loan Agreement) then in effect plus .50% or (ii) 4.75%.

2324

T a b l e o f C o n t e n t sTable of Contents

Amounts borrowed under the A&R Revolving Line may be repaid and, prior to the A&R Revolving Line Maturity Date (defined below), reborrowed. The Revolving Line terminates on October 10, 2021 (the “A&R Revolving Line Maturity Date”), unless earlier terminated by us. No amounts have been borrowed under this A&R Loan Agreement.

Amounts due under the A&R Loan Agreement are secured by our assets, including all personal property and bank accounts; however, intellectual property is not secured under the Loan Agreement. The Loan Agreement requires us to observe a number of financial and operational covenants, including maintenance of a specified Liquidity Coverage Ratio (as defined in the A&R Loan Agreement), protection and registration of intellectual property rights and customary negative covenants.

On October 29, 2020, we acquired a small company that develops and manufactures fiber optic test and measurement equipment and advanced fiber optic subsystems primarily for telecommunication and radio-over-fiber applications. The company's acquired operations will be integrated into, and reported as a part of, our Lightwave division. This acquisition supports our growth strategy in the communications test arena.


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

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” under Items 2 and 3, respectively, of Part I of this report, and the section entitled “Risk Factors” under Item 1A of Part II of this report, may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. All statements other than statements of historical fact are “forward-looking statements” for purposes of these statutes, including those relating to future events or our future financial performance. In some cases, you can identify these forward looking statements by words such as “intends,” “will,” “plans,” “anticipates,” “expects,” “may,” “might,” “estimates,” “believes,” “should,” “projects,” “predicts,” “potential” or “continue,” or the negative of those words and other comparable words, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. Similarly, statements that describe our business strategy, goals, prospects, opportunities, outlook, objectives, plans or intentions are also forward-looking statements. These statements are only predictions and may relate to, but are not limited to, expectations of future operating results or financial performance, capital expenditures, introduction of new products, regulatory compliance and plans for growth and future operations, the potential impacts of the COVID-19 pandemic on our business, operations and financial results, as well as assumptions relating to the foregoing.

These statements are based on current expectations and assumptions regarding future events and business performance and involve known and unknown risks, uncertainties and other factors that may cause actual events or results to be materially different from any future events or results expressed or implied by these statements. These factors include those set forth in the following discussion and within Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q and elsewhere within this report.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this report.

Overview of Our Business

We are a leader in advanced optical technology, providing high performance fiber optic test, measurement and control products for the telecommunications and photonics industries, and distributed fiber optic sensing ~~products~~solutions that measure, or “sense,” the structures for industries ~~utilizing composite~~ranging from aerospace, automotive, energy, oil and ~~other advanced materials, such as~~gas, security and infrastructure.

Our communications test and control products help customers test their fiber optic networks and assemblies with speed and precision in both lab and production environments, accelerating the ~~automotive, aerospace, energy~~development of fiber optic products and ~~infrastructure industries.~~assuring accurate testing of optical components like photonic integrated circuits ("PIC"s) and coherent receivers, which are both critical elements of meeting the world’s exponentially growing demand for bandwidth. Our distributed fiber optic sensing products help designers and manufacturers more efficiently develop new and innovative products by ~~providing valuable information such as highly detailed~~measuring stress, strain, and temperature ~~measurements of~~at a high resolution for new ~~design~~designs or manufacturing ~~process.~~processes. In addition, our distributed fiber optic sensing products ~~are used to monitor~~ensure the safety and structural integrity or operational health of critical assets ~~including~~in the field, by monitoring stress, strain, and vibration in large civil ~~structures~~and industrial infrastructure such as ~~bridges.~~

T a b l e o f C o n t e n t s

~~Our communications test~~bridges, roads, pipelines and ~~control products accelerate the development of advanced fiber optic components and networks by providing fast and highly accurate characterization of components and networks.~~

borders. We also provide applied research services, typically under research programs funded by the U.S. government, in areas of sensing and instrumentation, advanced materials, optical technologies and health sciences. Our business model is designed to accelerate the process of bringing new and innovative products to market. We use our in-house technical expertise across a range of technologies to perform applied research services for companies and for government funded projects. We continue to invest in product development and commercialization, which we anticipate will lead to increased product sales growth.

We are organized into two reporting segments, the Lightwave segment and the Luna Labs segment.

~~During~~Our Lightwave segment consists of our fiber optics testing, measurement and sensing solutions. Our Lightwave segment revenues represented 79% and 70% of our total revenues for the three months ended June 30, 2021 and 2020, ~~we changed~~respectively, and 79% and 69% of our ~~reportable segments to Lightwave and Luna Labs to align with how our Chief Operating Decision Maker (CODM) evaluates segment performance and allocates resources to~~total revenues for the ~~segments. Prior to the three~~six months ended June 30, 2021 and 2020, we reported under two different reporting segments, the Products and Licensing segment and Technology Development segment. We have reflected these new segment measures beginning in the three months ended June 30, 2020 and prior periods have been restated for comparability.respectively.

Table of Contents

Our Lightwave segment develops, manufactures and markets distributed fiber optic sensing products and fiber optic communications test and control products. We ~~continue to~~ develop and commercialize our fiber optic technology for sensing applications for aerospace, automotive, energy and infrastructure as well as for test and measurement applications in the telecommunications and data communications industries. Our Lightwave segment also performs applied research principally in the areas of optical and terahertz technologies. Our Lightwave segment revenues represented 73% and 71% of our total revenues for the three months ended September 30, 2020 and 2019, respectively, and 70% and 69% of our total revenues for the nine months ended September 30, 2020 and 2019, respectively. The Lightwave segment revenues were $15.4 million and $13.1 million for the three months ended September 30, 2020 and 2019, respectively, and $39.8 million and $35.1 million for the nine months ended September 30, 2020 and 2019, respectively.

Revenues from product sales are mostly derived from the sales of our sensing and test, measurement and control products that make use of light-transmitting optical fibers, or fiber optics. We continue to invest in product development and commercialization, which we anticipate will lead to increased product sales growth. Although we have been successful in licensing certain technologies in past years, we do not expect license revenues to represent a significant portion of future revenues. ~~In the near term, we expect revenues from product sales to continue to be primarily in areas associated with our sensing and test, measurement and control fiber optic test platforms.~~

In the long term, we expect that revenues from product sales will represent a larger portion of our total revenues. As we develop and commercialize new products, these revenues will reflect a broader and more diversified mix of products. Our key initiative for long term growth is to become a leading provider of fiber optic test, measurement, control and sensing equipment. The acquisition of OptaSense in December 2020 added distributed acoustic sensing technology to our existing suite of sensing products and provided for expansion into high-growth markets such as security and perimeter detection, smart infrastructure monitoring and oil and gas. Our products have historically been strong in long-range, discrete sensing and short range, fully distributed sensing which are best when specific, known locations needed to be monitored. OptaSense's product offering has helped us fill a gap for long range, fully distributed measurement, which is best for applications where signals can occur anywhere along the length of the sensor.

Our Luna Labs segment performs applied research principally in the areas of sensing and instrumentation, advanced materials and health sciences. Our Luna Labs segment comprised 21% and 30% of our total revenues for the three months ended June 30, 2021 and 2020, respectively, and 21% and 31% of our total revenues for the six months ended June 30, 2021 and 2020, respectively. Most of the government funding for our Luna Labs segment is derived from the Small Business Innovation Research ("SBIR"), program coordinated by the U.S. Small Business Administration. Within the Luna Labs segment, we have historically had a backlog of contracts for which work has been scheduled, but for which a specified portion of work has not yet been completed.

We define backlog as the dollar amount of obligations payable to us under negotiated contracts upon completion of a specified portion of work that has not yet been completed, exclusive of revenues previously recognized for work already performed under these contracts, if any. Total backlog includes funded backlog, which is the amount for which money has been directly authorized by the U.S. government and for which a purchase order has been received by a commercial customer, and unfunded backlog, representing firm orders for which funding has not yet been appropriated. Indefinite delivery and quantity contracts and unexercised options are not reported in total backlog. The approximate value of our Lightwave segment backlog was ~~$21.6~~$36.9 million and $35.9 million at ~~September~~June 30, ~~2020~~2021 and ~~$16.1 million at~~ December 31, ~~2019. The backlog at September 30,~~ 2020, ~~is expected to be recognized as revenue in the future as follows:~~

(in thousands) 2020 2021 2022 2023 2024 and beyond Total
Lightwave
Funded $ 2,669 $ 4,862 $ 629 $ — $ — $ 8,160
Unfunded $ 3,205 $ 4,780 $ 3,839 $ 1,617 $ 30 $ 13,471

The Luna Labs segment performs applied research principally in the areas of sensing and instrumentation, advanced materials and health sciences. This segment comprised 27% and 29% of our total revenues for the three months ended September 30, 2020 and 2019, respectively, and 30% and 31% of our total revenues for the nine months ended September 30, 2020 and 2019, respectively. Most of the government funding for our Luna Labs segment is derived from the Small Business Innovation Research ("SBIR") program coordinated by the U.S. Small Business Administration ("SBA"). The Luna Labs segment revenues were $5.7 million and $5.3 million for the three months ended September 30, 2020 and 2019, respectively, and $16.9 million and $15.9 million for the nine months ended September 30, 2020 and 2019, respectively.

T a b l e o f C o n t e n t s

~~Within the Luna Labs segment, we have historically had a backlog of contracts for which work has been scheduled, but for which a specified portion of work has not yet been completed.~~ The approximate value of our Luna Labs segment backlog was ~~$24.4~~$25.6 million and $19.0 million at ~~September~~June 30, ~~2020~~2021 and ~~$31.3 million at~~ December 31, ~~2019. The backlog at September 30,~~ 2020, ~~is expected to be recognized as revenue in the future as follows:~~respectively.

(in thousands) 2020 2021 2022 2023 2024 and beyond Total
Luna Labs
Funded $ 5,464 $ 11,565 $ 4,093 $ 491 $ — $ 21,613
Unfunded $ 342 $ 1,374 $ 1,095 $ — $ — $ 2,811

Table of Contents

Acquisitions

OptaSense Holdings Limited

On ~~March 1, 2019,~~December 3, 2020, we acquired ~~all of the outstanding stock of General Photonics Corporation~~OptaSense Holdings Limited ("~~GP"~~OptaSense"), for $38.9 million (£29.0 million) in cash. OptaSense, formerly owned by QinetiQ Holdings Limited, is a ~~leading provider of innovative components, modules and test equipment focused on the generation, measurement and control of polarized light critical~~market leader in fiber ~~optic-based applications~~optic distributed monitoring solutions for ~~aggregate consideration~~pipelines, oilfield services, security, highways and railways, and in power and utilities monitoring systems. The acquisition of ~~$19.0 million~~OptaSense provided us with ~~an earn-out provision of up~~important distributed acoustic sensing ("DAS") intellectual property and products. OptaSense's technology and products and geographic footprint are highly complementary to ~~$1.0 million. Of the purchase price, $17.1 million was paid at closing~~our Lightwave segment which we believe will accelerate our technology and $1.9 million was placed into escrow for possible working capital adjustments to the purchase price and potential satisfaction of certain post-closing indemnification obligations. The $1.0 million in additional cash consideration was paid in the second quarter of 2020 as a result of the successful completion of the earn-out provision.overall growth roadmap.

We may also grow our business in part through acquisitions of additional companies and complementary technologies, which could cause us to incur transaction expenses, amortization or write-offs of intangible assets and other acquisition-related expenses.

Description of Revenues, Costs and Expenses

Impact of COVID-19 Pandemic

The ongoing global COVID-19 pandemic has impacted, and will likely continue to impact, the way we conduct our business, including the way in which we interface with customers, suppliers and our employees. Although to date we have not experienced any adverse material impacts from the COVID-19 pandemic, the broader impact of the COVID-19 pandemic on our results of operations and overall financial performance remains uncertain. The COVID-19 pandemic has affected how we interact with our customers by reducing face-to-face meetings and increasing our on-line and virtual presence. While increasing our on-line and virtual presence has proven effective, we are unsure of the impact if these conditions continue for an extended period. In addition, we have experienced minor impacts on our supply chain that we have managed. For example, in cases where there were delays we relied on our inventory of components to continue production. There is no guarantee we will be able to manage through future delays in our supply chain. See “Risk Factors” for further discussion of the potential adverse impacts of the COVID-19 pandemic on our business.

Revenues

We generate revenues from product sales, commercial product development and licensing and technology development activities. Our Lightwave segment revenues reflect amounts that we receive from sales of our products or development of products for third parties and, to a lesser extent, fees paid to us in connection with licenses or sub-licenses of certain patents and other intellectual property, and represented 73% and 71% of our total revenues for the three months ended September 30, 2020 and 2019, respectively, and 70% and 69% of our total revenues for the nine months ended September 30, 2020 and 2019, respectively.property.

We derive Luna Labs segment revenues from providing research and development services to third parties, including government entities, academic institutions and corporations, and from achieving milestones established by some of these contracts and in collaboration agreements. In general, we complete contracted research over periods ranging from six months to three years and recognize these revenues over the life of the contract as costs are incurred. The Luna Labs segment revenues represented 27% and 29% of total revenues for the three months ended September 30, 2020 and 2019, respectively, and 30% and 31% of our total revenues for the nine months ended September 30, 2020 and 2019, respectively.

Cost of Revenues

Cost of revenues associated with our Lightwave segment revenues consists of license fees for use of certain technologies, product manufacturing costs including all direct material and direct labor costs, amounts paid to our contract manufacturers, manufacturing, shipping and handling, provisions for product warranties, and inventory obsolescence as well as overhead allocated to each of these activities.

T a b l e o f C o n t e n t s

Cost of revenues associated with our Luna Labs segment revenues consists of costs associated with performing the related research activities including direct labor, amounts paid to subcontractors and overhead allocated to Luna Labs segment activities.

Operating Expense

Operating expense consists of selling, general and administrative expenses, as well as expenses related to research, development and engineering, depreciation of fixed assets and amortization of intangible assets. These expenses also include compensation for employees in executive and operational functions including certain non-cash charges related to expenses from equity awards, facilities costs, professional fees, salaries, commissions, travel expense and related benefits of personnel engaged in sales, ~~product management~~marketing and ~~marketing~~administrative activities, costs of marketing programs and promotional materials, salaries, bonuses and related benefits of personnel engaged in our own research and development beyond the scope and activities of our Luna Labs segment, product development activities not provided under contracts with third parties, and overhead costs related to these activities.

Table of Contents

Investment Income

Investment income consists of amounts earned on our cash equivalents. We sweep on a daily basis a portion of our cash on hand into a fund invested in U.S. government obligations.

Interest Expense

Interest expense is composed of interest paid under our term loans as well as interest accrued on our finance lease obligations.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or judgments.

The COVID-19 pandemic has resulted and is expected to continue to result in a slowdown of economic activity that is likely to interrupt business operations across the globe. Estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require the exercise of judgment. As of the date of issuance of our financial statements included in this report, we are not aware of any specific event or circumstance that would require us to update our estimates, assumptions and judgments or revise the reported amounts of assets and liabilities or the disclosure of contingent assets and liabilities. These estimates, however, may change as new events occur and additional information is obtained, and are recognized in the financial statements as soon as they become known.

Our critical accounting policies are described in the Management’s Discussion and Analysis section and the notes to our audited consolidated financial statements previously included in our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, as filed with the Securities and Exchange Commission ("SEC") on March ~~13, 2020.~~12, 2021.

Results of Operations

Three Months Ended ~~September~~June 30, ~~2020~~2021 Compared to Three Months Ended ~~September~~June 30, ~~2019~~2020

Revenues

Three Months Ended September 30,
(in thousands) 2020 2019 $ Difference % Difference
Revenues:
     Lightwave $ 15,350 $ 13,088 $ 2,262 17 %
     Luna Labs 5,700 5,301 399 8 %
          Total revenues $ 21,050 $ 18,389 $ 2,661 14 %

T a b l e o f C o n t e n t s


	Three Months Ended June 30,
(in thousands)	2021		2020		$ Difference		% Difference
Revenues:
Lightwave	$	21,965	$	12,933	$	9,032	70	%
Luna Labs	5,972		5,643		329		6	%
Total revenues	$	27,937	$	18,576	$	9,361	50	%

Our Lightwave segment included revenues from sales of test and measurement systems, primarily representing sales of our Optical Backscatter Reflectometer, ODiSI, Optical Vector Analyzer platforms, optical components and sub-assemblies and sales of our Hyperion platforms.

Lightwave segment revenues for the three months ended ~~September~~June 30, ~~2020~~2021 increased ~~$2.3~~$9.0 million, or ~~17%~~70%, to ~~$15.4~~$22.0 million compared to ~~$13.1~~$12.9 million for the three months ended ~~September~~June 30, ~~2019.~~

2020. The vast majority of the increase in revenues for the three months ended ~~September~~June 30, ~~2020,~~2021, compared to the three months ended ~~September~~June 30, ~~2019, resulted primarily~~2020, was due to the revenues from OptaSense which was acquired on December 3, 2020. Excluding OptaSense, we experienced continued growth in ~~sales of~~ our ~~sensing and~~ communications ~~testing products.~~

test business. Revenues from our Luna Labs segment for the three months ended ~~September~~June 30, ~~2020~~2021 increased ~~$0.4~~$0.3 million, or 8%6%, to ~~$5.7~~$6.0 million compared to ~~$5.3~~$5.6 million for the three months ended ~~September~~June 30, 2019. The increase in Luna Labs segment revenues continues a growth trend experienced over the past three years largely driven by successes in second Phase 2 SBIR awards as well as non-SBIR awards. The increase for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, was realized primarily in our advanced materials group. As Phase 2, second Phase 2 and non-SBIR contracts generally have a performance period of a year or more, we currently expect revenues to remain at a similar level for the near term.2020.

Table of Contents

Cost of Revenues and Gross Profit


		Three Months Ended September 30,									Three Months Ended June 30,
(in thousands)	(in thousands)	2020		2019		$ Difference		% Difference		(in thousands)	2021		2020		$ Difference		% Difference
Cost of revenues:	Cost of revenues:									Cost of revenues:
Lightwave	Lightwave	$	5,670	$	5,449	$	221	4	%	Lightwave	$	9,441	$	5,181	$	4,260	82	%
Luna Labs	Luna Labs	4,431		3,665		766		21	%	Luna Labs	4,546		3,878		668		17	%
Total cost of revenues	Total cost of revenues	10,101		9,114		987		11	%	Total cost of revenues	13,987		9,059		4,928		54	%
Gross profit	Gross profit	$	10,949	$	9,275	$	1,674	18	%	Gross profit	$	13,950	$	9,517	$	4,433	47	%

4042

T a b l e o f C o n t e n t sTable of Contents

Shifts in product mix may result in declines in gross profit.

Our gross profit margins vary among our product platforms and are generally highest on our test and measurement instruments. Our overall gross profit may fluctuate from period to period as a result of a variety of factors including shifts in product mix, the introduction of new products, and decreases in average selling prices for older products. If our customers decide to buy more of our products with low gross profit margins or fewer of our products with high gross profit margins, our total gross profits could be harmed.

RISKS RELATING TO OUR OPERATIONS AND BUSINESS STRATEGY

If we fail to properly evaluate and execute our strategic initiatives, including the integration of acquired businesses, it could have an adverse effect on our future results and the market price of our common stock.

We evaluate strategic opportunities related to products, technology and business transactions, including acquisitions and divestitures. In the past, we have acquired businesses to support our growth strategy, including the acquisition of OptaSense in December 2020, General Photonics Corporation in March 2019 and Micron Optics, Inc. in October 2018. If we choose to enter into such transactions in the future, we face certain risks including:

•the failure of the acquired business to meet our performance and financial expectations;

•difficulty integrating an acquired business's operations, personnel and financial and reporting systems into our current business

•potential unknown liabilities associated with the acquisition;

•lost sales and customers as a result of customers deciding not to do business with us;

•complexities associated with managing the larger combined company with distant business locations;

•integrating personnel while maintaining focus on providing consistent, high quality products;

•loss of key employees; and

•performance shortfalls as a result of the division of management's attention caused by completing the acquisition and integrating operations.

If any of these events were to occur, our ability to maintain relationships with the customers, suppliers and employees or our ability to achieve the anticipated benefits of the acquisition could be adversely affected, or could reduce our future earnings or otherwise adversely affect our business and financial results and, as a result, adversely affect the market price of our common stock.

If we cannot successfully transition our revenue mix from contract research revenues to product sales and license revenues, we may not be able to fully execute our business model or grow our business.

Our business model and future growth depend on our ability to transition to a revenue mix that contains significantly larger product sales and revenues from the provision of services or from licensing. Product sales and these revenues potentially offer greater scalability than contract research revenues. Our current plan is to increase our sales of commercial products, our licensing revenues and our provision of non-research services to customers so as to represent a larger percentage of our total revenues. If we are unable to develop and grow our product sales and revenues from the provision of services or from licensing to augment our contract research revenues, however, our ability to execute our business model or grow our business could suffer. There can be no assurance that we will be able to achieve increased revenues in this manner.

Failure to develop, introduce and sell new products or failure to develop and implement new technologies, could adversely impact our financial results.

Our success will depend on our ability to develop and introduce new products that customers choose to buy. The new products the market requires tend to be increasingly complex, incorporating more functions and operating at faster speeds than old products. If we fail to introduce new product designs or technologies in a timely manner or if customers do not successfully introduce new systems or products incorporating our products, our business, financial condition and results of operations could be materially harmed.

T a b l e o f C o n t e n t s

If we are unable to manage growth effectively, our revenues and net loss could be adversely affected.

Table of Contents

We may need to expand our personnel resources to grow our business effectively. We believe that sustained growth at a higher rate will place a strain on our management as well as on our other human resources. To manage this growth, we must continue to attract and retain qualified management, professional, scientific and technical and operating personnel. If we are unable to recruit a sufficient number of qualified personnel, we may be unable to staff and manage projects adequately, which in turn may slow the rate of growth of our contract research revenues or our product development efforts.

We may not be successful in identifying market needs for new technologies or in developing new products.

Part of our business model depends on our ability to correctly identify market needs for new technologies. We intend to identify new market needs, but we may not always have success in doing so in part because our contract research largely centers on identification and development of unproven technologies, often for new or emerging markets. Furthermore, we must identify the most promising technologies from a sizable pool of projects. If our commercialization strategy process fails to identify projects with commercial potential or if management does not ensure that such projects advance to the commercialization stage, we may not successfully commercialize new products and grow our revenues.

Our growth strategy requires that we also develop successful commercial products to address market needs. We face several challenges in developing successful new products. Many of our existing products and those currently under development are technologically innovative and require significant and lengthy product development efforts. These efforts include planning, designing, developing and testing at the technological, product and manufacturing-process levels. These activities require us to make significant investments. Although there are many potential applications for our technologies, our resource constraints require us to focus on specific products and to forgo other opportunities. We expect that one or more of the potential products we choose to develop will not be technologically feasible or will not achieve commercial acceptance, and we cannot predict which, if any, of our products we will successfully develop or commercialize. The technologies we research and develop are new and steadily changing and advancing. The products that are derived from these technologies may not be applicable or compatible with the state of technology or demands in existing markets. Our existing products and technologies may become uncompetitive or obsolete if our competitors adapt more quickly than we do to new technologies and changes in customers’ requirements. Furthermore, we may not be able to identify if and when new markets will open for our products given that future applications of any given product may not be readily determinable, and we cannot reasonably estimate the size of any markets that may develop. If we are not able to successfully develop new products, we may be unable to increase our product revenues.

We face risks associated with our international business.

We currently conduct business internationally and we might considerably expand our international activities in the future. Our international business operations are subject to a variety of risks associated with conducting business internationally, including:

•having to comply with U.S. export control regulations and policies that restrict our ability to communicate with non-U.S. employees and supply foreign affiliates and customers;

•changes in or interpretations of foreign regulations that may adversely affect our ability to sell our products, perform services or repatriate profits to the United States;

•the imposition of tariffs;

•hyperinflation or economic or political instability in foreign countries;

•imposition of limitations on, or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures;

•conducting business in places where business practices and customs are unfamiliar and unknown;

•the imposition of restrictive trade policies;

•the imposition of inconsistent laws or regulations;

•the imposition or increase of investment and other restrictions or requirements by foreign governments;

•uncertainties relating to foreign laws and legal proceedings;

•having to comply with a variety of U.S. laws, including the Foreign Corrupt Practices Act ("FCPA"); and

•having to comply with licensing requirements.

We do not know the impact that these regulatory, geopolitical and other factors may have on our international business in the future. Further, the ~~developing situation regarding the public health epidemic originating in China,~~COVID-19 pandemic has prompted precautionary government-imposed closures of certain travel and business. It is unknown whether and how global supply chains, may be affected if such an epidemic persists for an extended period of time. We may incur expenses or delays relating to such events outside of our control or experience potential disruption of our ability to travel to customer sites and industry

T a b l e o f C o n t e n t s

conferences important to the marketing and support of our products, any of which could have an adverse impact on our business, operating results and financial condition.

Table of Contents

We may dispose of or discontinue existing product lines and technology developments, which may adversely impact our future results.

On an ongoing basis, we evaluate our various product offerings and technology developments in order to determine whether any should be discontinued or, to the extent possible, divested. In addition, if we are unable to generate the amount of cash needed to fund the future operations of our business, we may be forced to sell one or more of our product lines or technology developments.

We cannot guarantee that we have correctly forecasted, or that we will correctly forecast in the future, the right product lines and technology developments to dispose or discontinue or that our decision to dispose of or discontinue various investments, product lines and technology developments is prudent if market conditions change. In addition, there are no assurances that the discontinuance of various product lines will reduce operating expenses or will not cause us to incur material charges associated with such decision. Furthermore, the discontinuance of existing product lines entails various risks, including the risk that we will not be able to find a purchaser for a product line or the purchase price obtained will not be equal to at least the book value of the net assets for the product line. Other risks include managing the expectations of, and maintaining good relations with, our historical customers who previously purchased products from a disposed or discontinued product line, which could prevent us from selling other products to them in the future. We may also incur other significant liabilities and costs associated with disposal or discontinuance of product lines, including employee severance costs and excess facilities costs.

Health epidemics, including the COVID-19 pandemic, have had, and could in the future have, an adverse impact on our business, operations, and the markets and communities in which we and our customers and suppliers operate.

In December 2019, a disease referred to as COVID-19 was reported and has spread to many countries worldwide, including the United States.

The ongoing global COVID-19 pandemic has impacted, and will likely continue to impact, the way we conduct our business, including the way in which we interface with customers, suppliers and our employees. Although to date we have not experienced any material changes in our customers’ purchasing patterns during the COVID-19 pandemic, it is possible that the pandemic could result in customers delaying purchasing decisions, deferring the ordering of our products or experiencing reductions in capital expenditure budgets that could otherwise impact the near term demand for our products. Similarly, while we have not experienced any material changes in our supply chain, it is possible that suppliers could experience difficulty in providing us with necessary components for our products. If the demand for our products, or our access to critical components were to be interrupted, it could have a material adverse impact on our results of operations.

The COVID-19 pandemic has been declared a national emergency. In response to the COVID-19 pandemic, many state, local, and foreign governments have put in place, and others in the future may put in place, quarantines, executive orders, shelter-in-place orders, and similar government orders and restrictions in order to control the spread of the disease. Such orders or restrictions, or the perception that such orders or restrictions could occur, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions, and cancellation or postponement of events, among other effects that could negatively impact productivity and disrupt our operations and those of our customers and suppliers. We have implemented alternate work arrangements, including staggered schedules and shifts, distancing within our offices and working from home for most of our employees, and we may take further actions that alter our operations as may be required by federal, state, or local authorities, or which we determine are in our best interests. While most of our operations can be performed under these alternate work arrangements, there is no guarantee that we will be as effective while working under them because our team is dispersed, many employees may have additional personal needs to attend to (such as looking after children as a result of school closures or family who become sick), and employees may become sick themselves and be unable to work. Decreased effectiveness of our team could adversely affect our results due to our inability to meet in person with potential customers, longer time periods for supply, longer time periods for manufacturing and other decreases in productivity that could seriously harm our business. Furthermore, we may decide to postpone or cancel planned investments in our business in response to changes in our business as a result of the spread of COVID-19, which could seriously harm our business.

In addition, while the potential impact and duration of the COVID-19 pandemic on the global economy and our business in particular may be difficult to assess or predict, the pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital, which could negatively affect our liquidity in the future.

The global impact of COVID-19 continues to rapidly evolve, and we will continue to monitor the situation closely. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not

T a b l e o f C o n t e n t s

yet know the full extent of potential delays or impacts on our business, operations, or the global economy as a whole. While the spread of COVID-19 may eventually be contained or mitigated, there is no guarantee that a future outbreak of this or any other

Table of Contents

widespread epidemics will not occur, or that the global economy will recover, either of which could seriously harm our business.

RISKS RELATING TO OUR REGULATORY ENVIRONMENT

Our operations are subject to domestic and foreign laws, regulations and restrictions, and noncompliance with these laws, regulations and restrictions could expose us to fines, penalties, suspension or debarment, which could have a material adverse effect on our profitability and overall financial position.

Our operations, particularly our international sales, subject us to numerous U.S. and foreign laws and regulations, including, without limitation, regulations relating to imports, exports (including the Export Administration Regulations and the International Traffic in Arms Regulations), technology transfer restrictions, anti-boycott provisions, economic sanctions and anti-corruption laws including the ~~FCPA.~~FCPA and the UK Bribery Act of 2010 in the United Kingdom. The number of our various emerging technologies, the development of many of which has been funded by the Department of Defense, presents us with many regulatory challenges. Failure by us or our sales representatives or consultants to comply with these laws and regulations could result in administrative, civil, or criminal liabilities and could result in suspension of our export privileges, which could have a material adverse effect on our business. Changes in regulation or political environment may affect our ability to conduct business in foreign markets including investment, procurement and repatriation of earnings.

Environmental regulations could increase operating costs and additional capital expenditures and delay or interrupt operations.

The photonics industry, as well as the semiconductor industry, are subject to governmental regulations for the protection of the environment, including those relating to air and water quality, solid and hazardous waste handling, and the promotion of occupational safety. Various federal, state and local laws and regulations require that we maintain certain environmental permits. While we believe that we have obtained all necessary environmental permits required to conduct our manufacturing processes, if we are found to be in violation of these laws, we could be subject to governmental fines and liability for damages resulting from such violations.

Changes in the aforementioned laws and regulations or the enactment of new laws, regulations or policies could require increases in operating costs and additional capital expenditures and could possibly entail delays or interruptions of our operations.

If our manufacturing facilities do not meet Federal, state or foreign country manufacturing standards, we may be required to temporarily cease all or part of our manufacturing operations, which would result in product delivery delays and negatively impact revenues.

Our manufacturing facilities are subject to periodic inspection by regulatory authorities and our operations will continue to be regulated by the FDA for compliance with Good Manufacturing Practice requirements contained in the quality systems regulations. We are also required to comply with International Organization for Standardization ("ISO"), quality system standards in order to produce certain of our products for sale in Europe. If we fail to continue to comply with Good Manufacturing Practice requirements or ISO standards, we may be required to cease all or part of our operations until we comply with these regulations. Obtaining and maintaining such compliance is difficult and costly. We cannot be certain that our facilities will be found to comply with Good Manufacturing Practice requirements or ISO standards in future inspections and audits by regulatory authorities. In addition, if we cannot maintain or establish manufacturing facilities or operations that comply with such standards or do not meet the expectations of our customers, we may not be able to realize certain economic opportunities in our current or future supply arrangements.

We are subject to additional significant foreign and domestic government regulations, including environmental and health and safety regulations, and failure to comply with these regulations could harm our business.

Our facilities and current and proposed activities involve the use of a broad range of materials that are considered hazardous under applicable laws and regulations. Accordingly, we are subject to a number of foreign, federal, state and local laws and regulations relating to health and safety, protection of the environment and the storage, use, disposal of, and exposure to, hazardous materials and wastes. We could incur costs, fines and civil and criminal penalties, personal injury and third-party property damage claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental, health and safety laws. Moreover, a failure to comply with environmental laws could result

T a b l e o f C o n t e n t s

in fines and the revocation of environmental permits, which could prevent us from conducting our business. Liability under environmental laws can be joint and several and without regard to fault. There can be no assurance that violations of

Table of Contents

environmental and health and safety laws will not occur in the future as a result of the inability to obtain permits, human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business. Accordingly, violations of present and future environmental laws could restrict our ability to expand facilities, pursue certain technologies, and could require us to acquire costly equipment or incur potentially significant costs to comply with environmental regulations.

Compliance with foreign, federal, state and local environmental laws and regulations represents a small part of our present budget. If we fail to comply with any such laws or regulations, however, a government entity may levy a fine on us or require us to take costly measures to ensure compliance. Any such fine or expenditure may adversely affect our development. We cannot predict the extent to which future legislation and regulation could cause us to incur additional operating expenses, capital expenditures or restrictions and delays in the development of our products and properties.

We are or may become subject to a variety of privacy and data security laws, and our failure to comply with them could harm our business.

We maintain sensitive information, including confidential business and personal information in connection with our business customers and our employees, and may be subject to laws and regulations governing the privacy and security of such information. In the United States, there are numerous federal and state privacy and data security laws and regulations governing the collection, use, disclosure and protection of personal information. Each of these constantly evolving laws can be subject to varying interpretations.

In addition, states are constantly adopting new laws or amending existing laws, requiring attention to frequently changing regulatory requirements. For example, ~~California enacted~~ the California Consumer Privacy Act, or the CCPA, ~~on June 28, 2018, which~~ took effect on January 1, 2020 and has been dubbed the first “GDPR-like” law in the United States. The CCPA gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used by requiring covered companies to provide new disclosures to California consumers (as that term is broadly defined and can include any of our current or future employees who may be California residents) and provide such residents new ways to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential liability. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States. Other states are beginning to pass similar laws.

Additionally, California voters approved a new privacy law, the California Privacy Rights Act, or CPRA, in the November 3, 2020 election. Effective starting on January 1, 2023, the CPRA will significantly modify the CCPA, including by expanding consumers’ rights with respect to certain sensitive personal information. The CPRA also creates a new state agency that will be vested with authority to implement and enforce the CCPA and the CPRA.

New legislation proposed or enacted in Illinois, Massachusetts, Nevada, New Jersey, New York, Rhode Island, Virginia, Washington and other states, and a proposed right to privacy amendment to the Vermont Constitution, imposes, or has the potential to impose, additional obligations on companies that collect, store, use, retain, disclose, transfer and otherwise process confidential, sensitive and personal information, and will continue to shape the data privacy environment nationally. State laws are changing rapidly and there is discussion in Congress of a new federal data protection and privacy law to which we would become subject if it is enacted. All of these evolving compliance and operational requirements impose significant costs that are likely to increase over time, may require us to modify our data processing practices and policies, divert resources from other initiatives and projects, and could restrict the way products and services involving data are offered, all of which could significantly harm our business, financial condition, results of operations and prospects. Further, certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to confidential, sensitive and personal information than federal, international or other state laws, and such laws may differ from each other, which may complicate compliance efforts.

A similar situation exists in the ~~EU. In May 2018, a new privacy regime,~~EU, where the General Data Protection Regulation, the GDPR, took effect in 2018 in the European Economic Area, the EEA. The GDPR governs the collection, use, disclosure, transfer or other processing of personal data of European data subjects. Among other things, the GDPR imposes requirements regarding the security of personal data and notification of data processing obligations to the competent national data processing authorities, changes the lawful bases on which personal data can be processed, and expands the definition of personal data. In addition, the GDPR increases the scrutiny of transfers of personal data from the EEA to the United States and other jurisdictions that the European Commission does not recognize as having “adequate” data protection laws, and imposes substantial fines for breaches and violations (up to the greater of €20 million or 4% of our consolidated annual worldwide gross revenue). The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies and obtain compensation for damages resulting from violations of the GDPR. Compliance with these and any other applicable privacy and data security laws and regulations is a rigorous and time-intensive process, and we may be required to put in place

Table of Contents

additional mechanisms ensuring compliance with the new data protection rules. If we fail to comply with any such laws or regulations, we may face significant fines and penalties that could adversely affect our business, financial condition and results of operations. Furthermore, the laws are not consistent, and compliance in the event of a widespread data breach could be costly.

More recently, the Court of Justice of the European Union ruled in July 2020 that the Privacy Shield, used by thousands of companies to transfer data between the European Union and United States, was invalid and could no longer be used. In September 2020, Switzerland concluded that the Swiss-U.S. Privacy Shield Framework does not provide an adequate level of protection for data transfers from Switzerland to the United States. Alternative transfer mechanisms may be used, including the standard contractual clauses (“SCCs”), while the authorities interpret the decisions and scope of the invalidated Privacy Shield, but the SCCs have also been called into question in the same ruling that invalidated Privacy Shield. At present, there are few if any viable alternatives to the SCCs, so future developments may necessitate further expenditures on local infrastructure, changes to internal business processes, or may otherwise affect or restrict sales and operations.

Further, the vote in the United Kingdom in favor of exiting the European Union, referred to as Brexit, has complicated data protection regulation in the United Kingdom. In particular, as of January 1,2021, the GDPR has been converted into United Kingdom law and the United Kingdom is now a “third country” under the GDPR. Pursuant to the Trade and Cooperation Agreement, which went into effect on January 1, 2021, the United Kingdom and European Union agreed to a specified period during which the United Kingdom will be treated like a European Union member state in relation to transfers of personal data to the United Kingdom for four months from January 1, 2021. This period may be extended by two further months. Unless the European Commission makes an ‘adequacy finding’ in respect of the United Kingdom before the expiration of such specified period, the United Kingdom will become an ‘inadequate third country’ under the GDPR and transfers of data from the EEA to the United Kingdom will require an ‘transfer mechanism,’ such as the standard contractual clauses. Furthermore, following the expiration of the specified period, there will be increasing scope for divergence in application, interpretation and enforcement of the data protection law as between the United Kingdom and EEA.

T In addition to the foregoing, any breach of privacy laws or data security laws, particularly resulting in a b l e o f C o n t e n t s

significant security incident or breach involving the misappropriation, loss or other unauthorized use or disclosure of sensitive or confidential personal information, could have a material adverse effect on our business, reputation and financial condition. In any circumstances where we are a data controller, we will be accountable for any third-party service providers we engage to process personal data on our behalf. We attempt to mitigate the associated risks but there is no assurance that privacy and security-related safeguards will protect us from all risks associated with the third-party processing, storage and transmission of such information.

RISKS RELATING TO OUR INTELLECTUAL PROPERTY

Our proprietary rights may not adequately protect our technologies.

Our commercial success will depend in part on our obtaining and maintaining patent, trade secret, copyright and trademark protection of our technologies in the United States and other jurisdictions as well as successfully enforcing this intellectual property and defending it against third-party challenges. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable intellectual property protections, such as patents or trade secrets, cover them. In particular, we place considerable emphasis on obtaining patent and trade secret protection for significant new technologies, products and processes. The degree of future protection of our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. The degree of future protection of our proprietary rights is also uncertain for products that are currently in the early stages of development because we cannot predict which of these products will ultimately reach the commercial market or whether the commercial versions of these products will incorporate proprietary technologies.

Our patent position is highly uncertain and involves complex legal and factual questions. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. For example:

•we or our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;

•we or our licensors might not have been the first to file patent applications for these inventions;

•others may independently develop similar or alternative technologies or duplicate any of our technologies;

•it is possible that none of our pending patent applications or the pending patent applications of our licensors will result in issued patents;

•patents may issue to third parties that cover how we might practice our technology;

•our issued patents and issued patents of our licensors may not provide a basis for commercially viable technologies, may not provide us with any competitive advantages, or may be challenged and invalidated by third parties; and

Table of Contents

•we may not develop additional proprietary technologies that are patentable.

Patents may not be issued for any pending or future pending patent applications owned by or licensed to us, and claims allowed under any issued patent or future issued patent owned or licensed by us may not be valid or sufficiently broad to protect our technologies. Moreover, protection of certain of our intellectual property may be unavailable or limited in the United States or in foreign countries, and we have not sought to obtain foreign patent protection for certain of our products or technologies due to cost, concerns about enforceability or other reasons. Any issued patents owned by or licensed to us now or in the future may be challenged, invalidated, or circumvented, and the rights under such patents may not provide us with competitive advantages. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, and in the case of certain products no foreign patents were filed or can be filed. This could make it easier for competitors to capture or increase their market share with respect to related technologies. We could incur substantial costs to bring suits in which we may assert our patent rights against others or defend ourselves in suits brought against us. An unfavorable outcome of any litigation could have a material adverse effect on our business and results of operations.

We also rely on trade secrets to protect our technology, especially where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. We regularly attempt to obtain confidentiality agreements and contractual provisions with our collaborators, employees and consultants to protect our trade secrets and proprietary know-how. These agreements may be breached or may not have adequate remedies for such breach. While we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors or scientific and other advisors, or those of our strategic partners, may unintentionally or willfully disclose our information to competitors. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, our enforcement efforts would be expensive and time consuming, and the outcome would be unpredictable. In addition, courts outside the United States are sometimes unwilling to protect trade secrets. Moreover, if our competitors independently develop equivalent knowledge, methods and know-how, it will be more difficult for us to enforce our rights and our business could be harmed.

If we are not able to defend the patent or trade secret protection position of our technologies, then we will not be able to exclude competitors from developing or marketing competing technologies and we may not generate enough revenues from product sales to justify the cost of developing our technologies and to achieve or maintain profitability.

We also rely on trademarks to establish a market identity for our company and our products. To maintain the value of our trademarks, we might have to file lawsuits against third parties to prevent them from using trademarks confusingly similar to or dilutive of our registered or unregistered trademarks. Also, we might not obtain registrations for our pending trademark applications, and we might have to defend our registered trademark and pending trademark applications from challenge by third

T a b l e o f C o n t e n t s

parties. Enforcing or defending our registered and unregistered trademarks might result in significant litigation costs and damages, including the inability to continue using certain trademarks.

Third parties may claim that we infringe their intellectual property, and we could suffer significant litigation or licensing expense as a result.

Various U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in our technology areas. Such third parties may claim that we infringe their patents. Because patent applications can take several years to result in a patent issuance, there may be currently pending applications, unknown to us, which may later result in issued patents that our technologies may infringe. For example, we are aware of competitors with patents in technology areas applicable to our optical test equipment products. Such competitors may allege that we infringe these patents. There could also be existing patents of which we are not aware that our technologies may inadvertently infringe. We have from time to time been, and may in the future be, contacted by third parties, including patent assertion entities or intellectual property advisors, about licensing opportunities that also contain claims that we are infringing on third party patent rights. If third parties assert these claims against us, we could incur extremely substantial costs and diversion of management resources in defending these claims, and the defense of these claims could have a material adverse effect on our business, financial condition and results of operations. Even if we believe we have not infringed on a third party’s patent rights, we may have to settle a claim on unfavorable terms because we cannot afford to litigate the claim. In addition, if third parties assert claims against us and we are unsuccessful in defending against these claims, these third parties may be awarded substantial damages as well as injunctive or other equitable relief against us, which could effectively block our ability to make, use, sell, distribute or market our products and services in the United States or abroad.

Commercial application of nanotechnologies in particular, or technologies involving nanomaterials, is new and the scope and breadth of patent protection is uncertain. Consequently, the patent positions of companies involved in nanotechnologies have not been tested, and there are complex legal and factual questions for which important legal principles will be developed or may remain unresolved. In addition, it is not clear whether such patents will be subject to interpretations or legal doctrines that differ from conventional patent law principles. Changes in either the patent laws or in interpretations of patent laws in the

Table of Contents

United States and other countries may diminish the value of our nanotechnology-related intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our nanotechnology-related patents or in third party patents. In the event that a claim relating to intellectual property is asserted against us, or third parties not affiliated with us hold pending or issued patents that relate to our products or technology, we may seek licenses to such intellectual property or challenge those patents. However, we may be unable to obtain these licenses on commercially reasonable terms, if at all, and our challenge of the patents may be unsuccessful. Our failure to obtain the necessary licenses or other rights could prevent the sale, manufacture or distribution of our products and, therefore, could have a material adverse effect on our business, financial condition and results of operations.

A substantial portion of our technology is subject to retained rights of our licensors, and we may not be able to prevent the loss of those rights or the grant of similar rights to third parties.

A substantial portion of our technology is licensed from academic institutions, corporations and government agencies. Under these licensing arrangements, a licensor may obtain rights over the technology, including the right to require us to grant a license to one or more third parties selected by the licensor or that we provide licensed technology or material to third parties for non-commercial research. The grant of a license for any of our core technologies to a third party could have a material and adverse effect on our business. In addition, some of our licensors retain certain rights under the licenses, including the right to grant additional licenses to a substantial portion of our core technology to third parties for non-commercial academic and research use. It is difficult to monitor and enforce such non-commercial academic and research uses, and we cannot predict whether the third-party licensees would comply with the use restrictions of such licenses. We have incurred and could incur substantial expenses to enforce our rights against them. We also may not fully control the ability to assert or defend those patents or other intellectual property which we have licensed from other entities, or which we have licensed to other entities.

In addition, some of our licenses with academic institutions give us the right to use certain technology previously developed by researchers at these institutions. In certain cases, we also have the right to practice improvements on the licensed technology to the extent they are encompassed by the licensed patents and are within our field of use. Our licensors may currently own and may in the future obtain additional patents and patent applications that are necessary for the development, manufacture and commercial sale of our anticipated products. We may be unable to agree with one or more academic institutions from which we have obtained licenses whether certain intellectual property developed by researchers at these academic institutions is covered by our existing licenses. In the event that the new intellectual property is not covered by our existing licenses, we would be required to negotiate a new license agreement. We may not be able to reach agreement with current or future licensors on commercially reasonable terms, if at all, or the terms may not permit us to sell our products at a profit after payment of royalties, which could harm our business.

T a b l e o f C o n t e n t s

Some of our patents may cover inventions that were conceived or first reduced to practice under, or in connection with, U.S. government contracts or other federal funding agreements. With respect to inventions conceived or first reduced to practice under a federal funding agreement, the U.S. government may retain a non-exclusive, non-transferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the invention throughout the world. We may not succeed in our efforts to retain title in patents, maintain ownership of intellectual property or in limiting the U.S. government’s rights in our proprietary technologies and intellectual property when an issue exists as to whether such intellectual property was developed in the performance of a federal funding agreement or developed at private expense.

If we fail to obtain the right to use the intellectual property rights of others which are necessary to operate our business, and to protect their intellectual property, our business and results of operations will be adversely affected.

In the past, we have licensed certain technologies for use in our products. In the future, we may choose, or be required, to license technology or intellectual property from third parties in connection with the development of our products. We cannot assure you that third-party licenses will be available on commercially reasonable terms, if at all. Our competitors may be able to obtain licenses, or cross-license their technology, on better terms than we can, which could put us at a competitive disadvantage. Also, we often enter into confidentiality agreements with such third parties in which we agree to protect and maintain their proprietary and confidential information, including at times requiring our employees to enter into agreements protecting such information. There can be no assurance that the confidentiality agreements will not be breached by any of our employees or that such third parties will not make claims that their proprietary information has been disclosed.

Table of Contents

RISKS RELATING TO OUR COMMON STOCK

Our common stock price has been volatile and we expect that the price of our common stock will fluctuate substantially in the future, which could cause you to lose all or a substantial part of your investment.

The public trading price for our common stock is volatile and may fluctuate significantly. Since January 1, 2009, our common stock has traded between a high of ~~$9.32~~$12.85 per share and a low of $0.26 per share. Among the factors, many of which we cannot control, that could cause material fluctuations in the market price for our common stock are:

•sales of our common stock by our significant stockholders, or the perception that such sales may occur;

•changes in earnings estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ earnings estimates;

•changes in our status as an entity eligible to receive SBIR contracts and grants;

•quarterly variations in our or our competitors’ results of operations;

•challenges integrating our recent or future acquisitions, including the inability to realize any expected synergies;

•general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors;

•announcements by us, or by our competitors, of acquisitions, new products, significant contracts, commercial relationships or capital commitments;

•pending or threatened litigation;

•any major change in our board of directors or management or any competing proxy solicitations for director nominees;

•changes in governmental regulations or in the status of our regulatory approvals;

•announcements related to patents issued to us or our competitors;

•a lack of, limited or negative industry or securities analyst coverage;

•health epidemics, including the COVID-19 pandemic;

•discussions of our company or our stock price by the financial and scientific press and online investor communities; and

•general developments in our industry.

In addition, the stock prices of many technology companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These factors may materially and adversely affect the market price of our common stock.

T a b l e o f C o n t e n t s

If our estimates relating to our critical accounting policies are based on assumptions or judgments that change or prove to be incorrect, our operating results could fall below expectations of financial analysts and investors, resulting in a decline in our stock price.

The preparation of financial statements in conformity with U.S. GAAP requires our management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of financial analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, stock-based compensation and income taxes. Moreover, the revenue recognition guidance, ASC Topic 606, Revenue from Contracts with Customers, requires more judgment than did the prior guidance.

Our financial results may be adversely affected by changes in accounting principles applicable to us.

U.S. GAAP ~~are~~is subject to interpretation by the FASB, the SEC, and other bodies formed to promulgate and interpret appropriate accounting principles. For example, in May 2014, the FASB issued ASC Topic 606, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. We adopted this guidance as of January 1, 2018. The most significant impact relates to changing the revenue recognition for custom optoelectronics to an over time method. Before the adoption of this standard, we deferred the recognition of revenue until products were shipped to the customer. Any difficulties in implementing these pronouncements or adequately accounting after adoption could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us.

Table of Contents

Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws and Delaware law could discourage or prevent a change in control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management.

Our amended and restated certificate of incorporation and bylaws and Delaware law contain provisions that might delay or prevent a change in control, discourage bids at a premium over the market price of our common stock and adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include:

•a classified board of directors serving staggered terms;

•advance notice requirements to stockholders for matters to be brought at stockholder meetings;

•a supermajority stockholder vote requirement for amending certain provisions of our amended and restated certificate of incorporation and bylaws; and

•the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer.

We are also subject to provisions of the Delaware General Corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years unless the holder’s acquisition of our stock was approved in advance by our board of directors or certain other conditions are satisfied.

The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.

Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware and the U.S. federal district courts will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:

• any derivative claim or cause of action brought on our behalf;

• any claim or cause of action asserting a breach of fiduciary duty;

• any claim or cause of action against us arising under DGCL;

• any claim or cause of action arising under or seeking to interpret our amended and restated certificate of incorporation or our amended and restated bylaws; and

• any claim or cause of action against us that is governed by the internal affairs doctrine.

The provisions would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated bylaws further provide that, unless we consent to the selection of an alternate forum, the U.S. federal district courts will be the exclusive forum for resolving any complaint asserting a cause or causes of action arising under the Securities Act.

While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated bylaws. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.

These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.

T a b l e o f C o n t e n t sTable of Contents

GENERAL RISK FACTORS

Legal, political and economic uncertainty surrounding the exit of the U.K., from the European Union may be a source of instability in international markets, create significant currency fluctuations, adversely affect our operations in the U.K. and pose additional risks to our business, revenue, financial condition and results of operations.

Following the result of a referendum in 2016, the U.K. left the EU on January 31, 2020, commonly referred to as Brexit. Pursuant to the formal withdrawal arrangements agreed between the U.K. and the EU, the U.K. will be subject to a transition period until December 31, 2020 (the "Transition Period"), during which the EU rules will continue to apply.

~~Negotiations between the U.K. and the EU are expected to continue in relation to the customs and trading relationship between the U.K. and the EU following the expiry of the Transition Period.~~

The uncertainty concerning the U.K.'s legal, political and economic relationship with the EU after the Transition Period may be a source of instability in the international markets, create significant currency fluctuations, and/or otherwise adversely affect trading agreements or similar cross-border cooperation arrangements (whether economic, tax, legal, regulatory or otherwise).

These developments, or the perception that any of them could occur, have had and may continue to have a significant adverse effect on global economic conditions and the stability of global financial markets, and could significantly reduce global market liquidity and limit the ability of key market participants to operate in certain financial markets. In particular, it could also lead to a period of considerable uncertainty in relation to the U.K. financial and banking markets, as well as on the regulatory process in Europe. Asset valuations, currency exchange rates and credit ratings may also be subject to increased market volatility.

If the U.K. and the EU are unable to negotiate acceptable trading and customs terms or if other EU Member States pursue withdrawal, barrier-free access between the U.K. and other EU Member States or among the European Economic Area overall could be diminished or eliminated. The long-term effects of Brexit will depend on any agreements (or lack thereof) between the U.K. and the EU and, in particular, any arrangements for the U.K. to retain access to EU markets after the Transition Period.

Such a withdrawal from the EU is unprecedented, and it is unclear how the U.K.'s access to the European single market for goods, capital, services and labor within the EU, or single market, and the wider commercial, legal and regulatory environment will impact our operations and customers. There may continue to be economic uncertainty surrounding the consequences of Brexit which could adversely impact customer confidence resulting in customers reducing their spending budgets, which could adversely affect our business, revenue, financial condition, and results of operations and could adversely affect the market price of our common stock.

We could be negatively affected by a security breach or other compromise, either through cyber-attack, cyber-intrusion or other significant disruption of our IT networks and related systems.

We face the risk, as does any company, of a security breach or other compromise, whether through cyber-attack or cyber-intrusion over the internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, or other significant disruption of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. We may also experience security breaches or compromises from unintentional or accidental actions by our employees, contractors, consultants, business partners, and/or other third parties. To the extent that any security breach or disruption were to result in a loss, destruction, unavailability, alteration or dissemination of, or damage to, our data or applications, or for it to be believed or reported that any of these occurred, we could incur liability and reputational damage.

As a technology company, and particularly as a government contractor, we may face a heightened risk of a security breach, compromise or disruption from attempts to gain unauthorized access to our proprietary, confidential or classified information on our IT networks and related systems via cyber-attacks or cyber-intrusions. These types of information and IT networks and related systems are critical to the operation of our business and essential to our ability to perform day-to-day operations, and, in some cases, are critical to our operations or those of our customers. Such critical information includes our proprietary software code, which we protect as a trade secret and is critical to the competitive advantage of many of our products, which could be adversely affected if this code were stolen in a cyber-intrusion or otherwise compromised. In addition, as certain of our technological capabilities become widely known, it is possible that we may be subjected to cyber-attack or

T a b l e o f C o n t e n t s

cyber-intrusion as third parties seek to gain improper access to information regarding these capabilities and cyber-attacks or cyber-intrusion could compromise our confidential information or our IT networks and systems generally, as it is not practical as a business matter to isolate all of our confidential information and trade secrets from email and internet access. A security breach, compromise or other significant disruption involving these types of information and IT networks and related systems could disrupt the proper functioning of these networks and systems and therefore our operations, compromise our confidential information and trade secrets, or damage our reputation among our customers and the public generally. We have not identified any significant security breaches or experienced other significant disruptions of these types to date. To date, we have not experienced a significant cyber-intrusion, cyber-attack or other similar disruption. There can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Any of these developments in the future could have a negative impact on our results of operations, financial condition and cash flows.

If there are substantial sales of our common stock, or the perception that such sales may occur, our stock price could decline.

If any of our stockholders were to sell substantial amounts of our common stock, the market price of our common stock may decline, which might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Substantial sales of our common stock, or the perception that such sales may occur, may have a material adverse effect on the prevailing market price of our common stock.

We may become involved in securities class action litigation that could divert management’s attention and harm our business and our insurance coverage may not be sufficient to cover all costs and damages.

The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of technology companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. Securities class litigation also often follows certain significant business transactions, such as the sale of a business division or a change in control transaction. We may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect our business.

Table of Contents

We are obligated to develop and maintain proper and effective internal controls over financial reporting and any failure to maintain the adequacy of these internal controls may adversely affect investor confidence in our company and, as a result, the value of our common stock.

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting on an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.

During the evaluation and testing process of our internal controls, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. While we have established certain procedures and controls over our financial reporting processes, we cannot assure you that these efforts will prevent restatements of our financial statements in the future. We may not be able to remediate any future material weaknesses, or to complete our evaluation, testing and any required remediation in a timely fashion.

Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the Nasdaq Stock Market, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

T a b l e o f C o n t e n t sTable of Contents


ITEM 2.			UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Unregistered Sales of Equity Securities during the Three Months Ended ~~September~~June 30, ~~2020~~2021

Not applicable.

(b) Use of Proceeds from Sale of Registered Equity Securities

Not applicable.

The following table summarizes repurchases of our common stock during ~~September 2020.~~May 2021. There were no purchases during ~~July 2020~~April 2021 or ~~August 2020.~~June 2021.

Total Number of

Approximate Dollar

Shares Purchased as

Value of Shares that

Total Number of Shares

Average Price Paid per

Part of a Publicly

May Yet be Purchased

Period

Purchased

Announced Program

Under the Program

5/1/~~1/2020~~2021 - 1/5/31/~~2020~~2021

~~14,700~~18,670 (1)

~~8.45~~11.67

—

(1) These shares of common stock were repurchased from employees to satisfy tax withholding obligations triggered upon vesting of restricted stock awards. ~~These shares were repurchased in January 2020 but were not reflected as treasury stock during first quarter 2020. These repurchased shares were adjusted in September 2020.~~


ITEM 3.			DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.			MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.			OTHER INFORMATION

Not applicable.

T a b l e o f C o n t e n t sTable of Contents


ITEM 6.			EXHIBITS


Exhibit Number						Description

10.1						~~First Amendment to Standard Industrial Real Estate Lease~~Employment Agreement dated ~~July 13, 2020~~May 1, 2018, by and between Brian J. Soller and Luna Innovations ~~Incorporated and Majestic Realty Co.~~Incorporated.

31.1						Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2						Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*						Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*						Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101						The following materials from the Registrant’s Quarterly Report on Form 10-Q for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, formatted in inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, (ii) Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, (iii) Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 and (iv) Notes to Unaudited Consolidated Financial Statements.

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


*			These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350 and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

T a b l e o f C o n t e n t sTable of Contents

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.

Luna Innovations Incorporated

Date:

~~November~~August 9, ~~2020~~2021

By:

/s/ Eugene J. Nestro

Eugene J. Nestro

Chief Financial Officer
(Principal Financial and Accounting Officer)


Delaware						54-1560050
(State or Other Jurisdiction of Incorporation or Organization)						(I.R.S. Employer Identification Number)


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.001 par value per share	LUNA	The Nasdaq Stock Market LLC


PART I. FINANCIAL INFORMATION		4
ITEM 1.	FINANCIAL STATEMENTS	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2526
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	3335
ITEM 4.	CONTROLS AND PROCEDURES	3436
PART II. OTHER INFORMATION		3537
ITEM 1.	LEGAL PROCEEDINGS	3537
ITEM 1A.	RISK FACTORS	3537
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	5356
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	5356
ITEM 4.	MINE SAFETY DISCLOSURES	5356
ITEM 5.	OTHER INFORMATION	5356
ITEM 6.	EXHIBITS	5457
SIGNATURES		5558


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
		(unaudited)					(unaudited)
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	26,422	$	25,006	Cash and cash equivalents	$	11,970	$	15,366
Accounts receivable, net	Accounts receivable, net	18,254		16,269		Accounts receivable, net	24,605		24,951
Receivable from sale of HSOR business		0		2,501

Contract assets	Contract assets	4,219		2,759		Contract assets	6,857		7,046
Inventory, net		11,713		10,294
Inventory						Inventory	25,579		23,597
Prepaid expenses and other current assets	Prepaid expenses and other current assets	3,268		1,287		Prepaid expenses and other current assets	6,886		4,509

Total current assets	Total current assets	63,876		58,116		Total current assets	75,897		75,469
Property and equipment, net	Property and equipment, net	2,111		3,466		Property and equipment, net	3,183		3,308
Intangible assets, net	Intangible assets, net	9,193		10,194		Intangible assets, net	18,887		20,109
Goodwill	Goodwill	10,542		10,542		Goodwill	19,155		18,121
Long-term contract assets	Long-term contract assets	577		449		Long-term contract assets	0		471
Operating lease right-of-use asset						Operating lease right-of-use asset	10,461		11,281
Finance lease right-of-use asset						Finance lease right-of-use asset	220		244
Other assets	Other assets	7,855		2,341		Other assets	38		39
Deferred tax asset	Deferred tax asset	1,729		1,416		Deferred tax asset	1,486		1,960

Total assets	Total assets	$	95,883	$	86,524	Total assets	$	129,327	$	131,002
Liabilities and stockholders’ equity	Liabilities and stockholders’ equity					Liabilities and stockholders’ equity
Liabilities:	Liabilities:					Liabilities:
Current liabilities:	Current liabilities:					Current liabilities:

Current portion of long-term debt obligations						Current portion of long-term debt obligations	$	4,167	$	4,167

Accounts payable	Accounts payable	$	3,177	$	2,787	Accounts payable	3,962		4,393
Accrued liabilities	Accrued liabilities	7,716		10,369		Accrued liabilities	11,171		12,159
Contract liabilities	Contract liabilities	3,721		3,888		Contract liabilities	6,425		7,095
Current portion of operating lease liability						Current portion of operating lease liability	2,314		2,223
Current portion of finance lease liability						Current portion of finance lease liability	48		48

Total current liabilities	Total current liabilities	14,614		17,044		Total current liabilities	28,087		30,085
Long-term debt obligations						Long-term debt obligations	13,745		15,817
Long-term portion of operating lease liability						Long-term portion of operating lease liability	9,226		10,248
Long-term portion of operating lease liability						Long-term portion of operating lease liability	172		196

Other long-term liabilities	Other long-term liabilities	7,761		2,011		Other long-term liabilities	214		214

Total liabilities	Total liabilities	22,375		19,055		Total liabilities	51,444		56,560
Commitments and contingencies (Note 13)
Commitments and contingencies (Note 12)						Commitments and contingencies (Note 12)	0		0
Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:

Common stock, par value $0.001, 100,000,000 shares authorized, 32,510,506 and 31,788,896 shares issued, 30,823,065 and 30,149,105 shares outstanding at September 30, 2020 and December 31, 2019, respectively		33		32
Treasury stock at cost, 1,687,441 and 1,639,791 shares at September 30, 2020 and December 31, 2019, respectively		(4,666)		(4,337)
Common stock, par value $0.001, 100,000,000 shares authorized, 33,511,899 and 32,724,512 shares issued, 31,772,444 and 31,024,537 shares outstanding at June 30, 2021 and December 31, 2020, respectively						Common stock, par value $0.001, 100,000,000 shares authorized, 33,511,899 and 32,724,512 shares issued, 31,772,444 and 31,024,537 shares outstanding at June 30, 2021 and December 31, 2020, respectively	33		33
Treasury stock at cost, 1,739,455 and 1,699,975 shares at June 30, 2021 and December 31, 2020, respectively						Treasury stock at cost, 1,739,455 and 1,699,975 shares at June 30, 2021 and December 31, 2020, respectively	(5,209)		(4,789)
Additional paid-in capital	Additional paid-in capital	91,034		88,022		Additional paid-in capital	95,936		92,403
Accumulated deficit	Accumulated deficit	(12,893)		(16,248)		Accumulated deficit	(13,505)		(12,957)
Accumulated other comprehensive income/(loss)						Accumulated other comprehensive income/(loss)	628		(248)
Total stockholders’ equity	Total stockholders’ equity	73,508		67,469		Total stockholders’ equity	77,883		74,442
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	95,883	$	86,524	Total liabilities and stockholders’ equity	$	129,327	$	131,002


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
		2020		2019		2020		2019			2021		2020		2021		2020

Revenues:	Revenues:									Revenues:
Lightwave	Lightwave	$	15,350	$	13,088	$	39,837	$	35,129	Lightwave	$	21,965	$	12,933	$	42,962	$	24,487
Luna Labs	Luna Labs	5,700		5,301		16,929		15,907		Luna Labs	5,972		5,643		11,274		11,230
Total revenues	Total revenues	21,050		18,389		56,766		51,036		Total revenues	27,937		18,576		54,236		35,717
Cost of revenues:	Cost of revenues:									Cost of revenues:
Lightwave	Lightwave	5,670		5,449		15,736		15,063		Lightwave	9,441		5,181		18,212		10,066
Luna Labs	Luna Labs	4,431		3,665		12,200		11,178		Luna Labs	4,546		3,878		8,645		7,770
Total cost of revenues	Total cost of revenues	10,101		9,114		27,936		26,241		Total cost of revenues	13,987		9,059		26,857		17,836
Gross profit	Gross profit	10,949		9,275		28,830		24,795		Gross profit	13,950		9,517		27,379		17,881
Operating expense:	Operating expense:									Operating expense:
Selling, general and administrative	Selling, general and administrative	6,505		5,746		19,085		17,955		Selling, general and administrative	13,142		6,202		24,432		12,579
Research, development and engineering	Research, development and engineering	1,616		2,047		4,717		5,241		Research, development and engineering	1,810		1,505		4,743		3,102
Loss on sale of property and equipment		576		0		576		0

Total operating expense	Total operating expense	8,697		7,793		24,378		23,196		Total operating expense	14,952		7,707		29,175		15,681
Operating income		2,252		1,482		4,452		1,599
Operating (loss)/income										Operating (loss)/income	(1,002)		1,810		(1,796)		2,200
Other income/(expense):	Other income/(expense):									Other income/(expense):
Investment income	Investment income	1		76		65		324		Investment income	0		4		0		64
Other income/(expense)	Other income/(expense)	14		1		19		(5)		Other income/(expense)	0		(4)		0		5
Interest expense		(1)		(4)		(2)		(15)
Total other income		14		73		82		304
Income from continuing operations before income taxes		2,266		1,555		4,534		1,903
Interest expense, net										Interest expense, net	(122)		(1)		(265)		(1)
Total other (expense)/income										Total other (expense)/income	(122)		(1)		(265)		68
(Loss)/income from continuing operations before income taxes										(Loss)/income from continuing operations before income taxes	(1,124)		1,809		(2,061)		2,268
Income tax (benefit)/expense	Income tax (benefit)/expense	(836)		325		(257)		(1,293)		Income tax (benefit)/expense	(894)		440		(1,513)		579

Net income from continuing operations		3,102		1,230		4,791		3,196
Loss from discontinued operations, net of income tax of $464		0		0		(1,436)		0
Net (loss)/income from continuing operations										Net (loss)/income from continuing operations	(230)		1,369		(548)		1,689
Loss from discontinued operations, net of income tax of $0										Loss from discontinued operations, net of income tax of $0	0		0		0		(1,436)

Net income		3,102		1,230		3,355		3,196
Preferred stock dividend		0		113		0		285
Net income attributable to common stockholders		$	3,102	$	1,117	$	3,355	$	2,911
Net income per share from continuing operations:
Net (loss)/income										Net (loss)/income	(230)		1,369		(548)		253

Net (loss)/income per share from continuing operations:										Net (loss)/income per share from continuing operations:
Basic	Basic	$	0.10	$	0.04	$	0.16	$	0.11	Basic	$	(0.01)	$	0.04	$	(0.02)	$	0.06
Diluted	Diluted	$	0.10	$	0.04	$	0.15	$	0.10	Diluted	$	(0.01)	$	0.04	$	(0.02)	$	0.05
Net loss per share from discontinued operations:	Net loss per share from discontinued operations:									Net loss per share from discontinued operations:
Basic	Basic	$	0	$	0	$	(0.05)	$	0	Basic	$	0	$	0	$	0	$	(0.05)
Diluted	Diluted	$	0	$	0	$	(0.04)	$	0	Diluted	$	0	$	0	$	0	$	(0.04)
Net income per share attributable to common stockholders:
Net (loss)/income per share attributable to common stockholders:										Net (loss)/income per share attributable to common stockholders:
Basic	Basic	$	0.10	$	0.04	$	0.11	$	0.10	Basic	$	(0.01)	$	0.04	$	(0.02)	$	0.01
Diluted	Diluted	$	0.10	$	0.03	$	0.10	$	0.09	Diluted	$	(0.01)	$	0.04	$	(0.02)	$	0.01
Weighted average shares:	Weighted average shares:									Weighted average shares:
Basic	Basic	30,809,896		28,291,297		30,593,954		28,193,330		Basic	31,494,563		30,484,797		31,413,451		30,589,249
Diluted	Diluted	32,411,086		32,115,847		32,478,625		31,768,575		Diluted	33,500,801		32,494,950		33,487,109		32,466,122


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


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


		Three Months Ended June 30, 2021
	Common Stock		Treasury Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total
		Shares	$		Shares	$		$		$		$		$
Balance at March 31, 2021		31,392,989	33		1,720,785	(4,991)		93,904		(13,275)		875		76,546
Exercise of stock options		263,484	—		—	—		645		—		—		645
Share-based compensation		71,448	—		—	—		857		—		—		857
ESPP issuance		63,193	—		—	—		530		—		—		530


Purchase of treasury stock		(18,670)	—		18,670	(218)		—		—		—		(218)
Net loss		—	—		—	—		—		(230)		—		(230)
Foreign currency translation adjustment		—	—		—	—		—		—		(247)		(247)

Balance at June 30, 2021		31,772,444	$	33	1,739,455	$	(5,209)	$	95,936	$	(13,505)	$	628	$	77,883


		Six Months Ended June 30, 2021
	Common Stock		Treasury Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive (Loss)/Income		Total
		Shares	$		Shares	$		$		$		$		$
Balance at December 31, 2020		31,024,537	33		1,699,975	(4,789)		92,403		(12,957)		(248)		$	74,442
Exercise of stock options		578,181	—		—	—		1,489		—		—		1,489
Share-based compensation		146,013	—		—	—		1,514		—		—		1,514

ESPP issuance		63,193	—		—	—		530		—		—		530

Purchase of treasury stock		(39,480)	—		39,480	(420)		—		—		—		(420)


Net loss		—	—		—	—		—		(548)		—		(548)
Foreign currency translation adjustment		—	—		—	—		—		—		876		876
Balance at June 30, 2021		31,772,444	$	33	1,739,455	$	(5,209)	$	95,936	$	(13,505)	$	628	$	77,883


		September 30, 2020		December 31, 2019			June 30, 2021		December 31, 2020
(in thousands)	(in thousands)					(in thousands)
Finished goods	Finished goods	$	2,211	$	1,695	Finished goods	$	12,894	$	11,547
Work-in-process	Work-in-process	1,238		1,008		Work-in-process	1,217		1,425
Raw materials	Raw materials	8,264		7,591		Raw materials	11,468		10,625

Total inventory, net		$	11,713	$	10,294
Total inventory						Total inventory	$	25,579	$	23,597


Year Ending December 31,	Amount
2021 - remaining 6 months	$	2,083
2022	4,167
2023	11,662
Total	$	17,912


Lease component	Classification	September 30, 2020		December 31, 2019
(in thousands)
Assets
ROU assets - operating lease	Other assets	$	7,785	$	2,236
ROU assets - finance lease	Other assets	36		70
Total ROU assets		$	7,821	$	2,306

Liabilities
Current operating lease liability	Accrued liabilities	$	1,209	$	1,283
Current finance lease liability	Accrued liabilities	18		50
Long-term operating lease liability	Other liabilities	7,745		1,988
Long-term finance lease liability	Other liabilities	16		23
Total lease liabilities		$	8,988	$	3,344


		Operating Leases		Finance Leases			Operating Leases		Finance Leases
Year Ending December 31,	Year Ending December 31,					Year Ending December 31,
2020 - remaining 3 months		$	434	$	14
2021		1,721		11
2021 - remaining 6 months						2021 - remaining 6 months	$	1,561	$	26
2022	2022	1,657		10		2022	2,817		53
2023	2023	1,616		5		2023	2,402		53
2024	2024	1,274		0		2024	1,902		52
2025 and beyond		4,633		0
2025						2025	1,230		48
2026 and beyond						2026 and beyond	3,883		0
Total future minimum lease payments	Total future minimum lease payments	11,335		40		Total future minimum lease payments	13,795		232
Less: interest	Less: interest	2,381		6		Less: interest	2,255		12
Total lease liabilities	Total lease liabilities	$	8,954	$	34	Total lease liabilities	$	11,540	$	220

Current lease liability	Current lease liability	$	1,209	$	18	Current lease liability	$	2,314	$	48
Long-term lease liability	Long-term lease liability	7,745		16		Long-term lease liability	9,226		172
Total lease liabilities	Total lease liabilities	$	8,954	$	34	Total lease liabilities	$	11,540	$	220


	Six Months Ended June 30, 2021
Risk-free rate	0.98	%
Expected volatility	55.22	%
Expected term (in years)	7


	Options Outstanding						Options Exercisable
	Number of Shares	Price per Share Range	Weighted Average Exercise Price		Aggregate Intrinsic Value (1)		Number of Shares	Weighted Average Exercise Price		Aggregate Intrinsic Value (1)
(in thousands, except share, per share and weighted-average data)

Balance, January 1, 2020	3,160,397	$1.18 - $7.37	$	2.72	$	14,460	1,835,799	$	2.28	$	9,198
Granted	70,000	$6.27 - $7.59	$	6.65

Exercised	(688,495)	$1.18 - $4.43	$	2.84
Canceled	(100,187)	$1.27 - $4.75	$	3.33
Balance, September 30, 2020	2,441,715	$1.18 - $7.59	$	2.77	$	7,971	1,396,231	$	2.18	$	5,323


(in thousands, except share and weighted-average share data)	Number of Unvested Shares	Weighted Average Grant Date Fair Value		Aggregate Grant Date Fair Value of Unvested Shares
Balance, January 1, 2020	502,102	$	3.32	$	1,667
Granted	149,302	6.48		967
Vested	(205,267)	2.86		(587)


Balance, September 30, 2020	446,137	$	4.58	$	2,047


(in thousands, except stock units and weighted-average share data)	Number of Stock Units	Weighted Average Grant Date Fair Value per Share		Intrinsic Value Outstanding
Balance, January 1, 2020	629,003	$	2.09	$	4,585
Granted	47,015	6.70		281

Issued	(47,377)	1.65		0
Balance, September 30, 2020	628,641	$	2.37	$	3,759


	Preferred Stock			Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Deficit		Total
	Shares	$		Shares	$		Shares	$		$		$		$
(in thousands, except share data)
Balance, January 1, 2020, as previously reported	0	$	0	30,149,105	$	32	1,639,791	$	(4,337)	$	88,022	$	(16,248)	$	67,469
Exercise of stock options	—	—		316,504	—		—	—		1,198		—		1,198
Share-based compensation	—	—		55,668	—		—	—		502		—		502


Net income	—	—		—	—		—	—		—		(1,116)		(1,116)
Forfeitures of restricted stock	—	—		(34,700)	—		—	—		(276)		—		(276)

Balance, March 31, 2020	0	$	0	30,486,577	$	32	1,639,791	$	(4,337)	$	89,446	$	(17,364)	$	67,777
Exercise of stock options	—	—		346,461	—		—	—		726		—		726
Share-based compensation	—	—		11,600	—		—	—		465		—		465

Deferred compensation issuance	—	—		47,377	—		—	—		78		—		78
Net income	—	—		—	—		—	—		—		1,369		1,369
Forfeitures of restricted stock	—	—		(61,530)	—		—	—		(410)		—		(410)
Purchase of treasury stock	—	—		(32,950)	—		32,950	(204)		—		—		(204)
Balance, June 30, 2020	0	$	0	30,797,535	$	32	1,672,741	$	(4,541)	$	90,305	$	(15,995)	$	69,801
Exercise of stock options	—	—		25,530	1		—	—		33		—		34
Share-based compensation	—	—		—	—		—	—		571		—		571


Net income	—	—		—	—		—	—		—		3,102		3,102
Forfeitures of restricted stock	—	—		14,700	—		—	—		125		—		125
Purchase of treasury stock	—	—		(14,700)	—		14,700	(125)		—		—		(125)
Balance, September 30, 2020	0	$	0	30,823,065	$	33	1,687,441	$	(4,666)	$	91,034	$	(12,893)	$	73,508