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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________________________ 
FORM 10-Q
_____________________________________  
ý☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2022
OR
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 000-52008
_____________________________________ 
luna-20220331_g1.jpg
LUNA INNOVATIONS INCORPORATED
(Exact name of registrant as specified in its charter)
_____________________________________  
Delaware54-1560050
(State or Other Jurisdiction of

Incorporation or Organization)
(I.R.S. Employer

Identification Number)
301 First Street SW, Suite 200
Roanoke, VA 24011
(Address of Principal Executive Offices)
(540) 769-8400
(Registrant’s Telephone Number, Including Area Code)


_____________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, $0.001 par value per shareLUNAThe Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý☐  Yes   ¨☒   No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý☒  Yes    ¨☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer        o☐Accelerated filer         o☐
 
Non-accelerated filer        o (Do not check if a smaller reporting company)        ☒Smaller reporting company ý☒


Emerging growth company o☐
                    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨☐  Yes    ý☒  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 9, 2017,May 12, 2022, there were 28,402,88732,424,713 shares of the registrant’s common stock outstanding.





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LUNA INNOVATIONS INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2017MARCH 31, 2022
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PART I. FINANCIAL INFORMATION
 
ITEM 1.FINANCIAL STATEMENTS




























Luna Innovations Incorporated
Consolidated Balance Sheets
(Unaudited)
 September 30, 2017 December 31, 2016
 (unaudited)  
Assets   
Current assets:   
Cash and cash equivalents$38,514,437
 $12,802,458
Accounts receivable, net8,940,405
 10,269,012
Inventory7,300,035
 6,848,835
Prepaid expenses and other current assets924,196
 1,375,659
Current assets held for sale—
 5,801,629
Total current assets55,679,073
 37,097,593
Property and equipment, net3,145,769
 3,482,687
Intangible assets, net3,264,285
 3,367,217
Goodwill502,000
 502,000
Long term receivable- sale of HSOR business4,000,000
 —
Other assets18,024
 38,194
Non-current assets held for sale—
 10,509,282
Total assets$66,609,151
 $54,996,973
Liabilities and stockholders’ equity   
Liabilities:   
Current liabilities:   
Current portion of long-term debt obligations$1,833,333
 $1,833,333
Current portion of capital lease obligations49,070
 52,128
Accounts payable2,188,776
 2,954,742
Accrued liabilities9,586,554
 7,913,544
Deferred revenue897,023
 837,906
Current liabilities held for sale—
 2,376,703
Total current liabilities14,554,756
 15,968,356
Long-term deferred rent1,221,170
 1,319,402
Long-term debt obligations1,057,263
 2,420,032
Long-term capital lease obligations79,246
 114,940
Non-current liabilities held for sale—
 84,555
Total liabilities16,912,435
 19,907,285
Commitments and contingencies
 
Stockholders’ equity:   
Preferred stock, par value $0.001, 1,321,514 shares authorized, issued and outstanding at September 30, 2017 and December 31, 20161,322
 1,322
Common stock, par value $0.001, 100,000,000 shares authorized, 28,402,887 and 27,988,104 shares issued, 27,815,060 and 27,541,277 shares outstanding at September 30, 2017 and December 31, 201629,074
 28,600
Treasury stock at cost, 587,827 and 446,827 shares at September 30, 2017 and December 31, 2016(746,007) (517,987)
Additional paid-in capital83,204,263
 82,451,958
Accumulated deficit(32,791,936) (46,874,205)
Total stockholders’ equity49,696,716
 35,089,688
Total liabilities and stockholders’ equity$66,609,151
 $54,996,973
(in thousands, except share data)
March 31, 2022December 31, 2021
Assets
Current assets:
Cash and cash equivalents$10,788 $17,128 
Accounts receivable, net26,261 20,913 
Contract assets4,889 5,166 
Inventory28,891 22,493 
Prepaid expenses and other current assets7,152 3,793 
Assets held for sale— 12,952 
Total current assets77,981 82,445 
Property and equipment, net4,398 2,988 
Intangible assets, net22,332 17,177 
Goodwill29,199 18,984 
Operating lease right-of-use assets5,544 5,075 
Other non-current assets3,872 247 
Deferred tax asset1,339 3,321 
Total assets$144,665 $130,237 
Liabilities and stockholders’ equity
Liabilities:
Current liabilities:
Current portion of long-term debt obligations$4,167 $4,167 
Accounts payable2,617 2,809 
Accrued and other current liabilities17,312 9,258 
Contract liabilities4,047 4,649 
Current portion of operating lease liabilities2,458 2,101 
Liabilities associated with assets held for sale— 9,703 
Total current liabilities30,601 32,687 
Long-term debt obligations, net of current portion18,087 11,673 
Long-term portion of operating lease liabilities3,526 3,509 
Other long-term liabilities434 445 
Total liabilities52,648 48,314 
Commitments and contingencies (Note 13)00
Stockholders’ equity:
Common stock, par value $0.001, 100,000,000 shares authorized, 34,143,411 and 33,855,725 shares issued, 32,361,122 and 32,116,270 shares outstanding at March 31, 2022 and December 31, 2021, respectively34 34 
Treasury stock at cost, 1,782,289 and 1,744,026 shares at March 31, 2022 and December 31, 2021, respectively(5,526)(5,248)
Additional paid-in capital99,906 98,745 
Accumulated deficit(1,994)(11,575)
Accumulated other comprehensive loss(403)(33)
Total stockholders’ equity92,017 81,923 
Total liabilities and stockholders’ equity$144,665 $130,237 
The accompanying notes are an integral part of these unaudited consolidated financial statements.



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Luna Innovations Incorporated
Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share data)
                                                                                                                                            Three Months Ended March 31,
 20222021
Revenue$22,481 $20,997 
Cost of revenue8,202 8,726 
Gross profit14,279 12,271 
Operating expense:
Selling, general and administrative14,102 10,934 
Research, development and engineering2,543 2,917 
       Total operating expense16,645 13,851 
Operating loss(2,366)(1,580)
Other income/(expense):
Other income21 — 
Interest expense(113)(143)
Total other expense(92)(143)
Loss from continuing operations before income taxes(2,458)(1,723)
Income tax benefit(1,115)(664)
Net loss from continuing operations(1,343)(1,059)
Income from discontinued operations, net of income tax of $1,022 and $463 740 
Gain on sale of discontinued operations, net of tax of $3,11710,921 — 
Net income from discontinued operations10,924 740 
Net income/(loss)9,581 (319)
Net loss per share from continuing operations:
       Basic$(0.04)$(0.03)
       Diluted$(0.04)$(0.03)
Net income per share from discontinued operations:
       Basic$0.34 $0.02 
       Diluted$0.34 $0.02 
Net income/(loss) per share attributable to common stockholders:
        Basic$0.30 $(0.01)
        Diluted$0.30 $(0.01)
Weighted average shares:
        Basic32,243,082 31,350,629 
        Diluted32,243,082 31,350,629 





4
 Three Months Ended 
 September 30,		 Nine Months Ended 
 September 30,
 2017 2016 2017 2016
 (unaudited) (unaudited)
Revenues:       
Technology development$4,590,054
 $4,118,245
 $13,428,428
 $11,772,731
Products and licensing7,052,094
 7,066,908
 19,593,648
 18,301,631
       Total revenues11,642,148
 11,185,153
 33,022,076
 30,074,362
Cost of revenues:       
Technology development3,491,840
 3,068,360
 10,045,261
 8,986,312
Products and licensing3,617,547
 3,758,765
 10,201,459
 9,954,987
       Total cost of revenues7,109,387
 6,827,125
 20,246,720
 18,941,299
Gross profit4,532,761
 4,358,028
 12,775,356
 11,133,063
Operating expense:       
Selling, general and administrative3,256,074
 3,816,679
 10,345,964
 11,296,389
Research, development and engineering833,811
 812,050
 2,581,473
 2,789,801
       Total operating expense4,089,885
 4,628,729
 12,927,437
 14,086,190
Operating income/(loss)442,876
 (270,701) (152,081) (2,953,127)
Other income/(expense):       
Other expense(3,389) (231) (4,258) (1,904)
Interest expense(55,099) (71,991) (179,860) (237,081)
Total other expense(58,488) (72,222) (184,118) (238,985)
Income/(loss) from continuing operations before income taxes384,388
 (342,923) (336,199) (3,192,112)
Income tax (benefit)/expense(130,977) 44,797
 (63,350) (173,801)
Net income/(loss) from continuing operations515,365
 (387,720) (272,849) (3,018,311)
Income/(loss) from discontinued operations, net of income tax (benefit)/expense of $(349,515), $(35,095), $(349,515), and $209,678.145,293
 (57,358) (644,241) 342,685
Gain on sale, net of $1,508,373 of related income taxes15,096,666
 —
 15,096,666
 —
Net income/(loss) from discontinued operations15,241,959
 (57,358) 14,452,425
 342,685
Net income/(loss)15,757,324
 (445,078) 14,179,576
 (2,675,626)
Preferred stock dividend33,699
 28,941
 97,331
 74,731
Net income/(loss) attributable to common stockholders$15,723,625
 $(474,019) $14,082,245
 $(2,750,357)
Net income/(loss) per share from continuing operations:       
       Basic$0.02
 $(0.01) $(0.01) $(0.11)
       Diluted$0.02
 $(0.01) $(0.01) $(0.11)
Net income/(loss) per share from discontinued operations:       
       Basic$0.55
 $0.00
 $0.52
 $0.01
       Diluted$0.47
 $0.00
 $0.52
 $0.01
Net income/(loss) per share attributable to common stockholders:       
        Basic$0.57
 $(0.02) $0.51
 $(0.10)
        Diluted$0.48
 $(0.02) $0.51
 $(0.10)
Weighted average common shares and common equivalent shares outstanding:       
        Basic27,692,539
 27,605,028
 27,611,905
 27,531,730
        Diluted32,714,389
 27,605,028
 27,611,905
 27,531,730
Table of Contents
Luna Innovations Incorporated
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)

 Three Months Ended March 31,
 20222021
Net income/(loss)$9,581 $(319)
Other comprehensive (loss)/income(370)1,123 
Total other comprehensive income$9,211 $804 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
















































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Luna Innovations Incorporated
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(in thousands, except share data)
Three Months Ended March 31, 2022
 Common StockTreasury StockAdditional
Paid-in
Capital		Accumulated DeficitAccumulated Other Comprehensive LossTotal
 Shares$Shares$$$$$
Balance, December 31, 202132,116,270 34 1,744,026 (5,248)98,745 (11,575)(33)81,923 
Exercise of stock options143,392 — — — 220 — — 220 
Share-based compensation139,723 — — — 941 — — 941 
Purchase of treasury stock(38,263)— 38,263 (278)— — — (278)
Net income— — — — — 9,581 — 9,581 
Foreign currency translation adjustment— — — — — — (370)(370)
Balance at March 31, 202232,361,122 $34 1,782,289 $(5,526)$99,906 $(1,994)$(403)$92,017 
Three Months Ended March 31, 2021
 Common StockTreasury StockAdditional
Paid-in
Capital		Accumulated DeficitAccumulated Other Comprehensive (Loss)/IncomeTotal
 Shares$Shares$$$$$
Balance, December 31, 202031,024,537 33 1,699,975 (4,789)92,403 (12,957)(248)74,442 
Exercise of stock options314,697 — — — 845 — — 845 
Share-based compensation74,565 — — — 657 — — 657 
Purchase of treasury stock(20,810)— 20,810 (202)— — — (202)
Net loss— — — — — (319)— (319)
Foreign currency translation adjustment— — — — — — 1,123 1,123 
Balance, March 31, 202131,392,989 $33 1,720,785 $(4,991)$93,905 $(13,276)$875 $76,546 



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Luna Innovations Incorporated
Consolidated Statements of Cash Flows (Unaudited)
(in thousands, except share data)
Three Months Ended March 31,
Nine Months Ended 
 September 30,		  20222021
2017 2016 
(unaudited) 
Cash flows provided by/(used in) operating activities    
Cash flows used in operating activitiesCash flows used in operating activities
Net income/(loss)$14,179,576
 $(2,675,626) Net income/(loss)$9,581 $(319)
Adjustments to reconcile net income/(loss) to net cash used in operating activities  
 
Adjustments to reconcile net loss to net cash used in operating activitiesAdjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization2,241,867
 2,759,877
 Depreciation and amortization1,179 1,231 
Share-based compensation476,428
 665,354
 Share-based compensation1,132 657 
Bad debt expense40,753
 255,522
 
Loss on disposal of fixed assets3,640
 —
 
Gain on sale of discontinued operations(15,096,666) —
 
Gain on sale of discontinued operations, net of taxGain on sale of discontinued operations, net of tax(10,921)— 
Deferred taxesDeferred taxes220 — 
Tax benefit from release of valuation allowanceTax benefit from release of valuation allowance— 262 
Change in assets and liabilities  
 Change in assets and liabilities
Accounts receivable2,127,794
 (1,197,885) Accounts receivable(1,795)1,439 
Contract assetsContract assets(1,144)(729)
Inventory(2,251,236) 964,443
 Inventory(1,416)(1,617)
Other current assets380,858
 (381,632) Other current assets(1,636)(847)
Accounts payable and accrued expenses(1,581,608) (1,055,060) 
Other long term assetsOther long term assets2 (80)
Accounts payable and accrued and other current liabilitiesAccounts payable and accrued and other current liabilities2,287 (1,939)
Contract liabilitiesContract liabilities171 (992)
Deferred revenue59,980
 (120,871) Deferred revenue(33)— 
Net cash provided by/(used in) operating activities581,386
 (785,878) 
Cash flows provided by/(used in) investing activities    
Net cash used in operating activitiesNet cash used in operating activities(2,373)(2,934)
Cash flows used in investing activitiesCash flows used in investing activities
Acquisition of property and equipment(893,698) (1,433,260) Acquisition of property and equipment(915)(361)
Intangible property costs(392,485) (317,287) Intangible property costs38 (48)
Proceeds from sale of property and equipment3,000
 —
  Proceeds from sale of property and equipment25 — 
Proceeds from sales of discontinued operations28,026,528
 —
 
Net cash provided by/(used in) investing activities26,743,345
 (1,750,547) 
Proceeds from sale of discontinued operationsProceeds from sale of discontinued operations12,973 — 
Acquisition of LIOSAcquisition of LIOS(22,085)— 
Net cash used in investing activitiesNet cash used in investing activities(9,964)(409)
Cash flows provided by/(used in) financing activities    Cash flows provided by/(used in) financing activities
Payments on capital lease obligations(38,752) (44,404) 
Payments on finance lease obligationsPayments on finance lease obligations(12)(12)
Payments of debt obligations(1,375,000) (1,375,000) Payments of debt obligations(1,036)(1,036)
Repurchase of common stock(228,020) (325,060) Repurchase of common stock(278)(202)
Proceeds from ESPPProceeds from ESPP85 — 
Proceeds from the exercise of options29,020
 —
 Proceeds from the exercise of options220 845 
Net cash used in financing activities(1,612,752) (1,744,464) 
Net increase in cash and cash equivalents25,711,979
 (4,280,889) 
Proceeds from borrowings under revolverProceeds from borrowings under revolver7,450 — 
Net cash provided by/(used in) financing activitiesNet cash provided by/(used in) financing activities6,429 (405)
Effect of exchange rate changes on cash and cash equivalentsEffect of exchange rate changes on cash and cash equivalents(432)176 
Net decrease in cash and cash equivalentsNet decrease in cash and cash equivalents(6,340)(3,572)
Cash and cash equivalents—beginning of period12,802,458
 17,464,040
 Cash and cash equivalents—beginning of period17,128 15,366 
Cash and cash equivalents—end of period$38,514,437
 $13,183,151
 Cash and cash equivalents—end of period$10,788 $11,794 
Supplemental disclosure of cash flow information    Supplemental disclosure of cash flow information
Cash paid for interest$173,275
 $239,347
 Cash paid for interest$108 $125 
Cash paid for income taxes$41,131
 $203,305
 
Non-cash investing and financing activities    
Dividend on preferred stock, 59,469 shares of common stock issuable for the nine months ended September 30, 2017 and 2016$97,331
 $74,731
 
Capital expenditures funded by capital lease borrowings$—
 $157,246
 
Cash received for income tax refund, netCash received for income tax refund, net$342 $87 
The accompanying notes are an integral part of these unaudited consolidated financial statements.



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Luna Innovations Incorporated
Notes to Unaudited Consolidated Financial Statements
 
1.    Basis of Presentation and Significant Accounting Policies
1.    Basis of Presentation and Significant Accounting Policies
Nature of Operations
Luna Innovations Incorporated (“we,” “Luna Innovations” or the “Company”), headquartered in Roanoke, Virginia, was incorporated in the Commonwealth of Virginia in 1990 and reincorporated in the State of Delaware in April 2003.

We are a leader in advanced optical technology, providing unique capabilities in high performance fiber optic test, measurement and control products for the telecommunications industry,and photonics industries, and distributed fiber optic sensing solutions that measure, or "sense" the structures for industries ranging from aerospace, automotive, oil and 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 aerospacedevelopment of fiber optic products and automotive industries,assuring accurate testing of optical components like photonic integrated circuits and custom optoelectronic componentscoherent 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 subsystems. We are organized into two reportable segments, which work closely together to turn ideas into products: our Technology Development segment and our Products and Licensing segment. Our business model is designed to accelerate the process of bringingmanufacturers more efficiently develop new and innovative products by measuring stress, strain, and temperature at a high resolution for new designs or manufacturing processes. Our distributed fiber optic sensing products ensure the safety and structural integrity or operational health of critical assets in the field, by monitoring stress, strain, and vibration in large civil and industrial infrastructure such as bridges, roads, pipelines and borders. We also provide applied research services, primarily under federally funded development programs, that leverage our sensing and instrumentation technologies to market. We have a historymeet the specific needs and applications of net losses from operations beginning in 2005. We have historically managed our liquidity through cost reduction initiatives, debt financings, capital markets transactions and the sale of assets.customers.
Unaudited Interim Financial Information
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United StatedStates of America (“U.S. GAAP”) for interim financial statements and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. The unaudited consolidated interim financial statements have been prepared on the same basis as the annual financial statements and in the opinion of management reflect all adjustments, consisting of only normal recurring accruals considered necessary to present fairly our financial position at September 30, 2017,March 31, 2022, results of operations, comprehensive income/(loss) and changes in stockholders' equity for the three and nine months ended September 30, 2017March 31, 2022 and 2016,2021, and cash flows for the ninethree months ended September 30, 2017March 31, 2022 and 2016.2021. The results of operations for the three and nine months ended September 30, 2017,March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2022. The consolidated balance sheet as of December 31, 2021 was derived from our audited consolidated financial statements.
The consolidated interim financial statements, including our significant accounting policies, should be read in conjunction with the audited Consolidated Financial Statementsconsolidated financial statements and the notes thereto for the year ended December 31, 2016,2021, included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 20, 2017.14, 2022.
Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis, as of October 1 of each year, or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Purchased intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. We analyze the reasonableness of the remaining useful life whenever events or circumstances indicate that the carrying amount may not be recoverable to determine whether the carrying value has been impaired.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants. Various valuation approaches can be used to determine fair value, each requiring different valuation inputs. The following hierarchy classifies the inputs used to determine fair value into three levels:
 
•Level 1—Quoted prices for identical instruments in active marketsmarkets.


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•Level 2—Quoted prices for similar instruments in active markets,markets; quoted prices for identical or similar instruments in markets that are not active,active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active marketsobservable.
•Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservableunobservable.
The carrying values of cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities approximate fair value because of the short-term nature of these instruments. The carrying valueamount of our debt approximateslease liabilities approximate fair value as webecause these financial instruments bear interest at rates that approximate current market rates for similar agreements with similar maturities and credit. We consider the floatingterms of the PNC Bank, National Association debt facility including its interest rate on our credit facilities with Silicon Valley Bank ("SVB")of LIBOR plus a margin ranging from 1.75% to 2.25%, to be at market forbased upon similar instruments. Certain non-financialinstruments that would be available to us. The Company has certain assets and liabilities are measuredthat have been recorded at fair value on a nonrecurringnon-recurring basis in accordance with U.S. GAAP. This includes items such as non-financialfollowing an acquisition. Refer to Note 3, Business Acquisition, for the allocation of the total consideration based upon the fair value of the assets acquired and liabilities initially measuredassumed as of the acquisition date.
Reportable Segments
Prior to September 30, 2021, we were organized into 2 main reporting segments, our Lightwave segment and our Luna Labs segment. We now have 1 reportable segment, Lightwave, following the determination that our Luna Labs segment met held-for-sale and discontinued operations accounting criteria at fair valuethe end of the third quarter of 2021. On March 8, 2022, we completed the sale of substantially all of our equity interests in a business combinationLuna Labs. Prior to the sale, our Luna Labs segment performed applied research principally in the areas of sensing and non-financial long-lived asset groups measured at fair valueinstrumentation, advanced materials, optical technologies and health sciences. See Note 2, Sale of Discontinued Operations, for an impairment assessment. In general, non-financialadditional disclosure related to discontinued operations and assets including intangible assetsheld for sale.
The remaining segment, Lightwave, develops, manufactures and propertymarkets distributed fiber optic sensing products and equipment are measured at fair value when there is an indication of impairmentfiber optic communications test and are recorded at fair value only when any impairment is recognized.

control products.
Net LossIncome/(Loss) Per Share
Basic per share data is computed by dividing our net lossincome/(loss) by the weighted average number of shares outstanding during the period. Diluted per share data is computed by dividing net income, if applicable,income/(loss) by the weighted average shares outstanding during the period increased to include, if dilutive, the number of additional common share equivalents that would have been outstanding if potential shares of common stock had been issued using the treasury stock method. Diluted per share data would also include the potential common share equivalents relating to convertible securities by application of the if-converted method.
The effect of 5.0 million common stock equivalents (which include outstanding warrants, preferred stock and stock options) are included for the diluted per share data forFor the three months ended September 30, 2017. The effectMarch 31, 2022 and 2021, all potentially dilutive securities for stock options and restricted stock unites were excluded as their impact would be anti-dilutive.

Foreign Currency

For our non-U.S. dollar functional currency subsidiaries, assets and liabilities are translated into U.S. dollars using fiscal period end exchange rates. Sales and expenses are translated at average monthly exchange rates. Foreign currency translation gains and losses are included as a component of 5.6 million common stock equivalentsaccumulated other comprehensive loss within equity. Gains and losses resulting from foreign currency transactions are not included for the three months ended September 30, 2016 as they are anti-dilutive to earnings per share due to our net loss from continuing operations. The effect of 4.9 million and 5.7 million common stock equivalents are not included for the nine months ended September 30, 2017 and 2016, respectively, as they are considered anti-dilutive to earnings per share due to our net loss from continuing operations.in earnings.

Recently Issued Accounting Pronouncements, Not Yet Adopted


Effective January 1, 2017, we adopted Accounting Standards Update ("ASU") No. 2016-09, Improvements to Employee Share-Based Payment Accounting. These amendments apply to several aspects of accounting for share-based compensation including the recognition of excess tax benefits and deficiencies and their related presentation in the statement of cash flows as well as accounting for forfeitures. The adoption of ASU No. 2016-09 did not have a significant impact on our financial condition, results of operations or cash flows.
Effective January 1, 2017, we adopted ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred taxes by requiring that deferred tax assets and liabilities be classified as noncurrent in any classified balance sheet rather than being separated into current and non-current amounts. The adoption of ASU No. 2015-17 did not have a significant impact on our consolidated financial statements.
In January 2017, the Financial Accounting Standards Board ("FASB") issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This update simplifies the subsequent measurement of goodwill. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The accounting standard will be effective for reporting periods beginning after December 15, 2019. We do not expect ASU 2017-04 will have a material impact on our financial statements.
In AugustJune 2016, the FASB issued ASU No. 2016-15, Statement2016-13 Financial Instruments - Credit Losses (Topic 326) - Measurement of Cash Flows (Topic 230), Credit Losses on Financial Instruments, which addresses eight specific cash flow issues withrequires companies to measure financial assets at an amortized cost basis to be presented at the objectivenet amount expected to be collected. The new accounting rules eliminate the probable initial recognition threshold and, instead, reflect an entity's current estimate of reducingall 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 existing diversity in practice in how cash receiptsadoption date for entities that qualify as a small reporting company. We have elected this extension and cash payments are presented in the statement of cash flows. ASU 2016-15 is effective date for public entitiesus to adopt this standard will be for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments should be applied retrospectively to all periods presented.2022. We are currently in the process of evaluating the impact of ASU 2016-13, but we do not expect ASU 2016-15 willthe adoption to have a material impact on our financial statements.

In April 2016, the FASB issued ASU 2016-10, Revenue from contracts with customers: Identifying Performance Obligations and Licensing, to clarify certain aspects of the existing standard specific to how an entity should recognize revenue to depict the transfer of promised goods or services to customers. Certain other ASUs have been issued specific to Topic 606 and our disclosure below includes our assessment of all ASUs specific to Topic 606 in the aggregate. In accordance with this update, we will adopt the requirements of the new standard effective January 1, 2018.

We are finalizing our assessment of the financial impact of Topic 606. To date we have reached the following conclusions specific to the impact of Topic 606. Contracts in our Technology Development segment primarily provide research services.  We have concluded that revenue specific to this segment will not be materially impacted upon the adoption of Topic 606 as revenue will continue to be recognized over time using an input model.  Contracts in our Products and Licensing segment generally provide for the following revenue sources: standard product sales, custom product development and sales, product rental, extended warranties, training/service, and certain royalties.  We expect revenue for this segment to be recognized using either “point in time” or “over time” based on the revenue source.  Based on our analysis to date we expect the pattern of recognition of the customized products to potentially change from “point in time” to “over time” upon the adoption of Topic 606. Our revenue recognized specific to customized products approximates $10 million annually.   This change will result in the acceleration of revenue when compared to existing standards with the cumulative adjustment relating to contracts that are not complete as of December 31, 2017 recognized as an adjustment to opening retained earnings on January 1, 2018.   We are continuing to assess the impact of this potential change, or other changes which may be subsequently identified, on our financial statements and current processes and controls. We intend to adopt the standard using the modified retrospective transition method. Under the modified retrospective approach, the new standard

will, for the period beginning January 1, 2018, apply to net contracts and those that were not completed as of January 1, 2018. For those contracts not completed as of January 1, 2018, this method will result in a cumulative catch-up adjustment to retained earnings. Prior periods will not be retrospectively adjusted, but we will maintain dual reporting for the year of initial application in order to disclose the effect on revenue of adopting the new guidance.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires a lessee to recognize in its statement of financial position an asset and liability for most leases with a term greater than 12 months. Lessees should recognize a liability to make lease payments and a right-of-use asset representing the lessee's right to use the underlying asset for the lease term. The amendment is effective for fiscal years ending after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.






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2.    Sale of Discontinued Operations

On August 9, 2017,March 8, 2022, we completed the sale of our high speed optical receivers ("HSOR") business, which was partsubstantially all of our Productsequity interests in our Luna Labs business to certain members of Luna Labs’ senior management team and Licensing segment, to an unaffiliated third partya group of outside investors for an initial purchase price of $33.5$20.4 million before working capital and escrow adjustments and transaction expenses. Total consideration included $13.0 million of which $29.5cash received at closing, $2.5 million in cash has been received,the form of a convertible note and $4.0$1.7 million was placed into escrow until December 15, 2018 for possible working capital adjustmentsin the form of 60-day promissory notes. We can earn up to $1.0 million in future payments from Luna Labs upon the purchase price and potential satisfactionachievement by Luna Labs of certain post-closing indemnification obligations (the "Transaction").financial goals. The purchase price is subject to adjustment in60-day promissory notes and earn out receivable are included within the future based upon a determination of final working capital, as defined in the asset purchase agreement. The HSOR business was a component of the operations of Advanced Photonix, Inc., which we acquired in May 2015. As part of the Transaction, the buyer also hired approximately 49 of our employees who were engaged in the development, manufacture,prepaid expenses and sale of HSOR products in addition to certain corporate administrative functions. The buyer will provide certain transition services to us with respect to infrastructure and administration for which we will pay $0.3 million per month for a period of five months, for a total of $1.5 million, following the date of the Transaction. We have recorded this obligation as a reduction of the value of the purchase price. In assessing the fair value of the services expected to be received by us versus those we expect to deliver to the buyer, we concluded that the transition service payments were more closely aligned with the fair value of theother current assets sold versus the services received and thus should be part of the consideration reconciliation versus operating activities. As of September 30, 2017, $0.6 million has been paid to the buyerline item and the remaining $0.9 millionconvertible note is included in accrued liabilities at September 30, 2017. Our HSOR business accounted for 8.2%other non-current assets line item of revenues and 10.1%the consolidated balance sheet. The gain on the transaction was $10.9 million, net of our costtaxes of revenues for the three months ended September 30, 2017, and 16.1% of revenues and 18.5% of our costs of revenues for the nine months ended September 30, 2017.$3.1 million.
We have separately reported the financial results of operations of our HSOR businessLuna Labs as discontinued operations in our consolidated financial statements. We allocated a portionstatements of operations for the three months ended March 31, 2022 and 2021, respectively, and presented the related assets and liabilities as held for sale in the consolidated balance sheets as of December 31, 2021. These changes have been applied to all periods presented. The operating results of the discontinued operations only reflect revenues and expenses that are directly attributable to the Luna Labs segment that will be eliminated from continuing operations. Previously reported expenses for the Luna Labs segment have been restated to exclude certain allocated expenses that are not directly attributable to the Luna Labs segment.

The key components from discontinued operations related to the Luna Labs business are as follows (in thousands):

Three Months Ended March 31,
 20222021
Revenues$5,108 $5,302 
Cost of revenues3,692 4,144 
Gross profit1,416 1,158 
Selling, general and administrative expenses391 372 
Operating income1,025 786 
Income tax expense1,022 46 
Net income from discontinued operations, net of tax$3 $740 

Assets and liabilities of discontinued operations classified as held for sale in the consolidated tax (benefit)/expensebalance sheets as of December 31, 2021 consist of the following (in thousands):

December 31, 2021
Accounts receivable, net$2,967 
Inventory, net282 
Contract assets4,051 
Prepaid expenses and other current132 
Property and equipment, net330 
Intangible assets, net165 
Operating lease ROU asset4,884 
Other assets141 
Assets held for sale$12,952 
Accounts payable1,042 
Accrued and other current liabilities821 
Contract liabilities2,626 
Current portion of operating lease liabilities388 
Long-term portion of operating lease liabilities4,826 
Liabilities associated with assets held for sale$9,703 



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The cash flows related to discontinued operations have not been segregated and are included in the consolidated statements of cash flows. The following table presents cash flow and non-cash information related to discontinued operations for the three months ended March 31, 2022 and 2021 (in thousands):

Three Months Ended March 31,
 20222021
Depreciation and amortization$23 $31 
Share-based compensation66 10 
Acquisition of property and equipment34 50 

3.    Business Acquisition
On March 10, 2022, we entered into and closed a Share Purchase Agreement (the “Share Purchase Agreement”) with NKT Photonics A/S ("NKT Photonics") to purchase all of the shares of NKT Photonics GmbH and LIOS Technologies Inc. (collectively "LIOS") for aggregate consideration of $22.1 million (€20.0 million). LIOS is a provider of distributed fiber optic monitoring solutions for power cable, pipelines, oilfield services, security, highways, railways and industrial fire detection systems. The acquisition of LIOS provides us with long range, fully distributed temperature and strain sensing capabilities, intellectual property, products and expertise that are highly complementary to Luna, which we believe will accelerate our technology and overall growth roadmap. The Share Purchase Agreement contains customary representations and warranties and indemnities.

The LIOS acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805 - Business Combinations. Under ASC 805, the total estimated purchase consideration is allocated to the acquired tangible and intangible assets and assumed liabilities based on the ratiotheir estimated fair values as of the discontinued business's loss/(income) before allocations.acquisition date. Any excess of the fair value of the acquisition consideration over the identifiable assets acquired and liabilities assumed is recognized as goodwill.Due to the timing of the acquisition relative to the interim balance sheet date, the purchase price allocation of LIOS is based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available.

The following table presents a summarysummarizes the preliminary allocation of the transactions related topurchase consideration of the sale.LIOS acquisition:

(in thousands)
Accounts receivable$3,001 
Inventory5,388 
Prepaid expenses and other current assets92 
Property and equipment858 
Intangible assets5,994 
Goodwill10,322 
Operating lease right-of-use asset512 
Accounts payable(1,217)
Accrued and other current liabilities(815)
Current portion of operating lease liability(322)
Deferred income tax liability(1,537)
Long-term portion of operating lease liability(191)
Total purchase consideration$22,085 





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 September 30, 2017
 (unaudited)
Sale price$33,500,000
Less: transition services payments(1,500,000)
Adjusted purchase price32,000,000
  
Assets held for sale(16,851,540)
Liabilities held for sale2,330,052
Transaction costs(873,473)
Income tax expense(1,508,373)
Gain on sale of discontinued operations$15,096,666

Assets and liabilities held for sale as of December 31, 2016 were as follows:

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 December 31, 2016
  
Assets 
Current assets: 
Accounts receivable, net$4,028,713
Inventory1,521,400
Prepaid expenses and other current assets251,516
Total current assets5,801,629
Property and equipment, net3,298,151
Intangible assets, net5,314,046
Goodwill1,846,331
Other assets50,754
       Total non-current assets10,509,282
Total assets held for sale$16,310,911
Liabilities 
Current liabilities: 
Accounts payable$1,511,450
Accrued liabilities753,556
Deferred revenue111,697
Total current liabilities2,376,703
Long-term deferred rent84,555
       Total non-current liabilities84,555
Total liabilities held for sale$2,461,258
The key components of income from discontinued operationsidentifiable intangible assets and their estimated useful lives were as follows:

 Three Months Ended 
 September 30,		 Nine Months Ended September 30,
 2017 2016 2017 2016
 (unaudited) (unaudited)
Net revenues$1,041,310
 $3,433,767
 $6,356,237
 $13,178,475
Cost of revenues797,678
 2,182,495
 4,599,042
 8,687,783
Operating expenses447,854
 1,342,117
 2,750,951
 3,901,685
Other expenses—
 (1,608) —
 (36,644)
(Loss)/income before income taxes(204,222) (92,453) (993,756) 552,363
Allocated tax (benefit)/expense(349,515) (35,095) (349,515) 209,678
Operating income/(loss) from discontinued operations145,293
 (57,358) (644,241) 342,685
Gain on sale, net of related income taxes15,096,666
 —
 15,096,666
 —
Net income/(loss) from discontinued operations$15,241,959
 $(57,358) $14,452,425
 $342,685

For the nine months ended September 30, 2017 and 2016, cash flows (used in)/provided by operating activities for discontinued operations were $(0.8) million and $0.2 million, respectively. For the nine months ended September 30, 2017 and 2016, cash flows provided by/(used in) investing activities for discontinued operations were $27.1 million and $(1.4) million, respectively.

3.InventoryEstimated
Useful Life(in thousands)
Developed technology6 years1,998 
Customer relationships8 years3,330 
Trade names and trademarks7 years333 
Backlog1 year333 
$5,994 

LIOS's developed technology primarily consists of its distributed fiber optic monitoring solutions that provide a wide range of applications using fully distributed temperature and strain sensing. The developed technologies were valued using the "relief from royalty method" under the income approach. The relief from royalty 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 14.5% 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 LIOS 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 14.5% was used to discount the cash flows to the present value.

Backlog arises from unfulfilled purchase or sales order contracts. The value of LIOS's backlog as of the acquisition date was calculated using the "multi-period excess earnings" method under the income approach. A discount rate of 13.5% was used to discount the cash flows attributable solely to the backlog to the present value.

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. LIOS's customer relationships were valued using the "multi-period excess earnings" method under the income approach. This method reflects the present value of the projected cash flows that are expected by the existing customers less charges representing the contribution of other assets to those cash flows. A discount rate of 15.5% 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. We do not expect this goodwill to be deductible for tax purposes.

4.Intangible assets, net

    Intangible assets, net at March 31, 2022 and December 31, 2021 consisted of the following:

Estimated LifeMarch 31, 2022December 31, 2021
(in thousands)
Patent costs1 - 18 years$9,187 $9,230 
Developed technology6 - 10 years16,446 14,440 
In-process research and developmentN/A2,732 2,732 
Customer base5 - 8 years4,030 700 
Trade names7 - 15 years883 550 
Backlog1 - 3 years333 — 
33,611 27,652 
Accumulated amortization(11,279)(10,475)
$22,332 $17,177 


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    Amortization expense for the three months ended March 31, 2022 was $0.8 million. Estimated aggregate amortization, based on the net value of intangible assets at March 31, 2022, for each of the next five years and beyond is as follows (in thousands):

Year Ending December 31,
2022 (remaining 9 months)$2,793 
20233,774 
20243,282 
20252,947 
20262,830 
2027 & beyond6,706 
Total$22,332 

5.Goodwill

    The change in the carrying value of goodwill during the three months ended March 31, 2022 was as follows:

(in thousands)
Balance as of December 31, 202118,984 
   Acquisition of LIOS10,322 
   Foreign currency translation(107)
Balance as of March 31, 2022$29,199 


6.Inventory
Inventory consists of finished goods, work-in-process and raw materials valued at the lower of cost (determined on the first-in, first-out basis) or market. We write down inventory for estimated obsolescence or unmarketable inventory in an amount

equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions.net realizable value.
Components of inventory were as follows:
March 31,
2022		December 31,
2021
(in thousands)
Finished goods$10,099 $10,087 
Work-in-process3,553 2,318 
Raw materials15,239 10,088 
            Total inventory28,891 22,493 


13
 September 30,
2017		 December 31,
2016
 (unaudited)  
Finished goods$2,234,828
 $1,952,885
Work-in-process844,083
 714,867
Raw materials4,221,124
 4,181,083
Total inventory$7,300,035
 $6,848,835
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4.7.    Accrued Liabilities


Accrued liabilities at September 30, 2017 and December 31, 2016 consisted of the following:
March 31, 2022December 31, 2021
(in thousands)
Accrued compensation$7,985 $6,798 
       Contingent consideration100 225 
Accrued professional fees1,360 503 
Accrued income tax3,012 328 
Current portion of finance lease liability49 48 
Acquisition and divestiture related liabilities2,015 — 
Accrued liabilities - other2,791 1,356 
            Total accrued and other current liabilities$17,312 $9,258 
8.Debt
 September 30, 2017 December 31, 2016 
 (unaudited)   
Accrued compensation$4,377,850
 $4,742,760
 
Income tax payable1,027,687
 —
 
Claims reserve1,727,123
 1,577,123
 
Transition services900,000
 —
 
Accrued sub-contracts581,544
 483,477
 
Accrued professional fees70,308
 67,719
 
Deferred rent141,500
 155,138
 
Royalties263,625
 345,895
 
Warranty reserve212,849
 185,125
 
Accrued liabilities - other284,068
 356,307
 
Total accrued liabilities$9,586,554
 $7,913,544
 
Long-term debt consisted of the following:
(in thousands)March 31, 2022December 31, 2021
Term Loan (net of debt issuance costs of $38 and $44, 2.13% and 2.48% at March 31, 2022 and December 31, 2021, respectively)$7,254 $8,290 
Revolving Loan (2.09% at March 31, 2022 and December 31, 2021)15,000 7,550 
22,254 15,840 
Less: Current portion of long-term debt obligations(4,167)(4,167)
Long-term debt obligations$18,087 $11,673 

5.Debt
Silicon ValleyPNC Bank Facility
We currently have
On December 1, 2020 (the “Effective Date”), we entered into a Loan Agreement (the “Loan Agreement”) with PNC Bank, National Association, as lender (the “Lender”) and Securityour domestic subsidiaries as guarantors. The Loan Agreement with SVBprovides a $12.5 million term loan facility (the "Credit Facility"“Term Loan”) underand a $15.0 million revolving credit facility (the “Revolving Line”), which as amended on May 8, 2015,includes a $3.0 million letter of credit sublimit. On the Effective Date, we haveborrowed the full amount of the Term Loan from the Lender pursuant to a term note (the “Term Note”) and a $7.6 million revolving loan pursuant to a revolving line of credit note. During the three months ended March 31, 2022, we borrowed the remaining $7.4 million of availability of our Revolving Line in conjunction with an original borrowing amountthe acquisition of $6.0 million (the “OriginalLIOS. We may repay and reborrow advances under the Revolving Line from time to time pursuant to the Revolving Line of Credit Note.

The Term Loan”).Loan matures on December 1, 2023. The Original Term Loan is repayabledue and payable in 48 monthly installments12 equal quarterly payments of $125,000, plus accrued interest payable monthly in arrears,principal and unless earlier terminated, is scheduled to mature in May 2020.interest. The Original Term Loan carries a floating annual interest rate equal to SVB’s prime rate then in effect plus 2%. We may prepay amounts due under the Original Term Loan at any time, subject to an early termination fee of up to 2% of the amount of prepayment.
In September 2015, we entered into the Waiver and Seventh Loan Modification Agreement, which provided an additional $1 million of available financing for purchases of equipment through December 31, 2015, which we fully borrowed in December 2015 (the "Second Term Loan" and, together with the Original Term Loan, the "Term Loans"). The Second Term Loan also bears interest at a floating primeper annum rate equal to the sum of (a) LIBOR plus 2% and is(b) a margin ranging from 1.75% to be repaid2.25% depending on the Net Leverage Ratio (as defined in 35 monthly installments of $27,778 plus accrued interest.the Loan Agreement). We may prepay the Term Loan without penalty or premium.

The Credit Facility requires usRevolving Line expires on December 1, 2023. Borrowings under the Revolving Line will bear interest at a floating per annum rate equal to maintainthe sum of (a) LIBOR plus (b) a minimum cash balancemargin ranging from 1.75% to 2.25% depending on the Net Leverage Ratio. Accrued interest will be due and payable on the first day of $4.0 million and to maintain at each month end a ratio of cash plus 60% of accounts receivable greater than or equal to 1.5 timesand the outstanding principal balance and any accrued but unpaid interest will be due and payable on December 1, 2023. The unused portion of the Term Loans. Revolving Line will accrue a fee equal to 0.20% per annum multiplied by the quarterly average unused amount.

Provided our obligations under the Loan Agreement have been satisfied, we may terminate the Loan Agreement at any time upon three business days’ advance written notice to the Lender.

The Credit Facility also requires us to observeLoan Agreement includes a number of affirmative and restrictive covenants applicable to us and our subsidiaries, including, among others, affirmative covenants regarding delivery of financial statements, payment of taxes, and maintenance


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of government compliance, and restrictive covenants regarding dispositions of property, acquisitions, incurrence of additional operational covenants, including protectionindebtedness or liens, investments and registration of intellectual property rights, and certain customary negative covenants. As of September 30, 2017, wetransactions with affiliates. We are also restricted from paying dividends or making other distributions or payments on our capital stock, subject to limited exceptions. We were in compliance with allour covenants as of March 31, 2022.

Upon the occurrence of certain events, including failure to satisfy our payment obligations under the Loan Agreement, failure to adhere to the financial covenants, the breach of certain of our other covenants under the Credit Facility.Loan Agreement, cross defaults to other indebtedness or material agreements, judgment defaults and defaults related to failure to maintain governmental approvals, the Lender will have the right, among other remedies, to declare all principal and interest immediately due and payable, and to exercise secured party remedies.


Amounts due underMaturities on debt are as follows (in thousands):
Year Ending December 31,Amount
2022 (remaining 9 months)$3,125 
202319,129 
Total$22,254 

9.Leases

    We recognize right-of-use ("ROU") assets and lease liabilities on the Credit Facility are secured by substantially allbalance sheet for those leases classified as operating or finance leases with terms greater than twelve months.

    We have operating leases for our facilities, which have remaining terms ranging from 1 to 5 years. Most of our assets, including intellectual property, personal property and bank accounts. In addition,leases do not have an option to extend the Credit Facility contains customary events of default, including nonpayment of principal, interest or other amounts, violation of covenants, material adverse change,lease period beyond the stated term unless the new term is agreed to by both parties. They also do not have an event of default under any subordinated debt documents, incorrectness of representations and warranties inearly termination clause included. Our operating lease agreements do not contain any material respect, bankruptcy, judgmentsrestrictive covenants. Some of our operating lease agreements contain variable payment provisions that provide for rental increases based on consumer price indices. The change in excessrent expense resulting from changes in these indices are included within variable rent.

    We also have finance leases for equipment which have remaining terms ranging from 1 to 3 years. These lease agreements are for general office equipment with a 5-year useful life. These lease agreements do not have an option to extend the lease beyond the stated terms nor do they have an early termination clause. These lease agreements do not have any variable payment provisions included. The finance lease costs consist of a threshold amount,interest expense and violationsamortization, and are included primarily in selling, general and administrative expense in our consolidated statement of operations. The finance lease ROU assets are included within the other agreements in excessnon-current assets line item of a threshold amount. If any eventthe consolidated balance sheets. The current and long-term portion of default occurs SVB may declare due immediately all borrowings under the Credit FacilityROU lease liabilities are included within the accrued and foreclose onother current liabilities and other long-term liabilities line items of the collateral. Furthermore, an event of default under the Credit Facility would result in an increaseconsolidated balance sheets, respectively.

    The discount rate for both our operating and finance leases was not readily determinable in the interestspecific lease agreements. As a result, our incremental borrowing rate on any amounts outstanding.was used as the discount rate when establishing the ROU assets and corresponding lease liabilities. As of September 30, 2017, there wereMarch 31, 2022, we had no events of default on the Credit Facility.operating or finance leases that have not yet commenced.
The aggregate balance under the Term Loans at September 30, 2017 and December 31, 2016, was $2.9 million and $4.3 million, respectively. The effective rate of our Term Loan at September 30, 2017 was 6.25%.
The following table presents a summary of debt outstanding as of September 30, 2017 and December 31, 2016:
 September 30, 2017 December 31, 2016
 (unaudited)  
Silicon Valley Bank Term Loan$2,916,666
 $4,291,666
Less: unamortized debt issuance costs26,070
 38,301
Less: current portion1,833,333
 1,833,333
Total long-term debt$1,057,263
 $2,420,032

The schedule of remaining principal payments under our Term Loans as of September 30, 2017 was as follows:
2017$458,333
20181,833,333
2019625,000
 $2,916,666

6.Capital Stock and Share-Based Compensation
We recognize share-based compensationRent expense based upon the fair value of the underlying equity award on the date of the grant. For restricted stock awards and restricted stock units, we recognize expense based upon the price of our underlying stock at the date of the grant. We have elected to use the Black-Scholes-Merton option pricing model to value any option or warrant awards granted. We recognize share-based compensation for such awardsis recognized on a straight-line basis over the requisite service period of the awards. The risk-free interest rate is based on U.S. Treasury interest rates, the terms of which are consistent with the expected life of the stock options. The expected life and estimated post-employment termination behavior is based upon historical experience of homogeneous groups within our company. We also assume an expected dividend yield of zero for all periods, as we have never paid a dividend on our common stock and do not have any plans to do so in the future.
A summarylease. Rent expense consists of the stock option activity for the nine months ended September 30, 2017following:

Three Months Ended March 31,
(in thousands)20222021
Operating lease costs$575 $544 
Variable rent costs(50)(47)
   Total rent expense$525 $497 




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    Future minimum lease payments under non-cancelable operating and finance leases were as follows as of March 31, 2022 (in thousands):

Operating LeasesFinance Leases
Year Ending December 31,
2022 (remaining 9 months)$2,043 $39 
20232,143 53 
20241,387 53 
2025695 48 
2026143 — 
2027 and beyond— — 
   Total future minimum lease payments6,411 193 
   Less: imputed interest427 8 
     Total lease liabilities$5,984 $185 
Current lease liability$2,458 $49 
Long-term lease liability3,526 136 
   Total lease liabilities$5,984 $185 


    Other information related to leases is presented below:as follows:
Three Months Ended March 31,
(in thousands, except weighted-average data)20222021
Finance lease cost:
   Amortization of right-of-use assets$13 $14 
   Interest on lease liabilities(1)1 
Total finance lease cost$12 $15 
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
   Operating cash flows from operating leases$577 $544 
   Finance cash flows from finance leases$12 $12 
Right-of-use assets obtained in exchange for new operating lease liabilities$759 $1,274 
Right-of-use assets obtained in exchange for new finance lease liabilities$— $— 
Weighted-average remaining lease term (years) - operating leases7.36.2
Weighted-average remaining lease term (years) - finance leases3.74.7
Weighted-average discount rate - operating leases5 %6 %
Weighted-average discount rate - finance leases3 %2 %




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 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)
Balance, January 1, 20172,857,114
 $0.61 - $6.83 $1.89
 $107,063
 2,367,630
 $1.93
 $101,071
Granted80,000
 $1.51 - $1.54 $1.53
        
Exercised(31,953) $0.82 - $1.38 $0.95
        
Canceled(170,590) $1.40 - $6.83 $2.27
        
Balance, September 30, 20172,734,571
 $0.61 - $6.55 $1.87
 $585,292
 2,619,914
 $1.88
 $555,926



(1)The intrinsic value of an option represents the amount by which the market value of the stock exceeds the exercise price of the option of in-the-money options only. The aggregate intrinsic value is based on the closing price of our common stock on the NASDAQ Capital Market, as applicable, on the respective dates.

At September 30, 2017, the outstanding stock options to purchase an aggregate of 2.7 million shares had a weighted-average remaining contractual term of 4.4 years,10.Capital Stock and the exercisable stock options to purchase an aggregate of 2.6 million shares had a weighted-average remaining contractual term of 4.3 years.Share-Based Compensation

Stock Options
For the ninethree months ended September 30, 2017March 31, 2022 and 20162021, we recognized $0.5$0.2 million and $0.7$0.3 million, respectively, in share-based compensation expense respectively,related to stock options, which is included in our selling, general and administrative expense in the accompanying consolidated financial statements.statement of operations. We expect to recognize $0.1$0.9 million in share-based compensation expense over the weighted-average remaining service period of 1.81.4 years for stock options outstanding as of September 30, 2017.March 31, 2022.

The following table summarizes the value of our unvested restricted stock awards:
 Number of Unvested Shares Weighted Average Grant Date Fair Value Aggregate Value of Unvested Shares
Balance, January 1, 2017829,998
 $1.19
 $988,763
Granted428,865
 $1.54
 660,752
Vested(442,498) $1.20
 (531,853)
Repurchased—
 $—
 —
Forfeitures(51,667) $1.14
 (58,917)
Balance, September 30, 2017764,698
 $1.38
 $1,058,745


Restricted Stock Units
We issueDuring the three months ended March 31, 2022 and 2021, we granted 255,842 and 79,250 time-based restricted stock units ("RSUs"), respectively. The general terms of the RSUs are similar to awards previously granted by us. The weighted average fair value of the time-based RSUs granted during the three months ended March 31, 2022 was $7.70 per share. The fair value of each RSU was determined based on the market price of our stock on the date of grant.
In addition, pursuant to our Deferred Compensation Plan, non-employee directors for service on our boardcan elect to defer the receipt of directors. Under our non-employee director compensation policy, continuing non-employee directors receive an annual RSU grant at the time of our annual meeting of stockholders, which grant vests on the earliersome or all of the one year anniversary of the grant or the following annual meeting of stockholders. Under our non-employee director deferredequity compensation plan, as amended (the "NEDCP") non-employee directors may also elect tothat they receive their annual cash retainers for board and committee serviceservice. During the three months ended March 31, 2022, and 2021, we granted 8,436 and 4,658 RSUs, respectively, pursuant to the Deferred Compensation Plan. The general terms of these RSUs are similar to awards previously granted by us. The weighted average fair value of these RSUs granted during the three months ended March 31, 2022 and 2021, was $8.46 and $9.42 per share, respectively. The fair value of each RSU was determined based on the market price of our stock on the date of grant.
For the three months ended March 31, 2022 and 2021, we recognized $0.7 million and $0.3 million, respectively, in share-based compensation expense related to RSUs, which is included in our selling, general and administrative expense in the accompanying consolidated statement of operations. We expect to recognize $4.2 million in share-based compensation expense over the weighted-average remaining service period of 2.4 years for RSUs outstanding as of March 31, 2022.
Employee Stock Purchase Plan ("ESPP")
For each of the three months ended March 31, 2022 and 2021, we recognized $0.1 million in share-based compensation expense related to the ESPP, which is included in our selling, general and administrative expense in the accompanying consolidated statement of operations.

11.Revenue Recognition

Disaggregation of Revenue

We disaggregate our revenue from contracts with customers by geographic locations, customer type, contract type, timing of recognition, and major categories, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are issued quarterlyaffected by economic factors. We disaggregate revenue on the basis of where the physical goods are shipped. We also classify revenue by the customer type of entity for which it does business, which is an indicator of the diversity of our client base. We attribute revenues generated from being a subcontractor to a commercial company as government revenue when the ultimate client is a government agency or department. Disaggregation by contract mix provides insight in terms of the degree of performance risk that we have assumed. Fixed-price contracts are considered to provide the highest amount of performance risk as we are required to deliver a scope of work or level of effort for a negotiated fixed price. Cost-based contracts are considered to provide the lowest amount of performance risk since we are generally reimbursed for all contract costs incurred in performance of contract deliverables with only the amount of incentive or award fees (if applicable) dependent on the achievement of negotiated performance requirements. By classifying revenue by major product and vest immediately upon their issuance, subjectservice, we attribute revenue from a client to deferred settlement in accordance with the NEDCP.major product or service that we believe to be the client's primary market.




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The following is a summary of our RSU activity for the nine months ended September 30, 2017:
 Number of RSUs   Intrinsic Value
 Issued Unvested Weighted Average Grant Date Fair Value per Share Outstanding Unvested
Balance, January 1, 2017393,012
 —
 $1.37 $577,728
 $—
  Granted55,748
 —
 $1.57    
  Vested—
 —
 $0.00    
  Forfeitures—
 —
 $0.00    
  Converted—
 —
 $0.00    
Balance, September 30, 2017448,760
 —
 $1.39 $758,404
 $—

The following details our equity transactions during the nine months ended September 30, 2017:
 Preferred Stock Common Stock Treasury Stock 
Additional
Paid-in
Capital
 Shares $ Shares $ Shares $ $
Balance, January 1, 20171,321,514
 1,322
 27,541,277
 28,600
 446,827
 (517,987) 82,451,958
Exercise of stock options—
 —
 31,953
 32
 —
 —
 819
Share-based compensation—
 —
 299,000
 299
 —
 —
 476,128
Non-cash compensation—
 —
 135,497
 136
 —
 —
 178,035
Stock dividends to Carilion Clinic(1)
—
 —
 —
 59
 —
 —
 97,271
Forfeitures of restricted stock grants—
 —
 (51,667) (52) —
 —
 —
Repurchase of common stock—
 —
 (141,000) —
 141,000
 (228,020) 52
Balance, September 30, 20171,321,514
 1,322
 27,815,060
 29,074
 587,827
 (746,007) 83,204,263
(1)
The stock dividends payable in connection with Carilion Clinic’s Series A Preferred Stock will be issued subsequent to September 30, 2017. For the period from January 12, 2010, the original issue date of the Series A Preferred Stock, through September 30, 2017, the Series A Preferred Stock issued to Carilion has accrued $1,110,773 in dividends. The accrued and unpaid dividends as of September 30, 2017 will be paid by the issuance of 611,870 shares of our common stock upon Carilion’s written request.
Stock Repurchase Program
In May 2016, our board of directors authorized us to repurchase up to $2.0 million of our common stock through May 31, 2017. As of May 31, 2017, we had repurchased a total of 205,500 shares for an aggregate purchase price of $0.2 million under this stock repurchase program, after which this stock repurchase program expired.

In September 2017, our board of directors re-instituted the stock repurchase program and authorized us to repurchase up to $2.0 million of our common stock through September 19, 2018. Our stock repurchase program does not obligate us to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. As of September 30, 2017, we had repurchased a total of 50,100 shares for an aggregate purchase price of $0.1 million under this stock repurchase program. We currently maintain all repurchased shares under these stock repurchase programs as treasury stock.

7.Operating Segments
Our operations are divided into two operating segments—“Technology Development” and “Products and Licensing”.
The Technology Development segment provides applied research to customers in our areas of focus. Our engineers and scientists collaborate with our network of government, academic and industry experts to identify technologies and ideas with promising market potential. We then compete to win fee-for-service contracts from government agencies and industrial customers who seek innovative solutions to practical problems that require new technology. The Technology Development segment derives its revenues primarily from services.
The Products and Licensing segment derives its revenues from product sales, funded product development and technology licenses.
Through September 30, 2017, our Chief Executive Officer and his direct reports collectively represented our chief operating decision makers, and they evaluated segment performance based primarily on revenues and operating income or loss. The accounting policies of our segments are the same as those describedlisted in the summary of significant accounting policies (see Note 1 to our Financial Statements, “Organization and Summary of Significant Accounting Policies,” presented in our Annual Report on Form 10-K as filed with the SEC on March 20, 2017).

The table below presents revenues and operating income/(loss) for reportable segments:

 Three Months Ended 
 September 30,		  Nine Months Ended 
 September 30,
 2017 2016  2017 2016
 (unaudited)  (unaudited)
Revenues:        
Technology development$4,590,054
 $4,118,245
  $13,428,428
 $11,772,731
Products and licensing7,052,094
 7,066,908
  19,593,648
 18,301,631
Total revenues$11,642,148
 $11,185,153
  $33,022,076
 $30,074,362
Technology development operating income/(loss)$182,776
 $139,134
  $(77,323) $(253,833)
Products and licensing operating income/(loss)260,100
 (409,835)  (74,758) (2,699,294)
Total operating income/(loss)$442,876
 $(270,701)  $(152,081) $(2,953,127)
Depreciation, technology development$87,389
 $87,884
  $267,282
 $264,549
Depreciation, products and licensing$117,219
 $300,530
  $688,700
 $827,661
Amortization, technology development$28,935
 $23,651
  $95,540
 $141,490
Amortization, products and licensing$247,522
 $486,209
�� $1,178,113
 $1,526,177
Products and licensing depreciation includes amounts from discontinued operations of $0.1 million and $0.2 million for the three months ended September 30, 2017March 31, 2022 and 2016, respectively. Products2021:

Three Months Ended March 31,
(in thousands)20222021
(unaudited)
Total Revenue by Geographic Location
United States$10,516 $10,579 
Asia4,830 3,672 
Europe4,907 3,977 
Canada, Central and South America2,228 2,769 
All Others— — 
Total$22,481 $20,997 
Total Revenue by Major Customer Type
Sales to the U.S. government$1,635 $2,414 
U.S. direct commercial sales and other8,881 8,165 
Foreign commercial sales & other11,965 10,418 
Total$22,481 $20,997 
Total Revenue by Contract Type
Fixed-price contracts$21,853 $20,405 
Cost-type contracts628 592 
  Total$22,481 $20,997 
Total Revenue by Timing of Recognition
Goods transferred at a point in time$18,609 $16,839 
Goods/services transferred over time3,872 4,158 
Total$22,481 $20,997 
Total Revenue by Major Products/Services
Technology development$1,597 $2,140 
Test, measurement and sensing systems20,096 18,519 
Other788 338 
Total$22,481 $20,997 


Contract Balances

Our contract assets consist of unbilled amounts for research contracts as well as custom product contracts. Contract liabilities include excess billings, subcontractor accruals, warranty expense, extended warranty revenue, and licensing amortization includescustomer deposits. During the three months ended March 31, 2022, we recognized $1.5 million of revenue that was included in contract liabilities as of December 31, 2021.




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The following table shows the components of our contract balances as of March 31, 2022 and December 31, 2021:

(in thousands)March 31, 2022December 31, 2021
Contract assets$4,889 $5,166 
Contract liabilities4,047 4,649 
   Net contract assets$842 $517 
Performance Obligations

Unfulfilled performance obligations represent amounts from discontinued operationsexpected to be earned on executed contracts. Indefinite delivery and quantity contracts and unexercised options are not reported in total unfulfilled performance obligations. Unfulfilled performance obligations include funded obligations, 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 obligations represent firm orders for which funding has not yet been appropriated. The approximate value of $0.1our unfulfilled performance obligations was $45.8 million at March 31, 2022. We expect to satisfy $36.1 million of the performance obligations in 2022, $7.7 million in 2023 and $0.4 millionthe remainder by 2026.


12.Income Taxes

Our provision for income taxes is based upon the estimated annual effective tax rate for the year applied to the current period income plus the tax effect of any significant or unusual items, discrete events or changes in tax law. Fluctuations in the distribution of pre-tax income among our operating subsidiaries can lead to fluctuations of the effective tax rate in the consolidated financial statements. We and our subsidiaries file U.S. federal income tax returns and income tax returns in various state, local, and foreign jurisdictions.

For the three months ended March 31, 2022, our effective income tax rate was 45.36% compared to 38.54% for the three months ended September 30, 2017 and 2016, respectively. Products and licensing depreciation includes amounts from discontinued operations of $0.4 million and $0.5 millionMarch 31, 2021. The effective tax rate for the nine months ended September 30, 2017 and 2016, respectively. Products and licensing amortization includes amounts from discontinued operations of $0.9 million and $1.2 million for the nine months ended September 30, 2017 and 2016, respectively.

The table below presents assets for reportable segments:
 September 30,
2017		 December 31,
2016
 (unaudited)  
Total segment assets:   
Technology development$30,738,481
 $16,923,090
Products and licensing35,870,670
 38,073,883
Total assets$66,609,151
 $54,996,973
Property plant and equipment, and intangible assets, technology development$2,427,556
 $2,602,803
Property plant and equipment, and intangible assets, products and licensing$4,484,498
 $4,749,144
There are no material inter-segment revenues for any period presented. Total assets for September 30, 2017 include proceeds2022 differed from the salefederal statutory rate of HSOR in21%, primarily as a result of research and development ("R&D") tax credits and favorable impact from the amountnet Global Intangible Low Taxed Inclusion ("GILTI"). The effective tax rate for 2021 differed from the federal statutory rate of $33.5 million (which includes21%, primarily as a long term receivable of $4.0 million) allocated evenly between the two segments. For December 31, 2016, the products and licensing segment assets include assets held for sale in the amount of $16.3 million. Property plant and equipment, and intangible assets excludes HSOR amounts for September 30, 2017 and December 31, 2016.
The U.S. government accounted for 45% and 39% of total consolidated revenues for the three months ended September 30, 2017 and 2016, respectively, and for 45% and 42% of total consolidated revenues for the nine months ended September 30, 2017 and 2016, respectively.
International revenues (customers outside the United States) accounted for 19% and 15% of total consolidated revenues for the three months ended September 30, 2017 and 2016, respectively, and 20% and 18%result of the total consolidated revenues for the nine months ended September 30, 2017excess tax benefit on stock compensation vesting and 2016, respectively. No single country, outside of the United States, represented more than 10% of total revenues in the threeexercises.

13.Commitments and nine months ended September 30, 2017 and 2016.Contingencies


8.Contingencies and Guarantees
We are from time to time involved in certain legal proceedings in the ordinary course of conducting our business. While the ultimate liability pursuant to these actions cannot currently be determined, we believe it is not reasonably possible that these legal proceedings will have a material adverse effect on our financial position or results of operations.
In September 2014, we received a preliminary audit report from the Defense Contract Audit Agency (the "DCAA"), with respect to our 2007 incurred cost submission and questioning $0.8 million of claimed costs that the DCAA believes are expressly unallowable under the Federal Acquisition Regulations and, therefore, subject to potential penalty. In June 2015, we received from the Defense Contract Management Agency ("DCMA") a final determination and demand for payment of penalties, interest, and over billing in the aggregate amount of $1.1 million. In July 2015, we filed an appeal with the Armed Services Board of Contract Appeals ("ABSCA").  In January 2017, a hearing was held before the ASBCA. No ruling has yet been issued with respect to our appeal. In April 2017, we made a settlement offer of $150,000 to the DCMA, and we have accrued that amount in our financial statements as of September 30, 2017. The DCMA notified us in May 2017 that it has declined our settlement offer. The appeals process remains ongoing.
In the third quarter of 2016 weWe executed two non-cancelable purchase orders totaling $1.4$3.9 million in 2020 and 2021 for multiple shipments of tunable lasers to be delivered over an 18-month period. At September 30, 2017,March 31, 2022, approximately $0.3$0.6 million of this commitmentthese commitments remained and isare expected to be delivered by February 28, 2018.August 24, 2022.
We have entered into indemnification agreements with our officers and directors, to the extent permitted by law, pursuant to which we have agreed to reimburse the officers and directors for legal expenses in the event of litigation and regulatory matters. The terms of these indemnification agreements provide for no limitation to the maximum potential future payments. We have a directors and officers insurance policy that may, in certain instances, mitigate the potential liability and payments.




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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 unique capabilities in high performance fiber optic test, measurement and control products for the telecommunications industry,and photonics industries, and distributed fiber optic sensing solutions that measure, or “sense,” the structures for industries ranging from aerospace, automotive, energy, oil and 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 aerospacedevelopment of fiber optic products and automotive industries,assuring accurate testing of optical components like photonic integrated circuits and custom optoelectronic components and subsystems.coherent receivers, which are both critical elements of meeting the world’s exponentially growing demand for bandwidth. Our distributed fiber optic sensing products provide criticalhelp designers and manufacturers more efficiently develop new and innovative products by measuring stress, strain, and temperature information to designersat a high resolution for new designs or manufacturing processes. Our distributed fiber optic sensing products ensure the safety and manufacturers working with advanced materials. Our custom optoelectronic products are sold to scientific instrumentation manufacturers for various applicationsstructural integrity or operational health of critical assets in the field, by monitoring stress, strain, and vibration in large civil and industrial infrastructure such as metrology, missile guidance, flame monitoring,bridges, roads, pipelines and temperature sensing. In addition, weborders. We also provide applied research services, typicallyprimarily under researchfederally funded development programs, funded by the U.S. government, in areas of advanced materials,that leverage Luna’s sensing and healthcare applications. 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 ofinstrumentation technologies to perform applied research services for companiesmeet the specific needs and for government funded projects. We continueapplications of our customers.

Prior to invest in product development and commercialization, whichSeptember 30, 2021, we anticipate will lead to increased product sales growth.
We arewere organized into two main businessreporting segments, the Products and Licensingour Lightwave segment and the Technology Developmentour Luna Labs segment. Our Products and LicensingLightwave segment develops, manufactures and markets distributed fiber optic sensing products as well as test & measurement products, and also conducts applied research in thesolutions and fiber optic sensing area for both corporatecommunications test and government customers. We are continuing to develop and commercialize our fiber optic technology for strain and temperature sensing applications for the aerospace, automotive, and energy industries.control products. Our Products and LicensingLuna Labs segment revenues represented 61% and 63% of our total revenues for the three months ended September 30, 2017 and 2016, respectively, and 59% and 61% of our total revenues for the nine months ended September 30, 2017 and 2016, respectively. The change in revenue mix was primarily a result of continued growth of our Technology Development business segment. The approximate value of our Products and Licensing segment backlog was $6.9 million at September 30, 2017 and $7.2 million at December 31, 2016.

The Technology Development segment performsperformed applied research principally in the areas of sensing and instrumentation, advanced materials and health sciences. This segment comprised 39% and 37% of total revenues for the three months ended September 30, 2017 and 2016, respectively, and 41% and 39% of our total revenues for the nine months ended September 30, 2017 and 2016, respectively. Most of the government funding for our Technology DevelopmentLuna Labs segment iswas derived from the Small Business Innovation Research ("SBIR"), program coordinated by the U.S. Small Business Administration ("SBA"). The Technology DevelopmentAdministration. We now have one reportable segment, Lightwave, following the determination that our Luna Labs segment met held-for-sale and discontinued operations accounting criteria at the end of the third quarter of 2021 and the sale of substantially all of our equity interests in Luna Labs on March 8, 2022.


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As we develop and commercialize new products, our 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. Recent acquisitions have added strategic technologies and products that complement 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 accountedbeen strong in long-range, discrete sensing and short range, fully distributed sensing which are best when specific, known locations needed to be monitored. Additional product offerings from these strategic acquisitions have helped us fill a gap for a large portion of total revenues,long range, fully distributed acoustic, temperature and we expect that they will continue to represent a significant portion of total revenues for the foreseeable future. The Technology Development segment revenues were $4.6 million and $4.1 million for the three months ended September 30, 2017 and 2016, respectively, and $13.4 million and $11.8 million for the nine months ended September 30, 2017 and 2016, respectively. Within the Technology Development 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. strain measurement.
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 Technology Development segment backlog was $27.3$45.8 million and $38.4 million at September 30, 2017March 31, 2022 and $17.6 million at December 31, 2016.2021, respectively.
Revenues from product sales have historically been mostly derived from
Acquisitions

On March 10, 2022, we acquired NKT Photonics GmbH and LIOS Technology Inc. (collectively, “LIOS”) for €20.0 million, or $22.1 million. LIOS, based in Cologne, Germany and formerly owned by NKT Photonics A/S, provides temperature and strain sensing products which are highly complementary to our existing portfolio of fiber optic offerings.

Discontinued Operations
On March 8, 2022, we completed the salessale of substantially all of our optoelectronic componentsequity interests in our Luna Labs business to certain members of Luna Labs’ senior management team and from the salesa group of sensing systemsoutside investors for an initial purchase price of $20.4 million before working capital and products that make use of light-transmitting optical fibers, or fiber optics.escrow adjustments and transaction fees. We continuehad been actively marketing our Luna Labs segment 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 technology in past years, we do not expect license revenues to represent a significant portion of revenues in the near term. Over time, however, we do intend to gradually increase such revenues. In the near term, we expect revenues from product sales and product development to be primarily in areas associated with our fiber optic instrumentation, test & measurement and sensing platforms. In the long term, we expect that revenues from product sales will represent a larger portionprospective buyers during 2021 as part of our total revenues and, as we develop and commercialize new products, we expect these revenues will reflect a broader and more diversified mix of products.
growth strategy for our Lightwave segment. 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.
Reductions in government spending may impacthave separately reported the availability of new program awards in the future. For example, the Budget Control Act commits the U.S. government to reduce the federal deficit by $1.2 trillion over ten years through a combination of automatic, across-the-board spending cuts and caps on discretionary spending, or sequestration. Automatic across-the-board cuts required by sequestration could have a material adverse effect on our Technology Development segment revenues and, consequently, our results of operations. While the exact manner in which sequestration will impact our business is unclear, funding for programs in which we participate could be reduced, delayed or canceled. Our ability to obtain new contract awards also could be negatively affected.
Recent Developments
On August 9, 2017, we sold our assets associated with the high speed optical receiver ("HSOR") business to a third party, for total cash consideration of $33.5 million, including $29.5 million received at closing and $4.0 million placed into escrow until December 15, 2018 for possible working capital adjustments to the purchase price and potential satisfaction of certain post-closing indemnification obligations. As part of the transaction, the buyer also hired 49 of our employees who were engaged in the development, manufacture, and sale of HSOR products in addition to certain corporate administrative functions. The buyer will provide certain transition services to us with respect to infrastructure and administration for which we will pay $0.3 million per month for a period of five months following the date of the transaction. We have recorded this obligationLuna Labs segment as a reduction of the value of the purchase price. As of September 30, 2017, $0.6 million has been paid to the buyer and the remaining $0.9 million is includeddiscontinued operations in our accrued liabilities.
Our revenues recognized related to the HSOR business were $1.0 million and $3.4 millionconsolidated statement of operations for the three months ended September 30, 2017March 31, 2022 and 2016, respectively,2021, and $6.4 millionpresented the related assets and $13.2 millionliabilities as held for sale in the nine months ended September 30, 2017 and 2016, respectively.consolidated balance sheet as of December 31, 2021.
Our sale of the HSOR business has significantly increased our capital resources, and we currently intend to use a portion of the proceeds from the sale to invest in expanding our fiber optic sensing business. However, the sale of the HSOR business is expected to result in lower revenues, primarily from reduced product sales, than we have experienced in prior periods until, if

ever, we can increase revenues from our remaining businesses significantly. As a result, we may incur greater net losses and reduced cash flows from operations than we have in recent periods.
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. 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. During 2022, we have continued to experience some disruption in our supply chain and, going forward, we expect potential delays in revenue from certain customers as a result of shut-downs in China. While we believe these disruptions are temporary, there is no guarantee we will be able to manage through these disruptions. See “Risk Factors” for further discussion of the potential adverse impacts of the COVID-19 pandemic on our business.

Revenues
We generate revenues from technology development, product sales, and commercial product development and licensing and technology development activities. We derive Technology Development 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 Technology Development segment revenues represented 39% and 37% of total revenues for the three months ended September 30, 2017 and 2016, respectively, and 41% and 39% of our total revenues for the nine months ended September 30, 2017 and 2016, respectively.
The Products and LicensingOur 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,property.
    We derived Luna Labs segment revenues, which are presented as discontinued operations, from providing research and represented 61%development services to third parties, including government entities, academic institutions and 63%corporations, and from achieving milestones established by some of these contracts and in collaboration agreements. In general, we completed 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. Following our totalsale of Luna Labs in March 2022, we will no longer derive revenues for the three months ended September 30, 2017 and 2016, respectively, and 59% and 61% of our total revenues for the nine months ended September 30, 2017 and 2016, respectively. Product and licensing revenues decreased as a percentage of our total revenues primarily a result of continued growth of our Technology Development business segment during the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016.from Luna Labs.

Cost of Revenues


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

    Cost of revenues associated with our Luna Labs segment revenues, which are presented as discontinued operations, consisted 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.assets and costs related to merger and acquisition activities. These expenses also include compensation for employees in executive and operational functions including certain non-cash charges related to expenses from option grants,equity awards, facilities costs, professional fees, salaries, commissions, travel expense and related benefits of personnel engaged in sales, product managementmarketing and marketingadministrative 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 Technology Developmenthistorical Luna Labs segment, product development activities not provided under contracts with third parties, and overhead costs related to these activities. The operating expense of our Luna Labs segment is presented in discontinued operations.
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 and revolving loans as well as interest accrued on our capitalfinance 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.

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, 2016,2021, as filed with the Securities and Exchange Commission ("SEC") on March 20, 2017. Effective January 1, 2017, we adopted Accounting Standards Update ("ASU") No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The amendments apply to several aspects of accounting for share-based compensation including the recognition of excess tax benefits and deficiencies and their related presentation in the statement of cash flows as well as accounting for forfeitures. The adoption of ASU No. 2016-09 did not have a significant impact on our financial condition, results of operations or cash flows. There have been no other material changes to the description of our critical accounting policies as described in our Form 10-K as filed with the SEC on March 20, 2017.14, 2022.



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Results of Operations
Three Months Ended September 30, 2017March 31, 2022 Compared to Three Months Ended September 30, 2016March 31, 2021
Revenues
 Three Months Ended September 30,    
 2017 2016 $ Difference % Difference
Revenues:       
Technology development$4,590,054
 $4,118,245
 $471,809
 11 %
Products and licensing7,052,094
 7,066,908
 (14,814) 0 %
Total revenues$11,642,148
 $11,185,153
 $456,995
 4 %
Revenues from our Technology Development segment for the three months ended September 30, 2017March 31, 2022 increased $0.5$1.5 million, or 11%7%, to $4.6$22.5 million compared to $4.1$21.0 million for the three months ended September 30, 2016.March 31, 2021. The vast majority of the increase in Technology Development segment revenues continues a growth trend experienced throughout 2016 and into 2017 largely driven by successes in Phase 2 SBIR awards. The increase for the three months ended September 30, 2017March 31, 2022, compared to the three months ended September 30, 2016March 31, 2021, was realized primarily in our intelligent systems research group. As Phase 2 contracts generally have a performance period of a year or more, we currently expect revenuesdue to remain at a similar level for the near term.
Our Products and Licensing segment included revenues from salesLIOS which was acquired on March 10, 2022.

Cost of test & measurement systems, primarily representing salesRevenues and Gross Profit
    Cost of our ODiSI, Optical Vector Analyzer, and Optical Backscatter Reflectometer platforms, optical components and sub-assemblies and sales of Terahertz sensing systems. Products and Licensing segment revenues remained substantially unchanged at $7.1decreasedby $0.5 million, or 6%, to $8.2 million for the three months ended September 30, 2017 and 2016.


Cost of Revenues and Gross Profit
 Three Months Ended September 30,    
 2017 2016 $ Difference % Difference
Cost of revenues:       
Technology development$3,491,840
 $3,068,360
 $423,480
 14 %
Products and licensing3,617,547
 3,758,765
 (141,218) (4)%
Total cost of revenues7,109,387
 6,827,125
 282,262
 4 %
Gross profit$4,532,761
 $4,358,028
 $174,733
 4 %
The cost of Technology Development segment revenuesMarch 31, 2022, compared to $8.7 million for the three months ended September 30, 2017March 31, 2021. Our overall gross margin for three months ended March 31, 2022 was 64%, compared to 58% for the three months ended March 31, 2021. The increase in gross margin was primarily due to a favorable sales mix.
Operating Expense
 Three Months Ended March 31,
(in thousands)20222021$ Difference% Difference
Operating expense:
Selling, general and administrative$14,102 $10,934 $3,168 29 %
Research, development and engineering2,543 2,917 (374)(13)%
            Total operating expense$16,645 $13,851 $2,794 20 %
    Our selling, general and administrative expense increased $0.4$3.2 million, or 14%29%, to $3.5 million compared to $3.1$14.1 million for the three months ended September 30, 2016. The increase in cost of Technology Development segment revenues was attributableMarch 31, 2022, compared to additional headcount and the increased utilization of subcontractors to support the growth in our research contracts.

The cost of revenues associated with our Products and Licensing segment decreased by $0.1 million, or 4%, to $3.6$10.9 million for the three months ended September 30, 2017 compared to $3.8 million for the three months ended September 30, 2016. This slight decrease in cost of revenues resulted from lower manufacturing overhead costs associated with our optoelectronic components products. Our overall gross margin remained substantially unchanged at 39% for the three months ended September 30, 2017 and 2016.
Operating Expense
 Three Months Ended September 30,    
 2017 2016 $ Difference % Difference
Operating expense:       
Selling, general and administrative$3,256,074
 $3,816,679
 $(560,605) (15)%
Research, development and engineering833,811
 812,050
 21,761
 3 %
Total operating expense$4,089,885
 $4,628,729
 $(538,844) (12)%
Our selling,March 31, 2021. Selling, general and administrative expense increased primarily due to the acquired LIOS operations and higher integration costs and share-based compensation.
    Research, development and engineering expense decreased $0.6$0.4 million, or 15%13%, to $3.3$2.5 million for the three months ended September 30, 2017March 31, 2022, compared to $3.8$2.9 million for the three months ended September 30, 2016. The decrease in selling, general and administrative expense was primarily due to a $0.2 million decrease in bad debt expense and a $0.2 million decrease in sales and marketing expenses resulting from lower headcount in 2017.
March 31, 2021. Research, development and engineering expense remained substantially unchanged at $0.8decreased primarily due to the timing of expenses from OptaSense last year.
Loss from Continuing Operations Before Income Taxes
    During the three months ended March 31, 2022, we recognized a loss from continuing operations before income taxes of $2.5 million compared to loss from continuing operations before income taxes of $1.7 million for the three months ended September 30, 2017 and 2016.March 31, 2021.
Interest ExpenseIncome Tax Benefit
Interest expense was $0.1 million during each ofFor the three months ended September 30, 2017 and 2016. During the three months ended September 30, 2017, our average outstanding balance on our term loans was $3.1March 31, 2022, we recognized an income tax benefit from continuing operations of $1.1 million, as compared to $4.9an income tax benefit from continuing operations of $0.7 million for the three months ended September 30, 2016.

Income Tax (Benefit)/Expense From Continuing Operations
March 31, 2021. The income tax benefit for the three months ended September 30, 2017March 31, 2022 was $0.1related to the pre-tax loss, research and development ("R&D") tax credits and favorable impact from the net Global Intangible Low Taxed Inclusion ("GILTI"). The income tax benefit for the three months ended March 31, 2021 was primarily related to the pre-tax loss and excess tax benefit on stock compensation vesting and exercises.     

Income from Discontinued Operations, net

For the three months ended March 31, 2022 and 2021, we recognized income from discontinued operations, net of income taxes, of $10.9 million which resulted in an effective tax rate from continuingand $0.7 million, respectively. The results of our discontinued operations for both quarterly periods include the operations of (34.0%), as compared to an immaterial income tax expense, based on an effective tax rateour Luna Labs segment that were held for sale. The results of 13.1%, from continuingour discontinued operations for the three months ended September 30, 2016. The decrease in our effectiveMarch 31, 2022 included a gain of $10.9 million, net of tax, rate resulted from the cumulative impact of the tax benefit associated with continuing operations for the nine months ended September 30, 2017, as the intraperiod allocation of income taxes from discontinued operations resulted from the sale of the HSOR business during the three months ended September 30, 2017, and accordingly, the year-to-date value was recognized in the current period.
Net Income/(Loss) From Continuing Operations
During the three months ended September 30, 2017, we recognized income from continuing operations before income taxes of $0.4 million compared to a loss from continuing operations before income taxes of $0.3 million for the three months ended September 30, 2016. After tax, our net income from continuing operations was $0.5 million for the three months ended September 30, 2017, compared to a net loss from continuing operations of $0.4 million for the three months ended September 30, 2016.
Net Income/(Loss) From Discontinued Operations
For the three months ended September 30, 2017, we recognized net income from discontinued operations of $15.2 million compared to a net loss from discontinued operations of $0.1 million for the three months ended September 30, 2016. For the three months ended September 30, 2017, our net income from discontinued operations included $0.1 million associated with the operations of the HSOR business prior to its sale in addition to a $15.1 million after tax gain recognized on the sale of the HSOR business. For the three months ended September 30, 2016, our net loss from discontinued operations included a $0.1 million loss associated with the operations of the HSORLuna Labs business.


Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

Revenues
23
 Nine Months Ended September 30,    
 2017 2016 $ Difference % Difference
Revenues:       
Technology development$13,428,428
 $11,772,731
 $1,655,697
 14%
Products and licensing19,593,648
 18,301,631
 1,292,017
 7%
Total revenues$33,022,076
 $30,074,362
 $2,947,714
 10%

Technology Development segment revenues increased $1.7 million, or 14%, to $13.4 million for the nine months ended September 30, 2017 compared to $11.8 million for the nine months ended September 30, 2016. The increase for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was realized primarily in our intelligent systems, nanomaterials and biomedical technologies groups.
Products and Licensing segment revenues increased $1.3 million, or 7%, to $19.6 million for the nine months ended September 30, 2017 compared to $18.3 million for the nine months ended September 30, 2016. The increase in Products and Licensing segment revenues was primarily driven by an increase in our sales of optical backscatter reflectometer instruments and optoelectronic components.
Cost of Revenues and Gross Profit
Table of Contents
 Nine Months Ended September 30,    
 2017 2016 $ Difference % Difference
Cost of revenues:       
Technology development$10,045,261
 $8,986,312
 $1,058,949
 12%
Products and licensing10,201,459
 9,954,987
 246,472
 2%
Total cost of revenues20,246,720
 18,941,299
 1,305,421
 7%
Gross profit12,775,356
 $11,133,063
 $1,642,293
 15%

Costs of Technology Development segment revenues increased $1.1 million, or 12%, to $10.0 million for the nine months ended September 30, 2017, compared to $9.0 million the nine months ended September 30, 2016. This increase was primarily driven by increases in direct labor and subcontractor costs over the same period to support the growth in research projects.

Costs of Products and Licensing segment revenues increased $0.2 million, or 2%, to $10.2 million for the nine months ended September 30, 2017 compared to $10.0 million for the nine months ended September 30, 2016. The increase in product and licensing costs is attributable to the component costs associated with increased volume of optical backscatter reflectometer instrument sales during the nine months ended September 30, 2017. Products and Licensing segment costs increased in accordance with the increase in Products and Licensing segment revenues over the same period, taking into account the gross margin effect of the product mix. Our overall gross margin for the nine months ended September 30, 2017 increased to 39% compared to 37% for the nine months ended September 30, 2016.
Operating Expense
 Nine Months Ended September 30,    
 2017 2016 $ Difference % Difference
Operating expense:       
Selling, general and administrative$10,345,964
 $11,296,389
 $(950,425) (8)%
Research, development and engineering2,581,473
 2,789,801
 (208,328) (7)%
Total operating expense$12,927,437
 $14,086,190
 $(1,158,753) (8)%

Selling, general and administrative expenses decreased $1.0 million, or 8%, to $10.3 million for the nine months ended September 30, 2017 compared to $11.3 million for the nine months ended September 30, 2016. The decrease in selling, general and administrative expenses year to date is primarily related to a $0.2 million decrease in bad debt expense, a $0.2 million decrease in share based compensation expense, and a $0.4 million decrease in sales and marketing costs in our Lightwave division driven by reduction in personnel and reduction in commissions related to a shift in sales to areas without distributors or salesmen.

Research, development and engineering expense decreased $0.2 million, or 7%, to $2.6 million for the nine months ended September 30, 2017 compared to $2.8 million for the nine months ended September 30, 2016 due to decreased engineering costs in internal research for our Terahertz product as more engineering time was spent on externally funded research activities and, accordingly, included in Technology Development cost of revenues.

Interest Expense
Interest expense for each of the nine months ended September 30, 2017 and 2016 was $0.2 million. During the first nine months of 2017, our average outstanding loan balance was $3.5 million as compared to $5.4 million for the nine months ended September 30, 2016.

Income Tax Benefit
The income tax benefit for the nine months ended September 30, 2017 was $0.1 million, which resulted in an effective tax rate from continuing operations of 18.8%, as compared to an income tax benefit of $0.2 million, reflecting an effective tax rate of 5.4%, from continuing operations for the nine months ended September 30, 2016. The increase in our effective tax rate for continuing operations for 2017 as compared to 2016, was primarily due to an increase in the intra-period allocation of tax benefit from discontinued operations.

Net Loss From Continuing Operations
During the nine months ended September 30, 2017 we incurred a loss from continuing operations before income taxes of $0.3 million compared to a loss from continuing operations before income taxes of $3.2 million during the nine months ended September 30, 2016. After tax, our net loss from continuing operations was $0.3 million for the nine months ended September 30, 2017, compared to a net loss from continuing operations of $3.0 million for the nine months ended September 30, 2016.

Net Income From Discontinued Operations
For the nine months ended September 30, 2017, we recognized net income from discontinued operations of $14.5 million compared to $0.3 million for the nine months ended September 30, 2016. Net income from discontinued operations for the nine months ended September 30, 2017 included an after tax gain of $15.1 million recognized on the sale of the HSOR business offset by an after tax loss of $0.6 million associated with the operations of the HSOR business prior to its sale. Net income from discontinued operations for the nine months ended September 30, 2016 included the after tax income of $0.3 million associated with the operations of HSOR during the period.



Liquidity and Capital Resources
At September 30, 2017,March 31, 2022, our total cash and cash equivalents were $38.5$10.8 million. We require cash to: (i) fund our operating expenses, working capital requirements, and outlays for strategic acquisitions and investments; (ii) service our debt, including principal and interest; (iii) conduct research and development; (iv) incur capital expenditures; and (v) repurchase our common stock. As part of our business strategy, we review acquisition and divestiture opportunities on a regular basis. In March 2022, we completed the disposition of Luna Labs and the acquisition of LIOS, which are discussed elsewhere in this Form 10-Q. The LIOS acquisition price of $22.1 million was funded from $13.0 million of initial cash proceeds from the disposition of Luna Labs with the remainder of funding coming from availability under our revolver and operating cash.


We currently havebelieve that the key factors that could affect our internal and external sources of cash include:

•Changes in demand for our products, including as a result of the COVID-19 pandemic, competitive pricing pressures, supply chain constraints, effective management of our manufacturing capacity, our ability to achieve further reductions in operating expenses, our ability to make progress on the achievement of our business strategy goals, and our ability to make the research and development expenditures required to remain competitive in our business.

•Our access to bank financing and the debt and equity capital markets that could impair our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including interest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing and our ability to maintain compliance with covenants under our debt agreements in effect from time to time.

As of March 31, 2022, we had outstanding borrowings under our Term Loan and Security Agreement with Silicon Valley Bank ("SVB")Revolving Line of $7.3 million and $15.0 million, respectively. We may repay and reborrow advances under which we have two term loans with an aggregate original borrowing amountthe Revolving Line from time to time pursuant to the Revolving Line of $7.0 million. As of September 30, 2017, these term loans had an aggregate outstanding principal balance of $2.9 million. One term loan, with a balance of $.4 million as of September 30, 2017,Credit Note.

The Term Loan matures on December 1, 2018.2023. The other term loan, withTerm Loan is due and payable in 12 equal quarterly payments of principal and interest. The Term Loan bears interest at a balancefloating per annum rate equal to the sum of $2.5 million as of September 30, 2017, matures(a) LIBOR plus (b) a margin ranging from 1.75% to 2.25% depending on Maythe Net Leverage Ratio (as defined in the Loan Agreement). We may prepay the Term Loan without penalty or premium.

The Revolving Line expires on December 1, 2019. The term loans2023. Borrowings under the Revolving Line will bear interest at a floating primeper annum rate equal to the sum of (a) LIBOR plus 2%. We may prepay amounts(b) a margin ranging from 1.75% to 2.25% depending on the Net Leverage Ratio. Accrued interest will be due underand payable on the term loans atfirst day of each month and the outstanding principal balance and any time, subject to prepayment penalties of up to 2%accrued but unpaid interest will be due and payable on December 1, 2023. The unused portion of the amount of prepayment. Amounts due underRevolving Line will accrue a fee equal to 0.20% per annum multiplied by the term loans are secured by substantially allquarterly average unused amount.

Additional details of our assets, including intellectual property, personal property and bank accounts. The term loans contain customary events of default, including nonpayment of principal, interest or other amounts, violation of covenants, material adverse change, an event of default under any subordinated debt documents, incorrectness of representations and warrantiesLoan Agreement can be found in

any material respect, bankruptcy, judgments in excess of a threshold amount, and violations of other agreements in excess of a threshold amount. If any event of default occurs, SVB may declare due immediately all borrowings under the credit facility and foreclose on the collateral. Furthermore, an event of default under the credit facility would result in an increase Note 8, "Debt" in the interest rate on any amounts outstanding. As of September 30, 2017, we werenotes to our unaudited condensed consolidated financial statements included elsewhere in compliance with all covenants under the Loan and Security Agreement.this Form 10-Q.


We believe that our cash balanceand cash equivalents as of September 30, 2017March 31, 2022 will provide adequate liquidity for us to meet our working capital needs over the next twelve months.months from the date of issuance of the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. Additionally, we believe that should we have the need for increased capital spending to support our planned growth, we will be able to fund such growth through either third-party financing on competitive market terms or through our available cash. However, these estimates are based on assumptions that may prove to be incorrect, including as a result of the ongoing COVID-19 pandemic and its potential impacts on our business. If we require additional capital beyond our current balances of cash and cash equivalents, this additional capital may not be available when needed, on reasonable terms, or at all. Moreover, our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.




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Discussion of Cash Flows
Recent Activity
 Nine months ended March 31,
(in thousands)20222021
Net cash used in operating activities$(2,373)$(2,934)
Net cash used in investing activities(9,964)(409)
Net cash provided/(used in) by financing activities6,429 (405)
Effect of exchange rate changes on cash and cash equivalents(432)176 
Net decrease in cash and cash equivalents$(6,340)$(3,572)
 Nine Months Ended September 30,  
 2017 2016 $ Difference
Net cash provided by/(used in) operating activities$581,386
 $(785,878) $1,367,264
Net cash provided by/(used in) investing activities26,743,345
 (1,750,547) 28,493,892
Net cash used in financing activities(1,612,752) (1,744,464) 131,712
Net increase/(decrease) in cash and cash equivalents$25,711,979
 $(4,280,889) $29,992,868

During the first ninethree months of 2017, operations provided $0.6 million of cash, as compared to the same period in 2016 in which operations used $0.8 million of cash. During the first nine months of 2017,ended March 31, 2022, net cash provided by operating activities consisted of our net income of $14.2 million, which included a gain on the sale of our HSOR business, net of income tax, of $15.1 million, non-cash charges for depreciation and amortization of $2.2 million and share-based compensation of $0.5 million, and a net cash outflow of $1.3 million from changes in working capital (principally driven by a decrease in accounts payable and accrued expenses of $1.6 million and an increase in inventory of $2.3 million, partially offset by a reduction in accounts receivable of $2.1 million).
During the first nine months of 2016, the $0.8 million of cash used in operating activities consistedwas $2.4 million compared to $2.9 million for the comparable period of our2021. Overall, this net lossdecrease in use of $2.7cash was spread over working capital.
    During the three months ended March 31, 2022, cash used in investing activities was $10.0 million which included charges for depreciation and amortization of $2.8increased by $9.6 million and share-based compensation of $0.7 million. Additionally, changesfrom 2021. The increase in working capital resulted in a net cash outflow of $1.8 million, principally driven by a reductionused in accounts payable and accrued liabilities of $1.1 million, a decrease in inventory of $1.0 million, an increase in other current assets of $0.4 million, and an increase of $1.2 million in accounts receivable.
Our cash from investing activities forwas primarily due to the nine months ended September 30, 2017 and 2016 included purchasesacquisition of equipment, capitalized costs associated withLIOS totaling $22.1 million, partially offset from the prosecution of patents as well as proceeds from the sale of our HSOR business in August 2017. Cash provided by investing activities for the nine months ended September 30, 2017 included proceeds from the sale of our HSOR business of $28.0 million, partially offset by $0.9 million of fixed asset additionsLuna Labs totaling $13.0 million. Excluding acquisitions and $0.4 million of capitalized intellectual property costs. Cashsales transactions, cash used in investing activitiesincreased by $0.4 million primarily due to increased capital expenditures for the ninenormal business needs.
    During three months ended September 30, 2016 included fixed asset additions of $1.4March 31, 2022, cash provided by financing activities was $6.4 million, and capitalized intellectual property costs of $0.3 million.
Netcompared to cash used in financing activities duringof $0.4 million in 2021, due to proceeds of $7.5 million from new borrowings used to partially fund the nine months ended September 30, 2017 and 2016 includedacquisition of LIOS in 2022. Excluding the repaymentcurrent year debt borrowings, cash used in financing activities decreased by $0.6 million in 2022 due to a reduction $0.6 million in the proceeds from exercises of the long term debt and repayments of capital lease obligations. In the aggregate, these activities resulted in net cash outflows of $1.6 million and $1.7 million for the nine months of 2017 and 2016, respectively.stock options.

Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4)(ii).

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. We do not hold or issue financial instruments for trading purposes or have any derivative financial instruments. Our exposure to market risk is limited to interest rate fluctuations, due to changes in the general level of U.S. interest rates, and foreign currency exchange rates.
Interest Rate Risk
We do not use derivative financial instruments as a hedge against interest rate fluctuations, and, as a result, interest income earned on our cash and cash equivalents and short-term investments iswe are subject to changes in interest rates. However, we believe that the impact of these fluctuations does not have a material effect on our financial position due to the immediately available liquidity or short-term nature of these financial instruments.
We are exposed to interest rate fluctuations as a result ofrisk on our term loansTerm Loan and Revolving Line with SVB having a variable interest rate. We do not currently use derivative instruments to alterrates based on LIBOR plus a margin as defined in the credit agreement governing the Term Loan and Revolving Line. As of March 31, 2022, we had outstanding borrowings under our Term Loan and Revolving Line of $7.3 million and $15.0 million, respectively, at the weighted-average variable interest rate characteristics of 2.1%. At this borrowing level, a 0.25% increase in interest rates would have had an unfavorable annual impact on our debt. Forpre-tax earnings and cash flows in the principal amount of $2.9 million outstanding under the term loans as of September 30, 2017, a change in the interest rate by one percentage point for one year would result in a change in our annual interest expense of $29,167.
Although we believe that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in our credit quality, composition of our balance sheet and other business developments that could affect our interest rate exposure. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate.approximately $55 thousand.
Foreign Currency Exchange Rate Risk
AsWe are exposed to risks from foreign currency exchange rate fluctuations on the translation of September 30, 2017, all payments made under our research contracts have been denominated in U.S. dollars. Our product sales to foreign customers are also generally denominated inoperations into U.S. dollars and we generally do not receive payments inon the purchase of goods by these foreign currency. As such, weoperations that are not directly exposeddenominated in their functional currencies. As of March 31, 2022, our exposure to significantforeign currency gainsrate fluctuations was not material to our financial condition or losses resulting from fluctuations in foreign exchange rates.

results of operations.


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ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

Under the supervision and with the participation of our management, including our principal executive officerPresident and Chief Executive Officer and our principal financial officer,Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report.quarterly report. Based on this evaluation, our principal executive officerPresident and Chief Executive Officer and our principal financial officerChief Financial Officer have concluded that, as of September 30, 2017,March 31, 2022, our disclosure controls and procedures were effective at the reasonable assurance level.effective.


Changes in Internal Control over Financial Reporting
No changeThere were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2017March 31, 2022 that has materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION
 
ITEM 1.LEGAL PROCEEDINGS


In June 2015,    From time to time, we received a lettermay become involved in litigation or claims arising out of final determination fromour operations in the Defense Contractnormal course of business. Management Agency ("DCMA") regardingcurrently believes the allowabilityamount of certain costs we included in our billings under cost-plus type research contracts during 2007. In conjunction with the DCMA's determination of those costs as expressly unallowable under the provisions of the Federal Acquisition Regulations, the DCMA assessed penalties and interest to us totaling $1.1 million. In July 2015, we filed an appeal of the assessed penalties and interest with the Armed Services Board of Contract Appeals ("ASBCA"). A hearing was heldultimate liability, if any, with respect to this appeal in January 2017, and a decision hasthese actions will not yet been reached by ASBCA. In April 2017, we made a settlement offer of $150,000 to DCMA, and we have accrued that amount inmaterially affect our financial statements asposition, results of September 30, 2017. In May 2017, the DCMA declined our settlement offer. The appeals process remains ongoing.operations, or liquidity.
For additional information regarding our legal proceedings, please refer to our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 20, 2017.

ITEM 1A.RISK FACTORS
You should carefully consider the risks described below before deciding whether to invest in our common stock. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations and financial results. If any of the following risks actually occurs, our business, financial condition or results of operations could be adversely affected. In such case, the trading price of our common stock could decline and you could lose all or part of your investment. Our filings with the SEC also contain forward-looking statements that involve risks or uncertainties. Our actual results could differ materially from those anticipated or contemplated by these forward-looking statements as a result of a number of factors, including the risks we face described below, as well as other variables that could affect our operating results. Past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
RISK FACTORS SUMMARY

Our business is subject to a number of risks and uncertainties, including those risks discussed at-length below. These risks include, among others, the following:

•Risks Relating to our Business
◦Our technology is subject to a license from Intuitive Surgical, Inc., which is revocable in certain circumstances. Without this license, we cannot continue to market, manufacture or sell our fiber-optic products.
◦We depend on third-party vendors for specialized components in our manufacturing operations, making us vulnerable to supply shortages and price fluctuations that could harm our business.
◦As a provider of contract research to the U.S. government, we are subject to federal rules, regulations, audits and investigations, the violation or failure of which could adversely affect our business.
◦Our products must meet exacting specifications, and defects and failures may occur, which may cause customers to return or stop buying our products.
◦The markets for many of our products are characterized by changing technology which could cause obsolescence of our products, and we may incur substantial costs in delivering new products.
•Risks Relating to our Operations and Business Strategy
◦If we fail to properly evaluate and execute our strategic initiatives, it could have an adverse effect on our future results and the market price of our common stock.
◦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.
•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.
◦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.
•Risks Relating to our Intellectual Property
◦Our proprietary rights may not adequately protect our technologies.
◦Third parties may claim that we infringe their intellectual property, and we could suffer significant litigation or licensing expense as a result.
•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.


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◦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.
RISKS RELATING TO OUR BUSINESS GENERALLY
Our technology is subject to a license from Intuitive Surgical, Inc., which is revocable in certain circumstances. Without this license, we cannot continue to market, manufacture or sell our fiber-optic products.
As a part of the sale of certain assets to Intuitive Surgical, Inc. ("Intuitive") in 2014, we entered into a license agreement with Intuitive pursuant to which we received rights to use all of our transferred technology outside the field of medicine and in respect of our existing non-shape sensing products in certain non-robotic medical fields. This license back to us is revocable if after notice and certain time periods, we were to (i) challenge the validity or enforceability of the transferred patents and patent applications, (ii) commercialize our fiber optical shape sensing and localization technology in the field of medicine (except to perform on a development and supply project for Hansen Medical, Inc.), (iii) violate our obligations related to our ability to sublicense in the field of medicine or (iv) violate our confidentiality obligations in a manner that advantages a competitor in the field of medicine and not cure such violation. Maintaining this license is necessary for us to conduct our fiber-optic products business, both for our telecom products and our ODiSI sensing products. If this license were to be revoked by Intuitive, we would no longer be able to market, manufacture or sell these products which would severely limitcould have a material adverse effect on our ability to continue operations.


We depend on third-party vendors for specialized components in our manufacturing operations, making us vulnerable to supply shortages and price fluctuations that could harm our business.
We primarily rely on third-party vendors for the manufacture of the specialized components used in our products. The highly specialized nature of our supply requirements poses risks that we may not be able to locate additional sources of the specialized components required in our business. For example, there are few manufacturers who produce the special lasers used in our optical test equipment. Our reliance on these vendors subjects us to a number of risks that could negatively affect our

ability to manufacture our products and harm our business, including interruption of supply.supply, including as a result of the COVID-19 pandemic. Although we are now manufacturing tunable lasers in low-rate initial production, we expect our overall reliance on third-party vendors to continue. Any significant delay or interruption in the supply of components, or our inability to obtain substitute components or materials from alternate sources at acceptable prices and in a timely manner could impair our ability to meet the demand of our customers and could harm our business.
We depend upon outside contract manufacturers for a portion of the manufacturing process for some of our products. Our operations and revenue related to these products could be adversely affected if we encounter problems with these contract manufacturers.
Many of our products are manufactured internally. However, we also rely upon contract manufacturers to produce the finished portion of some of our optoelectronic components and certain lasers. Our reliance on contract manufacturers for these products makes us vulnerable to possible capacity constraints and reduced control over delivery schedules, manufacturing yields, manufacturing quality control and costs. If the contract manufacturer for our products were unable or unwilling to manufacture our products in required volumes and at high quality levels or to continue our existing supply arrangement, we would have to identify, qualify and select an acceptable alternative contract manufacturer or move these manufacturing operations to internal manufacturing facilities. An alternative contract manufacturer may not be available to us when needed or may not be in a position to satisfy our quality or production requirements on commercially reasonable terms, including price. Any significant interruption in manufacturing our products, including as a result of the COVID-19 pandemic, would require us to reduce the supply of products to our customers, which in turn would reduce our revenue, harm our relationships with the customers of these products and cause us to forego potential revenue opportunities.
As a provider of contract research to the U.S. government, we are subject to federal rules, regulations, audits and investigations, the violation or failure of which could adversely affect our business.
We must comply with and are affected by laws and regulations relating to the award, administration and performance of U.S. government contracts. Government contract laws and regulations affect how we do business with our government customers and, in some instances, impose added costs on our business. A violation of a specific law or regulation could result in the imposition of fines and penalties, termination of our contracts or debarment from bidding on contracts. In some instances,


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these laws and regulations impose terms or rights that are more favorable to the government than those typically available to commercial parties in negotiated transactions. For example, the U.S. government may terminate any of our government contracts and, in general, subcontracts, at their convenience, as well as for default based on performance.
In addition, U.S. government agencies, including the Defense Contract Audit Agency and the Department of Labor, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. The U.S. government also may review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit uncovers the inclusion of certain claimed costs deemed to be expressly unallowable, or improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. In addition, our reputation could suffer serious harm if allegations of impropriety were made against us. In June 2015, we received a determination from the Defense Contract Management Agency ("DCMA") of expressly unallowable costs included in our claimed costs for the 2007 contract year. As a result of that determination, the DCMA assessed us penalties, interest and over billings of $1.1 million. We have appealed that assessment, and our appeal is currently pending. In April 2017, we also made a settlement offer of $150,000 to the DCMA, which the DCMA subsequently declined. Depending on the outcome of this appeal and the response to our settlement offer, we could be required to make payments that have a material adverse effect on our financial position.
In addition to the risk of government audits and investigations, U.S. government contracts and grants impose requirements on contractors and grantees relating to ethics and business practices, which carry civil and criminal penalties including monetary fines, assessments, loss of the ability to do business with the U.S. government and certain other criminal penalties.
We may also be prohibited from commercially selling certain products that we develop under our Technology Development segment or related products based on the same core technologies if the U.S. government determines that the commercial availability of those products could pose a risk to national security. For example, certain of our wireless technologies have been classified as secret by the U.S. government and as a result we cannot sell them commercially. Any of these determinations would limit our ability to generate product sales and license revenues.

We rely and will continue to rely on contracts and grants awarded under the SBIR program for a significant portion of our revenues. A finding by the SBA that we no longer qualify to receive SBIR awards could adversely affect our business.
We compete as a small business for some of our government contracts. Our revenues derived from the SBIR program account for a significant portion of our consolidated total revenues, and contract research, including SBIR contracts, will remain a significant portion of our consolidated total revenues for the foreseeable future. For the nine months ended September 30, 2017 and 2016, revenues generated under the SBIR program represented 32% and 35%, respectively, of our total revenues.
We may not continue to qualify to participate in the SBIR program or to receive new SBIR awards from federal agencies. In order to qualify for SBIR contracts and grants, we must meet certain size and ownership eligibility criteria. These eligibility criteria are applied as of the time of the award of a contract or grant. A company can be declared ineligible for a contract award as a result of a size challenge filed with the SBA by a competitor or a federal agency.
In order to be eligible for SBIR contracts and grants, under current SBA rules we must be more than 50% owned and controlled by individuals who are U.S. citizens or permanent resident aliens, and/or other small business concerns (each of which is more than 50% owned and controlled by individuals who are U.S. citizens or permanent resident aliens) or certain qualified investment companies. In the event our institutional ownership significantly increases, either because of increased buying by institutions or selling by individuals, we could lose eligibility for new SBIR contracts and grants.
Also, in order to be eligible for SBIR contracts and grants, the number of our employees, including those of any entities that are considered to be affiliated with us, cannot exceed 500. As of September 30, 2017, we had approximately 190 full-time employees. In determining whether we are affiliated with any other entity, the SBA may analyze whether another entity controls or has the power to control us. Carilion Clinic is our largest institutional stockholder. Since early 2011, a formal size determination by the SBA that focused on whether or not Carilion is or was our affiliate has been outstanding. Although we do not believe that Carilion has or had the power to control our company, we cannot assure you that the SBA will interpret its regulations in our favor on this question. If the SBA were to make a determination that we are or were affiliated with Carilion, we would exceed the size limitations, as Carilion has over 500 employees. In that case, we would lose eligibility for new SBIR contracts and grants and other awards that are set aside for small businesses based on the criterion of number of employees, and the relevant government agency would have the discretion to suspend performance on existing SBIR grants. The loss of our eligibility to receive SBIR awards would have a material adverse impact on our revenues, cash flows and our ability to fund our growth.
Moreover, as our business grows, it is foreseeable that we will eventually exceed the SBIR size limitations, in which case we may be required to seek alternative sources of revenues or capital.
A decline in government research contract awards or government funding for existing or future government research contracts, including SBIR contracts, could adversely affect our revenues, cash flows and ability to fund our growth.
Technology Development segment revenues, which consist primarily of government-funded research, accounted for 41% and 39% of our consolidated total revenues for the nine months ended September 30, 2017 and 2016, respectively. As a result, we are vulnerable to adverse changes in our revenues and cash flows if a significant number of our research contracts and subcontracts were to be simultaneously delayed or canceled for budgetary, performance or other reasons. For example, the U.S. government may cancel these contracts at any time without cause and without penalty or may change its requirements, programs or contract budget, any of which could reduce our revenues and cash flows from U.S. government research contracts. Our revenues and cash flows from U.S. government research contracts and subcontracts could also be reduced by declines or other changes in U.S. defense, homeland security and other federal agency budgets. In addition, we compete as a small business for some of these contracts, and in order to maintain our eligibility to compete as a small business, we, together with any affiliates, must continue to meet size and revenue limitations established by the U.S. government.
Our contract research customer base includes government agencies, corporations and academic institutions. Our customers are not obligated to extend their agreements with us and may elect not to do so. Also, our customers’ priorities regarding funding for certain projects may change and funding resources may no longer be available at previous levels.
In addition, the Budget Control Act commits the U.S. government to reduce the federal deficit by $1.2 trillion over ten years through a combination of automatic, across-the-board spending cuts and caps on discretionary spending. This “sequestration” under the Budget Control Act, which is split equally between defense and non-defense programs, went into effect on March 1, 2013. Any spending cuts required by “sequestration” could have a material adverse effect on our Technology Development revenues and, consequently, our results of operations. While the exact manner in which this

“sequestration” may impact our business remains unclear, funding for programs in which we participate could be reduced, delayed or canceled. Our ability to obtain new contract awards also could be negatively affected.
In addition to contract cancellations and changes in agency budgets, our future financial results may be adversely affected by curtailment of or restrictions on the U.S. government’s use of contract research providers, including curtailment due to government budget reductions and related fiscal matters or any legislation or resolution limiting the number or amount of awards we may receive. These or other factors could cause U.S. defense and other federal agencies to conduct research internally rather than through commercial research organizations or direct awards to other organizations, to reduce their overall contract research requirements or to exercise their rights to terminate contracts. Alternatively, the U.S. government may discontinue the SBIR program or its funding altogether. Also, SBIR regulations permit increased competition for SBIR awards from companies that may not have previously been eligible, such as those backed by venture capital operating companies, hedge funds and private equity firms. Any of these developments could limit our ability to obtain new contract awards and adversely affect our revenues, cash flows and ability to fund our growth.
Our narrowed scope and focus may make it more difficult for us to achieve or maintain operating profitability
Through the recent sale of our HSOR business to a third party, we have reduced our overall size and narrowed our focus. Although we anticipate realizing cost savings as a result of the sale of the HSOR operations, we will continue to incur significant operating expenses associated with our public company infrastructure. Accordingly, we will need to significantly increase the revenue we generate from our remaining operations in order to achieve or maintain operating profitability. While we intend to use a portion of the proceeds from the sale of the HSOR business to invest in our fiber optic sensing business, there can be no guarantee that these efforts will result in increased revenues sufficient to achieve or maintain profitability.
Our failure to attract, train and retain skilled employees or members of our senior management and to obtain necessary security clearances for such persons or maintain a facility security clearance would adversely affect our business and operating results.
The availability of highly trained and skilled technical and professional personnel is critical to our future growth and profitability. Competition for scientists, engineers, technicians and professional personnel is intense and our competitors aggressively recruit key employees. In the past, we have experienced difficulties in recruiting and hiring these personnel as a result of the tight labor market in certain fields. Any difficulty in hiring or retaining qualified employees, combined with our growth strategy and future needs for additional experienced personnel, particularly in highly specialized areas such as nanomaterial manufacturing and fiber optic sensing technologies, may make it more difficult to meet all of our needs for these employees in a timely manner. Although we intend to continue to devote significant resources to recruit, train and retain qualified employees, we may not be able to attract and retain these employees, especially in technical fields in which the supply of experienced qualified candidates is limited, or at the senior management level. Any failure to do so would have an adverse effect on our business. Any loss of key personnel could have a material adverse effect on our ability to meet key operational objectives, such as timely and effective project milestones and product introductions, which in turn could adversely affect our business, results of operations and financial condition.

We provide certain services to the U.S. government that require us to maintain a facility security clearance and for certain of our employees and our board chairman to hold security clearances. In general, the failure for necessary persons to obtain or retain sufficient security clearances, any loss by us of a facility security clearance or any public reprimand related to security matters could result in a U.S. government customer terminating an existing contract or choosing not to renew a contract or prevent us from bidding on or winning certain new government contracts.
In addition, our future success depends in a large part upon the continued service of key members of our senior management team. We do not maintain any key-person life insurance policies on our officers. The loss of any members of our management team or other key personnel could seriously harm our business.
Our business is subject to the cyclical nature of the markets in which we compete and any future downturn may reduce demand for our products and revenue.
Many factors beyond our control affect our business, including consumer confidence in the economy, interest rates, fuel prices, health crises, such as the COVID-19 pandemic, international conflicts, such as the current hostilities between Russia and Ukraine, and the general availability of credit. The overall economic climate and changes in Gross National Product growth have a direct impact on some of our customers and the demand for our products. We cannot be sure that our business will not be adversely affected as a result of an industry or general economic downturn.


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Our customers may reduce capital expenditures and have difficulty satisfying liquidity needs because of continued turbulence in the U.S. and global economies, resulting in reduced sales of our products and harm to our financial condition and results of operations.

In particular, our historical results of operations have been subject to substantial fluctuations, and we may experience substantial period-to-period fluctuations in future results of operations. Any future downturn in the markets in which we compete could significantly reduce the demand for our products and therefore may result in a significant reduction in revenue or increase the volatility of the price of our common stock. Our revenue and results of operations may be adversely affected in the future due to changes in demand from customers or cyclical changes in the markets utilizing our products.
In addition, the telecommunications industry has, from time to time, experienced, and may again experience, a pronounced downturn. To respond to a downturn, many service providers may slow their capital expenditures, cancel or delay new developments, reduce their workforces and inventories and take a cautious approach to acquiring new equipment and technologies from original equipment manufacturers, which would have a negative impact on our business. Weakness in the global economy or a future downturn in the telecommunications industry may cause our results of operations to fluctuate from quarter-to-quarter and year-to-year, harm our business, and may increase the volatility of the price of our common stock.
Customer acceptance of our products is dependent on our ability to meet changing requirements, and any decrease in acceptance could adversely affect our revenue.
Customer acceptance of our products is significantly dependent on our ability to offer products that meet the changing requirements of our customers, including telecommunication, military, medical and industrial corporations, as well as government agencies. Any decrease in the level of customer acceptance of our products could harm our business.
Our products must meet exacting specifications, and defects and failures may occur, which may cause customers to return or stop buying our products.
Our customers generally establish demanding specifications for quality, performance and reliability that our products must meet. However, our products are highly complex and may contain defects and failures when they are first introduced or as new versions are released. Our products are also subject to rough environments as they are integrated into our customer products for use by the end customers. If defects and failures occur in our products, we could experience lost revenue, increased costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or shipments, product returns or discounts, diversion of management resources or damage to our reputation and brand equity, and in some cases consequential damages, any of which would harm our operating results. In addition, delays in our ability to fill product orders as a result of quality control issues may negatively impact our relationship with our customers. We cannot assure you that we will have sufficient resources, including any available insurance, to satisfy any asserted claims.
Rapidly changing standards and regulations could make our products obsolete, which would cause our revenue and results of operations to suffer.
We design products to conform to our customers’ requirements and our customers’ systems may be subject to regulations established by governments or industry standards bodies worldwide. Because some of our products are designed to conform to current specific industry standards, if competing or new standards emerge that are preferred by our customers, we would have to make significant expenditures to develop new products. If our customers adopt new or competing industry standards with which our products are not compatible, or the industry groups adopt standards or governments issue regulations with which our products are not compatible, our existing products would become less desirable to our customers and our revenue and results of operations would suffer.
The markets for many of our products are characterized by changing technology which could cause obsolescence of our products, and we may incur substantial costs in delivering new products.
The markets for many of our products are characterized by changing technology, new product introductions and product enhancements, and evolving industry standards. The introduction or enhancement of products embodying new technology or the emergence of new industry standards could render existing products obsolete, and result in a write down to the value of our inventory, or result in shortened product life cycles. Accordingly, our ability to compete is in part dependent on our ability to continually offer enhanced and improved products.
The success of our new product offerings will depend upon several factors, including our ability to:


•accurately anticipate customer needs;
•innovate and develop new technologies and applications;
•successfully commercialize new technologies in a timely manner;
•price products competitively and manufacture and deliver products in sufficient volumes and on time; and

•differentiate our product offerings from those of our competitors.
 
Some of our products are used by our customers to develop, test and manufacture their products. We therefore must anticipate industry trends and develop products in advance of the commercialization of our customers’ products. In developing any new product, we may be required to make a substantial investment before we can determine the commercial viability of the new product. If we fail to accurately foresee our customers’ needs and future activities, we may invest heavily in research and development of products that do not lead to significant revenues.
Our inability to find new customers or retain existing customers could harm our business.
Our business is reliant on our ability to find new customers and retain existing customers. In particular, customers normally purchase certain of our products and incorporate them into products that they, in turn, sell in their own markets on an ongoing basis. As a result, the historical sales orof these products have been dependent upon the success of our customers’ products and theour future performance of our business is dependent upon our success in finding new customers and receiving new orders from existing customers.


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In several markets, the quality and reliability of our products are a major concern for our customers, not only upon the initial manufacture of the product, but for the life of the product. Many of our products are used in remote locations for higher value assembly, making servicing of our products unfeasible. Any failure of the quality or reliability of our products could harm our business.
If our customers do not qualify our products or if their customers do not qualify their products, our results of operations may suffer.
Most of our customers do not purchase our optoelectronics products prior to qualification of the products and satisfactory completion of factory audits and vendor evaluation. Our existing products, as well as each new product, must pass through varying levels of qualification with our customers. In addition, because of the rapid technological changes in some markets, a customer may cancel or modify a design project before we begin large-scale manufacturing and receiving revenues from the customer. It is unlikely that we would be able to recover the expenses for cancelled or unutilized custom design projects. It is difficult to predict with any certainty whether our customers will delay or terminate product qualification or the frequency with which customers will cancel or modify their projects. Any such delay, cancellation or modification could have a negative effect on our results of operations.
In addition, once a customer qualifies a particular supplier’s product or component, these potential customers design the product into their system, which is known as a design-in win. Suppliers whose products or components are not designed in are unlikely to make sales to that customer until at least the adoption of a future redesigned system. Even then, many customers may be reluctant to incorporate entirely new products into their new systems, as doing so could involve significant additional redesign efforts and increased costs. If we fail to achieve design-in wins in potential customers’ qualification processes, we will likely lose the opportunity for significant sales to those customers for a lengthy period of time.
If the end user customers that purchase systems from our customers fail to qualify or delay qualifications of any products sold by our customers that contain our products, our business could be harmed. The qualification and field testing of our customers’ systems by end user customers is long and unpredictable. This process is not under our control or that of our customers and, as a result, the timing of our sales may be unpredictable. Any unanticipated delay in qualification of one of our customers’ products could result in the delay or cancellation of orders from our customers for products included in their equipment, which could harm our results of operations.
Customer demand for our products is difficult to accurately forecast and, as a result, we may be unable to optimally match production with customer demand, which could adversely affect our business and financial results.
We make planning and spending decisions, including determining the levels of business that we will seek and accept, production schedules, inventory levels, component procurement commitments, personnel needs and other resource requirements, based on our estimates of customer requirements. The short-term nature of commitments by many of our customers and the possibility of unexpected changes in demand for their products reduce our ability to accurately estimate future customer requirements. On occasion, customers may require rapid increases in production, which can strain our resources, cause our manufacturing to be negatively impacted by materials shortages, necessitate higher or more restrictive procurement commitments, increase our manufacturing yield loss and scrapping of excess materials, and reduce our gross margin. We may not have sufficient capacity at any given time to meet the volume demands of our customers, or one or more of our suppliers may not have sufficient capacity at any given time to meet our volume demands. Conversely, a downturn in the markets in which our customers compete can cause, and in the past have caused, our customers to significantly reduce or delay

the amount of products ordered or to cancel existing orders, leading to lower utilization of our facilities. Because many of our costs and operating expenses are relatively fixed, reduction in customer demand due to market downturns or other reasons would have a negative effect on our gross margin, operating income and cash flow.
Customer orders
Rapidly changing standards and forecasts areregulations could make our products obsolete, which would cause our revenue and results of operations to suffer.

    We design products to conform to our customers’ requirements and our customers’ systems may be subject to cancellationregulations established by governments or modification at any time which could result in higher manufacturing costs.
Our salesindustry standards bodies worldwide. Because some of our products are made primarily pursuantdesigned to standard purchase orders for delivery of products. However, byconform to current specific industry practice, some orders may be canceledstandards, if competing or modified at any time. When a customer cancels an order, theynew standards emerge that are responsible for all finished goods, all costs, direct and indirect, incurred by us, as well as a reasonable allowance for anticipated profits. No assurance can be given that we will receive these amounts after cancellation. Furthermore, uncertainty in customer forecasts of their demands and other factors may lead to delays and disruptions in manufacturing, which could result in delays in product shipments to customers and could adversely affect our business.
Fluctuations and changes in customer demand are common in our business. Such fluctuations, as well as quality control problems experienced in manufacturing operations, may cause delays and disruptions in our manufacturing process and overall operations and reduce output capacity. As a result, product shipments could be delayed beyond the shipment schedules requestedpreferred by our customers, we would have to make significant expenditures to develop new products. If our customers adopt new or could be canceled,competing industry standards with which our products are not compatible, or the industry groups adopt standards or governments issue regulations with which our products are not compatible, our existing products would negatively affectbecome less desirable to our sales, operating income, strategic position at customers market share and reputation. In addition, disruptions, delays or cancellations could cause inefficient production which in turn could result in higher manufacturing costs, lower yieldsour revenue and potential excess and obsolete inventory or manufacturing equipment. In the past, we have experienced such delays, disruptions and cancellations.results of operations would suffer.
The results of our operations could be adversely affected by economic and political conditions and the effects of these conditions on our customers’ businesses and levels of business activity.
Global economic and political conditions affect our customers’ businesses and the markets they serve. A severe or prolonged economic downturn, including during and following the COVID-19 pandemic, or a negative or uncertain political climate could adversely affect our customers’ financial conditions and the timing or levels of business activity of our customers and the industries we serve. This may reduce the demand for our products or depress pricing for our products and have a material adverse effect on our results of operations. Changes in global economic conditions could also shift demand to products or services for which we do not have competitive advantages, and this could negatively affect the amount of business we are able to obtain. In addition, if we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, and our business could be negatively affected as a result.
We have a history ofexperienced net losses in the past, and because our strategy for expansion may be costly to implement, we may experience continuing losses and may never achieve ornot maintain profitability or positive cash flow.
We realized ahave experienced net loss from continuing operations of $0.3 million and $3.0 million forlosses in the nine months ended September 30, 2017 and 2016, respectively.past. We expect to continue to incur significant expenses as we pursue our strategic initiatives, including increased expenses for research and development, sales and marketing and manufacturing. We may also grow our business in part through acquisitions of additional companies and complementary technologies which could cause us to incur greater than anticipated transaction expenses, amortization or write-offs of intangible assets and other acquisition-related expenses. As a result, we may incur net losses forin the foreseeable future, and these losses could be substantial. At a certain level, continued net losses could impair our ability to comply with NASDAQNasdaq continued listing standards, as described further below.
Our ability to generate additional revenues and remain profitable will depend on our ability to execute our key growth initiative regarding the development, marketing and sale of sensing products, develop and commercialize innovative


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technologies, expand our contract research capabilities and sell the products that result from those development initiatives. We may not be able to sustain or increase our profitability on a quarterly or annual basis.

We have obtained capital by borrowing money under a term loansloan and revolving line of credit and we might require additional capital to support and expand our business; our term loan hasand revolving line of credit have various loan covenants with which we must comply.
We intend to continue to make investments to support our business growth, including developing new products, enhancing our existing products, obtaining important regulatory approvals, enhancing our operating infrastructure, completing our development activities and building our commercial scale manufacturing facilities. To the extent that we are unable to become or remain profitable and to finance our activities from continuing operations, we may require additional funds to support these initiatives and to grow our business.
If we are successful in raising additional funds through issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, including as the result of the issuance of warrants in connection with the financing, and any new equity securities we issue could have rights, preferences and privileges superior to those of our existing common stock. Furthermore, such financings may jeopardize our ability to apply for SBIR grants or qualify for SBIR contracts or grants, and our dependence on SBIR grants may restrict our ability to raise additional outside capital. If we raise additional

funds through debt financings, these financings may involve significant cash payment obligations and covenants that restrict our ability to operate our business and make distributions to our stockholders.
We have a term loansloan and borrowings under a revolving line of credit with Silicon ValleyPNC Bank, National Association("SVB"PNC"), which requiresrequire us to observe certain financialcomply with a number of affirmative and operationalrestrictive covenants including, among others, affirmative covenants regarding delivery of financial statements, payment of taxes, and maintenance of a minimum cash balancegovernment compliance, and restrictive covenants regarding dispositions of $4.0 million, protectionproperty, acquisitions, incurrence of additional indebtedness or liens, investments and registrationtransactions with affiliates. We are also restricted from paying dividends or making other distributions or payments on our capital stock, subject to limited exceptions.Upon the occurrence of intellectual property rights,certain events, including our failure to satisfy its payment obligations, failure to adhere to these covenants, the breach of certain of our other covenants, cross defaults to other indebtedness or material agreements, judgment defaults and certain customary negative covenants, as well asdefaults related to failure to maintain governmental approvals, PNC will have the right, among other customary events of default. If any event of default occurs SVB mayremedies, to declare all principal and interest immediately due immediately all borrowings under our term loans and foreclose on the collateral. Furthermore, an event of default would result in an increase in the interest rate on any amounts outstanding.payable, and to exercise secured party remedies.
If we are unable to obtain adequate financing or financing terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.
Our nanotechnology-enabled products are new and may be, or may be perceived as being, harmful to human health or the environment.
While we believe that none of our current products contain chemicals known by us to be hazardous or subject to environmental regulation, it is possible that our current or future products, particularly carbon-based nanomaterials, may become subject to environmental or other regulation. We intend to develop and sell carbon-based nanomaterials as well as nanotechnology-enabled products, which are products that include nanomaterials as a component to enhance those products’ performance. Nanomaterials and nanotechnology-enabled products have a limited historical safety record. Because of their size or shape or because they may contain harmful elements, such as gadolinium and other rare-earth metals, our products could pose a safety risk to human health or the environment. These characteristics may also cause countries to adopt regulations in the future prohibiting or limiting the manufacture, distribution or use of nanomaterials or nanotechnology-enabled products. Such regulations may inhibit our ability to sell some products containing those materials and thereby harm our business or impair our ability to develop commercially viable products.
The subject of nanotechnology has received negative publicity and has aroused public debate. Government authorities could, for social or other purposes, prohibit or regulate the use of nanotechnology. Ethical and other concerns about nanotechnology could adversely affect acceptance of our potential products or lead to government regulation of nanotechnology-enabled products.
We face and will face substantial competition in several different markets that may adversely affect our results of operations.
We face and will face substantial competition from a variety of companies in several different markets. As we focus on developing marketing and selling fiber optic sensing products, we may also face substantial and entrenched competition in that market.
Many of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. In addition, current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers or other third parties. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share. We cannot assure you that we will be able to compete successfully against current or new competitors, in which case our revenues may fail to increase or may decline.
Intense competition in our markets could result in aggressive business tactics by our competitors, including aggressively pricing their products or selling older inventory at a discount. If our current or future competitors utilize aggressive business tactics, including those described above, demand for our products could decline, we could experience delays or cancellations of customer orders, or we could be required to reduce our sales prices.
Decreases in average selling prices of our products may increase operating losses and net losses, particularly if we are not able to reduce expenses commensurately.
The market for optical components and subsystems continues to be characterized by declining average selling prices resulting from factors such as increased price competition among optical component and subsystem manufacturers, excess capacity, the introduction of new products and increased unit volumes as manufacturers continue to deploy network and storage systems. In recent years, we have observed a significant decline of average selling prices, primarily in the telecommunications market. We anticipate that average selling prices will continue to decrease in the future in response to product introductions by competitors or by us, or in response to other factors, including price pressures from significant customers. In order to sustain profitable operations, we must, therefore, reduce the cost of our current designs or continue to develop and introduce new

products on a timely basis that incorporate features that can be sold at higher average selling prices. Failure to do so could cause our sales to decline and operating losses to increase.
Our cost reduction efforts may not keep pace with competitive pricing pressures. To remain competitive, we must continually reduce the cost of manufacturing our products through design and engineering changes. We may not be successful in redesigning our products or delivering our products to market in a timely manner. We cannot assure you that any redesign will result in sufficient cost reductions enabling us to reduce the price of our products to remain competitive or positively contribute to operating results.
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.
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RISKS RELATING TO OUR OPERATIONS AND BUSINESS STRATEGY
If we fail to properly evaluate and execute our Operationsstrategic initiatives, including the integration of acquired businesses, it could have an adverse effect on our future results and Business Strategythe 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 LIOS in March 2022. 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.licensing, particularly following our sale of Luna Labs in March 2022. 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.
If we are unable to manage growth effectively, our revenues and net loss could be adversely affected.
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.



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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;
•potential changes in a specific country's or region's political or economic climate, including the current hostilities between Russia and Ukraine;
•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 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 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.

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



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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. For example, we recently sold our HSOR business to a third party. 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, productsproduct 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.
We may be liable for damages basedHealth epidemics, including the COVID-19 pandemic, have had, and could in the future have, an adverse impact on product liability claims relating to defectsour business, operations, and the markets and communities in our products, which might be brought against us directly, or against our customers in their end-use markets. Such claims could result in a loss of customers in addition to substantial liability in damages.

Our products are complexwe and undergo quality testing as well as formal qualification, both by our customers and suppliers operate.
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. The COVID-19 pandemic has affected how we interact with our customers by us. However, defects may occur from time to time. Our customers’ testing procedures may be limited to evaluatingreducing face-to-face meetings and increasing our products under likelyon-line and foreseeable failure scenariosvirtual presence. While increasing our on-line and over varying amounts of time. For various reasons, such as the occurrence of performance problems thatvirtual presence has proven effective, we are unforeseeable in testing or that are detected only when products age or are operated under peak stress conditions, our products may fail to perform as expected long after customer acceptance. Failures could result from faulty components or design, problems in manufacturing or other unforeseen reasons. As a result, we could incur significant costs to repair or replace defective products under warranty, particularly when such failures occur in installed systems. In addition, we may in certain circumstances honor warranty claims after the warranty has expired or for problems not covered by warranty in order to maintain customer relationships. Any significant product failure could result in lost future salesunsure of the affected productimpact if these conditions continue for an extended period. During 2021, and other products, as well as customer relations problems, litigationcontinuing in 2022, we experienced an increased level of disruption in our supply chain and damage to our reputation.
In addition, many of our products are embedded in, or deployed in conjunction with, our customers’ products, which incorporate a variety of components, modules and subsystems and may be expected to interoperate with modules produced by third parties. As a result, not all defects are immediately detectable, and, when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from internal product development efforts and cause significant customer relations problems or loss ofcertain customers all of which would harm our business.
Furthermore, many ofhave resulted in delayed revenue. While we believe these disruptions are temporary, there is no guarantee we will be able to manage through these disruptions.   If the demand for our products, may provideor our access to critical performance attributes to our customers’ products that will be sold to end users who could potentially bring product liability suits in which we could be named as a defendant. The sale of these products involves the risk of product liability claims. If a personcomponents were to bring a product liability suit against one of our customers, this customer may attempt to seek contribution from us. A person may also bring a product liability claim directly against us. A successful product liability claim or series of claims against us in excess of our insurance coverage for payments, for which we are not otherwise indemnified,be interrupted, it could have a material adverse effect on our financial condition or results of operations.
We could be negatively affected by a security breach, 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, 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.
As a technology company, and particularly as a government contractor, we may face a heightened risk of a security breach or disruption from threats to gain unauthorized access to our proprietary, confidential or classified information on our IT networks and related systems. 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 the operations of certain of our customers. In addition, as certain of our technological capabilities become widely known, it is possible that we may be subjected to cyber-attack or 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. 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.
A security breach 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. Any of these developments could have a negative impact on our results of operations.
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 financial condition and cash flows.
Risks Relatingthose 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 Regulatory Environmentinability 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.
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 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 widespread epidemics will not occur, or that the global economy will recover, either of which could seriously harm our business.




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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.
Medical products are subject to various international regulatory processes and approval requirements. If we do not obtain and maintain the necessary international regulatory approvals for any such potential products, we may not be able to market and sell our medical products in foreign countries.
To be able to market and sell medical products in other countries, we must obtain regulatory approvals and comply with the regulations of those countries. These regulations, including the requirements for approvals and the time required for regulatory review, vary from country to country. Obtaining and maintaining foreign regulatory approvals are expensive, and we cannot be certain that we will have the resources to be able to pursue such approvals or whether we would receive regulatory approvals in any foreign country in which we plan to market our products. For example, the European Union requires that manufacturers of medical products obtain the right to affix the CE mark to their products before selling them in member countries of the European Union, which we have not yet obtained and may never obtain. If we fail to obtain regulatory approval in any foreign country in which we plan to market our products, our ability to generate revenues will be harmed.
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 partythird-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

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 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


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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.
Risks Relating
We are or may become subject to a variety of privacy and data security laws, and our Intellectual Propertyfailure 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 constantly evolving federal and state privacy and data security laws and regulations governing the collection, use, disclosure and protection of personal information. Each of these laws can be subject to varying interpretations.
Certain federal regulators have been focusing on cybersecurity as an area of concern for several years. For example, in guidance from the SEC since at least 2011, cybersecurity has been raised as an area where companies, which would include global investment firms, must disclose both threats to the company and material cyber events that have been experienced by that company. In at least three cases from the latter half of 2021, the SEC brought enforcement actions against registered companies that failed to report such cyber events. We expect increasing SEC enforcement activity related to cybersecurity matters, including by the SEC’s Office of Compliance Inspections and Examinations (OCIE) in its examination programs, where cybersecurity has been prioritized with an emphasis on, among other things, proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security. Further, the SEC has indicated in recent remarks that areas of focus for potential new policies and initiatives could include cyber hygiene and preparedness, cyber incident reporting to the government and, in certain circumstances disclosure to the public.
In addition, states are constantly adopting new laws or amending existing laws, requiring attention to frequently changing regulatory requirements. For example, the California Consumer Privacy Act, or the CCPA, which took effect on January 1, 2020, is an example of a trend toward increasingly comprehensive privacy legislation being introduced 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 Colorado, 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. 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, 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


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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.

Certain jurisdictions have enacted data localization laws and cross-border personal data transfer laws, which could make it more difficult to transfer information across jurisdictions (such as transferring or receiving personal data that originates in the EU). Existing mechanisms that may facilitate cross-border personal data transfers may change or be invalidated. For example, absent appropriate safeguards or other circumstances, the EU GDPR generally restricts the transfer of personal data to countries outside of the EEA, such as the United States, which the European Commission does not consider to provide an adequate level of data privacy and security. The European Commission released a set of “Standard Contractual Clauses” in June 2021 that are designed to be a valid mechanism by which entities can transfer personal data out of the EEA to jurisdictions that the European Commission has not found to provide an adequate level of protection. Currently, these Standard Contractual Clauses are a valid mechanism to transfer personal data outside of the EEA. The Standard Contractual Clauses, however, require parties that rely upon that legal mechanism to comply with additional obligations, such as conducting transfer impact assessments to determine whether additional security measures are necessary to protect the at-issue personal data. Moreover, due to potential legal challenges, there exists some uncertainty regarding whether the Standard Contractual Clauses will remain a valid mechanism for transfers of personal data out of the EEA. In addition, laws in Switzerland and the UK similarly restrict transfers of personal data outside of those jurisdictions to countries such as the United States that do not provide an adequate level of personal data protection.

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. On June 28, 2021, the European Commission announced a decision of “adequacy” concluding that the UK ensures an equivalent level of data protection to the GDPR, which provides some relief regarding the legality of continued personal data flows from the EEA to the UK. Some uncertainty remains, however, as this adequacy determination must be renewed after four years and may be modified or revoked in the interim. We cannot fully predict how the Data Protection Act, the UK GDPR, and other UK data protection laws or regulations may develop in the medium to longer term nor the effects of divergent laws and guidance regarding how data transfers to and from the UK will be regulated

All of these evolving compliance and operational requirements may impose significant costs that are likely to increase over time, and may require us to (a) modify our data processing practices and policies, (b) put in place additional mechanisms ensuring compliance with the new data protection rules, (c) divert resources from other initiatives and projects, and (d) 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, compliance with these and any other applicable privacy and data security laws and regulations is a rigorous and time-intensive process. 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. In addition to the foregoing, any breach of privacy laws or data security laws, particularly resulting in a 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


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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
•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 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,


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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 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.
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.



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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.


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 $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;
•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;
•political, economic and social instability, including, for example, the military incursion of Russia into Ukraine, terrorist activities and any disruption these events may cause to the broader global industrial economy;
•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.
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


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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.
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


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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.

GENERAL RISK FACTORS

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 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.
Carilion Clinic holds approximately 3.5 million shares of our common stock (including approximately 1.3 million shares issuable to Carilion upon conversion of shares of Series A Convertible Preferred Stock that Carilion holds). All of these shares have been registered for sale on a Form S-3 registration statement and, accordingly, may generally be freely sold by Carilion at any time. Any sales of these shares, or the perception that future sales of shares may occur by Carilion or any of our other significant stockholders, may have a material adverse effect on the market price of our stock. Any such continuing material adverse effect on the market price of our stock could impair our ability to comply with NASDAQ’s continuing listing standards in respect of our minimum stock price, as further described below.
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.



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We may not be ableare obligated to comply with all applicable listing requirements or standards of The NASDAQ Capital Marketdevelop and NASDAQ could delist our common stock.
Our common stock is listed on The NASDAQ Capital Market. In ordermaintain proper and effective internal controls over financial reporting and any failure to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards. One such requirement is that we maintain a minimum bid pricethe adequacy of at least $1.00 per share for our common stock. Although we currently comply with the minimum bid requirement, in the recent past, our minimum bid price has fallen below $1.00 per share, and it could again do so in the future. If our bid price falls below $1.00 per share for 30 consecutive business days, we will receive a deficiency notice from NASDAQ advising us that we have 180 days to regain compliance by maintaining a minimum bid price of at least $1.00 for a minimum of ten consecutive business days. Under certain circumstances, NASDAQ could require that the minimum bid price exceed $1.00 for more than ten consecutive days before determining that a company complies.
In the event that our common stock is not eligible for continued listing on NASDAQ or another national securities exchange, trading of our common stock could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reductionthese internal controls may adversely affect investor confidence in our coverage by security analystscompany and, as a result, the news media, which could cause the price of our common stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange.
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 $5.00 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;
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;
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 pricevalue of our common stock.
If our internal control over financial reporting is found not
We are required, pursuant to be effective or if we make disclosure of existing or potential material weaknesses in those controls, investors could lose confidence in our financial reports, and our stock price may be adversely affected.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include an internal controlfurnish a report with our Annual Reportby management on, Form 10-K. That report must include management’s assessment ofamong other things, the effectiveness of our internal control over financial reporting ason an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.

During the endevaluation and testing process of the fiscal year.
We evaluate our existinginternal controls, if we identify one or more material weaknesses in our internal control over financial reporting, based on the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. During the course ofwe will be unable to assert that our ongoing evaluation of the internal controls,control over financial reporting is effective. While we may identify areas requiring improvement, and may have to design enhanced processesestablished certain procedures and controls to address issues identified through this review. Remedying any deficiencies, significant deficiencies or material weaknesses thatover our financial reporting processes, we identify may require us to incur significant costs and expend significant time and management resources. We cannot assure you that anythese efforts will prevent restatements of the measures we implement to remedy any such deficiencies will effectively mitigate or remedy such deficiencies. Investors could lose confidence in our financial reports,statements in the future. We may not be able to remediate any future material weaknesses, or to complete our evaluation, testing and our stock price may be adversely affected, if ourany required remediation in a timely fashion.

Any failure to maintain internal controlscontrol over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are found notunable to beconclude that our internal control over financial reporting is effective, by management or if we make disclosurecould lose investor confidence in the accuracy and completeness of existing or potential significant deficiencies or material weaknesses in those controls.
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 overfinancial reports, the market price of our common stock could decline, 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, whichwe could be used to dilute the stock ownership of a potential hostile acquirer.

We are also subject to provisionssanctions 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 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.capital markets.
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.








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ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Unregistered Sales of Equity Securities during the Three Months Ended September 30, 2017March 31, 2022
Common Stock Dividend Payable to CarilionNot applicable.
We issued 1,321,514 shares of Series A Preferred Stock, par value $0.001 per share, to Carilion Clinic in January 2010, which shares were issued in reliance on the exemptions from registration under the Securities Act provided by Sections 3(a)(9) and 4 (a)(2) thereof. The Series A Preferred Stock accrues dividends at the rate of $0.2815 per share per annum, payable quarterly in arrears. Accrued dividends are payable in shares of our common stock, with the number of shares being equal to the quotient of (i) the cumulative aggregate balance of accrued but unpaid dividends on each share of Series A Preferred Stock divided by (ii) the conversion price of the Series A Preferred Stock, which is currently $4.69159 per share. For the period from January 12, 2010, the original issue date of the Series A Preferred Stock, through September 30, 2017, the Series A Preferred Stock issued to Carilion has accrued $1,110,773 in dividends. The accrued dividend as of September 30, 2017 will be paid by the issuance of 611,870 shares of our common stock, which we will issue at Carilion’s written request. As the Series A Preferred Stock was issued in reliance on the exemption provided by Section 3(a)(9), the shares of common stock payable as dividends will also be exempt from registration in reliance on Section 3(a)(9) of the Securities Act.
(b) Use of Proceeds from Sale of Registered Equity Securities
Not applicable.

(c) Purchases of Equity Securities by the Registrant
On September 20, 2017, we announced that our board of directors re-instituted our stock repurchase program, authorizing the repurchase of up to $2.0 million of our common stock. An aggregate purchase price of $0.1 million had been expended under this program as of September 30, 2017. Unless extended, the stock repurchase authorization expires on September 19, 2018 and may be terminated, increased or decreased by our board of directors at any time.
The following table summarizes repurchases of our common stock during the three months ended September 30, 2017.January, February and March 2022.
Total Number ofApproximate Dollar
Shares Purchased asValue of Shares that
Total Number of SharesAverage Price Paid perPart of a PubliclyMay Yet be Purchased
PeriodPurchasedShareAnnounced ProgramUnder the Program
1/1/2022 - 1/31/202222,267 (1)$7.44 — $— 
2/1/2022 - 2/28/20224,427 (1)$6.69 — $— 
3/1/2022 - 3/31/202211,569 (1)$7.13 — $— 

(1) These shares of common stock were repurchased from employees to satisfy tax withholding obligations triggered upon vesting of restricted stock awards.



   Total Number ofApproximate Dollar
   Shares Purchased asValue of Shares that
 Total Number of SharesAverage Price Paid perPart of a PubliclyMay Yet be Purchased
PeriodPurchasedShareAnnounced ProgramUnder the Program
9/1/2017 - 9/30/201750,100
$1.70
50,100
$1,914,745




ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.


ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.


ITEM 5.OTHER INFORMATION
None.Retention Awards

On May 14, 2022, the Compensation Committee (the “Committee”) of our Board of Directors approved the grant of restricted stock units (the “Retention Grants”) for certain of our employees, including Eugene Nestro, our Chief Financial Officer and Brian Soller, our Chief Operating Officer (collectively, the “Named Executives”).The Committee approved these Retention Grants in recognition of the competitive market for talent in which we compete and to incentivize the recipients to maintain their commitment to the company over the next three years.


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ITEM 6.EXHIBITS



Exhibit
Number
Description
2.1+^
2.1+
10.1+
Transition Services Agreement,the Management Investors, dated as of August 9, 2017,March 7, 2022 (incorporated by reference to Exhibit 2.6 to the Registrant's Current Report on Form 10-K (File No. 000-52008) filed on March 14, 2022).
2.2+
31.1
31.2
32.1*
32.2*
101The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarterthree months ended September 30, 2017,March 31, 2022, formatted in inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2017March 31, 2022 and December 31, 2016,2021, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2017March 31, 2022 and 2016,2021, (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three months ended March 31, 2022 and 2021, (iv) Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2022 and 20162021 and (iv)(v) Notes to Unaudited Consolidated Financial Statements.

+Confidential treatment has been requested with respect to portions of this exhibit, indicated by asterisks, which has been filed separately with the SEC.
^104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

+Pursuant to Item 601(b)(2) of Regulation S-K promulgated by the SEC, certain exhibits and schedules to this agreement have been omitted. The RegistrantCompany hereby agrees to furnish supplementally to the SEC, upon its request, any or all of such omitted exhibits or schedules.
*
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.




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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 13, 2017May 16, 2022By:/s/ Dale Messick        Eugene J. Nestro
Dale MessickEugene J. Nestro
Chief Financial Officer

(principal financialPrincipal Financial and accounting officer and duly authorized officer)
Accounting Officer)



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