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



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



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



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

(Address of Principal Executive Offices)

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:



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

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 o☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ý☒ Yes o☐ 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 ý☐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). o☐ 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 ~~4, 2019,~~6, 2020, there were ~~30,165,771~~30,838,060 shares of the registrant’s common stock outstanding.

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


	September 30, 2020		December 31, 2019
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	26,422	$	25,006
Accounts receivable, net	18,254		16,269
Receivable from sale of HSOR business	0		2,501
Contract assets	4,219		2,759
Inventory, net	11,713		10,294
Prepaid expenses and other current assets	3,268		1,287

Total current assets	63,876		58,116
Property and equipment, net	2,111		3,466
Intangible assets, net	9,193		10,194
Goodwill	10,542		10,542
Long-term contract assets	577		449
Other assets	7,855		2,341
Deferred tax asset	1,729		1,416

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


Accounts payable	$	3,177	$	2,787
Accrued liabilities	7,716		10,369
Contract liabilities	3,721		3,888


Total current liabilities	14,614		17,044

Other long-term liabilities	7,761		2,011



Total liabilities	22,375		19,055
Commitments and contingencies (Note 13)
Stockholders’ equity:

Common stock, par value $0.001, 100,000,000 shares authorized, 32,510,506 and 31,788,896 shares issued, 30,823,065 and 30,149,105 shares outstanding at September 30, 2020 and December 31, 2019, respectively	33		32
Treasury stock at cost, 1,687,441 and 1,639,791 shares at September 30, 2020 and December 31, 2019, respectively	(4,666)		(4,337)
Additional paid-in capital	91,034		88,022
Accumulated deficit	(12,893)		(16,248)
Total stockholders’ equity	73,508		67,469
Total liabilities and stockholders’ equity	$	95,883	$	86,524

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

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

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(unaudited) (unaudited)
Revenues:
Products and licensing $ 11,926,178
$ 5,371,165
$ 31,459,323
$ 13,960,003
Technology development 6,494,832
5,315,861
19,576,574
15,418,919
       Total revenues 18,421,010
10,687,026
51,035,897
29,378,922
Cost of revenues:

Products and licensing 4,561,801
2,079,749
12,357,961
5,381,333
Technology development 4,574,035
3,918,666
13,874,156
11,131,965
       Total cost of revenues 9,135,836
5,998,415
26,232,117
16,513,298
Gross profit 9,285,174
4,688,611
24,803,780
12,865,624
Operating expense:

Selling, general and administrative 5,753,649
3,233,485
17,964,524
9,898,064
Research, development and engineering 2,047,524
873,629
5,240,759
2,513,497
       Total operating expense 7,801,173
4,107,114
23,205,283
12,411,561
Operating income 1,484,001
581,497
1,598,497
454,063
Other income/(expense):

Investment income 72,728
171,896
324,139
350,976
Other income/(expense) 278
8,319
(4,459 ) (16,001 )
Interest expense (2,032 ) (28,029 ) (14,806 ) (103,208 )
Total other income 70,974
152,186
304,874
231,767
Income from continuing operations before income taxes 1,554,975
733,683
1,903,371
685,830
Income tax expense/(benefit) 324,723
(559,093 ) (1,293,051 ) (674,329 )
Net income from continuing operations 1,230,252
1,292,776
3,196,422
1,360,159
(Loss)/income from discontinued operations, net of income tax of $216,813 and $235,312 for the three and nine months ended September 30, 2018, respectively —
(56,418 ) —
1,132,436
Gain on sale, net of income taxes of $1,866,232 and $1,508,373 for the three and nine months ended September 30, 2018, respectively —
7,612,044
—
7,571,810
Net income from discontinued operations —
7,555,626
—
8,704,246
Net income 1,230,252
8,848,402
3,196,422
10,064,405
Preferred stock dividend 112,846
63,235
285,450
190,895
Net income attributable to common stockholders $ 1,117,406
$ 8,785,167
$ 2,910,972
$ 9,873,510
Net income per share from continuing operations:
       Basic $ 0.04
$ 0.05
$ 0.11
$ 0.05
       Diluted $ 0.04
$ 0.04
$ 0.10
$ 0.04
Net income per share from discontinued operations:
       Basic $ —
$ 0.27
$ —
$ 0.32
       Diluted $ —
$ 0.23
$ —
$ 0.27
Net income per share attributable to common stockholders:
        Basic $ 0.04
$ 0.31
$ 0.10
$ 0.36
        Diluted $ 0.03
$ 0.27
$ 0.09
$ 0.30
Weighted average common shares and common equivalent shares outstanding:
        Basic 28,291,297
27,901,631
28,193,330
27,547,955
        Diluted 32,115,847
33,055,881
31,768,575
32,721,860
(in thousands, except share and per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019

Revenues:
Lightwave	$	15,350	$	13,088	$	39,837	$	35,129
Luna Labs	5,700		5,301		16,929		15,907
Total revenues	21,050		18,389		56,766		51,036
Cost of revenues:
Lightwave	5,670		5,449		15,736		15,063
Luna Labs	4,431		3,665		12,200		11,178
Total cost of revenues	10,101		9,114		27,936		26,241
Gross profit	10,949		9,275		28,830		24,795
Operating expense:
Selling, general and administrative	6,505		5,746		19,085		17,955
Research, development and engineering	1,616		2,047		4,717		5,241
Loss on sale of property and equipment	576		0		576		0
Total operating expense	8,697		7,793		24,378		23,196
Operating income	2,252		1,482		4,452		1,599
Other income/(expense):
Investment income	1		76		65		324
Other income/(expense)	14		1		19		(5)
Interest expense	(1)		(4)		(2)		(15)
Total other income	14		73		82		304
Income from continuing operations before income taxes	2,266		1,555		4,534		1,903
Income tax (benefit)/expense	(836)		325		(257)		(1,293)

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


Net income	3,102		1,230		3,355		3,196
Preferred stock dividend	0		113		0		285
Net income attributable to common stockholders	$	3,102	$	1,117	$	3,355	$	2,911
Net income per share from continuing operations:
Basic	$	0.10	$	0.04	$	0.16	$	0.11
Diluted	$	0.10	$	0.04	$	0.15	$	0.10
Net loss per share from discontinued operations:
Basic	$	0	$	0	$	(0.05)	$	0
Diluted	$	0	$	0	$	(0.04)	$	0
Net income per share attributable to common stockholders:
Basic	$	0.10	$	0.04	$	0.11	$	0.10
Diluted	$	0.10	$	0.03	$	0.10	$	0.09
Weighted average shares:
Basic	30,809,896		28,291,297		30,593,954		28,193,330
Diluted	32,411,086		32,115,847		32,478,625		31,768,575

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

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

(in thousands, except share data)

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

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

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 high performance fiber optic test, measurement and control products for the telecommunications ~~industry~~and photonics industries and distributed fiber optic sensing products for industries utilizing composite and other advanced materials, such as the automotive, aerospace, energy and infrastructure industries. Our distributed fiber optic sensing products help designers and manufacturers more efficiently develop new and innovative products by providing valuable information such as highly detailed stress, strain, and temperature measurements of a new design or manufacturing process. In addition, our distributed fiber optic sensing products are used to monitor the structural integrity or operational health of critical assets, including large civil structures such as bridges. Our communications test and control products accelerate the development of advanced fiber optic components and networks by providing fast and highly accurate characterization of components and networks.

We also provide applied research services, typically under research programs funded by the U.S. government, in areas of advanced materials, 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 of technologies to perform applied research services for companies and for government funded projects. We continue to invest in product development and commercialization, which we anticipate will lead to increased product sales growth.

Unaudited Interim Financial Information

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United ~~Stated~~States 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, ~~2019,~~2020, results of operations and changes in stockholders' equity for the three and nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, and cash flows for the nine months ended September 30, ~~2019~~2020 and ~~2018.~~2019. The results of operations for the three and nine months ended September 30, ~~2019,~~2020, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019.~~2020. The consolidated balance sheet as of December 31, ~~2018~~2019 was derived from our audited consolidated financial statements. The COVID-19 pandemic has resulted in a global slowdown of economic activity. While the impact of the COVID-19 pandemic to our business and operating results presents additional uncertainty, we continue to use reasonably available information to assess certain accounting matters including, but not limited to, accounts receivable, inventory and the carrying value of goodwill and other long-lived tangible and intangible assets. While the assessments have not resulted in any material impacts to our financial statements as of September 30, 2020, we believe the full impact of the pandemic remains uncertain and ongoing developments related to the pandemic may cause material impacts to our consolidated financial statements.

The consolidated interim financial statements, including our significant accounting policies, should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto for the year ended December 31, ~~2018,~~2019, included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March ~~15, 2019.~~13, 2020.

~~Business Combinations~~Reclassifications

~~We apply the provisions of Accounting Standards Codification ("ASC") 805,~~ ~~Business Combinations~~,Certain prior period amounts in the ~~accounting for acquisitions. ASC 805 requires us~~accompanying consolidated financial statements have been reclassified to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustmentsconform to the ~~assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period~~current year presentation. These reclassifications had no effect on previously reported net income or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded in our consolidated statements of operations. Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include: future expected cash flows from product sales; customer contracts and acquired technologies; expected costs to develop in-process research and development into commercially viable products and estimated cash flows from the projects when completed; and discount rates. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates, or actual results.stockholders' equity.

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

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

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 ~~markets~~markets.

•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 markets~~observable.

•Level 3—Valuations derived from valuation techniques in which ~~one or more significant inputs or~~ significant value drivers are ~~unobservable~~unobservable.

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 ~~value~~amount of ~~our debt as of December 31, 2018 approximates~~lease liabilities approximate fair value ~~as we~~because these financial instruments bear interest at rates that approximate current market rates for similar agreements with similar maturities and credit. We consider the ~~floating interest rate on our credit facilities with~~terms of the Silicon Valley Bank ("SVB") debt facility including its interest rate of prime plus 1%, to be at market based upon similar instruments that would be available to us.

We have 2 operating and reportable segments: Lightwave and Luna Labs.

During the three months ended June 30, 2020, we changed our reportable segments to Lightwave and Luna Labs to align with how our Chief Operating Decision Maker (CODM) evaluates segment performance and allocates resources to the segments. Prior to the three months ended June 30, 2020, we reported under 2 different reporting segments, Products and Licensing and Technology Development. We have reflected these new segment measures beginning in the three months ended June 30, 2020 and prior periods have been restated for ~~similar instruments. Certain non-financial assets~~comparability.

The Lightwave segment develops, manufactures and ~~liabilities are measured at fair value on a nonrecurring basis~~markets distributed fiber optic sensing products and fiber optic communications test and control products. The Luna Labs segment performs applied research principally in ~~accordance with U.S. GAAP. This includes items such as non-financial assets~~the areas of sensing and ~~liabilities initially measured at fair value in a business combination~~instrumentation, advanced materials and non-financial long-lived asset groups measured at fair value for an impairment assessment. In general, non-financial assets including intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when any impairment is recognized.health sciences.

Net Income Per Share

Basic per share data is computed by dividing our net income by the weighted average number of shares outstanding during the period. Diluted per share data is computed by dividing net income 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 effects of ~~3.8~~1.6 million and ~~5.2~~3.8 million common stock equivalents ~~(which include outstanding warrants, preferred stock and stock options)~~ are included for the diluted per share data for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The effects of ~~3.6~~1.9 million and ~~5.2~~3.6 million common stock equivalents are included for the diluted per share data for the nine months ended September 30, 2020 and 2019, respectively. Stock options and ~~2018, respectively.~~deferred stock units credited to our directors under our non-employee deferred compensation plan are included in our common stock equivalents for the three and nine months ended September 30, 2020 and 2019. In addition, accrued stock dividends and preferred stock are also included for the three and nine months ended September 30, 2019.

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

In ~~February 2016,~~January 2017, the ~~Financial Accounting Standards Board ("FASB")~~FASB issued ASU 2017-04 Simplifying the Test for Goodwill Impairment, which simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test which previously measured a ~~new standard related to Leases, Accounting Standards Update ("ASU") No. 2016-02,~~ ~~Leases (Topic 842)~~ ~~and subsequent amendments, which replaced existing U.S. GAAP and requires lessees to recognize right-of-use ("ROU") assets and lease liabilities on~~goodwill impairment loss by comparing the ~~balance sheet for those leases classified as operating leases for greater transparency. We, using~~implied fair value of a ~~modified retrospective adoption approach, are required to recognize and measure leases existing at~~reporting unit's goodwill with the ~~beginning of the adoption period, with certain practical expedients available.~~

carrying amount. We adopted ~~the standard~~ASU 2017-04, effective January 1, ~~2019. The standard allows~~2020. As a number of optional practical expedients to use for transition. We chose the certain practical expedients allowed under the transition guidance which permitted us to not to reassess any existing or expired contracts to determine if they contain embedded leases, to not reassess our lease classification on existing leases, to account for lease and non-lease components as a single lease component for equipment leases, and whether initial direct costs previously capitalized would qualify for capitalization under FASB ASC 842. The new standard also provides practical expedients and recognition exemptions for an entity's ongoing accounting policy elections. We have elected the short-term lease recognition for all leases that qualify, which means that we do not recognize a ROU asset and lease liability for any lease with a term of twelve months or less.

~~The most significant impact~~result of adopting the ~~standard was~~new rules, we compare the ~~recognition~~estimated fair value of ~~ROU assets and lease liabilities~~our reporting segments to their respective carrying values when evaluating the recoverability of goodwill. If the carrying value of a reporting unit exceeds its fair value, an impairment charge will be recognized for ~~operating leases on our consolidated balance sheet but it did~~the amount by which its carrying value exceeds the reporting unit's fair value; however, the loss recognized will not ~~have an impact on our consolidated statements of operations or consolidated statements of cash flows. The cumulative effect of~~exceed the ~~changes made~~goodwill allocated to ~~our January 1, 2019 unaudited consolidated balance sheet as a result of~~ the ~~adoption of ASC 842 are as follows:~~

Balance at Adjustment for Adjusted balance at
December 31, 2018 ASC 842 January 1, 2019
Assets:
Property and equipment, net 3,627,886
(90,494 ) 3,537,392
Other assets, net 1,995
3,536,133
3,538,128

Liabilities:
Accrued liabilities 6,597,458
1,242,669
7,840,127
Current portion of capital lease obligations 40,586
(40,586 ) —
Long-term deferred rent 1,035,974
(1,035,974 ) —
Long-term operating lease liability —
3,271,705
3,271,705
Long-term capital lease obligations 68,978
(68,978 ) —
Long-term finance lease liability —
76,803
76,803

~~Effective January 1, 2018, we adopted ASU No. 2016-15,~~ ~~Statement of Cash Flows (Topic 230)~~, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how cash receipts and cash payments are presented in the statement of cash flows.reporting unit. The adoption of ASU ~~No. 2016-15~~2017-04 did not have a significant impact on our consolidated financial statements.

~~In June 2016, the FASB issued ASU 2016-13:~~ ~~Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments~~. The ASU requires companies to measure credit losses by using a methodology that reflects the expected credit losses based on historical information current economic conditions, and reasonable and supportable information. The new standard is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. We do not expect the adoption of ASU 2016-13 will have a significant impact on our consolidated financial statements.

~~In February 2018, the FASB issued ASU 2018-02:~~ ~~Income Statement – Reporting Comprehensive Income (Topic 220)~~. Under current accounting guidance, the income tax effects for changes in income tax rates and certain other transactions are recognized in income from continuing operations resulting in income tax effects recognized in accumulated other comprehensive income that do not reflect the current tax rate of the entity (“stranded tax effects”). The new guidance allows us the option to reclassify these stranded tax effects to accumulated deficit that relate to the change in the federal tax rate resulting from the passage of the Tax Cuts and Jobs Act. We adopted ASU 2018-02, effective January 1, 2019. ASU 2018-02 did not have a significant impact on our consolidated financial statements.

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

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

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

In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, which requires companies to measure financial assets at an amortized cost basis to be presented at the net amount expected to be collected. The new accounting rules eliminate the probable initial recognition threshold and, instead, reflect an entity's current estimate of all expected credit losses. ASU 2016-13 is applicable to our trade receivables. This pronouncement was amended under ASU 2019-10 to allow an extension on the adoption date for entities that qualify as a small reporting company. We have elected this extension and the effective date for us to adopt this standard will be for fiscal years beginning after December 15, ~~2019 including interim periods within those fiscal years.~~2022. We are currently in the process of evaluating the impact of ASU 2016-13, but we do not expect ~~ASU 2018-13 will~~the adoption of these new accounting rules to have a ~~material~~significant impact on our consolidated financial statements.

On ~~October 15, 2018,~~August 9, 2017, we ~~acquired substantially all~~completed the sale of ~~the assets, other than cash,~~our high speed optical receivers ("HSOR") business, which was part of ~~the United States operations of Micron Optics, Inc. ("MOI")~~our Lightwave segment (and which was previously included in our Products and Licensing segment in prior periods), to an unaffiliated third party for ~~cash consideration of $5.5 million.~~

For the three months ended September 30, 2019, we recognized revenue of $2.7 million and operating income of $0.4 million associated with the acquired operations of MOI, and for the nine months ended September 30, 2019, we recognized revenue of $8.1 million and operating income of $1.8 million associated with the acquired operations of MOI.

~~On March 1, 2019, we acquired the outstanding stock of General Photonics Corporation ("GP") for cash consideration of $19.0 million. Of the~~an initial purchase price ~~$17.1~~of $33.5 million, of which $29.5 million in cash was ~~paid at closing~~received, and ~~$1.9~~$4.0 million was 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. Additionally,~~obligations (the "Transaction"). As of December 31, 2019, $1.5 million of the escrow had been received with $2.5 million remaining in escrow pending resolution of a dispute. In March 2020, we ~~may become obligated to pay additional cash consideration~~settled the dispute resulting in us receiving $0.6 million and the buyer receiving $1.9 million. We have recorded a loss from discontinued operations of ~~up to $1.0~~$1.4 million, ~~if certain revenue targets~~net of tax benefit, for the GP historical business are met for the twelve month period following the closing. We currently estimate the fair value of the contingent obligation to be $0.9 million, which is shown in accrued liabilities on the consolidated balance sheet. The fair value of the contingent obligation was determined using the present value of estimated likely future payments.

~~For the three~~nine months ended September 30, ~~2019, we recognized revenue of $3.2 million and operating income of $0.3 million associated with~~2020, to reflect the ~~acquired operations of GP, and we recognized revenue of $7.1 million and operating income of $0.5 million associated with the acquired operations of GP for the period from the closing~~settlement of the ~~acquisition through September 30, 2019. Operating income~~dispute. There were no results from discontinued operations for the three months ended September 30, 2020 and 2019 included $0.6 million in amortization expense for the acquired intangibles and step-up in value of acquired inventory associated with the acquisition of GP, and operating income included $1.4 million in such amortization expense for the period from the closing of the acquisition through September 30, 2019. Operating incomeor for the nine months ended September 30, 2019 also included $0.9 million of costs associated with the acquisition of GP. There were no costs associated with the acquisition of GP included in operating income for the three months ended September 30, 2019. The amortization expense for the acquired intangibles as well as the costs associated with the acquisition of GP are included in the cost of goods sold and selling, general and administrative expenses in our consolidated statements of operations.

These acquisitions have been accounted for under the acquisition method of accounting in accordance with ASC 805. Under the acquisition method of accounting, the total estimated purchase consideration is allocated to the acquired tangible and intangible assets and assumed liabilities based on their estimated fair values as of the acquisition date. Any excess of the fair value of the acquisition consideration over the identifiable assets acquired and liabilities assumed is recognized as goodwill. We have completed our allocation of the purchase consideration for MOI. We have completed

The following table ~~summarizes the allocation~~presents a summary of the purchase consideration of each acquisition. The allocation of the purchase consideration for GP is subject to revision as the work of the valuation expert is finalized or additional information becomes known in the future.

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

~~Developed technologies acquired primarily consist of MOI's technologies~~transactions related to fiber optic sensing instruments, modules, and components and GP's technologies relating to the measurement and control of the polarization of light. The developed technologies were valued using the "multi-period excess earnings" method, under the income approach. The multi-period excess earnings method reflects the present value of the projected cash flows that are expected by the developed technologies less charges representing the contribution of other assets to those cash flows. Discount rates of 24.5% and 17% were used to discount the cash flows of MOI and GP, respectively, to present value.

In process research and development represents the fair value of an incomplete MOI research and development project that had not reached technological feasibility as of the closing date of the acquisition. In the fourth quarter of 2019, the fair value of this project at the closing date of the acquisition will begin being amortized following the project's completion. The fair value of in process research and development was determined using the multi-period excess earnings method. A discount rate of 29.5% was used to discount the cash flows to the present value.

~~Customer base represents the fair value of projected cash flows that will be derived from~~ the sale of ~~products to existing customers of MOI and GP as of~~ the respective closing dates of their acquisitions. Customer relationships were valued using the "distributor" method, under the income approach. Under this premise, the margin of a distributor within the industry is deemed to be the margin attributable to customer relationships. This isolates the cash flows attributable to the customer relationships for which a market participant would be willing to pay. Discount rates of 24.5% and 16% were used to discount cash flows of MOI and GP, respectively, to present value.

Trade names and trademarks are considered a type of guarantee of a certain level of quality or performance represented by the MOI and GP brands. Trade names and trademarks were valued using the "relief from royalty" method of 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 this asset. Discount rates of 17% and 16% were used to discount the cash flows of MOI and GP, respectively, 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 ourHSOR business ~~acquisitions was primarily attributable to expected synergies from future growth.~~

~~Pro forma consolidated results of operations~~

The following unaudited pro forma financial information presents combined results of operations for each of the periods presented as if the acquisitions of MOI and GP had been completed on January 1, 2018. The pro forma information includes adjustments to depreciation expense for property and equipment acquired, to amortize expense for the intangible assets acquired, and to eliminate the acquisition transaction expenses recognized in each period. Transaction-related expenses associated with the acquisition and excluded from pro forma income from continuing operations were $0.9 million for the nine months ended September 30, 2019. There were no transaction-related expenses associated with the acquisition for the nine months ended September 30, 2018. The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations or the combined business had the acquisitions of MOI and GP actually occurred on January 1, 2018, or the results of future operations of the combined business. For instance, planned or expected operational synergies following the acquisition are not reflected in the pro forma information. Consequently, actual results will differ from the unaudited pro forma information presented below.2020:

~~3. Discontinued Operations~~

On July 31, 2018, we sold the assets and operations related to our optoelectronic components and subassemblies ("Opto") business, which was part of our Products and Licensing segment, to an unaffiliated third party for an initial purchase price up to $18.5 million, of which $17.5 million was received at closing and has been properly recorded in the financial statements with the remaining purchase price adjustment up to $1.0 million which is contingent upon the attainment of specified revenue targets during the eighteen months following the closing of the sale. The Opto business was a component of the operations of Advanced Photonix, Inc., which we acquired in May 2015, and represented all of our operations in our Camarillo, California and Montreal, Quebec facilities.

We have reported the results of operations of the Opto business as discontinued operations in our consolidated interim financial statements. We allocated a portion of the consolidated tax expense to discontinued operations based on the ratio of the discontinued business's loss before allocations.

~~The key components of net income from discontinued operations were as follows:~~


	Nine Months Ended September 30, 2020
(in thousands)
Settlement of HSOR receivable	$	1,900

Loss on sale	1,900





Allocated income tax benefit	(464)
Loss from discontinued operations, net of related income tax	$	1,436

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(unaudited) (unaudited)
Net revenues $ —
$ 1,089,681
$ —
$ 8,363,606
Cost of revenues —
648,652
—
5,294,268
Operating expenses —
271,262
—
1,714,920
Other income —
(9,372 ) —
13,330
Income before income taxes —
160,395
—
1,367,748
Allocated tax expense —
216,813
—
235,312
Operating (loss)/income from discontinued operations —
(56,418 ) —
1,132,436
Gain on sale, net of related income taxes —
7,612,044
—
7,571,810
Net income from discontinued operations $ —
$ 7,555,626
$ —
$ 8,704,246
3.Intangible assets, net

Intangible assets, net at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 consisted of the following:


	September 30, 2020		December 31, 2019
(in thousands)
Patent costs	$	5,582	$	5,291
Developed technology	9,800		9,800
In-process research & development	1,580		1,580
Customer base	700		700
Trade names and trademarks	550		550
	18,212		17,921
Accumulated amortization	(9,019)		(7,727)
	$	9,193	$	10,194

September 30, 2019
December 31, 2018
(unaudited)
Patent costs $ 3,955,374
$ 4,991,460
Developed technology 9,800,000
2,600,000
In-process research & development 1,580,000
200,000
Customer base 700,000
100,000
Trade names and trademarks 550,000
150,000
16,585,374
8,041,460
Accumulated amortization (6,015,027 ) (4,739,190 )
$ 10,570,347
$ 3,302,270

Amortization expense for the three and nine months ended September 30, ~~2019~~2020 was $0.4 million and ~~$1.1~~$1.3 million, respectively. Estimated aggregate amortization, based on the net value of intangible assets at September 30, ~~2019,~~2020, for each of the next five years and beyond is as ~~follows:~~follows (amounts in thousands):


Year Ending December 31,
2020 - remaining 3 months	$	425
2021	1,689
2022	1,539
2023	1,466
2024	1,276
2025 & beyond	2,798
Total	$	9,193

Year Ending December 31,
Remainder of 2019 $ 406,749
2020 1,626,995
2021 1,618,649
2022 1,465,880
2023 1,390,621
2024 & beyond 4,061,453
Total $ 10,570,347

~~The changes in the carrying value of goodwill during the nine months ended~~ Goodwill was approximately $10.5 million at September 30, 2020 and December 31, 2019 ~~were as follows:~~and has been allocated to the Lightwave segment.

Balance as of December 31, 2018 $ 101,008
Goodwill resulting from business combination - GP 10,315,490
Measurement Period Adjustment - MOI (71,248 )
Balance as of September 30, 2019 $ 10,345,250

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 net realizable value. 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.

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

Components of inventory were as follows:


	September 30, 2020		December 31, 2019
(in thousands)
Finished goods	$	2,211	$	1,695
Work-in-process	1,238		1,008
Raw materials	8,264		7,591


Total inventory, net	$	11,713	$	10,294

September 30,
2019 December 31,
2018
(unaudited)
Finished goods $ 1,376,797
$ 1,339,832
Work-in-process 1,002,702
643,420
Raw materials 7,265,365
4,890,490
Total inventory $ 9,644,864
$ 6,873,742

Accrued liabilities at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 consisted of the following:


	September 30, 2020		December 31, 2019
(in thousands)
Accrued compensation	$	5,829	$	6,416




Accrued professional fees	44		113
Accrued income tax	0		716

Current operating lease liability	1,209		1,283
Current finance lease liability	18		50
Royalties	269		365



Accrued liabilities - other	347		426

Contingent liability - General Photonics	0		1,000

Total accrued liabilities	$	7,716	$	10,369

September 30, 2019 December 31, 2018
(unaudited)
Accrued compensation $ 5,520,291
$ 4,467,587

Income tax payable 1,072,216
236,636

Accrued professional fees 116,656
198,062

Deferred Rent —
146,542

Current operating lease liability 1,394,761
—

Current finance lease liability 51,637
—

Royalties 265,770
302,428

Accrued liabilities - other 333,391
404,752

       Customer deposits —
298,468

       Contingent liability - GP 940,000
—

       Working capital adjustment - MOI —
542,983

       Total accrued liabilities $ 9,694,722
$ 6,597,458

7.Debt

Silicon Valley Bank Facility

We ~~maintain~~maintained a Loan and Security Agreement with SVB (the "Credit Facility") under which we had a term loan with an original borrowing amount of $6.0 million (the “Original Term Loan”). The Original Term Loan carried a floating annual interest rate equal to SVB’s prime rate then in effect plus 2%. The Original Term Loan matured and was repaid in May 2019.

On October 10, 2019, we entered into an Amended and Restated Loan and Security Agreement (the “Loan Agreement”) with SVB, which amended and restated in its entirety our previous Credit Facility. Under the Loan Agreement, SVB agreed to make advances available up to $10.0 million (the “Revolving Line”). If we borrow from the Revolving Line, such borrowing would carry a floating annual interest rate equal to the greater of (i) the Prime Rate (as defined in the Loan Agreement) then in effect plus 1% or (ii) 6%. Amounts borrowed under the Revolving Line may be repaid and, prior to the Revolving Line Maturity Date (defined below), reborrowed. The Revolving Line terminates on October 10, 2020 (the “Revolving Line Maturity Date”), unless earlier terminated by us. As of September 30, 2020, 0 amounts have been borrowed under this Loan Agreement. We amended and restated the ~~Credit Facility~~Loan Agreement on October ~~10, 2019,~~8, 2020, as described in Note 1514 - Subsequent Event.

Amounts due under the Loan Agreement are secured by our assets, including all personal property, inventory and bank accounts; however, intellectual property is not secured under the Loan Agreement. The ~~following table presents~~inventory used to secure the amount due does not include demo or loaner equipment with an aggregate book value up to $1.0 million. The Loan Agreement requires us to observe a ~~summary~~number of ~~debt outstanding as~~financial and operational covenants, including maintenance of a specified Liquidity Coverage Ratio (as defined in the Loan Agreement), protection and registration of intellectual property rights and customary negative covenants. 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 in the interest rate on any amounts outstanding. As of September 30, ~~2019 and December 31, 2018:~~2020, there were no events of default on the Credit Facility.

On April 28, 2020, we were granted a loan (the "Loan") from SVB in the aggregate amount of $4.5 million, pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act, which was enacted March 27, 2020.

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

September 30, 2019 December 31, 2018
(unaudited)
Silicon Valley Bank Term Loan $ —
$ 625,000

Less: unamortized debt issuance costs —
5,685

Less: current portion —
619,315

Total long-term debt $ —
$ —

On May 4, 2020, we returned the full amount of the proceeds of the Loan to SVB. The decision to return the proceeds was based on the revised guidance issued by the U.S. Department of Treasury and the Small Business Administration subsequent to our application for the Loan.

Interest expense, net for the three and nine months ended September 30, 2020 and 2019 consisted of the following:

We recognize right-of-use ("ROU") assets and lease liabilities on the balance 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 510 years. Most of our leases do not have an option to extend the lease period beyond the stated term unless the new term is agreed to by both parties. They also do not have an early termination clause included. Our operating lease agreements do not contain any material restrictive covenants. Some of our operating lease agreements contain variable payment provisions that provide for rental increases based on consumer price indices. The change in rent 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 43 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 interest expense and amortization, and are included primarily in selling, general and administrative expense in our consolidated statements of operations.

The discount rate for both our operating and finance leases was not readily determinable in the specific lease agreements. As a result, our incremental borrowing rate was used as the discount rate when establishing the ROU assets and corresponding lease liabilities.

~~As of September 30, 2019, our~~ Our lease components included in the consolidated balance ~~sheet~~sheets were as follows:


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

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

Lease component Classification September 30, 2019
Assets
ROU assets - operating lease Other assets $ 2,545,616
ROU assets - finance lease Other assets 83,813
Total ROU assets $ 2,629,429

Liabilities
Current operating lease liability Accrued liabilities $ 1,394,761
Current finance lease liability Accrued liabilities 51,637
Long-term operating lease liability Other liabilities 2,223,623
Long-term finance lease liability Other liabilities 34,335
Total lease liabilities $ 3,704,356

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

Rent expense is recognized on a straight-line basis over the life of the lease. Rent expense consists of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Operating lease costs	$	320	$	407	$	1,099	$	1,214
Variable rent costs	155		(37)		141		(110)
Total rent expense	$	475	$	370	$	1,240	$	1,104

Three Months Ended Nine Months Ended
September 30, 2019 September 30, 2019
Operating lease costs $ 407,365
$ 1,214,484
Variable rent costs (36,794 ) (109,748 )
Total rent expense $ 370,571
$ 1,104,736

Future minimum lease payments under non-cancelable operating and finance leases were as follows as of September 30, ~~2019:~~2020 (amounts in thousands):


	Operating Leases		Finance Leases
Year Ending December 31,
2020 - remaining 3 months	$	434	$	14
2021	1,721		11
2022	1,657		10
2023	1,616		5
2024	1,274		0
2025 and beyond	4,633		0
Total future minimum lease payments	11,335		40
Less: interest	2,381		6
Total lease liabilities	$	8,954	$	34

Current lease liability	$	1,209	$	18
Long-term lease liability	7,745		16
Total lease liabilities	$	8,954	$	34

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

September 30, 2019
2019 - remaining 3 months $ 407,992
2020 1,467,701
2021 640,800
2022 544,704
2023 544,704
2024 and beyond 544,704
   Total future minimum lease payments 4,150,605
   Less: Interest 532,221
     Total operating lease liabilities $ 3,618,384

Current operating lease liability $ 1,394,761
Long-term operating lease liability 2,223,623
   Total operating lease liabilities $ 3,618,384

Other information related to leases is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except weighted-average data)	2020			2019			2020			2019
Finance lease cost:
Amortization of right-of-use assets	$	7		$	11		$	35		$	33
Interest on lease liabilities	1			2			3			4
Total finance lease cost	$	8		$	13		$	38		$	37

Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	320		$	407		$	1,064		$	1,214
Finance cash flows from finance leases	$	13		$	13		$	39		$	27
Right-of-use assets obtained in exchange for new operating lease liabilities	$	1,274		$	0		$	6,805		$	0
Right-of-use assets obtained in exchange for new finance lease liabilities	$	0		$	0		$	0		$	15
Weighted-average remaining lease term (years) - operating leases	7.7			3.8			7.7			3.8
Weighted-average remaining lease term (years) - finance leases	2			2.2			2			2.2
Weighted-average discount rate - operating leases	6		%	7		%	6		%	7		%
Weighted-average discount rate - finance leases	7		%	7		%	7		%	7		%

Three Months Ended Nine Months Ended
September 30, 2019 September 30, 2019
Finance lease cost:
   Amortization of right-of-use assets $ 10,902
$ 32,867
   Interest on lease liabilities 1,649
3,880
Total finance lease cost $ 12,551
$ 36,747

Other information:
Cash paid for amounts included in the measurement of lease liabilities:
   Operating cash flows from operating leases $ 407,365
$ 1,214,484
   Finance cash flows from finance leases $ 13,249
$ 28,803
Right-of-use assets obtained in exchange for new finance lease liabilities $ —
$ 14,541
Weighted-average remaining lease term (years) - operating leases 3.8
3.8
Weighted-average remaining lease term (years) - finance leases 2.2
2.2
Weighted-average discount rate - operating leases 7 % 7 %
Weighted-average discount rate - finance leases 7 % 7 %

At September 30, ~~2019,~~2020, we had no additional operating or finance leases that ~~have~~had not yet commenced.


~~10.~~	~~Capital Stock and Share-Based Compensation~~

9.Capital Stock and Share-Based Compensation

We recognize share-based compensation 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 awards 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 is based upon historical experience of homogeneous groups within our company. We also assume an expected dividend yield of ~~zero~~0 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.

The fair values of stock options granted in each period presented were estimated using the following weighted-average assumptions:


	Three Months Ended September 30,			Nine Months Ended September 30,
	2020		2019	2020		2019
Risk-free rate	0.46	%	—	0.69	%	2.59	%
Expected volatility	62.78	%	—	62.84	%	64.63	%
Expected term (in years)	7		—	7		7

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

Stock Options

A summary of the stock option activity for the nine months ended September 30, ~~2019~~2020 is presented below:


														Options Outstanding						Options Exercisable
	Options Outstanding							Options Exercisable						Number of Shares	Price per Share Range	Weighted Average Exercise Price		Aggregate Intrinsic Value (1)		Number of Shares	Weighted Average Exercise Price		Aggregate Intrinsic Value (1)
(in thousands, except share, per share and weighted-average data)													(in thousands, except share, per share and weighted-average data)
	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, 2019	3,108,868		$0.61 - $6.55	$	2.26	$	3,669,794	1,986,740	$	1.81	$	3,314,494
Balance, January 1, 2020													Balance, January 1, 2020	3,160,397	$1.18 - $7.37	$	2.72	$	14,460	1,835,799	$	2.28	$	9,198
Granted	565,070		$3.21 - $3.37										Granted	70,000	$6.27 - $7.59	$	6.65

Exercised	(551,334	)	$0.61 - $1.81										Exercised	(688,495)	$1.18 - $4.43	$	2.84
Canceled	(13,507	)	$1.47 - $3.37										Canceled	(100,187)	$1.27 - $4.75	$	3.33
Balance, September 30, 2019	3,109,097		$1.18 - $4.75	$	2.62	$	9,847,522	1,734,345	$	2.22	$	6,186,154
Balance, September 30, 2020													Balance, September 30, 2020	2,441,715	$1.18 - $7.59	$	2.77	$	7,971	1,396,231	$	2.18	$	5,323

(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, ~~2019,~~2020, the outstanding stock options to purchase an aggregate of ~~3.1~~2.4 million shares had a weighted-average remaining contractual term of ~~6.4~~6.3 years, and the exercisable stock options to purchase an aggregate of ~~1.7~~1.4 million

For the nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 we recognized ~~$1.1~~$1.5 million and ~~$0.3~~$1.1 million in share-based compensation expense, respectively, which is included in our selling, general and administrative expense in the accompanying consolidated interim financial statements. We expect to recognize ~~$2.8~~$2.4 million in share-based compensation expense over the weighted-average remaining service period of ~~3.0~~2.2 years for stock options outstanding as of September 30, ~~2019.~~2020.

Restricted Stock and Restricted Stock Units

Historically, we have granted shares of restricted stock to certain employees that have vested in ~~three~~3 equal annual installments on the anniversary dates of their grant. However, beginning in 2019, we altered our approach for these grants to replace the grant of restricted stock subject to time-based vesting with the grant of a combination of restricted stock units ("RSUs") subject to time-based vesting and performance-based vesting. Each RSU represents the contingent right to receive a single share of our common stock upon the vesting of the award. For the nine months ended September 30, ~~2019,~~2020, we granted an aggregate of ~~230,000~~138,650 RSUs to certain employees. Of the RSUs granted during the nine months ended September 30, ~~2019, 167,000~~2020, 76,700 of such RSUs are subject to time-based vesting and are scheduled to vest in ~~three~~3 equal annual installments on the anniversary dates of the grant. The remaining ~~63,000~~61,950 RSUs are performance-based awards that will vest based on our achievement of long-term performance goals, in particular, based on our levels of ~~2021~~2022 revenue and operating income. The ~~63,000~~61,950 shares issuable upon vesting of the performance-based RSUs represent the maximum payout under our performance-based awards, based upon 150% of our target performance for ~~2021~~2022 revenue and operating income (the payout of such awards based on target performance for ~~2021~~2022 revenue and operating income would be ~~42,000~~41,300 shares). In the case of the time-based and performance-based RSUs, vesting is also subject to the employee's continuous service with us through vesting. During the nine months ended September 30, ~~2019, 177,665~~2020, 137,999 shares of restricted stock vested and 55,668 shares of RSUs issued to employees vested.

In addition, in conjunction with our 2018, 2019, and ~~2019~~2020 Annual Meetings of Stockholders, we granted RSUs to certain members of our Board of Directors in respect of the annual equity compensation under our non-employee director compensation policy (other members of our Board of Directors elected to receive their annual equity compensation for Board service in the form of stock units under our Deferred Compensation Plan as described below). RSUs granted to our non-employee Directors vest at the earlier of the one-year anniversary of their grant or the next annual stockholders' meeting. For the nine months ended September 30, ~~2019,~~2020, we granted ~~11,600~~10,652 RSUs to certain non-employee members of our Board of

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

Directors in respect of the annual equity grants pursuant to our non-employee director compensation policy. During the nine months ended September 30, ~~2019, 16,286~~2020, 11,600 RSUs issued pursuant to our non-employee director compensation policy vested.

Unamortized restricted stock and RSUs expense at September 30, 2020 that will amortize over the weighted-average remaining service period of 1.4 years totaled $1.4 million.

The following table summarizes the number of unvested shares underlying our restricted stock awards and RSUs and the value of our unvested restricted stock awards and RSUs:


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


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

Number of Unvested Shares Weighted Average Grant Date Fair Value Aggregate Grant Date Fair Value of Unvested Shares
Balance, January 1, 2019 458,620
$ 2.56
$ 1,172,456
Granted 241,600
3.04
733,429
Vested (193,951 ) 2.32
(450,935 )
Forfeitures —
—
—
Balance, September 30, 2019 506,269
$ 2.87
$ 1,454,950

Employee Stock Purchase Plan

On April 7, 2020, our board of directors approved, and on May 11, 2020, our stockholders approved, the Luna Innovations Incorporated 2020 Employee Stock Purchase Plan (the "2020 ESPP"). The first offering period under the 2020 ESPP commenced on July 1, 2020. The 2020 ESPP grants our eligible employees a purchase right to purchase up to that number of shares of common stock purchasable either with a percentage or with a maximum dollar amount, as designed by the Board of Directors, during the period that begins on the offering date and ends on the date stated in the offering. The maximum number of shares of common stock that may be issued under the 2020 ESPP is 1,200,000 shares. The 2020 ESPP is considered a compensatory plan and the fair value of the discount and the look-back period will be estimated using the Black-Scholes option pricing model and expense will be recognized over the six-month withholding period prior to the purchase date. For the three and nine months ended September 30, 2020 we recognized $0.1 million in share-based compensation expense related to the 2020 ESPP, which is included in our selling, general and administrative expense in the accompanying statement of operations.

Non-employee Director Deferred Compensation Plan

We maintain a non-employee director deferred compensation plan (the “Deferred Compensation Plan”) that permits our non-employee directors to defer receipt of certain of the compensation that they receive for serving on our board and board committees. The Deferred Compensation Plan has historically permitted the participants to elect to defer cash fees to which they were entitled for board and committee service. For participating directors, in lieu of payment of cash fees, we credit their accounts under the Deferred Compensation Plan with a number of stock units based on the trading price of our common stock as of the date of the deferral. These stock units vest immediately, although the participating directors do not receive the shares represented by such units until a future qualifying event.

~~In December 2017, we amended and restated~~Pursuant to our Deferred Compensation Plan, ~~to also permit participating~~ non-employee directors tocan also elect ~~beginning in 2018,~~ to defer the receipt of some or all of the equity compensation that they receive for board and committee service. Stock units representing this equity compensation vest at the earlier of the ~~one year~~one-year anniversary of their grant or the next annual stockholders' meeting.

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

The following is a summary of our stock unit activity under the Deferred Compensation Plan for the nine months ended September 30, ~~2019:~~2020:

Number of Stock Units Weighted Average Grant Date Fair Value per Share Intrinsic Value Outstanding
Balance, January 1, 2019 507,290
$1.53 $ 1,699,422
  Granted 112,503
4.30

  Forfeitures —
—

  Converted —
—

Balance, September 30, 2019 619,793
$2.03 $ 3,588,601


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

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

As of September 30, ~~2019, 37,546~~2020, 24,855 of the outstanding stock units had not yet vested.

The following ~~tables detail~~table details our equity transactions during the nine months ended September 30, ~~2019 and 2018:~~2020:


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


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

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

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


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

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

Preferred Stock Common Stock Treasury Stock
Additional
Paid-in
Capital
Accumulated Deficit Total
Shares $ Shares $ Shares $ $
Balance at January 1, 2019, as previously reported 1,321,514
1,322
27,956,401
30,120
1,253,105
(2,116,640 ) 85,744,750
(21,305,222 ) 62,354,330
Exercise of stock options —
—
189,312
189
—
—
184,769
—
184,958
Share-based compensation —
—
—
—
—
—
342,765
—
342,765
Stock dividends to Carilion Clinic⁽¹⁾
—
—
—
20
—
—
83,038
(83,058 ) —
Net income —
—
—
—
—
—
—
1,125,879
1,125,879
Balance, March 31 2019 1,321,514
1,322
28,145,713
30,329
1,253,105
(2,116,640 ) 86,355,322
(20,262,401 ) 64,007,932
Exercise of stock options —
—
207,786
208
—
—
182,317
—
182,525
Share-based compensation —
—
—
—
—
—
377,884
—
377,884
Stock dividends to Carilion Clinic⁽¹⁾
—
—
—
20
—
—
89,383
(89,403 ) —
Net income —
—
—
—
—
—
—
840,292
840,292
Purchase of treasury stock —
—
(52,733 ) —
52,733
(220,470 ) —
—
(220,470 )
Balance, June 30 2019 1,321,514
1,322
28,300,766
30,557
1,305,838
(2,337,110 ) 87,004,906
(19,511,512 ) 65,188,163
Exercise of stock options —
—
83,204
83
—
—
70,863
—
70,946
Share-based compensation —
—
16,286
16
—
—
419,535
—
419,551
Stock dividends to Carilion Clinic⁽¹⁾
—
—
770,454
20
—
—
112,970
(112,990 ) —
Preferred stock to common stock conversion (1,321,514 ) (1,322 ) 1,321,514
1,322
—
—
—
—
—
Net income —
—
—
—
—
—
—
1,230,252
1,230,252
Purchase of treasury stock —
—
(333,953 ) —
333,953
(1,999,997 ) —
—
(1,999,997 )
Balance, September 30 2019 —
—
30,158,271
31,998
1,639,791
(4,337,107 ) 87,608,274
(18,394,250 ) 64,908,915

Stock dividends to Carilion Clinic⁽¹⁾

~~770,454 shares of~~The following table details our ~~common stock in satisfaction of~~equity transactions during the ~~accrued dividends earned on the preferred stock prior to its conversion.~~

~~Stock Repurchase Program~~

In September 2017, our board of directors authorized us to repurchase up to $2.0 million of our common stock through September 19, 2018 (the "prior stock repurchase program"). Our prior stock repurchase program did not obligate us to acquire any specific number of shares. Under the prior stock repurchase program, shares could 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 19, 2018, we had repurchased a total of 565,629 shares for an aggregate purchase price of $1.1 million under the prior stock repurchase program, after which the prior stock repurchase program expired. We currently maintain all repurchased shares under the prior stock repurchase program as treasury stock.

~~In August 2019, our board of directors authorized a new stock repurchase program which allowed us to repurchase up to $2.0 million of our common stock through August 2020. As of~~nine months ended September 30, 2019, we had repurchased a total of 333,953 shares for an aggregate purchase price of $2.0 million under this new stock repurchase program, and accordingly the program expired. We currently maintain all repurchased shares under this new stock repurchase program as treasury stock.2019:


	Preferred Stock			Common Stock			Treasury Stock			Additional Paid-in Capital		Accumulated Deficit		Total
	Shares	$		Shares	$		Shares	$		$		$		$
(in thousands, except share data)
Balance, January 1, 2019, as previously reported	1,321,514	$	1	27,956,401	$	30	1,253,105	$	(2,117)	$	85,745	$	(21,305)	$	62,354
Exercise of stock options	—	—		189,312	—		—	—		185		—		185
Share-based compensation	—	—		—	—		—	—		343		—		343

Stock dividends to Carilion Clinic	—	—		—	—		—	—		83		(83)		—


Net income	—	—		—	—		—	—		—		1,126		1,126


Balance, March 31, 2019	1,321,514	$	1	28,145,713	$	30	1,253,105	$	(2,117)	$	86,356	$	(20,262)	$	64,008
Exercise of stock options	—	—		207,786	—		—	—		182		—		182
Share-based compensation	—	—		—	—		—	—		378		—		378

Stock dividends to Carilion Clinic	—	—		—	—		—	—		90		(90)		—
Net income	—	—		—	—		—	—		—		841		841
Purchase of treasury stock	—	—		(52,733)	—		52,733	(220)		—		—		(220)
Balance, June 30, 2019	1,321,514	$	1	28,300,766	$	30	1,305,838	$	(2,337)	$	87,006	$	(19,511)	$	65,189
Exercise of stock options	—	—		83,204	1		—	—		70		—		71
Share-based compensation	—	—		16,286	—		—	—		420		—		420

Stock dividends to Carilion Clinic	—	—		770,454	—		—	—		113		(113)		—
Preferred stock to common stock conversion	(1,321,514)	(1)		1,321,514	1		—	—		—		—		—
Net income	—	—		—	—		—	—		—		1,230		1,230
Purchase of treasury stock	—	—		(333,953)	—		333,953	(2,000)		—		—		(2,000)
Balance, September 30, 2019	0	$	0	30,158,271	$	32	1,639,791	$	(4,337)	$	87,609	$	(18,394)	$	64,910

~~Our operations are divided into two operating segments—“Products and Licensing” and “Technology Development”.~~

~~The Products and Licensing segment derives its revenues from product sales, funded product development and technology licenses.~~

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.

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

10.Revenue Recognition

Disaggregation of Revenue

We disaggregate our revenue from contracts with customers by geographic locations, ~~customer-type,~~customer type, contract type, timing of recognition, and major categories for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected 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 service, we attribute revenue from a client to the major product or service that we believe to be the client's primary market.

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

The details are listed in the table below for the three and nine months ended September 30, ~~2019~~2020 and ~~2018:~~2019:


		Three Months Ended September 30,
				2020						2019
(in thousands)		Lightwave		Luna Labs		Total		Lightwave		Luna Labs		Total
		(unaudited)
Total Revenue by Geographic Location
	United States	$	8,729	$	5,700	$	14,429	$	7,086	$	5,301	$	12,387
	Asia	4,532		0		4,532		3,729		0		3,729
	Europe	1,694		0		1,694		1,912		0		1,912
	Canada, Central and South America	319		0		319		219		0		219
	All Others	76		0		76		142		0		142
	Total	$	15,350	$	5,700	$	21,050	$	13,088	$	5,301	$	18,389


Total Revenue by Major Customer Type
	Sales to the U.S. government	$	2,599	$	5,287	$	7,886	$	2,793	$	4,879	$	7,672
	U.S. direct commercial sales and other	6,130		413		6,543		4,293		422		4,715
	Foreign commercial sales & other	6,621		0		6,621		6,002		0		6,002
	Total	$	15,350	$	5,700	$	21,050	$	13,088	$	5,301	$	18,389


Total Revenue by Contract Type
	Fixed-price contracts	$	14,717	$	3,349	$	18,066	$	12,166	$	3,215	$	15,381
	Cost-type contracts	633		2,351		2,984		922		2,086		3,008
	Total	$	15,350	$	5,700	$	21,050	$	13,088	$	5,301	$	18,389


Total Revenue by Timing of Recognition
	Goods transferred at a point in time	$	12,987	$	314	$	13,301	$	11,229	$	408	$	11,637
	Goods/services transferred over time	2,363		5,386		7,749		1,859		4,893		6,752
	Total	$	15,350	$	5,700	$	21,050	$	13,088	$	5,301	$	18,389


Total Revenue by Major Products/Services
	Technology development	$	2,040	$	5,386	$	7,426	$	1,602	$	4,893	$	6,495
	Test, measurement and sensing systems	12,987		0		12,987		11,234		0		11,234

	Other	323		314		637		252		408		660
	Total	$	15,350	$	5,700	$	21,050	$	13,088	$	5,301	$	18,389

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

Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
(unaudited) (unaudited)
Technology Development Products and Licensing Total Technology Development Products and Licensing Total
Total Revenue by Geographic Location
United States $ 19,576,574
$ 15,450,256
$ 35,026,830
$ 15,418,919
$ 7,961,048
$ 23,379,967
Asia —
9,450,775
9,450,775
—
3,280,348
3,280,348
Europe —
5,343,251
5,343,251
—
2,542,017
2,542,017
Canada, Central and South America —
936,426
936,426
—
99,807
99,807
All Others —
278,615
278,615
—
76,783
76,783
Total $ 19,576,574
$ 31,459,323
$ 51,035,897
$ 15,418,919
$ 13,960,003
$ 29,378,922

Total Revenue by Major Customer Type

Sales to the U.S. government $ 19,180,408
$ 2,457,677
$ 21,638,085
$ 15,284,661
$ 1,364,755
$ 16,649,416
U.S. direct commercial sales and other 396,166
12,992,580
13,388,746
134,258
6,583,006
6,717,264
Foreign commercial sales & other —
16,009,066
16,009,066
—
6,012,242
6,012,242
Total $ 19,576,574
$ 31,459,323
$ 51,035,897
$ 15,418,919
$ 13,960,003
$ 29,378,922

Total Revenue by Contract Type

Fixed-price contracts $ 10,654,247
$ 31,459,323
$ 42,113,570
$ 6,611,758
$ 13,960,003
$ 20,571,761
Cost-type contracts 8,922,327
—
8,922,327
8,807,161
—
8,807,161
Total $ 19,576,574
$ 31,459,323
$ 51,035,897
$ 15,418,919
$ 13,960,003
$ 29,378,922

Total Revenue by Timing of Recognition

Goods transferred at a point in time $ —
$ 30,302,926
$ 30,302,926
$ —
$ 13,505,897
$ 13,505,897
Goods/services transferred over time 19,576,574
1,156,397
20,732,971
15,418,919
454,106
15,873,025
Total $ 19,576,574
$ 31,459,323
$ 51,035,897
$ 15,418,919
$ 13,960,003
$ 29,378,922

Total Revenue by Major Products/Services
Technology development $ 19,576,574
$ —
$ 19,576,574
$ 15,418,919
$ —
$ 15,418,919
Optical test and measurement systems —
29,323,169
29,323,169
—
12,129,197
12,129,197
Other —
2,136,154
2,136,154
—
1,830,806
1,830,806
Total $ 19,576,574
$ 31,459,323
$ 51,035,897
$ 15,418,919
$ 13,960,003
$ 29,378,922

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

Contract Balances

Our contract assets consist of unbilled amounts for technology development contracts as well as custom product contracts. Also included in contract assets are royalty revenue and carrying amounts of right of ~~returned~~return inventory. Long-term

contract assets include the fee withholding on cost reimbursable contracts that will not be billed within a year. Contract liabilities include excess billings, subcontractor accruals, warranty expense, extended warranty revenue, right of return refund, and customer deposits. ~~The~~For the nine months ended September 30, 2020, net contract ~~assets~~ assets/(liabilities) increased ~~$0.2~~$1.8 million, due primarily to ~~increased contract assets in addition to a slight decrease in contract liabilities. The increase in contract assets is a result of the increased number of government research programs in addition to~~ an increase in ~~the number of~~ our Fixed-Price contracts that have not yet reached milestones as designated in their respective ~~contracts.~~contracts but for which revenue has been recognized. The increase is also attributable to subcontractor work that has been performed but not yet invoiced.

The following table shows the components of our contract balances as of September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


(in thousands)	September 30, 2020		December 31, 2019
Contract assets	$	4,796	$	3,208
Contract liabilities	3,721		3,888
Net contract liabilities	$	1,075	$	(680)

September 30, 2019 December 31, 2018
Contract assets $ 3,865,601
$ 2,759,315
Contract liabilities (3,389,417 ) (2,486,111 )
Net contract assets $ 476,184
$ 273,204

Performance Obligations

Unfulfilled performance obligations represent amounts expected 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 our ~~Products and Licensing~~Lightwave segment's unfulfilled performance obligations was ~~$14.6~~$21.6 million at September 30, ~~2019.~~2020. We expect to satisfy 27% of the performance obligations in ~~2019, 31%~~2020, 45% in ~~2020~~2021 and the remainder by ~~2023.~~2024. The approximate value of our ~~Technology Development~~Luna Labs segment's unfulfilled performance obligations was ~~$34.8~~$24.4 million at September 30, ~~2019.~~2020. We expect to satisfy ~~22%~~24% of the performance obligations in ~~2019, 55%~~2020, 53% in ~~2020~~2021 and the remainder by ~~2022.~~2023.

We and our subsidiaries file U.S. Federal income tax returns and income tax returns in various state, local and foreign jurisdictions.

Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant variation due to several factors, including the variability in accurately predicting our pre-tax and taxable income and the mix of jurisdictions to which they relate, changes in how we do business, changes in our stock price, tax law developments (including changes in statues, regulations, case law, and administrative practices), and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.

For the nine months ended September 30, ~~2019,~~2020, our effective income tax rate was ~~(67.93)~~(5.66)%~~. We expect our~~ compared to (67.92)% for the nine months ended September 30, 2019. Our effective income tax rate has fluctuated primarily because there was a valuation allowance release in 2019, as a result of the acquisition of GP, as well as claiming R&D credit not previously claimed.

The effective tax rate for ~~2019 to continue to differ~~2020 differs from the Federal statutory rate of 21%, ~~partly because~~primarily as a result of state taxes and permanent differences related to equity compensation and benefit for R&D credits.

The effective tax rate for 2019 differs from the Federal statutory rate of 21%, primarily as a result of the partial release of the valuation allowance ~~due~~related to ~~the acquisition of GP in the first quarter of 2019, and partly because of~~ the net operating loss carryforwards expected to be used to offset taxable ~~income.~~income in the period and certain discrete items.

We consider both positive and negative evidence when evaluating the recoverability of our deferred tax assets ("DTAs"). The assessment is required to determine whether based on all available evidence, it is more likely than not (i.e. greater than a 50% probability) that all or some portion of the DTAs will be realized in the future. As of September 30, ~~2019,~~2020, our valuation allowance was ~~$0.9 million.~~$0.4 million, which related to our dormant entities.

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


~~13.~~	~~Reportable Segments~~

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act includes significant business tax provisions that, among other things, include the removal of certain limitations on utilization of net operating losses, increase the loss carryback period for certain losses to five years, and increase the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. We do not expect the CARES Act to have a significant impact on our tax obligations.

12.Reportable Segments

We have 2 operating and reportable segments: Lightwave and Luna Labs.

During the three months ended June 30, 2020, we changed our reportable segments to Lightwave and Luna Labs to align with how our Chief Operating Decision Maker (CODM) evaluates segment performance and allocates resources to the segments. Prior to the three months ended June 30, 2020, we reported under 2 different reporting segments. We have reflected these new segment measures beginning in the three months ended June 30, 2020 and prior periods have been restated for comparability.

The Lightwave segment develops, manufactures and markets distributed fiber optic sensing products and fiber optic communications test and control products. The Luna Labs segment performs applied research principally in the areas of sensing and instrumentation, advanced materials and health sciences.

Through September 30, ~~2019,~~2020, our Chief Executive Officer and his direct reports ~~collectively~~(collectively represented our ~~chief operating decision makers, and they~~CODM), evaluated segment performance based primarily on revenues and operating income or loss. The accounting policies of our segments are the same as those described 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 ~~15, 2019)~~13, 2020).

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
(in thousands)	(unaudited)				(unaudited)
Revenues:
Lightwave	$	15,350	$	13,088	$	39,837	$	35,129
Luna Labs	5,700		5,301		16,929		15,907
Total revenues	$	21,050	$	18,389	$	56,766	$	51,036
Lightwave operating income	$	2,509	$	859	$	3,654	$	667
Luna Labs operating income	(257)		623		798		932
Total operating income	$	2,252	$	1,482	$	4,452	$	1,599
Depreciation, Lightwave	$	272	$	192	$	689	$	599
Depreciation, Luna Labs	$	41	$	40	$	115	$	106
Amortization, Lightwave	$	417	$	425	$	1,231	$	1,078
Amortization, Luna Labs	$	33	$	12	$	91	$	52

The table below presents assets for reportable segments:


	September 30, 2020		December 31, 2019
(in thousands)	(unaudited)
Total segment assets:
Lightwave	$	72,688	$	70,276
Luna Labs	23,195		16,248
Total assets	$	95,883	$	86,524
Property plant and equipment, and intangible assets, Lightwave	$	21,303	$	23,201
Property plant and equipment, and intangible assets, Luna Labs	$	543	$	1,001

September 30,
2019 December 31,
2018
(unaudited)
Total segment assets:
Products and licensing $ 45,702,864
$ 40,775,211
Technology development 37,184,931
34,823,525
Total assets $ 82,887,795
$ 75,598,736
Property plant and equipment, and intangible assets, products and licensing $ 22,380,346
$ 4,927,453
Property plant and equipment, and intangible assets, technology development $ 2,162,084
$ 2,103,711

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

The U.S. government accounted for ~~42%~~37% and ~~58%~~42% of total consolidated revenues for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~for~~38% and 42% ~~and 57%~~ of total consolidated revenues for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

International revenues (customers outside the United States) accounted for ~~33% and 20%~~31% of total consolidated revenues for both the three months ended September 30, 2020 and 2019 and ~~2018, respectively,~~32% and 31% ~~and 20%~~ of ~~the~~ total consolidated revenues for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Customers in China represented 11% of total revenues in both the three and nine months ended September 30, ~~2019,~~2020, while no other single country, outside of the United States, represented more than 10% of total revenues in the three and nine months ended September 30, ~~2019~~2019.

13.Commitments and ~~2018.~~Contingencies


~~14.~~	~~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 ~~March~~December 2018, we received a notice of claim (the "Claim") from Macom Technology Solutions, Inc. ("Macom"), who acquired our HSOR business in August 2017 pursuant to an asset purchase agreement. Under the asset purchase agreement, we agreed to indemnify Macom for certain matters, including, among other things, the collection of accounts receivable from certain major customers, and placed $4.0 million of the purchase price into an escrow account for the potential settlement of any valid indemnity claims. The notice of claim received from Macom totaled $2.0 million under various indemnity provisions. We have disputed Macom's assertion of right to payment for the matters described in the Claim. It is uncertain what amount, if any, will be owed in settlement of the Claim. As of ~~September 30,~~December 31, 2019, $1.5 million of the escrow ~~balance~~ had been received with ~~the remaining~~ $2.5 million remaining in ~~the~~ escrow ~~account~~ pending resolution of the dispute. In March 2020, we settled the dispute resulting in us receiving $0.6 million and Macom receiving $1.9 million. For the nine months ended September 30, 2020, we have recorded a loss from discontinued operations of $1.4 million, net of income tax benefit, to reflect the settlement of the dispute.

On July 31, 2018, we sold the assets associated with our Opto components business to an unaffiliated third party. The asset purchase agreement provides for additional consideration of up to $1.0 million contingent upon the achievement of a specified revenue level by the sold business during the 18 months following the sale. In addition, the asset purchase agreement provides for a potential adjustment to the consideration paid, either positive or negative, to the extent that working capital transferred to the buyer is greater or less than a specified target amount. ~~There have been no amounts recorded in reference to~~We did not receive any of the ~~above matter in~~additional $1.0 million of consideration because the ~~financial statements as of September 30, 2019. It is uncertain what amount, if any, will be received or paid with respect to each of these potential adjustments.~~minimum revenue targets were not achieved.

On March 1, 2019, we acquired all of the outstanding stock of GPGeneral Photonics Corporation ("GP"), a leading provider of innovative components, modules and test equipment focused on the generation, measurement and control of polarized light critical in fiber optic-based applications for ~~cash~~aggregate consideration of $19.0 ~~million. Additionally, we can become obligated to pay additional cash consideration~~million with an earn-out provision of up to $1.0 million. Of the purchase price, $17.1 million ifwas paid at closing and $1.9 million was placed into escrow for possible working capital adjustments to the purchase price and potential satisfaction of certain ~~revenue targets for the GP historical business are met for the twelve month period following the closing. At~~post-closing indemnification obligations. As of September 30, ~~2019, a liability of $0.9~~2020, the $1.0 million in additional cash consideration has been ~~recorded in~~paid as a result of the ~~financial statements in reference to~~successful completion of the ~~above matter.~~earn-out provision.

We executed a non-cancelable purchase ~~order~~orders totaling ~~$1.1 million in the first quarter of 2018 and a non-cancelable purchase order totaling $1.9~~$1.5 million in the third quarter of ~~2019~~2020 for multiple shipments of tunable lasers to be delivered over an 18-month period. At September 30, ~~2019,~~2020, approximately ~~$1.9~~$1.4 million of these commitments remained and isare expected to be delivered by December 31, ~~2020~~2021.

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.

~~15.~~14. Subsequent Event

On October ~~10, 2019,~~8, 2020, we entered into an Amended and Restated Loan and Security Agreement (the ~~“Loan~~“A&R Loan Agreement”) with SVB, which amended and restated in its entirety our previous Loan and Security Agreement dated as of ~~February 18, 2010,~~October 10, 2019, as amended ~~(See~~(see Note 8)7). Under the A&R Loan Agreement, SVB agreed to make advances available up to $10.0 million (the ~~“Revolving~~“A&R Revolving Line”). If we borrow from the A&R Revolving Line, such borrowing would carry a floating annual interest rate equal to the greater of (i) the Prime Rate (as defined in the Loan Agreement) then in effect plus 1%.50% or (ii) 6%4.75%.

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

Amounts borrowed under the A&R Revolving Line may be repaid and, prior to the A&R Revolving Line Maturity Date (defined below), reborrowed. The Revolving Line terminates on October 10, ~~2020~~2021 (the ~~“Revolving~~“A&R Revolving Line Maturity Date”), unless earlier terminated by us. No amounts have been borrowed under this A&R Loan Agreement.

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

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



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

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” under Items 2 and 3, respectively, of Part I of this report, and the section entitled “Risk Factors” under Item 1A of Part II of this

report, may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. All statements other than statements of historical fact are “forward-looking statements” for purposes of these statutes, including those relating to future events or our future financial performance. In some cases, you can identify these forward looking statements by words such as “intends,” “will,” “plans,” “anticipates,” “expects,” “may,” “might,” “estimates,” “believes,” “should,” “projects,” “predicts,” “potential” or “continue,” or the negative of those words and other comparable words, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. Similarly, statements that describe our business strategy, goals, prospects, opportunities, outlook, objectives, plans or intentions are also forward-looking statements. These statements are only predictions and may relate to, but are not limited to, expectations of future operating results or financial performance, capital expenditures, introduction of new products, regulatory compliance and plans for growth and future operations, the potential impacts of the COVID-19 pandemic on our business, operations and financial results, as well as assumptions relating to the foregoing.

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

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

Overview of Our Business

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

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

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

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

During the three months ended June 30, 2020, we changed our reportable segments to Lightwave and Luna Labs to align with how our Chief Operating Decision Maker (CODM) evaluates segment performance and allocates resources to the segments. Prior to the three months ended June 30, 2020, we reported under two different reporting segments, the Products and Licensing segment and ~~the~~ Technology Development segment. We have reflected these new segment measures beginning in the three months ended June 30, 2020 and prior periods have been restated for comparability.

Our ~~Products and Licensing~~Lightwave segment develops, manufactures and markets distributed fiber optic sensing products ~~as well as~~and fiber optic communications test and control products. We ~~are continuing~~continue to develop and commercialize our fiber optic technology for sensing applications for aerospace, automotive, energy, and infrastructure as well as for test and measurement applications in the telecommunications and data communications industries. Our ~~Products~~Lightwave segment also performs applied research principally in the areas of optical and ~~Licensing~~terahertz technologies. Our Lightwave segment revenues represented ~~65%~~73% and ~~50%~~71% of our total revenues for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~62%~~70% and ~~48%~~69% of our total revenues for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The ~~Products and Licensing~~Lightwave segment revenues were ~~$11.9~~$15.4 million and ~~$5.4~~$13.1 million for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$31.5~~$39.8 million and ~~$14.0~~$35.1 million for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

Revenues from product sales are mostly derived from the sales of our sensing and test, measurement and ~~measurement~~control products that make use of light-transmitting optical fibers, or fiber optics. We continue to invest in product development and commercialization, which we anticipate will lead to increased product sales growth. Although we have been successful in licensing certain ~~technology~~technologies in past years, we do not expect license revenues to represent a significant portion of future revenues. ~~Over time, however,~~In the near term, we ~~do intend~~expect revenues from product sales to ~~gradually increase such revenues.~~continue to be primarily in areas associated with our sensing and test, measurement and control fiber optic test platforms. In the long term, we expect that revenues from product sales will represent a larger portion of our total ~~revenues and that as~~revenues. As we develop and commercialize new products, these revenues will reflect a broader and more diversified mix of products.

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 ~~Products and Licensing~~Lightwave segment backlog was ~~$14.6~~$21.6 million at September 30, ~~2019~~2020 and ~~$5.8~~$16.1 million at December 31, ~~2018.~~2019. The backlog at September 30, ~~2019~~2020 is expected to be recognized as revenue in the future as follows:


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

2019 2020 2021 2022 2023 and beyond Total
Products and Licensing $ 3,915,638
$ 4,509,102
$ 1,992,612
$ 2,754,717
$ 1,413,842
$ 14,585,911

The ~~Technology Development~~Luna Labs segment performs applied research principally in the areas of sensing and instrumentation, advanced materials and health sciences. This segment comprised ~~35%~~27% and ~~50%~~29% of our total revenues for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~38%~~30% and ~~52%~~31% of our total revenues for the nine months ended September 30, 2020 and 2019, ~~and 2018.~~respectively. Most of the government funding for our ~~Technology Development~~Luna Labs segment is derived from the Small Business Innovation Research ("SBIR") program coordinated by the U.S. Small Business Administration ("SBA"). The ~~Technology Development~~Luna Labs segment revenues were ~~$6.5~~$5.7 million and $5.3 million for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$19.6~~$16.9 million and ~~$15.4~~$15.9 million for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

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

Within the ~~Technology Development~~Luna Labs segment, we have historically had a backlog of contracts for which work has been scheduled, but for which a specified portion of work has not yet been completed. The approximate value of our ~~Technology Development~~Luna Labs segment backlog was ~~$34.8~~$24.4 million at September 30, ~~2019~~2020 and ~~$26.0~~$31.3 million at December 31, ~~2018.~~2019. The backlog at September 30, ~~2019~~2020 is expected to be recognized as revenue in the future as follows:


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

Technology Development 2019 2020 2021 2022 Total
Funded $ 7,613,700
$ 18,178,690
$ 5,532,353
$ 1,566,062
$ 32,890,805
Unfunded $ 197,597
$ 790,387
$ 727,888
$ 153,750
$ 1,869,622

On October 15, 2018, we acquired substantially all of the assets, other than cash, as well as specified liabilities of Micron Optics, Inc. ("MOI"), a leading provider of innovative optical components and laser-based measurement technology, whose sensing and measurement solutions are deployed in multiple industries, for total cash consideration of $5.0 million, including $4.0 million paid at closing and $1.0 million placed in escrow until the later of October 1, 2019 or the date that specified matters are resolved as agreed by us and MOI. Following closing of the transaction, the purchase price was increased by $0.5 million based upon the final determination of working capital of MOI as of the closing date compared to a target working capital amount specified in the asset purchase agreement.

On March 1, 2019, we acquired all of the outstanding stock of General Photonics Corporation ("GP"), a leading provider of innovative components, modules and test equipment focused on the generation, measurement and control of polarized light critical in fiber optic-based applications for aggregate consideration of $19.0 million with an earn-out provision of up to $1.0 million. Of the purchase price, $17.1 million was paid at closing and $1.9 million was placed into escrow for possible working capital adjustments to the purchase price and potential satisfaction of certain post-closing indemnification obligations. ~~Additionally, we can become obligated to pay~~The $1.0 million in additional cash consideration was paid in the second quarter of ~~up to $1.0 million if certain revenue targets for~~2020 as a result of the ~~GP historical business are met for~~successful completion of the ~~twelve months following the closing.~~earn-out provision.

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

Description of Revenues, Costs and Expenses

Impact of COVID-19 Pandemic

The broader impact of the COVID-19 pandemic on our results of operations and overall financial performance remains uncertain. The COVID-19 pandemic has affected how we interact with our customers by reducing face-to-face meetings and increasing our on-line and virtual presence. While increasing our on-line and virtual presence has proven effective, we are unsure of the impact if these conditions continue for an extended period. In addition, we have experienced minor impacts on our supply chain that we have managed. For example, in cases where there were delays we relied on our inventory of components to continue production. There is no guarantee we will be able to manage through future delays in our supply chain. See “Risk Factors” for further discussion of the potential adverse impacts of the COVID-19 pandemic on our business.

Revenues

~~The Products~~ We generate revenues from product sales, commercial product development and ~~Licensing~~licensing and technology development activities. Our Lightwave segment revenues reflect amounts that we receive from sales of our products or development of products for third parties and, to a lesser extent, fees paid to us in connection with licenses or sub-licenses of certain patents and other intellectual property, and represented ~~65%~~73% and ~~50%~~71% of our total revenues for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~62%~~70% and ~~48%~~69% of our total revenues for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

~~We generate revenues from technology development, product sales and commercial product development and licensing activities.~~ We derive ~~Technology Development~~Luna Labs segment revenues from providing research and development services to third parties, including government entities, academic institutions and corporations, and from achieving milestones established by some of these contracts and in collaboration agreements. In general, we complete contracted research over periods ranging from six months to three years and recognize these revenues over the life of the contract as costs are incurred. The ~~Technology Development~~Luna Labs segment revenues represented ~~35%~~27% and ~~50%~~29% of total revenues for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~38%~~30% and ~~52%~~31% of our total revenues for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

Cost of Revenues

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

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

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

Operating Expense

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

Investment Income

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

Interest Expense

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

Critical Accounting Policies and Estimates

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

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

Our critical accounting policies are described in the Management’s Discussion and Analysis section and the notes to our audited consolidated financial statements previously included in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, as filed with the Securities and Exchange Commission ("SEC") on March ~~15, 2019.~~13, 2020.

~~In February 2016, the Financial Accounting Standards Board ("FASB") issued a new standard related to Leases, Accounting Standards Update ("ASU") No. 2016-02,~~ ~~Leases (Topic 842)~~ and subsequent amendments, which replaced existing GAAP and requires lessees to recognize right-of-use ("ROU") assets and corresponding lease liabilities that depict the rights and obligations arising from a lease agreement. We implemented ASU 2016-02 on January 1, 2019 and elected certain practical expedients available under the ASU. As a result of the adoption, we recognized ROU assets totaling $3.5 million and lease liabilities totaling $4.7 million as of the adoption date. For additional information, see Note 1 to our Unaudited Consolidated Financial Statements - "Basis of Presentation and Significant Accounting Policies-Recently Issued Accounting Pronouncements" elsewhere in this Quarterly Report.

Results of Operations

Three Months Ended September 30, ~~2019~~2020 Compared to Three Months Ended September 30, ~~2018~~2019

Revenues


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

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

Three Months Ended September 30,
2019 2018 $ Difference % Difference
Revenues:
Products and licensing $ 11,926,178
$ 5,371,165
$ 6,555,013
122 %
Technology development 6,494,832
5,315,861
1,178,971
22 %
Total revenues $ 18,421,010
$ 10,687,026
$ 7,733,984
72 %
Our Lightwave segment included revenues from sales of test and measurement systems, primarily representing sales of our Optical Backscatter Reflectometer, ODiSI, Optical Vector Analyzer platforms, optical components and sub-assemblies and sales of our Hyperion platforms. Lightwave segment revenues for the three months ended September 30, 2020 increased $2.3 million, or 17%, to $15.4 million compared to $13.1 million for the three months ended September 30, 2019.

The increase for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, resulted primarily from growth in sales of our sensing and communications testing products.

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

Cost of Revenues and Gross Profit


	Three Months Ended September 30,
(in thousands)	2020		2019		$ Difference		% Difference
Cost of revenues:
Lightwave	$	5,670	$	5,449	$	221	4	%
Luna Labs	4,431		3,665		766		21	%
Total cost of revenues	10,101		9,114		987		11	%
Gross profit	$	10,949	$	9,275	$	1,674	18	%

The cost of Lightwave segment revenues increasedby $0.2 million, or 4%, to $5.7 million for the three months ended September 30, 2020, compared to $5.4 million for the three months ended September 30, 2019. This increase in cost of revenues resulted from higher sales volume in our sensing and communications testing products.

The cost of Luna Labs segment revenues for the three months ended September 30, 2020 increased $0.8 million, or 21%, to $4.4 million compared to $3.7 million for the three months ended September 30, 2019. The increase in cost of Luna Labs segment revenues was primarily attributable to third-party subcontracted services associated with performing our awarded contracts and was consistent with the rate of revenue growth for this business segment. The increase in cost of revenues is also attributable to overhead expenses incurred in order to consolidate segment operations.

Our ~~Products~~overall gross margin increased to 52% for the three months ended September 30, 2020, compared to 50% for the three months ended September 30, 2019, primarily as a result of our revenue mix, with Lightwave segment revenues, which generally have stronger margins, representing a larger portion of our total revenues during the three months ended September 30, 2020.

Operating Expense


	Three Months Ended September 30,
(in thousands)	2020		2019		$ Difference		% Difference
Operating expense:
Selling, general and administrative	$	6,505	$	5,746	$	759	13	%
Research, development and engineering	1,616		2,047		(431)		(21)	%
Loss on sale of property and equipment	576		—		576		100	%
Total operating expense	$	8,697	$	7,793	$	904	12	%

Our selling, general and ~~Licensing~~administrative expense increased $0.8 million, or 13%, to $6.5 million for the three months ended September 30, 2020, compared to $5.7 million for the three months ended September 30, 2019. Selling, general and administrative expense increased primarily due to the additional selling related expenses as a result of increased revenues, increased depreciation on acquired fixed assets and share-based compensation related to the recent implementation of our ESPP.

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

Research, development and engineering expense decreased $0.4 million, or 21%, to $1.6 million for the three months ended September 30, 2020, compared to $2.0 million for the three months ended September 30, 2019. Research, development and engineering expense decreased due to additional expenses incurred related to product improvements in our Lightwave segment for the three months ended September 30, 2019 that did not reoccur during the three months ended September 30, 2020.

The loss on sale of property and equipment was primarily due to the sale of one of our buildings and other fixed assets in order to consolidate operations in our Luna Labs operating segment.

Income from Continuing Operations Before Income Tax

During the three months ended September 30, 2020, we recognized income from continuing operations before income taxes of $2.3 million compared to income from continuing operations before income taxes of $1.6 million for the three months ended September 30, 2019.

Income Tax (Benefit)/Expense

For the three months ended September 30, 2020, we recognized an income tax benefit from continuing operations of $0.8 million, compared to an income tax expense from continuing operations of $0.3 million for the three months ended September 30, 2019, respectively. The income tax benefit for the three months ended September 30, 2020 is related to R&D tax credits.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Revenues


	Nine Months Ended September 30,
(in thousands)	2020		2019		$ Difference		% Difference
Revenues:
Lightwave	$	39,837	$	35,129	$	4,708	13	%
Luna Labs	16,929		15,907		1,022		6	%
Total revenues	$	56,766	$	51,036	$	5,730	11	%

Our Lightwave segment included revenues from sales of test and measurement systems, primarily representing sales of our Optical Backscatter Reflectometer, ODiSI, and Optical Vector Analyzer platforms, optical components and sub-assemblies and sales of our Hyperion and Terahertz sensing platforms. ~~Products and Licensing~~Lightwave segment revenues for the ~~three~~nine months ended September 30, 2020 increased $4.7 million, or 13%, to $39.8 million compared to $35.1 million for the nine months ended September 30, 2019. The increase for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, resulted primarily from the incremental revenues associated with the acquired operations of GP as well as increased ~~$6.6~~revenues from our sensing products.

Luna Labs segment revenues increased $1.0 million, or ~~122%~~6%, to ~~$11.9 million compared to $5.4~~$16.9 million for the ~~three~~nine months ended September 30, ~~2018.~~2020, compared to $15.9 million for the nine months ended September 30, 2019. The increase for the ~~three~~nine months ended September 30, ~~2019,~~2020 compared to the ~~three~~nine months ended September 30, 2018, resulted primarily from $2.7 million of revenues realized from the legacy business of MOI and $3.2 million of revenues realized from the legacy business of GP during the period. Continued growth in sales of our communications test instruments also contributed to this increase.

~~Revenues from our Technology Development segment for the three months ended September 30,~~ 2019 ~~increased $1.2 million, or 22%, to $6.5 million compared to $5.3 million for the three months ended September 30, 2018. The increase in Technology Development segment revenues~~ continues a growth trend experienced over the past ~~two~~few years largely driven by successes in Phase 2 SBIR awards. The increase ~~for the three months ended September 30, 2019, compared to the three months ended September 30, 2018,~~ was realized primarily in our ~~terahertz,~~ advanced materials ~~and systems groups.~~research group. As Phase 2 contracts generally have a performance period of a year or more, we currently expect revenues to remain at a similar level for the near term.

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Cost of Revenues and Gross Profit


	Nine Months Ended September 30,
(in thousands)	2020		2019		$ Difference		% Difference
Cost of revenues:
Lightwave	$	15,736	$	15,063	$	673	4	%
Luna Labs	12,200		11,178		1,022		9	%
Total cost of revenues	27,936		26,241		1,695		6	%
Gross profit	$	28,830	$	24,795	$	4,035	16	%

Three Months Ended September 30,
2019 2018 $ Difference % Difference
Cost of revenues:
Products and licensing $ 4,561,801
$ 2,079,749
$ 2,482,052
119 %
Technology development 4,574,035
3,918,666
655,369
17 %
Total cost of revenues 9,135,836
5,998,415
3,137,421
52 %
Gross profit $ 9,285,174
$ 4,688,611
$ 4,596,563
98 %

~~The cost~~Costs of ~~Products and Licensing~~Lightwave segment revenues increased ~~by $2.5~~$0.7 million, or ~~119%~~4%, to ~~$4.6~~$15.7 million for the ~~three~~nine months ended September 30, ~~2019,~~2020, compared to ~~$2.1~~$15.1 million for the ~~three~~nine months ended September 30, ~~2018.~~2019. This increase in cost of revenues primarily resulted from ~~$2.3 million~~the incremental revenues associated with the acquired operations of ~~cost of revenues from the legacy businesses of MOI and~~ GP as well as

the organic growth in sales of our ~~communications test equipment. The~~ ~~119%~~ ~~increase in cost~~sensing products.

Costs of ~~Products and Licensing segment revenues is consistent with our 122% increase in associated revenue as described above.~~

~~The cost of Technology Development segm~~ent revenues for the three months ended September 30, 2019 increased $0.7 million, or 17%, to $4.6 million compared to $3.9 million for the three months ended September 30, 2018. The increase in cost of Technology Development segment revenues was primarily attributable to additional labor costs associated with performing our awarded contracts. Cost of Technology DevelopmentLuna Labs segment revenues increased ~~at a lower rate than Technology Development segment revenues due to decreased reliance on utilization of subcontractors to perform on our awarded contracts.~~

Our overall gross margin increased to 50% for the three months ended September 30, 2019, compared to 44% for the three months ended September 30, 2018, primarily as a result of our revenue mix, with Products and Licensing segment revenues representing a larger portion of our total revenues during the three months ended September 30, 2019.

~~Operating Expense~~

Three Months Ended September 30,
2019 2018 $ Difference % Difference
Operating expense:
Selling, general and administrative $ 5,753,649
$ 3,233,485
$ 2,520,164
78 %
Research, development and engineering 2,047,524
873,629
1,173,895
134 %
Total operating expense $ 7,801,173
$ 4,107,114
$ 3,694,059
90 %

~~Our selling, general and administrative expense increased $2.5~~$1.0 million, or ~~78%~~9%, to $5.8 million for the three months ended September 30, 2019, compared to $3.2 million for the three months ended September 30, 2018. Selling, general and administrative expense increased primarily due to $2.0 million of expenses associated with the legacy businesses of MOI and GP for the three months ended September 30, 2019, in addition to an increase in share-based compensation expenses of $0.3 million due to new stock awards and a $0.2 million increase in marketing expenses and additional resources as a result of increased revenue.

Research, development and engineering expense increased $1.2 million, or 134%, to $2.0 million for the three months ended September 30, 2019, compared to $0.9 million for the three months ended September 30, 2018, due to $0.8 million of research, development and engineering expenses associated with the legacy businesses of MOI and GP during the three months ended September 30, 2019 in addition to other engineering expenses of $0.3 million to support new product development activities.

~~Investment Income~~

Investment income was $0.1 million and $0.2 million for the three months ended September 30, 2019 and 2018. During the three months ended September 30, 2019 and 2018, we invested a portion of our cash in funds holding U.S. treasury securities.

~~Income Tax Expense/(Benefit)~~

For the three months ended September 30, 2019, we recognized an income tax expense from continuing operations of $0.3 million, compared to an income tax benefit from continuing operations of $0.6 million for the three months ended September 30, 2018, respectively. The increase in our income tax expense was primarily due to the intraperiod allocation of tax benefit from discontinued operations during the three months ended September 30, 2018.

We regularly evaluate the realizability of our net deferred tax assets based on all available evidence, both positive and negative. The realization of net deferred tax assets is dependent on our ability to generate sufficient future taxable income during periods prior to the expiration of tax attributes to fully utilize these assets. Given our history of operating losses, we have maintained a valuation allowance against our deferred tax asset. However, considering our current assessment of the probability of maintaining profitability, there is a reasonable possibility that, within the next 12 months, sufficient positive evidence may become available to reach a conclusion that a significant portion, or all, of the valuation allowance will no longer be needed. As such, we may release a significant portion, or all, of our valuation allowance against our deferred tax assets within the next 12 months. This release, if any, would result in the recognition of certain deferred tax assets and a decrease to our income tax expense for the period such release is recorded.

~~Income From Continuing Operations~~

~~During the three months ended September 30, 2019, we recognized~~ ~~income f~~rom continuing operations before income taxes of $1.6 million compared to $0.7 million for the three months ended September 30, 2018. After tax, our net income from continuing operations was $1.2 million compared to $1.3 million for the three months ended September 30, 2019 and 2018, respectively.

~~Net Income From Discontinued Operations~~

For the three months ended September 30, 2018, our net income from discontinued operations of $7.6 million represented the after-tax gain on sale of our optoelectronic components business in addition to the operating results of that business for the period prior to its sale. There were no results from discontinued operations for the three months ended September 30, 2019.

~~Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018~~

~~Revenues~~

Nine Months Ended September 30,
2019 2018 $ Difference % Difference
Revenues:
Products and licensing $ 31,459,323
$ 13,960,003
$ 17,499,320
125 %
Technology development 19,576,574
15,418,919
4,157,655
27 %
Total revenues $ 51,035,897
$ 29,378,922
$ 21,656,975
74 %

Our Products and Licensing segment included revenues from sales of test and measurement systems, primarily representing sales of our Optical Backscatter Reflectometer, ODiSI, and Optical Vector Analyzer platforms, optical components and sub-assemblies and sales of our Hyperion and Terahertz sensing platforms. Products and Licensing segment revenues for the nine months ended September 30, 2019 increased $17.5 million, or 125%, to $31.5 million compared to $14.0$12.2 million for the nine months ended September 30, ~~2018. The increase for the nine months ended September 30, 2019,~~2020, compared to the nine months ended September 30, 2018, resulted primarily from $8.1 million of revenues realized from the legacy business of MOI and $7.1 million of revenues realized from the legacy business of GP during the period. Continued growth in sales of our fiber-optic sensing products, including our ODiSI products directed toward the expanding use of composite materials and the need for improved means of testing their structural integrity, and our communications test instruments also contributed to this increase.

Technology Development segment revenues increased $4.2 million, or 27%, to $19.6 million for the nine months ended September 30, 2019, compared to $15.4 million for the nine months ended September 30, 2018. The increase for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 continues a growth trend experienced over the past two years largely driven by successes in Phase 2 SBIR awards. The increase was realized primarily in our advanced materials, optical systems, and terahertz research groups. As Phase 2 contracts generally have a performance period of a year or more, we currently expect revenues to remain at a similar level for the near term.

~~Cost of Revenues and Gross Profit~~

Nine Months Ended September 30,
2019 2018 $ Difference % Difference
Cost of revenues:
Products and licensing $ 12,357,961
$ 5,381,333
$ 6,976,628
130 %
Technology development 13,874,156
11,131,965
2,742,191
25 %
Total cost of revenues 26,232,117
16,513,298
9,718,819
59 %
Gross profit $ 24,803,780
$ 12,865,624
$ 11,938,156
93 %

Costs of Products and Licensing segment revenues increased $7.0 million, or 130%, to $12.4 million for the nine months ended September 30, 2019, compared to $5.4 million for the nine months ended September 30, 2018. This increase in cost of revenues primarily resulted from $6.2 million of cost of revenues from the legacy businesses of MOI and GP, as well as an increase in sales volume.

~~Costs of Technology Development segment revenues increased $2.7 million, or 25%, to $13.9 million for the nine months ended September 30, 2019, compared to $11.1~~$11.2 million the nine months ended September 30, ~~2018.~~2019. The increase in cost of ~~Technology Development~~Luna Labs segment revenues was attributable to additional headcount and the increased ~~utilization of third-party analytical services~~spending on other direct costs to support the growth in our research contracts and was consistent with the rate of revenue growth for this business segment.

Our overall gross margin for the nine months ended September 30, ~~2019~~2020 increased to ~~49%~~51% compared to ~~44%~~49% for the nine months ended September 30, ~~2018~~2019 primarily as a result of our revenue mix, with ~~Products and Licensing~~Lightwave segment revenues, which generally have stronger margins, representing a larger portion of our total revenues during the nine months ended September 30, ~~2019.~~2020.

Operating Expense


	Nine Months Ended September 30,
(in thousands)	2020		2019		$ Difference		% Difference
Operating expense:
Selling, general and administrative	$	19,085	$	17,955	$	1,130	6	%
Research, development and engineering	4,717		5,241		(524)		(10)	%
Loss on sale of property and equipment	576		—		576		100	%
Total operating expense	$	24,378	$	23,196	$	1,182	5	%

Nine Months Ended September 30,
2019 2018 $ Difference % Difference
Operating expense:
Selling, general and administrative $ 17,964,524
$ 9,898,064
$ 8,066,460
81 %
Research, development and engineering 5,240,759
2,513,497
2,727,262
109 %
Total operating expense $ 23,205,283
$ 12,411,561
$ 10,793,722
87 %

Selling, general and administrative expense increased ~~$8.1~~$1.1 million, or ~~81%~~6%, to $19.1 million for the nine months ended September 30, 2020, compared to $18.0 million for the nine months ended September 30, ~~2019, compared to $9.9 million for the nine months ended September 30, 2018.~~2019. Selling, general and administrative expense increased primarily due to ~~$4.9 million of expenses~~incremental costs associated with the ~~legacy businesses~~acquired operations of ~~MOI~~GP, which we acquired on March 1, 2019.

Research, development and GPengineering expense decreased $0.5 million, or 10%, to $4.7 million for the nine months ended September 30, 2019, in addition to $0.9 million in transaction costs associated with the acquisition of GP, a $0.8 million increase in share-based compensation as a result of new awards, increased audit and legal fees of $0.3 million due to increased company growth, and a $1.0 million increase in expenses related to marketing and additional resources as a result of increased revenue.

~~Research, development and engineering expense increased $2.7 million, or 109%,~~2020, compared to $5.2 million for the nine months ended September 30, 2019. Research, development and engineering expense decreased due to additional expenses incurred related to product improvements in our Lightwave segment for the nine months ended September 30, 2019 ~~compared~~that did not reoccur during the nine months ended September 30, 2020.

The loss on sale of property and equipment was primarily due to ~~$2.5~~the sale of one of our buildings and other fixed assets in order to consolidate operations in our Luna Labs operating segment.

Investment Income

Investment income was $0.1 million for the nine months ended September 30, ~~2018 primarily due~~2020, compared to $2.2 million of research, development and engineering expenses associated with the legacy businesses of MOI and GP during the nine months ended September 30, 2019 in addition to other engineering expenses of $0.5 million to support new product development activities.

~~Investment Income~~

~~Investment income was~~ $0.3 million for the nine months ended September 30, ~~2019, compared to $0.4 million for the nine months ended September 30, 2018.~~2019. During the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, we invested a portion of our cash in funds holding U.S. treasury securities. The decrease in investment income is related to lower returns on our cash balance held in U.S. treasury securities.

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Income from Continuing Operations Before Income Tax

During the nine months ended September 30, 2020, we recognizedincome from continuing operations before income taxes of $4.5 million compared to $1.9 million for the nine months ended September 30, 2019.

Income Tax Benefit

For the nine months ended September 30, ~~2019,~~2020, we recognized an income tax benefit from continuing operations of ~~$1.3~~$0.3 million, compared to ~~$0.7~~an income tax benefit of $1.3 million for the nine months ended September 30, ~~2018.~~2019. The ~~increase~~decrease in our income tax benefit for the nine months ended September 30, 2020 was primarily due to a reduction in our deferred tax asset valuation allowances as a result of the acquisition of ~~GP.~~

probability of maintaining profitability, there is a reasonable possibility that, within the next 12 months, sufficient positive evidence may become available to reach a conclusion that a significant portion, or all, of the valuation allowance will no longer be needed. As such, we may release a significant portion, or all, of our valuation allowance against our deferred tax assets within the next 12 months. This release, if any, would resultGP in the ~~recognition of certain deferred~~2019 period, partially offset by R&D tax ~~assets and a decrease to our income tax expense for~~credits received in the ~~period such release is recorded.~~

~~Income From Continuing Operations~~

~~During the nine months ended September 30, 2019, we recognized income~~ from continuing operations before income taxes of $1.9 million compared to $0.7 million for the nine months ended September 30, 2018. After tax, our net income from continuing operations was $3.2 million for the nine months ended September 30, 2019, compared to income from continuing operations of $1.4 million for the nine months ended September 30, 2018.2020 period.

Net ~~Income From~~Loss from Discontinued Operations

For the nine months ended September 30, ~~2018,~~2020, our net ~~income~~loss from discontinued operations of ~~$8.7~~$1.4 million ~~included an~~represented the after-tax ~~gain of $7.6 million realized~~loss on ~~the~~ sale of our ~~optoeclectronic components business~~High Speed Optical Receiver ("HSOR") business. In March 2020, we settled the notice of claim dispute with Macom Technology Solutions, Inc. ("Macom") resulting in ~~addition to income of $1.1~~us receiving $0.6 million ~~associated with the operating results of the optoelectronic components business prior to its sale.~~and Macom receiving $1.9 million. There were no results from discontinued operations for the nine months ended September 30, 2019.

Liquidity and Capital Resources

At September 30, ~~2019,~~2020, our total cash and cash equivalents were ~~$21.4~~$26.4 million.

On October 10, 2019, we entered into an Amended and Restated Loan and Security Agreement (the "Loan Agreement") with Silicon Valley Bank ("SVB"), which amended and restated in its entirety our previous Loan and Security Agreement dated as of February 18, 2010, as amended. Under the Loan Agreement, SVB agreed to make advances available up to $10.0 million (the "Revolving Line"). The Revolving Line terminates on October 10, 2020 unless earlier terminated by us. No amounts have been borrowed under this Loan Agreement.

We believe that our cash balance as of September 30, ~~2019~~2020 in addition to amounts available to us under our Revolving Line, which we renewed on October 8, 2020, will provide adequate liquidity for us to meet our working capital needs over the next twelve months. 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 and borrowing capacity under the Revolving Line described above, 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 the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.

Discussion of Cash Flows

~~Recent Activity~~


	Nine Months Ended September 30,
(in thousands)	2020		2019		$ Difference
Net cash provided by operating activities	$	97	$	1,085	$	(988)
Net cash provided by/(used in) investing activities	290		(19,697)		19,987
Net cash provided by/(used in) financing activities	1,029		(2,434)		3,463
Net increase/(decrease) in cash and cash equivalents	$	1,416	$	(21,046)	$	22,462

During the first nine months of 2020, the $0.1 million of net cash provided by operating activities consisted of our net income of $3.4 million, which included non-cash charges for depreciation and amortization of $2.1 million, share-based compensation of $1.5 million, net loss on sale of fixed assets of $0.6 million, and a net loss from discontinued operations of $1.4 million offset by a net cash outflow of $8.8 million from changes in working capital. The changes in working capital include a decrease in accounts payable and accrued expenses of $1.5 million, a decrease in contract liabilities of $0.2 million, an increase in accounts receivable of $2.1 million, an increase in inventory of $1.4 million, an increase in other current assets of $2.0 million, and an increase in contract assets of $1.6 million.

Nine Months Ended September 30,
2019 2018 $ Difference
Net cash provided by/(used in) operating activities $ 1,084,960
$ (3,444,408 ) $ 4,529,368
Net cash (used in)/provided by investing activities (19,697,015 ) 14,227,434
(33,924,449 )
Net cash used in financing activities (2,433,940 ) (619,840 ) (1,814,100 )
Net (decrease)/increase in cash and cash equivalents $ (21,045,995 ) $ 10,163,186
$ (31,209,181 )

During the first nine months of 2019, the $1.1 million of net cash provided by operating activities consisted of our net income of $3.2 million, which included non-cash charges for depreciation and amortization of $1.8 million and share-based compensation of $1.1 million, offset by a tax benefit from a partial release of the valuation allowances associated with GP of $1.9 million, and a net cash outflow of $3.2 million from changes in working capital. The changes in working capital included an increase in accounts receivable of $2.2 million, an increase in contract assets of $1.1 million, an increase in other long term

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

assets of $0.3 million, and a decrease in accounts payable and accrued expenses of $0.1 million partially offset by an increase in contract liabilities of $0.7 million.

During the first nine months of 2018, the $3.4 million of net cash used in operating activities consisted of our net income of $10.1 million, which included a gain recognized on the sale of our optoelectronic segment that was sold in July 2018 of $7.6 million in addition to non-cash charges for depreciation and amortization of $0.9 million and share-based compensation of $0.3 million, offset Cash provided by a net cash outflow of $7.2 million from changes in working capital. The changes in working capital included a reduction in contract liabilities of $1.9 million as a result of the payment of $1.6 million in outstanding claims for excess billed amounts on government research contracts. The changes in working capital also included an increase in accounts receivable of $4.1 million, an increase in contract assets of $1.0 million, and an increase in inventory of $1.0 million, all partially offset by a reduction in other current assets of $0.5 million and an increase in accounts payable and accrued expenses of $0.2 million.

~~Cash used in~~ investing activities ~~for~~during the nine months ended September 30, ~~2019~~2020 included $19.0 million to acquire the operations of GP, in addition to $0.5 million of fixed asset additions and $0.2 million of capitalized intellectual property costs. Cash provided by investing activities for the nine months ended September 30, 2018 included $14.8$0.6 million in proceeds from the sale of ~~our optoelectronic segment~~discontinued operations and $0.4 million in proceeds from the sale of property and equipment, partially offset by ~~$0.3~~$0.4 million of fixed asset additions and $0.3 million of capitalized intellectual property costs. Net cash used in investing activities during the nine months ended September 30, 2019 included $0.5 million of fixed asset additions, $0.2 million of capitalized intellectual property costs and $19.0 million to acquire the operations of GP.

Net cash provided by financing activities during the nine months ended September 30, 2020 consisted primarily of proceeds from the exercise of stock options of $1.4 million, partially offset by a cash outflow of $0.3 million to repurchase our common stock. Net cash used in financing activities during the nine months ended September 30, 2019 ~~included long term debt repayments~~consisted primarily of $0.6 million ~~compared to $1.4 million~~ of payments on long-term debt ~~repayments during the nine months ended September 30, 2018. During the nine months ended September 30, 2019 we also repurchased~~obligations and $2.2 million ofto repurchase our common stock ~~including $2.0 million~~ on the open market, compared to $0.5 million of our common stock repurchases during the nine months ended September 30, 2018. During the nine months ended September 30, 2019 we received proceeds from the exercise of options and warrants ofpartially offset by $0.4 ~~million, compared to $1.3~~ million in proceeds received from the exercise of ~~options and warrants during the nine months ended September 30, 2018.~~options.

Off-Balance Sheet Arrangements

We have no ~~material~~ off-balance sheet arrangements as ~~defined in Regulation S-K Item 303(a)(4)(ii).~~of September 30, 2020.



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.

The uncertainty that exists with respect to the economic impact of the global COVID-19 pandemic has introduced significant volatility in the financial markets subsequent to our quarter ended September 30, 2020.

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 is 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.

Foreign Currency Exchange Rate Risk

As of September 30, ~~2019,~~2020, all payments made under our research contracts have been denominated in U.S. dollars. Our product sales to foreign customers are also generally denominated in U.S. dollars, and we generally do not receive payments in foreign currency. As such, we are not directly exposed to significant currency gains or losses resulting from fluctuations in foreign exchange rates.

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ITEM 4.			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 officer and our principal 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. Based on this evaluation, our principal executive officer and our principal financial officer have concluded that, as of September 30, ~~2019,~~2020, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended September 30, ~~2019~~2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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

~~None.~~ In December 2018, we received a notice of claim (the "Claim") from Macom Technology Solutions, Inc. ("Macom"), who acquired our HSOR business in August 2017 pursuant to an asset purchase agreement. Under the asset purchase agreement, we agreed to indemnify Macom for certain matters, including, among other things, the collection of accounts receivable from certain major customers, and placed $4.0 million of the purchase price into an escrow account for the potential settlement of any valid indemnity claims. As of December 31, 2019, $1.5 million of the escrow had been received with $2.5 million remaining in escrow pending resolution of the dispute. In March 2020, we settled the dispute resulting in us receiving $0.6 million and Macom receiving $1.9 million. We have recorded a loss from discontinued operations of $1.4 million net of income tax benefit for the nine months ended September 30, 2020 to reflect the settlement of the dispute.

Additionally, from time to time, we may become involved in litigation or claims arising out of our operations in the normal course of business. Management currently believes the amount of ultimate liability, if any, with respect to these actions will not materially affect our financial position, results of operations, or liquidity.

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:

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

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 could have a material adverse effect on our operations.

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.

Many of our products are manufactured internally. However, we also rely upon contract manufacturers to produce the finished portion of 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

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

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.

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, 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 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~~Lightwave and Luna Labs segments 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 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, ~~2019,~~2020, we had approximately ~~266~~277 full-time and part-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.

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

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.



PART I. FINANCIAL INFORMATION		34
ITEM 1.	FINANCIAL STATEMENTS	34
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2725
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	3733
ITEM 4.	CONTROLS AND PROCEDURES	3834
PART II. OTHER INFORMATION		3935
ITEM 1.	LEGAL PROCEEDINGS	3935
ITEM 1A.	RISK FACTORS	3935
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	5553
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	5553
ITEM 4.	MINE SAFETY DISCLOSURES	5553
ITEM 5.	OTHER INFORMATION	5553
ITEM 6.	EXHIBITS	5654
SIGNATURES		5755


								Nine Months Ended September 30,
	Nine Months Ended September 30,							2020		2019
	2019			2018
	(unaudited)
Cash flows provided by/(used in) operating activities
Cash flows provided by operating activities							Cash flows provided by operating activities
Net income	$	3,196,422		$	10,064,405		Net income	$	3,355	$	3,196
Adjustments to reconcile net income to net cash provided by/(used in) operating activities
Adjustments to reconcile net income to net cash provided by operating activities							Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	1,834,594			898,215			Depreciation and amortization	2,126		1,835
Share-based compensation	1,140,202			345,582			Share-based compensation	1,538		1,140
Bad debt expense	—			6,000			Bad debt expense	147		0
Gain on disposal of fixed assets	—			(1,000		)
Gain on sale of discontinued operations	—			(7,571,810		)

Loss on sale of property and equipment							Loss on sale of property and equipment	576		0
Loss from discontinued operations, net of tax							Loss from discontinued operations, net of tax	1,436		0
Deferred taxes							Deferred taxes	(313)		0
Tax benefit from release of valuation allowance	(1,889,266		)	—			Tax benefit from release of valuation allowance	0		(1,889)
Change in assets and liabilities							Change in assets and liabilities
Accounts receivable	(2,238,234		)	(4,056,716		)	Accounts receivable	(2,131)		(2,238)
Contract assets	(1,106,286		)	(957,012		)	Contract assets	(1,589)		(1,106)
Inventory	(73,122		)	(992,075		)	Inventory	(1,419)		(73)
Other current assets	(74,321		)	482,155			Other current assets	(1,982)		(74)
Other long term assets	(338,347		)	—			Other long term assets	0		(339)
Accounts payable and accrued expenses	(113,414		)	243,965			Accounts payable and accrued expenses	(1,481)		(114)
Contract liabilities	746,732			(1,906,117		)	Contract liabilities	(166)		747
Net cash provided by/(used in) operating activities	1,084,960			(3,444,408		)
Cash flows (used in)/provided by investing activities

Net cash provided by operating activities							Net cash provided by operating activities	97		1,085
Cash flows provided by/(used in) investing activities							Cash flows provided by/(used in) investing activities
Acquisition of property and equipment	(500,562		)	(272,039		)	Acquisition of property and equipment	(422)		(501)
Intangible property costs	(192,203		)	(277,068		)	Intangible property costs	(291)		(192)
Proceeds from sale of property and equipment	—			1,000			Proceeds from sale of property and equipment	403		0
Proceeds from sales of discontinued operations	—			14,775,541
Proceeds from sale of discontinued operations							Proceeds from sale of discontinued operations	600		0
Acquisition of General Photonics Corporation	(19,004,250		)	—			Acquisition of General Photonics Corporation	0		(19,004)
Net cash (used in)/provided by investing activities	(19,697,015		)	14,227,434
Cash flows used in financing activities
Net cash provided by/(used in) investing activities							Net cash provided by/(used in) investing activities	290		(19,697)
Cash flows provided by/(used in) financing activities							Cash flows provided by/(used in) financing activities
Payments on finance lease obligations	(26,901		)	(33,064		)	Payments on finance lease obligations	(39)		(27)
Payments of debt obligations	(625,000		)	(1,375,000		)	Payments of debt obligations	0		(625)
Repurchase of common stock	(2,220,467		)	(466,894		)	Repurchase of common stock	(329)		(2,220)

Proceeds from the exercise of options and warrants	438,428			1,255,118			Proceeds from the exercise of options and warrants	1,397		438
Net cash used in financing activities	(2,433,940		)	(619,840		)
Net (decrease)/increase in cash and cash equivalents	(21,045,995		)	10,163,186
Net cash provided by/(used in) financing activities							Net cash provided by/(used in) financing activities	1,029		(2,434)
Net increase/(decrease) in cash and cash equivalents							Net increase/(decrease) in cash and cash equivalents	1,416		(21,046)
Cash and cash equivalents—beginning of period	42,460,267			36,981,533			Cash and cash equivalents—beginning of period	25,006		42,460
Cash and cash equivalents—end of period	$	21,414,272		$	47,144,719		Cash and cash equivalents—end of period	$	26,422	$	21,414
Supplemental disclosure of cash flow information							Supplemental disclosure of cash flow information
Cash paid for interest	$	16,928		$	97,867		Cash paid for interest	$	3	$	17
Cash paid for income taxes	$	735,000		$	7,686		Cash paid for income taxes	$	2,000	$	735
Non-cash investing and financing activities							Non-cash investing and financing activities
Contingent liability for business combination	$	940,000		$	—		Contingent liability for business combination	$	0	$	940
Dividend on preferred stock, 59,469 shares of common stock issuable for each of the nine months ended September 30, 2019 and 2018	$	285,450		$	190,895
Dividend on preferred stock, 59,469 shares of common stock issuable for the nine months ended September 30, 2019							Dividend on preferred stock, 59,469 shares of common stock issuable for the nine months ended September 30, 2019	$	0	$	285



	MOI			GP
Accounts receivable	$	1,742,693		$	1,520,950
Inventory	1,435,606			2,698,000
Other current assets	69,951			763,873
Property and equipment	996,460			286,000
Identifiable intangible assets	1,650,000			8,200,000
Goodwill	29,760			10,315,490
Accounts payable and accrued expenses	(379,737		)	(3,840,063		)
Total purchase consideration	$	5,544,733		$	19,944,250



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
	(unaudited)				(unaudited)
Revenues:
Products and licensing	$	11,926,178	$	5,371,165	$	31,459,323	$	13,960,003
Technology development	6,494,832		5,315,861		19,576,574		15,418,919
Total revenues	$	18,421,010	$	10,687,026	$	51,035,897	$	29,378,922
Products and licensing operating income/(loss)	$	706,185	$	240,645	$	233,177	$	(410,477	)
Technology development operating income	777,816		340,852		1,365,320		864,540
Total operating income	$	1,484,001	$	581,497	$	1,598,497	$	454,063
Depreciation, products and licensing	$	133,142	$	42,559	$	417,633	$	192,058
Depreciation, technology development	$	98,393	$	95,673	$	287,901	$	283,550
Amortization, products and licensing	$	422,391	$	56,062	$	1,054,234	$	300,837
Amortization, technology development	$	15,060	$	43,708	$	74,826	$	121,770



	September 30, 2019			December 31, 2018
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	21,414,272		$	42,460,267
Accounts receivable, net	16,796,252			13,037,068
Receivable from sale of HSOR business	2,500,941			2,500,000
Contract assets	3,441,771			2,422,495
Inventory	9,644,864			6,873,742
Prepaid expenses and other current assets	1,119,622			935,185
Total current assets	54,917,722			68,228,757
Long-term contract assets	423,830			336,820
Property and equipment, net	3,626,833			3,627,886
Intangible assets, net	10,570,347			3,302,270
Goodwill	10,345,250			101,008
Other assets, net	3,003,813			1,995
Total assets	$	82,887,795		$	75,598,736
Liabilities and stockholders’ equity
Liabilities:
Current liabilities:
Current portion of long-term debt obligations	$	—		$	619,315
Current portion of capital lease obligations	—			40,586
Accounts payable	2,636,783			2,395,984
Accrued liabilities	9,694,722			6,597,458
Contract liabilities	3,389,417			2,486,111
Total current liabilities	15,720,922			12,139,454
Long-term deferred rent	—			1,035,974
Other long-term liabilities	2,257,958			—
Long-term capital lease obligations	—			68,978
Total liabilities	17,978,880			13,244,406
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.001, 1,321,514 shares authorized, 0 and 1,321,514 issued and outstanding at September 30, 2019 and December 31, 2018, respectively	—			1,322
Common stock, par value $0.001, 100,000,000 shares authorized, 31,798,062 and 29,209,506 shares issued, 30,158,271 and 27,956,401 shares outstanding at September 30, 2019 and December 31, 2018, respectively	31,998			30,120
Treasury stock at cost, 1,639,791 and 1,253,105 shares at September 30, 2019 and December 31, 2018, respectively	(4,337,107		)	(2,116,640		)
Additional paid-in capital	87,608,274			85,744,750
Accumulated deficit	(18,394,250		)	(21,305,222		)
Total stockholders’ equity	64,908,915			62,354,330
Total liabilities and stockholders’ equity	$	82,887,795		$	75,598,736


1.	~~Basis of Presentation and Significant Accounting Policies~~



	Balance at	Adjustment for		Adjusted balance at
	December 31, 2018	ASC 842		January 1, 2019
Assets:
Property and equipment, net	3,627,886	(90,494	)	3,537,392
Other assets, net	1,995	3,536,133		3,538,128

Liabilities:
Accrued liabilities	6,597,458	1,242,669		7,840,127
Current portion of capital lease obligations	40,586	(40,586	)	—
Long-term deferred rent	1,035,974	(1,035,974	)	—
Long-term operating lease liability	—	3,271,705		3,271,705
Long-term capital lease obligations	68,978	(68,978	)	—
Long-term finance lease liability	—	76,803		76,803



	Estimated	Estimated Fair Value
	Useful Life	MOI		GP
Developed technology	5 - 8 years	$	1,200,000	$	7,200,000
In process research and development	7 years	200,000		—
Trade names and trademarks	3 years	150,000		400,000
Customer base	7 - 15 years	100,000		600,000
		$	1,650,000	$	8,200,000



Year Ending December 31,
Remainder of 2019	$	406,749
2020	1,626,995
2021	1,618,649
2022	1,465,880
2023	1,390,621
2024 & beyond	4,061,453
Total	$	10,570,347



Balance as of December 31, 2018	$	101,008
Goodwill resulting from business combination - GP	10,315,490
Measurement Period Adjustment - MOI	(71,248		)
Balance as of September 30, 2019	$	10,345,250



	September 30, 2019		December 31, 2018
	(unaudited)
Finished goods	$	1,376,797	$	1,339,832
Work-in-process	1,002,702		643,420
Raw materials	7,265,365		4,890,490
Total inventory	$	9,644,864	$	6,873,742



	Three Months Ended			Nine Months Ended
	September 30, 2019			September 30, 2019
Operating lease costs	$	407,365		$	1,214,484
Variable rent costs	(36,794		)	(109,748		)
Total rent expense	$	370,571		$	1,104,736



	September 30, 2019
2019 - remaining 3 months	$	407,992
2020	1,467,701
2021	640,800
2022	544,704
2023	544,704
2024 and beyond	544,704
Total future minimum lease payments	4,150,605
Less: Interest	532,221
Total operating lease liabilities	$	3,618,384

Current operating lease liability	$	1,394,761
Long-term operating lease liability	2,223,623
Total operating lease liabilities	$	3,618,384


~~(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.


2.	~~Business Combinations~~


5.	~~Goodwill~~


6.	~~Inventory~~


8.	~~Debt~~


~~(1)~~	For the period from January 12, 2010, the original issue date of the Series A Preferred Stock, through September 30, 2019, the Series A Preferred Stock issued to Carilion accrued $1,703,084 in dividends. In September 2019, Carilion elected to convert the preferred stock into an equal number of shares of our common stock. In addition, we issued


																Nine Months Ended September 30,
		Three Months Ended September 30, 2019						Three Months Ended September 30, 2018										2020						2019
		(unaudited)						(unaudited)
(in thousands)														(in thousands)		Lightwave		Luna Labs		Total		Lightwave		Luna Labs		Total
		Technology Development		Products and Licensing		Total		Technology Development		Products and Licensing		Total				(unaudited)
Total Revenue by Geographic Location	Total Revenue by Geographic Location													Total Revenue by Geographic Location
	United States	$	6,494,832	$	5,924,077	$	12,418,909	$	5,315,861	$	3,251,602	$	8,567,463		United States	$	21,622	$	16,929	$	38,551	$	19,120	$	15,907	$	35,027
	Asia	—		3,728,671		3,728,671		—		1,143,767		1,143,767			Asia	11,857		0		11,857		9,451		0		9,451
	Europe	—		1,912,652		1,912,652		—		899,683		899,683			Europe	5,261		0		5,261		5,343		0		5,343
	Canada, Central and South America	—		218,846		218,846		—		1,330		1,330			Canada, Central and South America	782		0		782		936		0		936
	All Others	—		141,932		141,932		—		74,783		74,783			All Others	315		0		315		279		0		279
	Total	$	6,494,832	$	11,926,178	$	18,421,010	$	5,315,861	$	5,371,165	$	10,687,026		Total	$	39,837	$	16,929	$	56,766	$	35,129	$	15,907	$	51,036


Total Revenue by Major Customer Type	Total Revenue by Major Customer Type													Total Revenue by Major Customer Type
	Sales to the U.S. government	$	6,411,899	$	1,260,475	$	7,672,374	$	5,216,389	$	977,076	$	6,193,465		Sales to the U.S. government	$	6,119	$	15,399	$	21,518	$	6,980	$	14,658	$	21,638
	U.S. direct commercial sales and other	82,933		4,663,602		4,746,535		99,472		2,250,656		2,350,128			U.S. direct commercial sales and other	15,503		1,530		17,033		12,140		1,249		13,389
	Foreign commercial sales & other	—		6,002,101		6,002,101		—		2,143,433		2,143,433			Foreign commercial sales & other	18,215		0		18,215		16,009		0		16,009
	Total	$	6,494,832	$	11,926,178	$	18,421,010	$	5,315,861	$	5,371,165	$	10,687,026		Total	$	39,837	$	16,929	$	56,766	$	35,129	$	15,907	$	51,036


Total Revenue by Contract Type	Total Revenue by Contract Type													Total Revenue by Contract Type
	Fixed-price contracts	$	3,487,522	$	11,926,178	$	15,413,700	$	2,004,166	$	5,371,165	$	7,375,331		Fixed-price contracts	$	37,667	$	9,615	$	47,282	$	32,823	$	9,291	$	42,114
	Cost-type contracts	3,007,310		—		3,007,310		3,311,695		—		3,311,695			Cost-type contracts	2,170		7,314		9,484		2,306		6,616		8,922
	Total	$	6,494,832	$	11,926,178	$	18,421,010	$	5,315,861	$	5,371,165	$	10,687,026		Total	$	39,837	$	16,929	$	56,766	$	35,129	$	15,907	$	51,036


Total Revenue by Timing of Recognition	Total Revenue by Timing of Recognition													Total Revenue by Timing of Recognition
	Goods transferred at a point in time	$	—	$	11,669,034	$	11,669,034	$	—	$	5,190,830	$	5,190,830		Goods transferred at a point in time	$	34,023	$	1,148	$	35,171	$	29,308	$	995	$	30,303
	Goods/services transferred over time	6,494,832		257,144		6,751,976		5,315,861		180,335		5,496,196			Goods/services transferred over time	5,814		15,781		21,595		5,821		14,912		20,733
	Total	$	6,494,832	$	11,926,178	$	18,421,010	$	5,315,861	$	5,371,165	$	10,687,026		Total	$	39,837	$	16,929	$	56,766	$	35,129	$	15,907	$	51,036


Total Revenue by Major Products/Services	Total Revenue by Major Products/Services													Total Revenue by Major Products/Services
	Technology development	$	6,494,832	$	—	$	6,494,832	$	5,315,861	$	—	$	5,315,861		Technology development	$	5,275	$	15,781	$	21,056	$	4,665	$	14,912	$	19,577
	Optical test and measurement systems	—		11,266,322		11,266,322		—		4,469,677		4,469,677			Test, measurement and sensing systems	34,023		0		34,023		29,323		0		29,323
	Other	—		659,856		659,856		—		901,488		901,488
	Total	$	6,494,832	$	11,926,178	$	18,421,010	$	5,315,861	$	5,371,165	$	10,687,026		Other	539		1,148		1,687		1,141		995		2,136
															Total	$	39,837	$	16,929	$	56,766	$	35,129	$	15,907	$	51,036



		Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2018
		(unaudited)						(unaudited)
		Technology Development		Products and Licensing		Total		Technology Development		Products and Licensing		Total
Total Revenue by Geographic Location
	United States	$	19,576,574	$	15,450,256	$	35,026,830	$	15,418,919	$	7,961,048	$	23,379,967
	Asia	—		9,450,775		9,450,775		—		3,280,348		3,280,348
	Europe	—		5,343,251		5,343,251		—		2,542,017		2,542,017
	Canada, Central and South America	—		936,426		936,426		—		99,807		99,807
	All Others	—		278,615		278,615		—		76,783		76,783
	Total	$	19,576,574	$	31,459,323	$	51,035,897	$	15,418,919	$	13,960,003	$	29,378,922


Total Revenue by Major Customer Type
	Sales to the U.S. government	$	19,180,408	$	2,457,677	$	21,638,085	$	15,284,661	$	1,364,755	$	16,649,416
	U.S. direct commercial sales and other	396,166		12,992,580		13,388,746		134,258		6,583,006		6,717,264
	Foreign commercial sales & other	—		16,009,066		16,009,066		—		6,012,242		6,012,242
	Total	$	19,576,574	$	31,459,323	$	51,035,897	$	15,418,919	$	13,960,003	$	29,378,922


Total Revenue by Contract Type
	Fixed-price contracts	$	10,654,247	$	31,459,323	$	42,113,570	$	6,611,758	$	13,960,003	$	20,571,761
	Cost-type contracts	8,922,327		—		8,922,327		8,807,161		—		8,807,161
	Total	$	19,576,574	$	31,459,323	$	51,035,897	$	15,418,919	$	13,960,003	$	29,378,922


Total Revenue by Timing of Recognition
	Goods transferred at a point in time	$	—	$	30,302,926	$	30,302,926	$	—	$	13,505,897	$	13,505,897
	Goods/services transferred over time	19,576,574		1,156,397		20,732,971		15,418,919		454,106		15,873,025
	Total	$	19,576,574	$	31,459,323	$	51,035,897	$	15,418,919	$	13,960,003	$	29,378,922


Total Revenue by Major Products/Services
	Technology development	$	19,576,574	$	—	$	19,576,574	$	15,418,919	$	—	$	15,418,919
	Optical test and measurement systems	—		29,323,169		29,323,169		—		12,129,197		12,129,197
	Other	—		2,136,154		2,136,154		—		1,830,806		1,830,806
	Total	$	19,576,574	$	31,459,323	$	51,035,897	$	15,418,919	$	13,960,003	$	29,378,922




				Total Number of	Approximate Dollar
				Shares Purchased as	Value of Shares that
	Total Number of Shares	Average Price Paid per		Part of a Publicly	May Yet be Purchased
Period	Purchased	Share		Announced Program	Under the Program
9/1/2019 - 9/30/2019	333,953	$	5.99	333,953	$	—



Exhibit Number						Description

~~31.1~~10.1						First Amendment to Standard Industrial Real Estate Lease dated July 13, 2020 between Luna Innovations Incorporated and Majestic Realty Co.

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

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

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

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

101						The following materials from the Registrant’s Quarterly Report on Form 10-Q for the three ~~months~~ and nine months ended September 30, ~~2019,~~2020, formatted in inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, (ii) Consolidated Statements of Operations for the three ~~months~~ and nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 and (iv) Notes to Unaudited Consolidated Financial Statements.



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


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