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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 _____________________________________ 
FORM 10-Q
  _____________________________________  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
COMMISSION FILE NUMBER 000-52008
  _____________________________________ 
LUNA INNOVATIONS INCORPORATED
(Exact name of registrant as specified in its charter)
  _____________________________________  
Delaware54-1560050
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
301 First Street SW, Suite 200
Roanoke, VA 24011
(Address of Principal Executive Offices)
(540) 769-8400
(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes   ☐   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).    ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ☐    Accelerated filer   ☒
 
Non-accelerated filer  ☐    Smaller reporting company  

Emerging growth company  
            
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes    ☒  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 August 4, 2020, there were 30,798,535 shares of the registrant’s common stock outstanding.



Table of Contents
LUNA INNOVATIONS INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2020
TABLE OF CONTENTS

ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
2

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PART I. FINANCIAL INFORMATION
 
ITEM 1.FINANCIAL STATEMENTS
Luna Innovations Incorporated
Consolidated Balance Sheets
(in thousands, except share data)
June 30, 2020December 31, 2019
(unaudited)
Assets
Current assets:
Cash and cash equivalents$26,506  $25,006  
Accounts receivable, net16,435  16,269  
Receivable from sale of HSOR business  2,501  
Contract assets3,220  2,759  
Inventory, net11,231  10,294  
Prepaid expenses and other current assets1,691  1,287  
Total current assets59,083  58,116  
Property and equipment, net3,078  3,466  
Intangible assets, net9,544  10,194  
Goodwill10,542  10,542  
Long-term contract assets496  449  
Other assets7,053  2,341  
Deferred tax asset1,426  1,416  
Total assets$91,222  $86,524  
Liabilities and stockholders’ equity
Liabilities:
Current liabilities:
Accounts payable$2,763  $2,787  
Accrued liabilities8,150  10,369  
Contract liabilities3,368  3,888  
Total current liabilities14,281  17,044  
Other long-term liabilities7,140  2,011  
Total liabilities21,421  19,055  
Commitments and contingencies (Note 13)
Stockholders’ equity:
Common stock, par value $0.001, 100,000,000 shares authorized, 32,470,276 and 31,788,896 shares issued, 30,797,535 and 30,149,105 shares outstanding at June 30, 2020 and December 31, 2019, respectively
32  32  
Treasury stock at cost, 1,672,741 and 1,639,791 shares at June 30, 2020 and December 31, 2019, respectively
(4,541) (4,337) 
Additional paid-in capital90,305  88,022  
Accumulated deficit(15,995) (16,248) 
Total stockholders’ equity69,801  67,469  
Total liabilities and stockholders’ equity$91,222  $86,524  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Luna Innovations Incorporated
Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share data)
Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Revenues:
Lightwave$12,933  $12,523  $24,487  $22,041  
Luna Labs5,643  5,291  11,230  10,606  
       Total revenues18,576  17,814  35,717  32,647  
Cost of revenues:
Lightwave5,181  5,334  10,066  9,613  
Luna Labs3,878  3,728  7,770  7,514  
       Total cost of revenues9,059  9,062  17,836  17,127  
Gross profit9,517  8,752  17,881  15,520  
Operating expense:
Selling, general and administrative6,202  6,003  12,579  12,229  
Research, development and engineering1,505  1,735  3,102  3,193  
       Total operating expense7,707  7,738  15,681  15,422  
Operating income1,810  1,014  2,200  98  
Other income/(expense):
Investment income4  77  64  268  
Other (expense)/income(4) (3) 5  (4) 
Interest expense(1)   (1) (13) 
Total other (expense)/income(1) 74  68  251  
Income from continuing operations before income taxes1,809  1,088  2,268  349  
Income tax expense/(benefit)440  247  579  (1,618) 
Net income from continuing operations1,369  841  1,689  1,967  
Loss from discontinued operations, net of income tax of $464
    (1,436)   
Net income1,369  841  253  1,967  
Preferred stock dividend  90    173  
Net income attributable to common stockholders$1,369  $751  $253  $1,794  
Net income per share from continuing operations:
       Basic$0.04  $0.03  $0.06  $0.07  
       Diluted$0.04  $0.02  $0.05  $0.06  
Net loss per share from discontinued operations:
       Basic$  $  $(0.05) $  
       Diluted$  $  $(0.04) $  
Net income per share attributable to common stockholders:
        Basic$0.04  $0.03  $0.01  $0.06  
        Diluted$0.04  $0.02  $0.01  $0.05  
Weighted average shares:
        Basic30,589,249  28,246,840  30,484,797  28,143,534  
        Diluted32,466,122  33,650,790  32,494,950  33,588,951  

The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Luna Innovations Incorporated
Consolidated Statements of Cash Flows (Unaudited)
(in thousands, except share data)
Six Months Ended June 30,
 20202019
Cash flows provided by operating activities
Net income$253  $1,967  
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization1,363  1,166  
Share-based compensation843  721  
Bad debt expense(26)   
Loss on disposal of fixed assets4    
Loss from discontinued operations, net of tax1,436    
Deferred taxes(10)   
Change in assets and liabilities
Accounts receivable(139) 713  
Contract assets(508) (721) 
Inventory(937) (161) 
Other current assets(404) (18) 
Accounts payable and accrued expenses(1,286) (2,314) 
Contract liabilities(520) (235) 
Net cash provided by operating activities69  1,118  
Cash flows provided by/(used in) investing activities
Acquisition of property and equipment(111) (406) 
Intangible property costs(192) (137) 
       Proceeds from sale of property and equipment1    
Proceeds from sale of discontinued operations600    
Acquisition of General Photonics Corporation  (19,004) 
Net cash provided by/(used in) investing activities298  (19,547) 
Cash flows provided by/(used in) financing activities
Payments on finance lease obligations(26) (15) 
Payments of debt obligations  (625) 
Repurchase of common stock(204) (220) 
Proceeds from the exercise of options and warrants1,363  367  
Net cash provided by/(used in) financing activities1,133  (493) 
Net increase/(decrease) in cash and cash equivalents1,500  (18,922) 
Cash and cash equivalents—beginning of period25,006  42,460  
Cash and cash equivalents—end of period$26,506  $23,538  
Supplemental disclosure of cash flow information
Cash paid for interest$2  $13  
Cash paid for income taxes$29  $687  
Non-cash investing and financing activities
Contingent liability for business combination$  $915  
Dividend on preferred stock, 39,646 shares of common stock issuable for the six months ended June 30, 2019
$  $173  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Luna Innovations Incorporated
Notes to Unaudited Consolidated Financial Statements
 
1.        Basis of Presentation and Significant Accounting Policies
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 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 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 June 30, 2020, results of operations and changes in stockholders' equity for the three and six months ended June 30, 2020 and 2019, and cash flows for the six months ended June 30, 2020 and 2019. The results of operations for the three and six months ended June 30, 2020, are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The consolidated balance sheet as of December 31, 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 June 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, 2019, included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020.
Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis, as of October 1 of each year, or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Purchased intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives and reviewed for impairment as described above.
Fair Value Measurements
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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.
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant value drivers are observable.
Level 3—Valuations derived from valuation techniques in which significant value drivers are unobservable.
The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the short-term nature of these instruments. The carrying amount of lease liabilities approximate fair value because these financial instruments bear interest at rates that approximate current market rates for similar agreements with similar maturities and credit. We consider the 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.
Reportable Segments
We have two 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 two 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 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.
Net Income/(Loss) Per Share
Basic per share data is computed by dividing our net income/(loss) by the weighted average number of shares outstanding during the period. Diluted per share data is computed by dividing net income/(loss) by the weighted average shares outstanding during the period increased to include, if dilutive, the number of additional common share equivalents that would have been outstanding if potential shares of common stock had been issued using the treasury stock method. Diluted per share data would also include the potential common share equivalents relating to convertible securities by application of the if-converted method.
The effects of 1.9 million and 5.4 million common stock equivalents are included for the diluted per share data for the three months ended June 30, 2020 and 2019, respectively. The effects of 2.0 million and 5.4 million common stock equivalents are included for the diluted per share data for the six months ended June 30, 2020 and 2019, respectively. Stock options and 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 six months ended June 30, 2020 and 2019.  In addition, accrued stock dividends and preferred stock are also included for the three and six months ended June 30, 2019.

Recently Adopted Accounting Pronouncements

        In January 2017, the FASB issued ASU 2017-04 Simplifying the Test for Goodwill Impairment,” which simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test which previously measured a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount. We adopted ASU 2017-04, effective January 1, 2020. As a result of adopting the new rules, we compare the estimated fair value of our reporting segments to their respective carrying values when evaluating the recoverability of goodwill. If the carrying value of a reporting unit exceeds its fair value, an impairment charge will be recognized for the amount by which its carrying value exceeds the reporting unit's fair value; however, the loss recognized will not exceed the goodwill allocated to the reporting unit. The adoption of ASU 2017-04 did not have a significant impact on our consolidated financial statements.
        In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement, which amends the disclosure requirements in ASC 820 by adding, changing, or
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removing certain disclosures. The ASU applies to all entities that are required under this guidance to provide disclosures about recurring or nonrecurring fair value measurements. We adopted these amendments, effective January 1, 2020. The adoption of ASU 2018-13 did not have a significant impact on our consolidated financial statements.

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

Recently Issued Pronouncements, not yet adopted

        In December 2019, the FASB issued ASU 2019-12 Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles of the accounting for income taxes and also improves consistent application of and simplification of other areas when accounting for income taxes. The guidance is effective for us beginning in the first quarter of fiscal year 2021, while early adoption is permitted. 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, 2022. We are currently in the process of evaluating the impact of ASU 2016-13, but we do not expect the adoption of these new accounting rules to have a significant impact on our consolidated financial statements


2. Discontinued Operations
On August 9, 2017, we completed the sale of our high speed optical receivers ("HSOR") business, which was part of our Lightwave segment (and which was previously included in our Products and Licensing segment in prior periods), to an unaffiliated third party for an initial purchase price of $33.5 million, of which $29.5 million in cash was received, and $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 (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 settled the dispute resulting in us receiving $0.6 million and the buyer receiving $1.9 million. We have recorded a loss from discontinued operations of $1.4 million, net of tax benefit, for the six months ended June 30, 2020, to reflect the settlement of the dispute. There were no results from discontinued operations for the three months ended June 30, 2020 and 2019 or for the six months ended June 30, 2019.
        The following table presents a summary of the transactions related to the sale of the HSOR business for the six months ended June 30, 2020:
Six Months Ended June 30, 2020
(in thousands)
Settlement of HSOR receivable$1,900  
Loss on sale1,900  
Allocated income tax benefit(464) 
Loss from discontinued operations, net of related income tax $1,436  
 
3. Intangible assets, net
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        Intangible assets, net at June 30, 2020 and December 31, 2019 consisted of the following:

June 30, 2020December 31, 2019
(in thousands)
Patent costs$5,484  $5,291  
Developed technology9,800  $9,800  
In-process research & development1,580  $1,580  
Customer base700  $700  
Trade names and trademarks550  $550  
18,114  $17,921  
Accumulated amortization(8,570) $(7,727) 
$9,544  $10,194  

        Amortization for the three and six months ended June 30, 2020 was $0.4 million and $0.9 million, respectively. Estimated aggregate amortization, based on the net value of intangible assets at June 30, 2020, for each of the next five years and beyond is as follows (amounts in thousands):
Year Ending December 31,
2020 - remaining 6 months$845  
20211,679  
20221,529  
20231,456  
20241,266  
2025 & beyond2,769  
Total$9,544  

4.Goodwill

        Goodwill was approximately $10.5 million at June 30, 2020 and December 31, 2019 and has been allocated to the Lightwave segment.
        
5.Inventory, net
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.
Components of inventory were as follows:
 
June 30,
2020
December 31,
2019
(in thousands)
Finished goods$2,195  $1,695  
Work-in-process1,423  1,008  
Raw materials7,613  7,591  
            Total inventory, net$11,231  $10,294  
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6. Accrued Liabilities

Accrued liabilities at June 30, 2020 and December 31, 2019 consisted of the following:
June 30, 2020December 31, 2019
(in thousands)
Accrued compensation$5,360  $6,416  
Accrued professional fees153  113  
Accrued income tax956  716  
Current operating lease liability868  1,283  
Current finance lease liability 29  50  
Royalties147  365  
Accrued liabilities - other637  426  
       Contingent liability - General Photonics  1,000  
            Total accrued liabilities$8,150  $10,369  
7.Debt
Silicon Valley Bank Facility
        We 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 June 30, 2020, no amounts have been borrowed under this Loan Agreement.
        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 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 number of 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 June 30, 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 $4.5 million, pursuant to the Paycheck Protection Program (the "PPP") under Division A, Title I of the CARES Act, which was enacted March 27, 2020.
On May 4, 2020, we returned the full amount of the proceeds of the Loan to SVB. The decision to return the proceeds was based on the revised guidance issued by the U.S. Department of Treasury and the Small Business Administration subsequent to our application for the Loan.
Interest expense, net for the three and six months ended June 30, 2020 and 2019 consisted of the following:
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 Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2020201920202019
Interest expense on Term Loans$  $1  $  $8  
Amortization of debt issuance costs  (2)   1  
Other interest expense1  1  1  4  
Total interest expense, net$1  $  $1  $13  
8.Leases

        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 10 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 4 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.

        Our lease components included in the consolidated balance sheets were as follows:

Lease componentClassificationJune 30, 2020December 31, 2019
(in thousands)
Assets
ROU assets - operating leaseOther assets$6,975  $2,236  
ROU assets - finance leaseOther assets43  70  
   Total ROU assets$7,018  $2,306  
Liabilities
Current operating lease liabilityAccrued liabilities$868  $1,283  
Current finance lease liabilityAccrued liabilities29  50  
Long-term operating lease liabilityOther liabilities7,122  1,988  
Long-term finance lease liabilityOther liabilities18  23  
   Total lease liabilities$8,037  $3,344  

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

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Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2020201920202019
Operating lease costs$367  $405  $779  $808  
Variable rent costs25  (48) (14) (73) 
   Total rent expense$392  $357  $765  $735  


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

Operating LeasesFinance Leases
Year Ending December 31,
2020 - remaining 6 months$707  $28  
20211,308  11  
20221,232  10  
20231,252  5  
20241,273    
2025 and beyond4,634    
   Total future minimum lease payments10,406  54  
   Less: interest2,416  7  
     Total operating lease liabilities$7,990  $47  
Current operating lease liability$868  $29  
Long-term operating lease liability7,122  18  
   Total operating lease liabilities$7,990  $47  


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        Other information related to leases is as follows:
Three Months Ended June 30,Six Months Ended June 30,
(in thousands, except weighted-average data)2020201920202019
Finance lease cost:
   Amortization of right-of-use assets$14  $10  $27  $22  
   Interest on lease liabilities1    2  2  
Total finance lease cost$15  $10  $29  $24  
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
   Operating cash flows from operating leases$367  $405  $744  $808  
   Finance cash flows from finance leases$13  $9  $26  $15  
Right-of-use assets obtained in exchange for new operating lease liabilities$5,531  $  $5,531  $  
Right-of-use assets obtained in exchange for new finance lease liabilities$  $  $  $15  
Weighted-average remaining lease term (years) - operating leases8.33.93.73.9
Weighted-average remaining lease term (years) - finance leases1.93.91.93.9
Weighted-average discount rate - operating leases6 %7 %6 %7 %
Weighted-average discount rate - finance leases7 %7 %7 %7 %

        At June 30, 2020, we had no additional operating or finance leases that had not yet commenced. As of the date of filing of this report, we have an additional operating lease not yet commenced with a potential lease liability of $1.3 million and a term of 3 years.


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 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.
Stock Options
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