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Table of Contents
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 March 31, 2021
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

  
https://cdn.kscope.io/2d74a374d535cdd292557f5852e4102a-luna-20210331_g1.jpg
LUNA INNOVATIONS INCORPORATED
(Exact name of registrant as specified in its charter)
  _____________________________________  
Delaware54-1560050
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
301 First Street SW, Suite 200
Roanoke, VA 24011
(Address of Principal Executive Offices)
(540) 769-8400
(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☐  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 May 13, 2021, there were 31,418,971 shares of the registrant’s common stock outstanding.



Table of Contents
LUNA INNOVATIONS INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2021
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.


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Table of Contents
PART I. FINANCIAL INFORMATION
 
ITEM 1.FINANCIAL STATEMENTS
Luna Innovations Incorporated
Consolidated Balance Sheets
(in thousands, except share data)
March 31, 2021December 31, 2020
(unaudited)
Assets
Current assets:
Cash and cash equivalents$11,794 $15,366 
Accounts receivable, net23,697 24,951 
Contract assets8,328 7,046 
Inventory25,550 23,597 
Prepaid expenses and other current assets5,388 4,509 
Total current assets74,757 75,469 
Property and equipment, net3,329 3,308 
Intangible assets, net19,642 20,109 
Goodwill18,309 18,121 
Long-term contract assets 471 
Operating lease right-of-use asset10,820 11,281 
Finance lease right-of-use asset232 244 
Other assets118 39 
Deferred tax asset1,699 1,960 
Total assets$128,906 $131,002 
Liabilities and stockholders’ equity
Liabilities:
Current liabilities:
Current portion of long-term debt obligations$4,167 $4,167 
Accounts payable4,108 4,393 
Accrued liabilities10,732 12,159 
Contract liabilities6,228 7,095 
Current portion of operating lease liability2,195 2,223 
Current portion of finance lease liability48 48 
Total current liabilities27,478 30,085 
Long-term debt obligations14,781 15,817 
Long-term portion of operating lease liability9,702 10,248 
Long-term portion of operating lease liability184 196 
Other long-term liabilities214 214 
Total liabilities52,359 56,560 
Commitments and contingencies (Note 12)
Stockholders’ equity:
Common stock, par value $0.001, 100,000,000 shares authorized, 33,113,774 and 32,724,512 shares issued, 31,392,989 and 31,024,537 shares outstanding at March 31, 2021 and December 31, 2020, respectively
33 33 
Treasury stock at cost, 1,720,785 and 1,699,975 shares at March 31, 2021 and December 31, 2020, respectively
(4,991)(4,789)
Additional paid-in capital93,905 92,403 
Accumulated deficit(13,275)(12,957)
Accumulated other comprehensive income/(loss)875 (248)
Total stockholders’ equity76,547 74,442 
Total liabilities and stockholders’ equity$128,906 $131,002 
The accompanying notes are an integral part of these unaudited consolidated financial statements.


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Table of Contents
Luna Innovations Incorporated
Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share data)
Three Months Ended March 31,
 20212020
Revenues:
Lightwave$20,997 $11,554 
Luna Labs5,302 5,587 
       Total revenues26,299 17,141 
Cost of revenues:
Lightwave8,771 4,885 
Luna Labs4,099 3,892 
       Total cost of revenues12,870 8,777 
Gross profit13,429 8,364 
Operating expense:
Selling, general and administrative11,290 6,377 
Research, development and engineering2,933 1,597 
       Total operating expense14,223 7,974 
Operating (loss)/income(794)390 
Other income/(expense):
Investment income 59 
Other income 9 
Interest expense, net(143) 
Total other (expense)/income(143)68 
(Loss)/income from continuing operations before income taxes(937)458 
Income tax (benefit)/expense(619)138 
Net (loss)/income from continuing operations(318)320 
Loss from discontinued operations, net of income tax of $464
 (1,436)
Net loss(318)(1,116)
Net (loss)/income per share from continuing operations:
       Basic$(0.01)$0.01 
       Diluted$(0.01)$0.01 
Net loss per share from discontinued operations:
       Basic$ $(0.05)
       Diluted$ $(0.04)
Net loss per share attributable to common stockholders:
        Basic$(0.01)$(0.04)
        Diluted$(0.01)$(0.03)
Weighted average shares:
        Basic31,350,629 30,380,345 
        Diluted33,353,456 32,549,487 

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









4

Table of Contents
Luna Innovations Incorporated
Consolidated Statements of Comprehensive Income/(Loss)
 (in thousands)

 Three Months Ended March 31,
 20212020
Net loss$(318)$(1,116)
Other comprehensive income1,123  
Total other comprehensive income/(loss)$805 $(1,116)

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

















































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Table of Contents
Luna Innovations Incorporated
Consolidated Statements of Changes in Stockholders' Equity
 (in thousands, except share data)

Three Months Ended March 31, 2021
 Common StockTreasury StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated Other Comprehensive (Loss) IncomeTotal
 Shares$Shares$$$$$
Balance at December 31, 202031,024,537 $33 1,699,975 $(4,789)$92,403 $(12,957)$(248)$74,442 
Exercise of stock options314,697 — — — 845 — — 845 
Share-based compensation74,565 — — — 657 — — 657 
Purchase of treasury stock(20,810)— 20,810 (202)— — — (202)
Net loss— — — — — (318)— (318)
Foreign currency translation adjustment— — — — — — 1,123 1,123 
Balance at March 31, 202131,392,989 $33 1,720,785 $(4,991)$93,905 $(13,275)$875 $76,547 


Three Months Ended March 31, 2020
 Common StockTreasury StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated Other Comprehensive IncomeTotal
 Shares$Shares$$$$$
Balance at December 31, 201930,149,105 $32 1,639,791 $(4,337)$88,022 $(16,248) $67,469 
Exercise of stock options316,504 — — — 1,198 — — 1,198 
Share-based compensation55,668 — — — 502 — — 502 
Net loss— — — — — (1,116)— (1,116)
Forfeitures of restricted stock(34,700)— — — (276)— — (276)
Balance at March 31, 202030,486,577 $32 1,639,791 $(4,337)$89,446 $(17,364)$ $67,777 

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


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Luna Innovations Incorporated
Consolidated Statements of Cash Flows (Unaudited)
(in thousands, except share data)
Three Months Ended March 31,
 20212020
Cash flows used in operating activities
Net loss$(318)$(1,116)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization1,231 679 
Share-based compensation657 226 
Bad debt expense 14 
Loss from discontinued operations, net of tax 1,436 
Deferred taxes262 (127)
Change in assets and liabilities
Accounts receivable1,439 737 
Contract assets(729)111 
Inventory(1,617)(897)
Other current assets(847)(287)
Other long term assets(80) 
Accounts payable and accrued expenses(1,939)(760)
Contract liabilities(992)(318)
Net cash used in operating activities(2,933)(302)
Cash flows (used in)/provided by investing activities
Acquisition of property and equipment(361)(74)
Intangible property costs(48)(91)
Proceeds from sale of discontinued operations 600 
Net cash (used in)/provided by investing activities(409)435 
Cash flows (used in)/provided by financing activities
Payments on finance lease obligations(12)(13)
Payments of debt obligations(1,036) 
Repurchase of common stock(202) 
Proceeds from the exercise of options and warrants845 1,198 
Net cash (used in)/provided by financing activities(405)1,185 
Effect of exchange rate changes on cash and cash equivalents175  
Net (decrease)/increase in cash and cash equivalents(3,572)1,318 
Cash and cash equivalents—beginning of period15,366 25,006 
Cash and cash equivalents—end of period$11,794 $26,324 
Supplemental disclosure of cash flow information
Cash paid for interest$125 $1 
Cash received for income tax refund, net$87 $ 
The accompanying notes are an integral part of these unaudited consolidated financial statements.


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Luna Innovations Incorporated
Notes to Unaudited Consolidated Financial Statements
 
1.    Basis of Presentation and Significant Accounting Policies
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 solutions that measure, or "sense" the structures for industries ranging from aerospace, automotive, oil and gas, security and infrastructure. Our communications test and control products help customers test their fiber optic networks and assemblies with speed and precision in both lab and production environments, accelerating the development of fiber optic products and assuring accurate testing of optical components like photonic integrated circuits ("PICs") and coherent receivers, which are both critical elements of meeting the world’s exponentially growing demand for bandwidth. Our distributed fiber optic sensing products help designers and manufacturers more efficiently develop new and innovative products by measuring stress, strain, and temperature at a high resolution for new designs or manufacturing processes. In addition, our distributed fiber optic sensing products ensure the safety and structural integrity or operational health of critical assets in the field, by monitoring stress, strain, and vibration in large civil and industrial infrastructure such as bridges, roads, pipelines and borders.
We also provide applied research services, 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 March 31, 2021, results of operations, comprehensive income, changes in stockholders' equity and cash flows for the three months ended March 31, 2021 and 2020. The results of operations for the three months ended March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The consolidated balance sheet as of December 31, 2020 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 March 31, 2021, 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, 2020, included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 12, 2021.
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.


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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.
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 PNC Bank, National Association debt facility including its interest rate of LIBOR plus a margin ranging from 1.75% to 2.25%, 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 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 2.0 million and 2.2 million common stock equivalents are included for the diluted per share data for the three months ended March 31, 2021 and 2020, 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 months ended March 31, 2021 and 2020.

Foreign Currency

For our non-U.S. dollar functional currency subsidiaries, assets and liabilities are translated into U.S. dollars using fiscal year end exchange rates. Sales and expenses are translated at average monthly exchange rates. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive loss within equity. Gains and losses resulting from foreign currency transactions are included in earnings.



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Recently Adopted Accounting Pronouncements

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 adopted ASU 2019-12, effective January 1, 2021. The adoption of ASU 2019-12 did not have a significant impact on our consolidated financial statements.


Recently Issued Pronouncements, Not Yet Adopted

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

    
2.    Business Acquisitions
OptaSense Holdings Limited

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

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

New Ridge Technologies

On October 29, 2020, we acquired New Ridge Technologies, a small company that develops and manufactures fiber optic test and measurement equipment and advanced fiber optic subsystems primarily for telecommunication and radio-over-fiber applications. New Ridge's acquired operations will be integrated into, and reported as a part of, our Lightwave segment. This acquisition supports our growth strategy in the communications test arena. The total consideration was $0.6 million which consisted of $0.4 million paid at closing and $0.2 million of contingent consideration related to an earn-out provision. We recorded $0.02 million of goodwill upon the completion of the purchase consideration allocation. Depending on the achievement of certain metrics during the two years following closing, we may pay the seller up to $0.2 million in contingent consideration related to the earn-out provision.

These acquisitions have been accounted for under the acquisition method of accounting in accordance with ASC 805 - Business Combinations. Under ASC 805, the total estimated purchase 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.



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The following table summarizes the allocation of the purchase consideration of the OptaSense acquisition (excluding cash of $5.2 million):

(in thousands)
Accounts receivable$5,553 
Contract assets2,823 
Inventory11,483 
Other current assets1,026 
Property and equipment1,247 
Identifiable intangible assets11,263 
Goodwill7,619 
Right of use assets2,082 
Other long-term assets22 
Accounts payable and accrued expenses(4,089)
Contract liabilities(3,259)
Other current liabilities(747)
Long-term operating lease liability(1,335)
Total purchase consideration$33,688 

The identifiable intangible assets and their estimated useful lives were as follows:
Estimated
(in thousands)Useful LifeOptaSense
Developed technology10 years$7,379 
Trade names and trademarks15 years2,580 
Backlog3 years699 
Customer relationships5 years605 
$11,263 

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

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

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

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



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Goodwill represents the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed in connection with the acquisition. Goodwill generated from our business acquisitions was primarily attributable to expected synergies from future customer and sales growth.

Pro forma consolidated results of operations

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

The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations or the combined business had the acquisition of OptaSense occurred on January 1, 2019, or the results of future operations of the combined business. For instance, planned or expected operational synergies following the acquisition are not reflected in the pro forma information. Consequently, actual results will differ from the unaudited pro forma information presented below.
For the three months ended
March 31, 2020
(in thousands)
Revenue$24,866 
Income from continuing operations$760 
 
3.    Intangible assets, net

    Intangible assets, net at March 31, 2021 and December 31, 2020 consisted of the following:

March 31, 2021December 31, 2020
(in thousands)
Patent costs$5,780 $5,702 
Developed technology17,559 17,344 
In-process research & development1,580 1,580 
Customer base1,302 1,302 
Trade names3,122 3,122 
Backlog696 696 
30,039 29,746 
Accumulated amortization(10,397)(9,637)
$19,642 $20,109 

    Amortization expense for the three months ended March 31, 2021 was $0.8 million. Estimated aggregate amortization, based on the net value of intangible assets at March 31, 2021, for each of the next five years and beyond is as follows (amounts in thousands):


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Year Ending December 31,
2021 - remaining 9 months$2,545 
20222,906 
20232,807 
20242,316 
20252,293 
2026 & beyond6,775 
Total$19,642 

4.Goodwill

    Goodwill was $18.3 million and $18.1 million at March 31, 2021 and December 31, 2020, respectively, and has been allocated to the Lightwave segment. The change in goodwill during the three months ended March 31, 2021 related to foreign currency translation.
    

5.Inventory
Inventory consists of finished goods, work-in-process and raw materials valued at the lower of cost (determined on the first-in, first-out basis) or net realizable value.
Components of inventory were as follows:
March 31,
2021
December 31,
2020
(in thousands)
Finished goods$10,382 $11,547 
Work-in-process2,536 1,425 
Raw materials12,632 10,625 
            Total inventory$25,550 $23,597 
6.    Accrued Liabilities

Accrued liabilities at March 31, 2021 and December 31, 2020 consisted of the following:
March 31, 2021December 31, 2020
(in thousands)
Accrued compensation$8,309 $9,103 
       Contingent consideration225 225 
Accrued professional fees679 825 
Accrued income tax112 281 
Accrued interest24 42 
Accrued royalties454 456 
Accrued liabilities - other929 1,227 
            Total accrued liabilities$10,732 $12,159 


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7.Debt
Long-term debt consisted of the following:
(in thousands)March 31, 2021December 31, 2020
Term Loan (net of debt issuance costs of $61 and $66, 2.48% and 2.48% at March 31, 2021 and December 31, 2020, respectively)
$11,398 $12,434 
Revolving Loan (2.48% at March 31, 2021 and December 31, 2020)
7,550 7,550 
18,948 19,984 
Less: Current portion of long-term debt obligations(4,167)(4,167)
Long-term debt obligations $14,781 $15,817 
PNC Bank Facility
On December 1, 2020 (the “Effective Date”), we entered into a Loan Agreement (the “Loan Agreement”) with PNC Bank, National Association, as lender (the “Lender”) and our domestic subsidiaries as guarantors. The Loan Agreement provides a $12.5 million term loan facility (the “Term Loan”) and a $15.0 million revolving credit facility (the “Revolving Line”), which includes a $3.0 million letter of credit sublimit. On the Effective Date, we borrowed the full amount of the Term Loan from the Lender pursuant to a term note (the “Term Note”) and a $7.6 million revolving loan (the “Revolving Loan”) pursuant to a revolving line of credit note (the “Revolving Line of Credit Note”). We may repay and reborrow advances under the Revolving Line from time to time pursuant to the Revolving Line of Credit Note.
The Term Loan matures on December 1, 2023. The Term Loan is due and payable in 12 equal quarterly payments of principal and interest. The Term Loan bears interest at a floating per annum rate equal to the sum of (a) LIBOR plus (b) a margin ranging from 1.75% to 2.25% depending on the Net Leverage Ratio (as defined in the Loan Agreement). We may prepay the Term Loan without penalty or premium.
The Revolving Line expires on December 1, 2023. Borrowings under the Revolving Line will bear interest at a floating per annum rate equal to the sum of (a) LIBOR plus (b) a margin ranging from 1.75% to 2.25% depending on the Net Leverage Ratio. Accrued interest will be due and payable on the first day of each month and the outstanding principal balance and any accrued but unpaid interest will be due and payable on December 1, 2023. The unused portion of the Revolving Line will accrue a fee equal to 0.20% per annum multiplied by the quarterly average unused amount.
Provided our obligations under the Loan Agreement have been satisfied, we may terminate the Loan Agreement at any time upon three business days’ advance written notice to the Lender.
The Loan Agreement includes a number of affirmative and restrictive covenants applicable to us and our subsidiaries, including, among others, financial covenants regarding minimum net leverage and fixed charge coverage, affirmative covenants regarding delivery of financial statements, payment of taxes, and maintenance of government compliance, and restrictive covenants regarding dispositions of property, acquisitions, incurrence of additional indebtedness or liens, investments and transactions with affiliates. We are also restricted from paying dividends or making other distributions or payments on our capital stock, subject to limited exceptions. We were in compliance with these covenants as of March 31, 2021.
Upon the occurrence of certain events, including failure to satisfy our payment obligations under the Loan Agreement, failure to adhere to the financial covenants, the breach of certain of our other covenants under the Loan Agreement, cross defaults to other indebtedness or material agreements, judgment defaults and defaults related to failure to maintain governmental approvals, the Lender will have the right, among other remedies, to declare all principal and interest immediately due and payable, and to exercise secured party remedies.
Maturities on debt are as follows (in thousands):
Year Ending December 31,Amount
2021 - remaining 9 months$3,125 
20224,167 
202311,656 
Total$18,948 



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Interest expense, net for the three months ended March 31, 2021 and 2020 consisted of the following:
 Three Months Ended March 31,
(in thousands)20212020
Interest expense on Term Loan$76 $ 
Interest expense on Revolving Line30  
Amortization of debt issuance costs11  
Other interest expense26  
Interest income  
Total interest expense, net$143 $ 
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 3 years. These lease agreements are for general office equipment with a 5-year useful life. These lease agreements do not have an option to extend the lease beyond the stated terms nor do they have an early termination clause. These lease agreements do not have any variable payment provisions included. The finance lease costs consist of 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 March 31, 2021, we had no operating or finance leases that have not yet commenced.

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

Three Months Ended March 31,
(in thousands)20212020
Operating lease costs$709 $412 
Variable rent costs(29)(39)
   Total rent expense$680 $373 




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    Future minimum lease payments under non-cancelable operating and finance leases were as follows as of March 31, 2021 (amounts in thousands):

Operating LeasesFinance Leases
Year Ending December 31,
2021 - remaining 9 months$2,374 $39 
20222,614 53 
20232,351 53 
20241,880 53 
20251,196 47 
2026 and beyond3,882  
   Total future minimum lease payments14,297 245 
   Less: interest2,400 13 
     Total lease liabilities$11,897 $232 
Current lease liability$2,195 $48 
Long-term lease liability9,702 184 
   Total lease liabilities$11,897 $232 


    Other information related to leases is as follows:
Three Months Ended March 31,
(in thousands, except weighted-average data)20212020
Finance lease cost:
   Amortization of right-of-use assets$14 $14 
   Interest on lease liabilities1 1 
Total finance lease cost$15 $15 
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
   Operating cash flows from operating leases$709 $378 
   Finance cash flows from finance leases$12 $13 
Right-of-use assets obtained in exchange for new operating lease liabilities$ $ 
Right-of-use assets obtained in exchange for new finance lease liabilities$ $ 
Weighted-average remaining lease term (years) - operating leases6.23.7
Weighted-average remaining lease term (years) - finance leases4.71.9
Weighted-average discount rate - operating leases6 %7 %
Weighted-average discount rate - finance leases2 %7 %



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9.Capital Stock and Share-Based Compensation

Stock Options
During the three months ended March 31, 2021, we granted options to purchase 80,735 shares of our common stock. The general terms of the stock options are similar to awards previously granted by us.
The fair values of stock options granted were estimated using the following weighted-average assumptions:
Three Months Ended March 31, 2021
Risk-free rate0.98 %
Expected volatility55.22 %
Expected term (in years)7
The weighted average fair value of stock options granted during the three months ended March 31, 2021 was $5.24 per share. The fair value of each stock option was determined using the Black-Scholes model.
For each of the three months ended March 31, 2021 and 2020 we recognized $0.3 million in share-based compensation expense related to stock options, which is included in our selling, general and administrative expense in the accompanying consolidated interim financial statements. We expect to recognize $2.2 million in share-based compensation expense over the weighted-average remaining service period of 2.2 years for stock options outstanding as of March 31, 2021.

Restricted Stock Units
During the three months ended March 31, 2021, we granted 79,250 time-based restricted stock units ("RSUs"). The general terms of the RSUs are similar to awards previously granted by us.
The weighted average fair value of the time-based RSUs granted during the three months ended March 31, 2021 was $11.40 per share. The fair value of each RSU was determined based on the market price of our stock on the date of grant.
In addition, pursuant to our Deferred Compensation Plan, non-employee directors can elect to defer the receipt of some or all of the equity compensation that they receive for board and committee service. During the three months ended March 31, 2021, we granted 4,658 RSUs pursuant to the Deferred Compensation Plan. The general terms of the RSUs are similar to awards previously granted by us. The weighted average fair value of the RSUs granted during the three months ended March 31, 2021 was $9.42 per share. The fair value of each RSU was determined based on the market price of our stock on the date of grant.
For each of the three months ended March 31, 2021 and 2020 we recognized $0.3 million in share-based compensation expense related to RSUs, which is included in our selling, general and administrative expense in the accompanying consolidated interim financial statements. We expect to recognize $1.8 million in share-based compensation expense over the weighted-average remaining service period of 2.2 years for RSUs outstanding as of March 31, 2021.

Employee Stock Purchase Plan ("ESPP")
For the three months ended March 31, 2021 we recognized $0.1 million in share-based compensation expense related to the ESPP, which is included in our selling, general and administrative expense in the accompanying statement of operations. There was no share-based compensation expense related to the ESPP for the three months ended March 31, 2020.

10.Revenue Recognition

Disaggregation of Revenue

We disaggregate our revenue from contracts with customers by geographic locations, customer type, contract type, timing of recognition, and major categories for each of our segments, as we believe it best depicts how the nature, amount, timing and


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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.

The details are listed in the table below for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,
20212020
(in thousands)LightwaveLuna LabsTotalLightwaveLuna LabsTotal
(unaudited)
Total Revenue by Geographic Location
United States$10,579 $5,263 $15,842 $5,852 $5,587 $11,439 
Asia3,672  3,672 3,756  3,756 
Europe3,977 27 4,004 1,713  1,713 
Canada, Central and South America2,769 12 2,781 206  206 
All Others   27  27 
Total$20,997 $5,302 $26,299 $11,554 $5,587 $17,141 
Total Revenue by Major Customer Type
Sales to the U.S. government$2,414 $4,927 $7,341 $1,825 $5,011 $6,836 
U.S. direct commercial sales and other8,165 337 8,502 4,027 576 4,603 
Foreign commercial sales & other10,418 38 10,456 5,702  5,702 
Total$20,997 $5,302 $26,299 $11,554 $5,587 $17,141 
Total Revenue by Contract Type
Fixed-price contracts$20,405 $3,232 $23,637 $11,554 $2,540 $14,094 
Cost-type contracts592 2,070 2,662  3,047 3,047 
  Total$20,997 $5,302 $26,299 $11,554 $5,587 $17,141 
Total Revenue by Timing of Recognition
Goods transferred at a point in time$16,839 $310 $17,149 $9,761 $480 $10,241 
Goods/services transferred over time4,158 4,992 9,150 1,793 5,107 6,900 
Total$20,997 $5,302 $26,299 $11,554 $5,587 $17,141 
Total Revenue by Major Products/Services
Technology development$2,140 $4,992 $7,132 $1,708 $5,107 $6,815 
Test, measurement and sensing systems18,519  18,519 9,761  9,761 
Other338 310 648 85