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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 June 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
COMMISSION FILE NUMBER 000-52008

  
https://cdn.kscope.io/41f19fb989d389b13824ec5bc1ffb6a7-luna-20220630_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 August 10, 2022, there were 32,809,755 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, 2022
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

Table of Contents
PART I. FINANCIAL INFORMATION
 
ITEM 1.FINANCIAL STATEMENTS
Luna Innovations Incorporated
Consolidated Balance Sheets (Unaudited)
(in thousands, except share data)
June 30, 2022December 31, 2021
Assets
Current assets:
Cash and cash equivalents$4,864 $17,128 
Accounts receivable, net30,422 20,913 
Contract assets3,369 5,166 
Inventory30,754 22,493 
Prepaid expenses and other current assets6,535 3,793 
Assets held for sale 12,952 
Total current assets75,944 82,445 
Property and equipment, net4,499 2,988 
Intangible assets, net20,399 17,177 
Goodwill28,441 18,984 
Operating lease right-of-use assets4,774 5,075 
Other non-current assets3,214 247 
Deferred tax asset4,612 3,321 
Total assets$141,883 $130,237 
Liabilities and stockholders’ equity
Liabilities:
Current liabilities:
Current portion of long-term debt obligations$2,000 $4,167 
Accounts payable3,881 2,809 
Accrued and other current liabilities16,413 9,258 
Contract liabilities4,816 4,649 
Current portion of operating lease liabilities2,449 2,101 
Liabilities associated with assets held for sale 9,703 
Total current liabilities29,559 32,687 
Long-term debt obligations, net of current portion19,218 11,673 
Long-term portion of operating lease liabilities2,767 3,509 
Deferred tax liability1,357  
Other long-term liabilities421 445 
Total liabilities53,322 48,314 
Commitments and contingencies (Note 13)
Stockholders’ equity:
Common stock, par value $0.001, 100,000,000 shares authorized, 34,528,065 and 33,855,725 shares issued, 32,752,348 and 32,116,270 shares outstanding at June 30, 2022 and December 31, 2021, respectively
35 34 
Treasury stock at cost, 1,784,957 and 1,744,026 shares at June 30, 2022 and December 31, 2021, respectively
(5,542)(5,248)
Additional paid-in capital102,043 98,745 
Accumulated deficit(4,345)(11,575)
Accumulated other comprehensive loss(3,630)(33)
Total stockholders’ equity88,561 81,923 
Total liabilities and stockholders’ equity$141,883 $130,237 
The accompanying notes are an integral part of these unaudited consolidated financial statements.


3

Table of Contents
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,
 2022202120222021
Revenue$26,162 $21,965 $48,642 $42,962 
Cost of revenue10,199 9,384 18,400 18,110 
Gross profit15,963 12,581 30,242 24,852 
Operating expense:
Selling, general and administrative15,760 12,805 29,862 23,739 
Research, development and engineering2,665 1,810 5,207 4,727 
       Total operating expense18,425 14,615 35,069 28,466 
Operating loss(2,462)(2,034)(4,827)(3,614)
Other income/(expense):
Other income53  73  
Interest expense, net(111)(122)(224)(265)
Total other expense, net(58)(122)(151)(265)
Loss from continuing operations before income taxes(2,520)(2,156)(4,978)(3,879)
Income tax expense/(benefit)422 (995)(693)(1,659)
Net loss from continuing operations(2,942)(1,161)(4,285)(2,220)
Income from discontinued operations, net of income tax expense (benefit) of ($856), $101, $166 and $146
591 931 594 1,672 
Gain on sale of discontinued operations, net of tax of $3,117
  10,921  
Net income from discontinued operations591 931 11,515 1,672 
Net (loss)/income(2,351)(230)7,230 (548)
Net loss per share from continuing operations:
       Basic$(0.09)$(0.04)$(0.13)$(0.07)
       Diluted$(0.09)$(0.04)$(0.13)$(0.07)
Net income per share from discontinued operations:
       Basic$0.02 $0.03 $0.36 $0.05 
       Diluted$0.02 $0.03 $0.36 $0.05 
Net (loss)/income per share attributable to common stockholders:
        Basic$(0.07)$(0.01)$0.22 $(0.02)
        Diluted$(0.07)$(0.01)$0.22 $(0.02)
Weighted average shares:
        Basic32,478,736 31,494,563 32,361,560 31,413,451 
        Diluted32,478,736 31,494,563 32,361,560 31,413,451 





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Luna Innovations Incorporated
Consolidated Statements of Comprehensive Income (Unaudited)
 (in thousands)

 Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
Net (loss)/income$(2,351)$(230)$7,230 $(548)
Other comprehensive (loss)/income(3,227)(247)(3,597)876 
Total other comprehensive (loss)/income$(5,578)$(477)$3,633 $328 

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















































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Luna Innovations Incorporated
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
 (in thousands, except share data)
Three Months Ended June 30, 2022
 Common StockTreasury StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated Other Comprehensive LossTotal
 Shares$Shares$$$$$
Balance, March 31, 202232,361,122 34 1,782,289 (5,526)99,906 (1,994)(403)92,017 
Exercise of stock options217,040 1 — — 937 — — 938 
Share-based compensation75,400 — — — 679 — — 679 
ESPP issuance101,454 — — — 521 — — 521 
Purchase of treasury stock(2,668)— 2,668 (16)— — — (16)
Net loss— — — — — (2,351)— (2,351)
Foreign currency translation adjustment— — — — — — (3,227)(3,227)
Balance, June 30, 202232,752,348 $35 1,784,957 $(5,542)$102,043 $(4,345)$(3,630)$88,561 
Three Months Ended June 30, 2021
 Common StockTreasury StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated Other Comprehensive (Loss)/IncomeTotal
 Shares$Shares$$$$$
Balance at March 31, 202131,392,989 33 1,720,785 (4,991)93,904 (13,275)875 76,546 
Exercise of stock options263,484 — — — 645 — — 645 
Share-based compensation71,448 — — — 857 — — 857 
ESPP issuance63,193 — — — 530 — — 530 
Purchase of treasury stock(18,670)— 18,670 (218)— — — (218)
Net loss— — — — — (230)— (230)
Foreign currency translation adjustment— — — — — — (247)(247)
Balance, June 30, 202131,772,444 $33 1,739,455 $(5,209)$95,936 $(13,505)$628 $77,883 


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Six Months Ended June 30, 2022
 Common StockTreasury StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated Other Comprehensive LossTotal
 Shares$Shares$$$$$
Balance, December 31, 202132,116,270 34 1,744,026 (5,248)98,745 (11,575)(33)81,923 
Exercise of stock options360,432 1 — — 1,157 — — 1,158 
Share-based compensation215,123 — — — 1,620 — — 1,620 
ESPP issuance101,454 — — — 521 — — 521 
Purchase of treasury stock(40,931)— 40,931 (294)— — — (294)
Net income— — — — — 7,230 — 7,230 
Foreign currency translation adjustment— — — — — — (3,597)(3,597)
Balance, June 30, 202232,752,348 $35 1,784,957 $(5,542)$102,043 $(4,345)$(3,630)$88,561 

Six Months Ended June 30, 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 options578,181 — — — 1,489 — — 1,489 
Share-based compensation146,013 — — — 1,514 — — 1,514 
ESPP issuance63,193 — — — 530 — — 530 
Purchase of treasury stock(39,480)— 39,480 (420)— — — (420)
Net loss— — — — — (548)— (548)
Foreign currency translation adjustment— — — — — — 876 876 
Balance at June 30, 202131,772,444 $33 1,739,455 $(5,209)$95,936 $(13,505)$628 $77,883 



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Luna Innovations Incorporated
Consolidated Statements of Cash Flows (Unaudited)
(in thousands, except share data)
Six Months Ended June 30,
 20222021
Cash flows used in operating activities
Net income/(loss)$7,230 $(548)
Adjustments to reconcile net income/(loss) to net cash used in operating activities
Depreciation and amortization2,694 2,360 
Share-based compensation2,177 1,514 
Gain on sale of discontinued operations, net of tax(10,921) 
Deferred taxes(124) 
Tax benefit from release of valuation allowance 475 
Change in assets and liabilities
Accounts receivable(6,555)(473)
Contract assets140 763 
Inventory(4,281)(1,562)
Other current assets(3,870)(2,399)
Other long-term assets646  
Accounts payable and accrued and other current liabilities6,123 (2,185)
Contract liabilities1,196 (826)
Other long-term liabilities(1,523) 
Net cash used in operating activities(7,068)(2,881)
Cash flows used in investing activities
Acquisition of property and equipment(1,657)(551)
Intangible property costs4 (141)
       Proceeds from sale of property and equipment25  
Proceeds from sale of discontinued operations12,973  
Acquisition of Lios (22,085) 
Net cash used in investing activities(10,740)(692)
Cash flows provided by/(used in) financing activities
Payments on finance lease obligations(24)(24)
Proceeds from borrowings under debt obligations21,150  
Payments of debt obligations(15,772)(2,072)
Repurchase of common stock(294)(420)
Proceeds from ESPP521 530 
Proceeds from the exercise of options1,158 1,490 
Net cash provided by/(used in) financing activities6,739 (496)
Effect of exchange rate changes on cash and cash equivalents(1,195)673 
Net decrease in cash and cash equivalents(12,264)(3,396)
Cash and cash equivalents—beginning of period17,128 15,366 
Cash and cash equivalents—end of period$4,864 $11,970 
Supplemental disclosure of cash flow information
Cash paid for interest$183 $125 
Cash received for income tax refund, net$787 $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 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. Our distributed fiber optic sensing products ensure the safety and structural integrity or operational health of critical assets in the field, by monitoring stress, strain, and vibration in large civil and industrial infrastructure such as bridges, roads, pipelines and borders. We also provide applied research services, primarily under federally funded development programs, that leverage our sensing and instrumentation technologies to meet the specific needs and applications of our customers.
Unaudited Interim Financial Information
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United 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 adjustments considered necessary to present fairly our financial position at June 30, 2022, results of operations, comprehensive income/(loss) and changes in stockholders' equity for the three and six months ended June 30, 2022 and 2021, and cash flows for the six months ended June 30, 2022 and 2021. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The consolidated balance sheet as of December 31, 2021 was derived from our audited consolidated financial statements.
The consolidated interim financial statements, including our significant accounting policies, should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2021, included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 14, 2022.
Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment on an annual basis, as of October 1 of each year, or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Purchased intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. We analyze the reasonableness of the remaining useful life whenever events or circumstances indicate that the carrying amount may not be recoverable to determine whether the carrying value has been impaired.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between marketplace participants. Various valuation approaches can be used to determine fair value, each requiring different valuation inputs. The following hierarchy classifies the inputs used to determine fair value into three levels:
 
Level 1—Quoted prices for identical instruments in active markets.


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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 and other 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 floating per annum interest rate of the daily simple secured overnight financing rate ("SOFR"), plus an SOFR adjustment, plus a margin ranging from 1.75% to 2.50%, to be at market based upon similar instruments that would be available to us. The Company has certain assets and liabilities that have been recorded at fair value on a non-recurring basis following an acquisition. Refer to Note 3, Business Acquisition, for the allocation of the total consideration based upon the fair value of the assets acquired and liabilities assumed as of the acquisition date.
Reportable Segments
Prior to September 30, 2021, we were organized into two main reporting segments, our Lightwave segment and our Luna Labs segment. We now have one reportable segment, Lightwave, following the determination that our Luna Labs segment met held-for-sale and discontinued operations accounting criteria at the end of the third quarter of 2021. On March 8, 2022, we completed the sale of substantially all of our equity interests in Luna Labs. Prior to the sale, our Luna Labs segment performed applied research principally in the areas of sensing and instrumentation, advanced materials, optical technologies and health sciences. See Note 2, Sale of Discontinued Operations, for additional disclosure related to discontinued operations and assets held for sale.
The remaining segment, Lightwave, develops, manufactures and markets distributed fiber optic sensing products and fiber optic communications test and control products.
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. For the three and six months ended June 30, 2022 and 2021, all potentially dilutive securities for stock options and restricted stock unites were excluded as their impact would be anti-dilutive.
Foreign Currency
For our non-U.S. dollar functional currency subsidiaries, assets and liabilities are translated into U.S. dollars using fiscal period end exchange rates. Sales and expenses are translated at average monthly exchange rates. Foreign currency translation gains and losses are included as a component of accumulated other comprehensive loss within equity. Gains and losses resulting from foreign currency transactions are included in earnings.
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 to have a material impact on our consolidated financial statements.




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2.    Sale of Discontinued Operations
On March 8, 2022, we completed the sale of substantially all of our equity interests in our Luna Labs business to certain members of Luna Labs’ senior management team and a group of outside investors for an initial purchase price of $20.4 million before working capital and escrow adjustments and transaction expenses. Total consideration included $13.0 million of cash received at closing, $2.5 million in the form of a convertible note and $1.7 million in the form of 60-day promissory notes. We can earn up to $1.0 million in future payments from Luna Labs upon the achievement by Luna Labs of certain financial goals. The 60-day promissory notes and earn out receivable are included within the prepaid expenses and other current assets line item and the convertible note is included in other non-current assets line item of the consolidated balance sheet. The gain on the transaction was $10.9 million, net of taxes of $3.1 million.
We have separately reported the financial results of Luna Labs as discontinued operations in our consolidated statements of operations for the three and six months ended June 30, 2022 and 2021, respectively, and presented the related assets and liabilities as held for sale in the consolidated balance sheet as of December 31, 2021. These changes have been applied to all periods presented. The operating results of the discontinued operations only reflect revenues and expenses that are directly attributable to the Luna Labs segment that will be eliminated from continuing operations. Previously reported expenses for the Luna Labs segment have been restated to exclude certain allocated expenses that are not directly attributable to the Luna Labs segment.
The key components from discontinued operations related to the Luna Labs business are as follows (in thousands):

Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
Revenues$ $5,972 $5,108 $11,274 
Cost of revenues 4,603 3,692 8,747 
Gross profit 1,369 1,416 2,527 
Selling, general and administrative expenses265 337 656 709 
Operating (loss)/income(265)1,032 760 1,818 
Income tax (benefit)/expense(856)101 166 146 
Net income from discontinued operations, net of tax$591 $931 $594 $1,672 
Assets and liabilities of discontinued operations classified as held for sale in the consolidated balance sheet as of December 31, 2021 consist of the following (in thousands):

December 31, 2021
Accounts receivable, net$2,967 
Inventory282 
Contract assets4,051 
Prepaid expenses and other current132 
Property and equipment, net330 
Intangible assets, net165 
Operating lease ROU asset4,884 
Other assets141 
Assets held for sale$12,952 
Accounts payable1,042 
Accrued and other current liabilities821 
Contract liabilities2,626 
Current portion of operating lease liabilities388 
Long-term portion of operating lease liabilities4,826 
Liabilities associated with assets held for sale$9,703 



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The cash flows related to discontinued operations have not been segregated and are included in the consolidated statements of cash flows. The following table presents cash flow and non-cash information related to discontinued operations for the six months ended June 30, 2022 and 2021 (in thousands):

Six Months Ended June 30,
 20222021
Depreciation and amortization$23 $31 
Share-based compensation177 10 
Acquisition of property and equipment34 50 

3.    Business Acquisition
On March 10, 2022, we entered into and closed a Share Purchase Agreement (the “Share Purchase Agreement”) with NKT Photonics A/S ("NKT Photonics") to purchase all of the shares of NKT Photonics GmbH and LIOS Technologies Inc. (collectively "Lios") for aggregate consideration of $22.1 million (€20.0 million). Lios is a provider of distributed fiber optic monitoring solutions for power cable, pipelines, oilfield services, security, highways, railways and industrial fire detection systems. The acquisition of Lios provides us with long range, fully distributed temperature and strain sensing capabilities, intellectual property, products and expertise that are highly complementary to Luna, which we believe will accelerate our technology and overall growth roadmap. The Share Purchase Agreement contains customary representations and warranties and indemnities.
The Lios acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805 - Business Combinations. Under ASC 805, the total estimated purchase consideration is allocated to the acquired tangible and intangible assets and assumed liabilities based on 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. Due to the timing of the acquisition relative to the interim balance sheet date, the purchase price allocation of Lios is based on a preliminary valuation and is subject to revision as final valuation of acquired intangible assets and evaluation of working capital values and related reserves are completed.

The following table summarizes the preliminary allocation of the purchase consideration of the Lios acquisition:

(in thousands)
Accounts receivable$3,001 
Inventory5,388 
Prepaid expenses and other current assets92 
Property and equipment858 
Intangible assets5,994 
Goodwill10,533 
Operating lease right-of-use asset512 
Accounts payable(1,217)
Accrued and other current liabilities(1,026)
Current portion of operating lease liability(322)
Deferred income tax liability(1,537)
Long-term portion of operating lease liability(191)
Total purchase consideration$22,085 





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

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

Lios's developed technology primarily consists of its distributed fiber optic monitoring solutions that provide a wide range of applications using fully distributed temperature and strain sensing. The developed technologies were valued using the "relief from royalty method" under the income approach. This method is based on the assumption that in lieu of ownership, a market participant would be willing to pay a royalty in order to exploit the related benefits of these assets. A discount rate of 14.5% was used to discount the cash flows to the present value.
Trade names and trademarks are considered a type of guarantee of a certain level of recognizability, quality or performance represented by the Lios brand. Trade names and trademarks were valued using the "relief from royalty" method under the income approach. This method is based on the assumption that in lieu of ownership, a market participant would be willing to pay a royalty in order to exploit the related benefits of these assets. A discount rate of 14.5% was used to discount the cash flows to the present value.
Backlog arises from unfulfilled purchase or sales order contracts. The value of Lios's backlog as of the acquisition date was calculated using the "multi-period excess earnings" method under the income approach. A discount rate of 13.5% was used to discount the cash flows attributable solely to the backlog to the present value.
Customer relationships represent the fair value of either (i) the avoidance of cost associated with the creation of a new customer relationship or (ii) the projected cash flows that will be derived from the sale of products to existing customers as of the acquisition date. Lios's customer relationships were valued using the "multi-period excess earnings" method under the income approach. This method reflects the present value of the projected cash flows that are expected by the existing customers less charges representing the contribution of other assets to those cash flows. A discount rate of 15.5% was used to discount these cash flows to the present value.
Goodwill represents the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed in connection with the acquisition. Goodwill generated from our business acquisitions was primarily attributable to expected synergies from future customer and sales growth. We do not expect this goodwill to be deductible for tax purposes.
 

4.    Intangible assets, net
Intangible assets, net at June 30, 2022 and December 31, 2021 consisted of the following:

Estimated LifeJune 30, 2022December 31, 2021
(in thousands)
Patent costs
1 - 18 years
$8,731 $9,230 
Developed technology
6 - 10 years
16,202 14,440 
In-process research and developmentN/A2,684 2,732 
Customer base
5 - 8 years
3,719 700 
Trade names
7 - 15 years
883 550 
Backlog
1 - 3 years
333  
32,552 27,652 
Accumulated amortization(12,153)(10,475)
$20,399 $17,177 



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Amortization expense for the three and six months ended June 30, 2022 was $0.8 million and $1.7 million, respectively. Estimated aggregate amortization, based on the net value of intangible assets at June 30, 2022, for each of the next five years and beyond is as follows (in thousands):

Year Ending December 31,
2022 (remaining 6 months)$2,377 
20233,926 
20243,248 
20252,914 
20262,798 
2027 & beyond5,136 
Total$20,399 

5.Goodwill
The change in the carrying value of goodwill during the six months ended June 30, 2022 was as follows:

(in thousands)
Balance as of December 31, 202118,984 
   Acquisition of Lios10,533 
   Foreign currency translation(1,076)
Balance as of June 30, 2022$28,441 
    

6.Inventory
Inventory consists of finished goods, work-in-process and raw materials valued at the lower of cost (determined on the first-in, first-out basis) or net realizable value.
Components of inventory were as follows:
June 30,
2022
December 31,
2021
(in thousands)
Finished goods$10,997 $10,087 
Work-in-process2,901 2,318 
Raw materials16,856 10,088 
            Total inventory30,754 22,493 
7.    Accrued Liabilities
Accrued liabilities consisted of the following:
June 30, 2022December 31, 2021
(in thousands)
Accrued compensation$7,794 $6,798 
       Contingent consideration100 225 
Accrued professional fees1,343 503 
Accrued income tax4,071 328 
Current portion of finance lease liability49 48 
Accrued liabilities - other3,056 1,356 
            Total accrued and other current liabilities$16,413 $9,258 
    


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8.Debt
Long-term debt consisted of the following:
(in thousands)June 30, 2022December 31, 2021
Term Loan (net of debt issuance costs of $82 and $44, 4.05% and 2.48% at June 30, 2022 and December 31, 2021, respectively)
$19,918 $8,290 
Revolving Loan (4.05% and 2.43% at June 30, 2022 and December 31, 2021)
1,300 7,550 
21,218 15,840 
Less: Current portion of long-term debt obligations(2,000)(4,167)
Long-term debt obligations $19,218 $11,673 
PNC Bank Facility
On June 21, 2022 (the “Effective Date”), the Company entered into a Loan Modification Agreement (the “Second Amendment”) in respect of its Loan Agreement, dated as of December 1, 2020 (the “Original Loan Agreement” and as amended by that certain First Amendment to Loan Agreement, dated as of March 10, 2022, and the Second Amendment, the “Loan Agreement”) with PNC Bank, National Association, as lender (the “Lender”) and certain of the Company’s domestic subsidiaries as guarantors, to, among other things, extend the maturity date of the Term Loan and Revolving Line (each as defined below) to June 21, 2027 and increase the total commitments to the Company.
The Loan Agreement provides a $15.0 million revolving credit facility (the “Revolving Line”) and a $20 million term loan facility (the “Term Loan”). On the Effective Date, we borrowed the full amount of the Term Loan from the Lender according to a term note (the “Term Note”), a portion of the proceeds of which were used to refinance the remaining principal amount of the $12.5 million in term loans issued under the Original Loan Agreement, and the remainder of which were used to pay down approximately $13.7 million of the $15.0 million in revolving loans outstanding under the Revolving Line (the “Revolving Loan”) according 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 according to the Revolving Line of Credit Note.
The Term Loan matures on June 21, 2027, which was extended from December 1, 2023 as part of the loan modification. The Term Loan amortizes at a rate equal to 10% for the first year, 15% for years two and three and 20% in years four and five, in each case payable on a quarterly basis. Accrued interest is 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 June 21, 2027. The Term Loan bears interest at a floating per annum rate equal to the sum of (a) the daily simple secured overnight finance rate ("Daily Simple SOFR"), plus (b) an SOFR adjustment of ten basis points (0.10%), plus (c) an applicable margin. The applicable margin ranges from 1.75% to 2.50% per annum, depending on our Net Leverage Ratio (as defined in the Loan Agreement). We may prepay the Term Loan without penalty or premium.

The Revolving Line expires on June 21, 2027, which was extended from December 1, 2023 as part of the loan modification. Borrowings under the Revolving Line bear interest at a floating per annum rate equal to the sum of (a) the Daily Simple SOFR, plus (b) an SOFR adjustment of ten basis points (0.10%), plus (c) an applicable margin. The applicable margin ranges from 1.75% to 2.50% per annum, depending on our Net Leverage Ratio. Accrued interest is due and payable on the first day of each month and the outstanding principal balance and any accrued but unpaid interest is due and payable on June 21, 2027. The unused portion of the Revolving Line accrues a fee equal to 0.20% per annum multiplied by the quarterly average unused amount. The unused Revolving Line totaled $13.7 million at June 30, 2022.
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 (beginning in the third quarter ended September 30, 2022), 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. For the quarter ended June 30, 2022, we were initially subject to a minimum adjusted EBITDA level which was not met as of June 30, 2022 but was subsequently waived. We expect to be in compliance with the minimum net leverage and fixed charge coverage financial covenants for the next twelve months.
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.


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Maturities on debt are as follows (in thousands):
Year Ending December 31,Amount
2022 (remaining 6 months)992 
20232,484 
20242,984 
20253,484 
20263,984 
2027 and thereafter7,290 
Total$21,218