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
(Exact name of registrant as specified in its charter)
_____________________________________
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |||||||
(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 class | Trading Symbol | Name of each exchange on which registered | ||||||
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 ☐
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.
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. | ||||||||
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PART I. FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS | ||||
Luna Innovations Incorporated
Consolidated Balance Sheets (Unaudited)
(in thousands, except share data)
| June 30, 2022 | December 31, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Contract assets | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Assets held for sale | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other non-current assets | |||||||||||
| Deferred tax asset | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ equity | |||||||||||
| Liabilities: | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt obligations | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued and other current liabilities | |||||||||||
| Contract liabilities | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Liabilities associated with assets held for sale | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt obligations, net of current portion | |||||||||||
| Long-term portion of operating lease liabilities | |||||||||||
| Deferred tax liability | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 13) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, par value $ | |||||||||||
Treasury stock at cost, | ( | ( | |||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expense: | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Research, development and engineering | |||||||||||||||||||||||
| Total operating expense | |||||||||||||||||||||||
| Operating loss | ( | ( | ( | ( | |||||||||||||||||||
| Other income/(expense): | |||||||||||||||||||||||
| Other income | |||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Total other expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Loss from continuing operations before income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax expense/(benefit) | ( | ( | ( | ||||||||||||||||||||
| Net loss from continuing operations | ( | ( | ( | ( | |||||||||||||||||||
Income from discontinued operations, net of income tax expense (benefit) of ($ | |||||||||||||||||||||||
Gain on sale of discontinued operations, net of tax of $ | |||||||||||||||||||||||
| Net income from discontinued operations | |||||||||||||||||||||||
| Net (loss)/income | ( | ( | ( | ||||||||||||||||||||
| Net loss per share from continuing operations: | |||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net income per share from discontinued operations: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Net (loss)/income per share attributable to common stockholders: | |||||||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Diluted | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Weighted average shares: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
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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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net (loss)/income | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Other comprehensive (loss)/income | ( | ( | ( | ||||||||||||||||||||
| Total other comprehensive (loss)/income | $ | ( | $ | ( | $ | $ | |||||||||||||||||
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 Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||||||||||||||
| Shares | $ | Shares | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| ESPP issuance | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | ( | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | ( | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive (Loss)/Income | Total | ||||||||||||||||||||||||||||||||||||||||||
| Shares | $ | Shares | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| ESPP issuance | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | ( | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | ( | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
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| Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||||||||||||||
| Shares | $ | Shares | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| ESPP issuance | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | ( | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | ( | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive (Loss)/Income | Total | ||||||||||||||||||||||||||||||||||||||||||
| Shares | $ | Shares | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | ( | ( | ( | $ | |||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| ESPP issuance | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | ( | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | ( | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
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Luna Innovations Incorporated
Consolidated Statements of Cash Flows (Unaudited)
(in thousands, except share data)
| Six Months Ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows used in operating activities | |||||||||||
| Net income/(loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income/(loss) to net cash used in operating activities | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation | |||||||||||
| Gain on sale of discontinued operations, net of tax | ( | ||||||||||
| Deferred taxes | ( | ||||||||||
| Tax benefit from release of valuation allowance | |||||||||||
| Change in assets and liabilities | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Contract assets | |||||||||||
| Inventory | ( | ( | |||||||||
| Other current assets | ( | ( | |||||||||
| Other long-term assets | |||||||||||
| Accounts payable and accrued and other current liabilities | ( | ||||||||||
| Contract liabilities | ( | ||||||||||
| Other long-term liabilities | ( | ||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows used in investing activities | |||||||||||
| Acquisition of property and equipment | ( | ( | |||||||||
| Intangible property costs | ( | ||||||||||
| Proceeds from sale of property and equipment | |||||||||||
| Proceeds from sale of discontinued operations | |||||||||||
| Acquisition of Lios | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows provided by/(used in) financing activities | |||||||||||
| Payments on finance lease obligations | ( | ( | |||||||||
| Proceeds from borrowings under debt obligations | |||||||||||
| Payments of debt obligations | ( | ( | |||||||||
| Repurchase of common stock | ( | ( | |||||||||
| Proceeds from ESPP | |||||||||||
| Proceeds from the exercise of options | |||||||||||
| Net cash provided by/(used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ||||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||
| Cash and cash equivalents—beginning of period | |||||||||||
| Cash and cash equivalents—end of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash received for income tax refund, net | $ | $ | |||||||||
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.
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.
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.
9
•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.
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.
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, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | |||||||||||||||||||
| Cost of revenues | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Operating (loss)/income | ( | ||||||||||||||||||||||
| Income tax (benefit)/expense | ( | ||||||||||||||||||||||
| Net income from discontinued operations, net of tax | $ | $ | $ | $ | |||||||||||||||||||
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 | $ | ||||
| Inventory | |||||
| Contract assets | |||||
| Prepaid expenses and other current | |||||
| Property and equipment, net | |||||
| Intangible assets, net | |||||
| Operating lease ROU asset | |||||
| Other assets | |||||
| Assets held for sale | $ | ||||
| Accounts payable | |||||
| Accrued and other current liabilities | |||||
| Contract liabilities | |||||
| Current portion of operating lease liabilities | |||||
| Long-term portion of operating lease liabilities | |||||
| Liabilities associated with assets held for sale | $ | ||||
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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, | |||||||||||
| 2022 | 2021 | ||||||||||
| Depreciation and amortization | $ | $ | |||||||||
| Share-based compensation | |||||||||||
| Acquisition of property and equipment | |||||||||||
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 | $ | |||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Property and equipment | ||||||||
| Intangible assets | ||||||||
| Goodwill | ||||||||
| Operating lease right-of-use asset | ||||||||
| Accounts payable | ( | |||||||
| Accrued and other current liabilities | ( | |||||||
| Current portion of operating lease liability | ( | |||||||
| Deferred income tax liability | ( | |||||||
| Long-term portion of operating lease liability | ( | |||||||
| Total purchase consideration | $ | |||||||
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The identifiable intangible assets and their estimated useful lives were as follows:
| Estimated | ||||||||||||||
| Useful Life | (in thousands) | |||||||||||||
| Developed technology | ||||||||||||||
| Customer relationships | ||||||||||||||
| Trade names and trademarks | ||||||||||||||
| Backlog | ||||||||||||||
| $ | ||||||||||||||
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.
4. Intangible assets, net
Intangible assets, net at June 30, 2022 and December 31, 2021 consisted of the following:
| Estimated Life | June 30, 2022 | December 31, 2021 | ||||||||||||
| (in thousands) | ||||||||||||||
| Patent costs | $ | $ | ||||||||||||
| Developed technology | ||||||||||||||
| In-process research and development | N/A | |||||||||||||
| Customer base | ||||||||||||||
| Trade names | ||||||||||||||
| Backlog | ||||||||||||||
| Accumulated amortization | ( | ( | ||||||||||||
| $ | $ | |||||||||||||
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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) | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 & beyond | ||||||||
| Total | $ | |||||||
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, 2021 | |||||
| Acquisition of Lios | |||||
| Foreign currency translation | ( | ||||
| Balance as of June 30, 2022 | $ | ||||
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 | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Raw materials | |||||||||||
| Total inventory | |||||||||||
7. Accrued Liabilities
| June 30, 2022 | December 31, 2021 | ||||||||||
| (in thousands) | |||||||||||
| Accrued compensation | $ | $ | |||||||||
| Contingent consideration | |||||||||||
| Accrued professional fees | |||||||||||
| Accrued income tax | |||||||||||
| Accrued liabilities - other | |||||||||||
| Total accrued and other current liabilities | $ | $ | |||||||||
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8.Debt
| (in thousands) | June 30, 2022 | December 31, 2021 | ||||||||||||
Term Loan (net of debt issuance costs of $ | $ | $ | ||||||||||||
Revolving Loan ( | ||||||||||||||
| Less: Current portion of long-term debt obligations | ( | ( | ||||||||||||
| Long-term debt obligations | $ | $ | ||||||||||||
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 20 0.10 %), plus (c) an applicable margin. The applicable margin ranges from 1.75 % to 2