UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
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x☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20172022
OR
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-52008
LUNA INNOVATIONS INCORPORATED
(Exact name of Registrant as Specified in its Charter)
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| Delaware | | 54-1560050 |
| (State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
301 1st St 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:
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Title of Each Classeach class | Trading Symbol | Name of Each Exchangeeach exchange on which Registeredregistered |
Common Stock, $0.001 par value $0.001 per share | LUNA | The NASDAQNasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 x¨ No ¨x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”filer,”
“smaller reporting company,” and “smaller reporting company”"emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ¨ | ☐ | Accelerated filer¨ | ☐ |
Non-accelerated filer¨ (Do not check if a smaller reporting company) | ☒ | Smaller reporting companyx | ☒ |
| 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. o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2017,2022 based upon the closing price of Common Stock on such date as reported by the NASDAQNasdaq Capital Market, was approximately $40.1$182.2 million.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x 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 March 15, 201814, 2023 there were 28,356,32233,420,773 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the registrant’s Proxy Statement with respect to its 20172023 Annual Meeting of stockholders, anticipated to be filed within 120 days after the end of its fiscal year ended December 31, 2017,2022, are incorporated by reference into Part III of this annual report on Form 10-K.
LUNA INNOVATIONS INCORPORATED
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 20172022
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” section in Item 7 of this report, and other materials accompanying this Annual Report on Form 10-K contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including those relating to future events or our future financial performance. In some cases, you can identify these forward- looking statements by words such as “intends,” “will,” “plans,” “anticipates,” “expects,” “may,” “might,” “estimates,” “believes,” “should,” “projects,” “predicts,” “potential” or “continue,” or the negative of those words and other comparable words, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. Similarly, statements that describe our business strategy, goals, prospects, opportunities, outlook, objectives, plans or intentions are also forward-looking statements. These statements are only predictions and may relate to, but are not limited to, expectations of future operating results or financial performance, capital expenditures, introduction of new products, regulatory compliance, plans for growth and future operations, the potential benefits of our recent acquisitions and dispositions, as well as assumptions relating to the foregoing.
These statements are based on current expectations and assumptions regarding future events and business performance and involve known and unknown risks, uncertainties and other factors that may cause actual events or results to be materially different from any future events or results expressed or implied by these statements. These factors include those set forth in the following discussion and within Item 1A “Risk Factors” of this Annual Report on Form 10-K and elsewhere within this report.
You should not place undue reliance on these forward-looking statements, which apply only as of the filing date of this Annual Report on Form 10-K. You should carefully review the risk factors described in other documents that we file from time to time with the U.S. Securities and Exchange Commission (“SEC”). Except as required by applicable law, including the rules and regulations of the SEC, we do not plan to publicly update or revise any forward-looking statements, whether as a result of any new information, future events or otherwise, other than through the filing of periodic reports in accordance with the Securities Exchange Act of 1934, as amended.
We have proprietary rights to a number of trademarks used in this Annual Report which are important to our business. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the ® and TM symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. All other trademarks, trade names and service marks appearing in this Annual Report are the property of their respective owners.
RISK FACTORS SUMMARY
Our business is subject to a number of risks and uncertainties, including those risks discussed at-length below. These risks include, among others, the following:
•Risks Relating to our Business
◦We depend on third-party vendors for specialized components in our manufacturing operations, making us vulnerable to supply shortages and price fluctuations that could harm our business.
◦As a provider of contract research to the U.S. government, we are subject to federal rules, regulations, audits and investigations, the violation or failure of which could adversely affect our business.
◦Some of our technology is in-licensed from Intuitive Surgical, Inc., which is revocable in certain circumstances. Without this license, we cannot continue to market, manufacture or sell a portion of our fiber-optic products.
◦Our products must meet exacting specifications, and defects and failures may occur, which may cause customers to return or stop buying our products.
◦The markets for many of our products are characterized by changing technology which could cause obsolescence of our products, and we may incur substantial costs in delivering new products.
•Risks Relating to our Operations and Business Strategy
◦If we fail to properly evaluate and execute our strategic initiatives, it could have an adverse effect on our future results and the market price of our common stock.
◦We are experiencing impacts from inflationary pressures, including with respect to labor and materials costs, which could adversely impact our profitability and cash flow.
◦Health epidemics, including the COVID-19 pandemic, have had, and could in the future have, an adverse impact on our business, operations, and the markets and communities in which we and our customers and suppliers operate.
•Risks Relating to our Regulatory Environment
◦Our operations are subject to domestic and foreign laws, regulations and restrictions, and noncompliance with these laws, regulations and restrictions could expose us to fines, penalties, suspension or debarment, which could have a material adverse effect on our profitability and overall financial position.
◦We are or may become subject to a variety of privacy and data security laws, and our failure to comply with them could harm our business.
•Risks Relating to our Intellectual Property
◦Our proprietary rights may not adequately protect our technologies.
◦Third parties may claim that we infringe their intellectual property, and we could suffer significant litigation or licensing expense as a result.
•Risks Relating to our Common Stock
◦Our common stock price has been volatile and we expect that the price of our common stock will fluctuate substantially in the future, which could cause you to lose all or a substantial part of your investment.
◦Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws and Delaware law could discourage or prevent a change in control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management.
PART I
ITEM 1. BUSINESS
Company Overview and Business Model
Luna Innovations Incorporated ("we" or the "Company") is a leader in advanced optical technology, providing high performance fiber optic test, measurement and control products for the telecommunications industryand photonics industries; and distributed fiber optic sensing solutions that measure and monitor materials and structures for applications in aerospace, automotive, oil and gas, security and infrastructure. We have a broad range of products for these applications based on proprietary technology covered by a portfolio of over 700 patents either owned or exclusively in-licensed.
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. Our test and measurement products accelerate the aerospacedevelopment of high speed fiber optic components like photonic integrated circuits ("PICs"), coherent receivers and automotive industries. short-run fiber networks.
Our distributed fiber optic sensing products provide criticalhelp designers and manufacturers more efficiently develop new and innovative products by measuring stress, strain, and temperature information to designers and manufacturers working with composite and other advanced materials. Our communications test products accelerate the development of advancedat a high resolution for new designs or manufacturing processes. In addition, our distributed fiber optic componentssensing products ensure the safety and networksstructural integrity or operational health of critical assets in the field, by providing fastmonitoring stress, strain, temperature and highly accurate characterization of componentsvibration in large civil and networks. In addition, we develop and manufacture custom optoelectronic products that are sold to scientific or industrial instrumentation manufacturers and to defense contractors for various applicationsinfrastructure such as metrology, missile guidance, flame monitoring,bridges, roads, pipelines and temperature sensing.borders. We manufacture and sell “terahertz” (THz) products for layer thickness measurements for materials like plastics, rubber, and paint. Our THz products are used in the aerospace and automotive/EV sectors. We also provide applied research services, typicallyprimarily under researchfederally funded development programs funded by the U.S. government, in areas of advanced materials,that leverage our 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 ofinstrumentation technologies to perform applied research services for companiesmeet the specific needs and for government funded projects. We continueapplications of our customers.
Prior to invest in product development and commercialization, whichSeptember 30, 2021, we anticipate will lead to increased product sales growth.
We arewere organized into two main businessreporting segments, our Products and LicensingLightwave 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. Our Lightwave segment consists of our fiber optics testing, measurement and sensing solutions. 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.
Dispositions and Acquisitions
Luna Labs
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 fees. We had been actively marketing our Luna Labs segment to prospective buyers during 2021 as part of our growth strategy for our Lightwave segment.
LIOS Sensing
On March 10, 2022, we acquired NKT Photonics GmbH and LIOS Technology Development segment. Inc. (collectively, “LIOS Sensing”) for €20.0 million, or $22.1 million. LIOS Sensing, based in Cologne, Germany and formerly owned by NKT Photonics A/S, provides temperature and strain sensing products which are highly complementary to our existing portfolio of fiber optic offerings.
Lightwave
Our Products and LicensingLightwave segment develops, manufactures and markets optical measurement technologies, including the following:
•Sensing, including
–short, medium and long-range distributed fiber optic sensing products, as well assolutions; and
–Terahertz, “THz” measurement products.
•Communications test & measurement products, and also conducts applied research in the fiber optic sensing areaphotonic control, including
–test equipment for both corporatecommunications devices and networks; and
–specialty laser and photonic components.
and government customers. We are continuing to develop and commercialize our fiber optic technology for strain and temperature sensing applications for the aerospace, automotive, and energy industries. Our Products and Licensing segment revenues represented approximately 60% and 61%
Our Technology DevelopmentLightwave segment also performs applied research principally in the areas of optical sensing & instrumentation, advanced materials, and health sciences. Our Technology Development segment comprised approximately 40% and 39% of our total revenues for the years ended December 31, 2017 and 2016, respectively. Most of the government funding for our Technology Development segment is derived from the Small Business Innovation Research ("SBIR") program coordinated by the U.S. Small Business Administration ("SBA").
Our SBIR research is focused on technological areas with commercial potential and we strive to commercialize any resulting scientific advancements. For the year ended December 31, 2017, approximately 37% of our total revenues were generated under the SBIR program, compared to 34% for the year ended December 31, 2016.
For the years ended December 31, 2017 and 2016, 48% and 41%, respectively, of our total revenues were derived from the U.S. government.
Merger with Advanced Photonix, Inc. and Subsequent Sale of HSOR Business
On May 8, 2015, we completed a merger with Advanced Photonix, Inc. ("API"), pursuant to the Agreement and Plan of Merger and Reorganization (the "Merger Agreement"), dated as of January 30, 2015, by and among Luna, API and API Merger Sub, Inc., our wholly owned subsidiary ("API Merger Sub"). In accordance with the terms of the Merger Agreement, upon the completion of the merger, API Merger Sub merged with and into API, with API surviving as our wholly-owned subsidiary. In the merger, former API stockholders received 0.31782 shares of our common stock for each share of API common stock they owned at the effective time of the merger.
API was a leading test & measurement company that packaged optoelectronic semiconductors into high-speed optical receivers ("HSOR"), custom optoelectronic sub systems and Terahertz instrumentation, serving the test & measurement, telecommunications, military/aerospace and medical markets. API had manufacturing facilities located in Camarillo, California and Ann Arbor, Michigan, both of which have remained in operation following the merger.
On August 9, 2017, we completed the sale of the HSOR business, which we had acquired as part of the merger with API, to an unaffiliated third party for an initial purchase price of $33.5 million, of which $29.5 million in cash has been received, and $4.0 million was placed into escrow until December 15, 2018 for possible working capital adjustments to the purchase price and potential satisfaction of certain post-closing indemnification obligations.
Products and Licensing
In addition to the operations of API acquired in May 2015, our Products and Licensing segment includes the sale of fiber optic test & measurement instruments. We provide fiber optic test & measurement products which provide solutions primarily for the telecommunications industry marketed under the Luna Technologies brand. We also market our ODiSI platform of products for distributed sensing of strain and temperature utilizing optical fiber.THz technologies.
Our key initiative for long term growth is to become a leading provider of products and solutions in these two markets. For our sensing market, the acquisition of OptaSense Holdings Limited ("OptaSense") in 2020 added distributed acoustic sensing technology to our existing suite of sensing products and provided for expansion into high-growth markets such as security and perimeter detection, smart infrastructure monitoring and oil and gas. Our products have historically been strong shorter-range and discrete applications, which are best when specific, known locations need to be monitored. OptaSense's product offering has helped us fill a gap for long range, fully distributed measurement, which is best for applications where signals can occur anywhere along the length of the sensor.
The addition of the Lios sensing portfolio brings long range, distributed temperature and strain measurement capability to our sensing solutions portfolio. This additional capability compliments our sensing products to bring what we believe is a complete set of fiber optic testmeasurement and measurement equipment, including products for strain and temperature sensing systems and standard test methods based upon the ODiSI product platform and products for the characterization of high speed fiber optic components and networks, including the growing silicon photonics market. monitoring solutions.
Our two primary product lines in our Products and Licensing segmentmarkets as described above are described in more detail below.
Communications Test & Measurement, Sensing, and InstrumentationPhotonic Controls Products
Test &and Measurement Equipment for Fiber Optic Components and Sub-Assemblies
Our product lines in theoptical test & measurement domain include our Optical Vector Analyzer, our Optical Backscatter Reflectometer, and the Phoenix family of tunable lasers.
Historically, our test & measurement products have primarily servedserve the telecommunications industry, as well as provide valuable applications in other fields. Our test &and measurement products test and monitor the integrity of fiber optic network components and sub-assemblies. These products are designed for manufacturers and suppliers of optical components and sub-assemblies and allowallowing them to reduce development, test and production costs and improve the quality of their products.
Our products are particularly useful for characterizing and testing photonic integrated circuits, such as silicon photonics components, which are a critical technology enabling the growing worldwide demand for internet connectivity. Most manufacturers and suppliers of optical components and modules currently use a combination of different types of optical test equipment to
identify measure performance and measureidentify failures in optical networks, such as bad splices, bends, crimps and other reflective and non-reflective events that can cause defects and negatively impact product performance. Our optical test equipment products replaceeliminate the need to employ multiple test products by addressing all stages of the end user’s product development lifecycle, including design verification, component qualification, assembly process verification and failure analysis.
Polarization Control
ODiSI Sensing Solution; Optical Distributed Sensor Interrogator
Our ODiSIpolarization control products provide fully distributed straininclude components, modules and temperature measurementsinstruments to measure, manage and deliver an extraordinary amountcontrol polarization and group delay in fiber optic networks. The laser light that is used in all modern fiber communication and other photonic architectures is polarized in nature. We manufacture the tools used to measure, monitor and manipulate the polarization of data by using an optical fiber as a continuous sensor for up to 50 meterslaser light in length. Compared to traditional sensing methods, such as electrical strain gages, this technology provides greater insight into the performance, tolerances and failure mechanisms of composite structures and vehicles. We believe the technology can provide exceptional value to the aerospace and automotive industries as they transition from steel and aluminum to composite structures.
We have significant expertise in distributed sensing systems, such as ODiSI, which are products composed of multiple sensors whose inputs are integrated through a fiber optic network and software. These products usesystem or network.
Our proprietary fiber optic sensingsqueezing technology with an innovative monitoringenables a high- performance polarization control and measurement system that allows several thousand sensors to be networked along a singlefor the accurate measurement of polarization properties of light sources and optical fiber.materials. We also manufacture and sell fiber optic coils for use in gyroscopes.
Tunable Lasers
We have acquired the rights to manufacture a line of Our swept tunable lasers to allow us to compete more effectively in our existing fiber optic test & measurement as well as sensing markets. This technology is beingare integrated into current and new products to help us provide our customers withbuild faster, more flexible and cost-effective test &and measurement products. TheOur laser has desirable properties in the quality of the laser light produced, the speed at which it can operate, the small size of the package, and the environmental conditions in which it can operate. We believe that these traits makeoperate, making it possible for us to move our fiber optic sensingbring these capabilities out of the laboratory, and into more demanding environments such as aircraft structural health monitoring, automotive manufacturing, green energy and industrial applications.
Optoelectronic SolutionsWe have developed and/or licensed all of the intellectual property related to our tunable lasers and we manufacture them. These lasers are used in our various different product platforms and are also sold as OEM modules to our customers in applications including fiber sensing and medical robotics.
Single Frequency Lasers
Through the acquisition of OptaSense, we acquired laser manufacturing capabilities for a range of highly coherent, integrated, very narrow line-width lasers for use in long range sensing applications. These lasers are manufactured under our “RIO” trade name and are used as the primary light source for our long range, DAS sensing products. We also sell these lasers as OEM components to other sensing and Light Detection and Ranging ("LiDAR") system manufacturers.
Sensing and Non-Destructive Test Products
ODiSI Sensing Solution
Our ODiSI products provide fully distributed strain and temperature measurements delivering an extraordinary amount of information by using an optical fiber as a continuous sensor to produce measurements every millimeter for a sensor up to 50 meters in length (x8 sensors per system). Compared to traditional sensing methods, such as electrical strain gages, this technology provides greater insight into the performance, tolerances and failure mechanisms of composite structures and vehicles and can be integrated into locations and environments not accessible with traditional sensors. We believe our ODiSI products provide exceptional value to the aerospace and automotive industries as they continue to adopt electrification and move to lighter weight systems made of composite structures.
ODiSI incorporates multiple channels of fiber optic sensors whose inputs are integrated through an advanced measurement system and software using fiber optic sensing technology with our innovative monitoring system that allows several thousand sensors to be networked along a single optical fiber.
Distributed Temperature Sensing (DTS) System
Our optoelectronics products are soldDTS system, which we acquired as part of the LIOS business, monitors temperature over long distances or across large surfaces, such as submarine or underground power cables, by using a single strand of optical fiber as a sensor as an alternative to installing countless numbers of conventional sensors. DTS uses light scattering in the fiber to measure temperature. Because the DTS system can accurately locate the position down the length of the fiber that the scattering is originated, temperature can be mapped with high precision and accuracy over very long lengths.
DTS provides a numberlong range, fully distributed temperature and strain sensing capability that complements our legacy offerings, brings a diverse, blue-chip customer base, representing a significant opportunity for cross-selling, expands our intellectual property portfolio, augments our international presence, building upon our already strong international customer base and sales capability, generates rapid expansion opportunities into high-growth markets such as green energy power generation, smart infrastructure monitoring and oil and gas, and leverages our acquisition of scientific instrumentation manufacturersLIOS to grow our operations, customer base, offerings, and defense contractors for variousfinancial profile.
Because DTS uses passive optical fibers as distributed sensors, a LIOS sensing system is immune to vibration, electromagnetic noise, dust, cryogenic temperatures, and moisture. Our DTS sensing systems have been installed worldwide in critical applications such as metrology, missile guidance, flamefire detection in road and rail tunnels, special hazardous buildings, power cable and aerial transmission line monitoring, temperaturein oil & gas exploration, and in industrial induction furnaces and LNG tanks.
Hyperion Sensing Solution
Our Hyperion sensing particle detection, colorproducts expand our capabilities in fiber optic sensing infrared detection,by providing distributed sensing using hundreds of Fiber-Bragg Grating ("FBG") or Extrinsic Fabry-Perot ("FP") sensors integrated into long-rage sensors of up to 40km in length, measured at sampling rates up to 5KHz. Hyperion enables rapid full-spectrum data acquisition and many otherflexible peak detect algorithms of FBGs, Long Period FBGs and FP sensors with low-latency access to data for closed-loop feedback applications. Our Hyperion products target fiber optic sensing applications that can only be done through optical sensing.require more dynamic measurement capabilities or longer distances than provided by our ODiSI platform, like monitoring of large, civil and industrial infrastructure.
Terahertz Sensing Systems
Our THz systems are usedgauging and imaging product line uses pulsed THz waves to provide precise single- and multi-layer thickness, density, basis weight and caliper thickness measurements to serve the industrial, non-destructive testing, and research markets. Similar to x-ray images, THz wavelengths penetrate through most non-conductive materials and can easily reveal imperfections such as voids, cracks, and density variations. THz offers a significant advantage over x-rays because the radiation is non-ionizing and thus is completely safe. THz technology, unlike other traditional methods, is non-contact, works with both opaque and translucent materials, and works well for multilayer structures. The ability to accurately measure layer thickness is critical for ensuring consistent quality, minimizing defects and reducing material usage for products such as tubing, tires, plastic bottles, adhesives and coatings. Handheld THz sensors can measure and verify physical properties on-linescan specialty coatings and in real-timemultilayer structures to reduce raw materialscheck thickness consistency and rework costs in manufacturing processes as well as to conduct quality control monitoring.locate subsurface defects. THz is a region of the electromagnetic spectrum that lies between microwave and infrared waves and is in the early stages of adoption. While microwaves and infrared waves have been explored and commercialized for decades, THz waves are in the early stages of being explored and commercialized due to the fact that they have historically been very difficult to generate and detect. Advances in femtosecond lasers and ultra-fast semiconductor and electro-optic devices combined with fiber-optic packaging technologies have enabled the development of practical THz instrumentation for the research market with increasing adoption in the industrial, military and aerospace markets. THzsystems can be used to "look"inspect the high-performance coatings used on military aircraft, verifying thickness of applied coatings with submicron accuracy.
Distributed Acoustic Sensing Products
Our line of advanced DAS interrogator units delivers superior measurements for a wide range of applications from advanced industrial monitoring through high performance geophysical measurements. Applications of these units include real-time pipeline monitoring preventing disruption flow, advance monitoring and beneath materials with high two-dimensionalevaluation of reservoir and three-dimensional spatial resolution. It can also uniquely identifywellbore to reduce risk and optimize recovery, real-time information detection on highways and railways for traffic management and ensuring safety, cost-effective surveillance of borders and national assets and the chemical compositionprecise detection of many hidden or subsurface objects using non-ionizing radiation, which is not harmful to humans atfaults in power and utility infrastructure. Our DAS operations include a market leading laser technology company that supports and vertically integrates the power levels commonly used today. We market our THz based products as our T-Ray product platform through value added resellers.most critical element of the DAS system, its internal laser.
Sales and Marketing
We primarily market our fiber optic test, & measurement and control products to telecommunications companies, defense agencies, government system integrators, researchers, original equipment manufacturers, distributors, testing labs and strategic partners worldwide. We have a regional sales force that markets and sells our products directly as well as through manufacturer representative organizations to customers in North America and through partner and distribution channels for other sales aroundoutside of North America, including the world.EMEA, LATAM and APAC regions. We have a dedicated sales force for direct marketing of our distributed sensing products, with an initial focus on customers in the automotive, aerospace, and energy industries.
We sell and market our THz instruments and our optoelectronic components or sub-assemblies primarily to original equipment manufacturers through a mix of technical sales engineers, value added resellers and independent sales representatives. We
market these products and capabilities through industry specific channels, including the internet, industry trade shows and in print through trade journals.
We believe that we provide a high level of support in developing and maintaining our long-term relationships with our customers. Customer service and support are provided through our offices and those of our partners that are located throughout the world.
Technology Development
We provide applied research for customers in our primary areas of focus, including sensing and materials such as nanomaterials, coatings, adhesives, composites and bio-engineered materials. We generally compete to win contracts in these areas on a fee-for-service basis. Our Technology Development segment has a successful track record of evaluating innovative technologies to address the needs of our customers.
We seek to maximize the benefits we derive from our contract research business, including revenue generation and identification of promising technologies for further development. We focus primarily on opportunities in which we develop intellectual property rights in areas that we believe have commercialization potential. We take a disciplined approach to contract research to try to ensure that the costs of any contract we undertake will be fully reimbursed. We believe that this model is cost-efficient and significantly reduces our development risk in that it enables us to defray the costs of higher risk technology development with third-party funding.
Although we conduct our applied research on a fee-for-service basis for third parties, we seek to retain full or partial rights to the technologies and patents developed under those contracts and to continuously enlarge and strengthen our intellectual property portfolio. New technology that we develop may complement existing technologies and enable us to develop applications and products that were not previously possible. In addition, the technologies we develop may also be applicable to commercial markets beyond the scope of the applications originally contemplated in the contract research stage, and we endeavor to capture the value of those opportunities. Funded research and development within this business segment was $18.6 million and $16.3 million for the years ended December 31, 2017 and 2016, respectively.
Each year, U.S. government federal agencies and departments are required to set aside a portion of their grant awards for SBIR-qualified organizations. SBIR contracts include Phase I feasibility contracts of up to $225,000 and Phase II proof-of-concept contracts, which can be as high as $1,500,000. We have won three National Tibbetts Awards from the SBA for outstanding SBIR performance. We have also won research contracts outside the SBIR program from corporations and government entities. These contracts typically have a longer duration and higher value than SBIR grants. In the future, we will seek to derive a larger portion of our contract research revenues from contracts outside of the SBIR program.
Materials
We are actively developing a wide variety of materials. For example, we have developed a range of coatings, including both hydrophobic and superoleophobic coatings. These coatings are being evaluated for use in a number of applications. Other coatings under development include anti-corrosion and damage-indicating coatings.
We are also working on a variety of bioengineered materials for homeostatic agents and wound healing. These materials must be approved by the FDA or similar foreign regulatory agencies before they can be marketed, which we do not expect to occur for at least several years, if at all.
Sensing
Our Technology Development segment also performs a significant amount of applied research towards developing new sensors. This includes sensors for the purpose of corrosion, temperature, strain, pressure, structural health, and chemical detection. Much of the work is directed to harsh environments and uses optics. Examples include measuring temperature and neutron flux in nuclear reactors, pressure and temperature in gas turbines, and temperatures of cryogenic lines. The effort utilizes both discrete and distributed sensors. Our technology development work in this area is closely aligned with our Products and Licensing segment and is directed at advancing the technology and the development of new applications.
Intellectual Property
We seek patent protection on inventions that we consider important to the operations of our business. We rely on a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We control access to
our proprietary technology and enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties.
Our success depends in part on our ability to develop patentable products and obtain, maintain and enforce patent and trade secret protection for our products, as well as toincluding successfully defend thesedefending our patents against third-party challenges both in the United States and in other countries. We will only be able to protect our technologies from unauthorized use by third parties to the extent that we own or have licensed valid and enforceable patents or trade secrets that cover them. Furthermore, the degree of future protection of our proprietary rights is uncertain because we may not be able to obtain patent protection on some or all of our technology and because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.
Currently, we own or license approximately 247745 U.S. and international patents and approximately 26868 U.S. and international patent applications, and we intend to file, or request that our licensors file, additional patent applications for patents covering our products.applications. Our issued patents generally have terms that are scheduled to expire between 20182023 and 2037.2042. The patents scheduled to expire in 20182023 are not expected to have a significant impact on our revenues or results of operations. However, patentsPatents may not be issued for any pending or future pending patent applications owned by or licensed to us. Claims allowed under any issued patent or future issued patent owned or licensed by us may not be valid or sufficiently broad to protect our technologies. Any issued patents owned by or licensed to us now or in the future may be challenged, invalidated or circumvented, and, in addition, the rights under such patents may not provide us with competitive advantages. In addition, competitors may design around our technology or develop competing technologies. IntellectualTo the extent we elect to pursue, intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture or increase their market share with respect to related technologies.
A discussion of our material in-licensed patents and patent applications is set forth below.
NASA Patents
We have licensed, on a non-exclusive basis, four U.S. patents and related patents in Japan, Canada, Germany, France, Great Britain and Belgium from the National Aeronautics and Space Administration, an agency of the U.S. government (“NASA”), which patents concern the measurement of strain in optical fiber using Bragg gratings and Rayleigh scatter and the measurement of the properties of fiber-optic communications devices. These patents expire between March 2020 and September 2020.
Coherent Patents
We have licensed, on a non-exclusive basis, several U.S. patents and other intellectual property rights owned or controlled by Coherent, Inc., related to the manufacturing, using, importing, selling and offering for sale of Coherent’s “Iolon” brand of swept tunable lasers, which we market under our “Phoenix” brand. These patents expire between 2020 and 2025.
Shape Sensing Patents
As a part of our sale of assets associated with our fiber optic shape sensing technology in the medical field to Intuitive Surgical, Inc. ("Intuitive") in 2014, we transferred our related patents to Intuitive. Also, as a part of this transaction, we entered into a revocable license agreement with Intuitive pursuant to which we have the right to use all of our transferred technology outside the field of medicine and in respect of our existing non-shape sensing products in certain non-robotic medical fields. The license is
revocable with ability to remedy, but only in the case that Luna were to enter competitively into the medical robotics space. Two U.S. patents that we now license back from Intuitive cover the use of optical frequency domain reflectometry and multiple, closely spaced Bragg gratings for shape sensing, and the use of the inherent scatter as a strain sensor for shape sensing. These two patents expire in July 2025. We also have a license back from Intuitive for apatents and patent applicationapplications that coverscover certain refinements to the measurements covered in the firstforegoing two patents and related technologies, which are necessary in order to achieve the necessary accuracies for medical and other applications. ThisThese patent application wasapplications were filed in the United States, the European Patent Office, China, India, Russia, Brazil, Japan, Indonesia and Indonesia.elsewhere. These patents and patent applications can support other nonmedical applications of our fiber optic shape sensing technology.
Corporate History
We were incorporated in the Commonwealth of Virginia in 1990 and reincorporated in the State of Delaware in April 2003. We completed our initial public offering in June 2006. In May 2015, we merged with API. Our executive offices are located at 301 1st St SW, Suite 200, Roanoke, Virginia 24011 and our main telephone number is (540) 769-8400.
Competition
Material Agreements
Sale of Assets to Intuitive Surgical
On January 17, 2014, we sold to Intuitive Surgical substantially all of our assets related to our medical shape sensing business, including all of the patents and patent applications used or useful for our fiber optical shape sensing and localization technology. We had been engaged since 2007 in a development project for Intuitive developing a fiber optic-based shape sensing and position tracking system to be integrated into Intuitive’s products. Also as a part of the Intuitive transaction, Intuitive has hired certain of our employees, many of whom were historically engaged in this development project.
In connection with the Intuitive transaction, we and Intuitive entered into a license agreement under which we received a license back to all of our transferred technology outside the field of medicine and in respect of our existing non-shape sensing products in certain non-robotic medical fields. The license back to us outside the medical field is exclusive to us except that Intuitive retained certain non-sublicensable rights for itself. This license back to us is revocable if we were, after notice and certain time periods, (i) to challenge the validity or enforceability of the transferred patents and patent applications, (ii) to commercialize our fiber optical shape sensing and localization technology in the field of medicine (except to perform on a development and supply project for Hansen Medical, Inc. ("Hansen")), (iii) to violate our obligations related to our ability to sublicense in the field of medicine or (iv) to violate our confidentiality obligations in a manner that advantages a competitor in the field of medicine and not cure such violation. As a part of the Intuitive transaction, we retained assets and rights necessary to perform on our development and supply project for Hansen if that project is re-started.
Also, as a part of the Intuitive transaction, for a period of 15 years after closing, we agreed to exit and not develop or commercialize our fiber optical shape sensing and localization technology in the field of medicine (except for Hansen as described above). For a period of 10 years after closing, Intuitive has agreed not to use any of the assets being acquired in the Intuitive transaction, including the key employees being hired, to compete with us outside the fielda variety of medicine for shape, strain and/companies in several different product markets. The products that we have developed or temperature sensing in the aerospace, automotive, and energy markets and for strain sensing in the civil structural monitoring and composite material markets.
Sale of High Speed Optical Receiver ("HSOR") Business
On August 9, 2017, we completed the sale of our HSOR business, which was part of our Products and Licensing segment, to an unaffiliated third party for an initial purchase price of $33.5 million, of which $29.5 million in cash has been received, and $4.0 million was placed into escrow until December 15, 2018 for possible working capital adjustments to the purchase price and potential satisfaction of certain post-closing indemnification obligations (the "Transaction"). The HSOR business was a component of the operations of Advanced Photonix, Inc., which we acquired in May 2015. As part of the Transaction, the buyer also hired approximately 49 of our employees who were engaged in the development, manufacture, and sale of HSORare currently developing will compete with other technologically innovative products, in addition to certain corporate administrative functions. We and the buyer entered into a transition services agreement under which each party agreed to provide certain transition services to the other with respect to infrastructure and administration. In connection with the transition services agreement, we paid $0.3 million per month for a period of five months, for a total of $1.5 million, ending in December 2017. We have recorded these payments as a reduction of the value of the purchase price.
Coherent
In December 2006, we entered into an asset transfer and license agreement with Coherent, Inc. Under the agreement, we acquired the rights to manufacture Coherent’s “Iolon” brand of swept tunable lasers as well as certain manufacturing equipmentproducts incorporating conventional materials and inventory previously used by Coherent totechnologies. We expect that we will compete with companies that manufacture the lasers. We continue to enhance, produce, and market these lasers under our “Phoenix” brand. Under this agreement, Coherent granted non-exclusive licenses to us for certain U.S. patents and other intellectual property rights owned or controlled by Coherent for making, having made, using, importing, selling and offering for sale the lasers. This agreement expired in 2016. However, the patent licenses became fully paid and perpetual, as we fulfilled our royalty obligations during the 10-year period and the license to the other intellectual property rights is perpetual. These U.S. patents expire between 2020 and 2025. As consideration, we paid Coherent a total of $1.3 million in addition to paying royalties on net sales of products sold by us that incorporate the lasers or that are manufactured using the intellectual property covered by the licenses. We paid Coherent royalty fees of approximately $78,000 for 2016 product sales. We also agreed to sell Coherent a limited number of lasers each year.
The Phoenix laser is a miniaturized, external-cavity laser offering high performance in a compact footprint and is applicable to a range of fiber optic test and measurement instrumentation,equipment for a wide range of industries, including aerospace, defense, healthcare, telecommunications, energy (including oil and sensinggas and green energy), industrial measurement, and security applications. TheseAlthough there can be no assurance that we will continue to do so, we believe that we compete favorably in these areas because our products employ frequency-tuned lasersleverage advanced technologies to measure various aspects ofoffer superior performance. If we are unable to effectively compete in these areas in the transmission properties of telecommunications fiber optic components and systems. Lasers are also used in fiber optic sensing applications such as distributed strain and temperature mapping, and
distributed measurement of shape. We currently use these lasers within our ODiSI platform of products, our fiber optic shape sensing products and certain of our backscatter reflectometer products, andfuture, we also sell variations of the Phoenix laser as standalone products. Under our agreements relatedcould lose business to our sale of assets to Intuitive, we have certain obligations to supply Intuitive with these lasers and Intuitive has certain rights to require us to transfer and assign this Coherent license to Intuitive, incompetitors, which case Intuitive would be similarly required to supply us with lasers.
NASAcould harm our operating results.
We have licensed, on a non-exclusive basis, certain patents from NASA under two license agreements. These patents concern the measurement of strain in optical fiber using Bragg gratings and Rayleigh scatter, and also the measurement of the properties of fiber-optic communications devices. Under the license agreements, we pay NASA certain royalties based on a percentage of net sales of products covered by the patents. We incur a royalty obligation to NASA based upon a specified percentage of the revenue earned on each product sold utilizing these patents subject to combined minimum royalties of $220,000 per year under the license agreements. The term of the license agreements continues until the expiration of the last licensed patent, which is September 2020. These license agreements may be terminated by us on 90 days' notice. Either party may terminate the license agreements for cause upon certain conditions.
Competition
Wecompete, or will compete, for government, university and corporate research contracts relating to a broad range of technologies. Competition for contract research is intense and the industry has few barriers to entry. We compete against a number of in-house research and development departments of major corporations, as well as a number of small, limited-service contract research providers and companies backed by large venture capital firms. The contract research industry continues to experience consolidation, which has resulted in greater competition for clients. Increased competition might lead to price and other forms of competition that could harm our operating results. We compete for contract research on the basis of a number of factors, including reliability, past performance, expertise and experience in specific areas, scope of service offerings, technological capabilities and price.
We also compete, or will compete, with a variety of companies in several different product markets. The products that we have developed or are currently developing will compete with other technologically innovative products, as well as products incorporating conventional materials and technologies. We expect that we will compete with companies in a wide range of industries, including semiconductors, electronics, biotechnology, textiles, alternative energy, military, defense, healthcare, telecommunications, industrial measurement, security applications and consumer electronics. Although there can be no assurance that we will continue to do so, we believe that we compete favorably in these areas because our products leverage advanced technologies to offer superior performance. If we are unable to effectively compete in these areas in the future, we could lose business to our competitors, which could harm our operating results.
Government Regulation
Qualification for Small Business Innovation Research Grants
SBIR is a highly competitive program that encourages small businesses to explore their technological potential and provides them with incentives to commercialize their technologies by funding research that might otherwise be prohibitively expensive or risky for companies like us. As noted above, we presently derive a significant portion of our revenue from this program, but we must continue to qualify for the SBIR program in order to be eligible to receive future SBIR awards. The eligibility requirements are:
Ownership. The company must be more than 50 percent owned and controlled by U.S. citizens or permanent resident aliens, or owned by an entity that is itself more than 50 percent owned and controlled by U.S. citizens or permanent resident aliens; and
Size. The company, including its affiliates, cannot have more than 500 employees.
These requirements are set forth in the SBA’s regulations and are interpreted by the SBA’s Office of Hearings and Appeals. In determining whether we satisfy the more than 50% ownership requirement, agreements to merge, stock options, convertible debt and other similar instruments are given “present effect” by the SBA as though the underlying security were actually issued unless the exercisability or conversion of such securities is speculative, remote or beyond the control of the security holder. We therefore believe our outstanding options and warrants held by eligible individuals may be counted as
outstanding equity for purposes of meeting the more than 50% equity ownership requirement. We believe that we are in compliance with the SBA ownership requirements.
In addition, to be eligible for SBIR contracts, the number of our employees, including those of any entities that are considered to be affiliated with us, cannot exceed 500. As of December 31, 2017, we, including all of our divisions, had 198 full- and part-time employees. In determining whether we have 500 or fewer employees, the SBA may count the number of employees of entities that are large stockholders who are “affiliated” or have the power to control us. In determining whether firms are affiliated, the SBA evaluates factors such as stock ownership and common management, but it ultimately may make its determination based on the totality of the circumstances. Eligibility protests can be raised to the SBA by a competitor or by the awarding contracting agency. If we grow larger, and if our ownership becomes more diversified, we may no longer qualify for the SBIR program, and we may be required to seek alternative sources and partnerships to fund some of our research and development costs. Additional information regarding these risks may be found below in “Risk Factors.”
Environmental, Health and Safety Regulation
Our facilities and current and proposed activities involve the use of a broad range of materials that are considered hazardous under applicable laws and regulations. Accordingly, we are subject to a number of domestic and foreign laws and regulations and other requirements relating to employee health and safety, protection of the environment, product labeling and product take back. Regulated activities include the storage, use, transportation and disposal of, and exposure to, hazardous or potentially hazardous materials and wastes. Our current and proposed activities also include potential exposure to physical hazards associated with work environment and equipment. We could incur costs, fines, civil and criminal penalties, personal injury and third-party property damage claims, or we could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental, health and safety laws and regulations or requirements. Liability under environmental, health and safety laws can be joint and several and without regard to fault. There can be no assurance that violations of environmental, health and safety laws will not occur in the future as a result of the inability to obtain permits in a timely manner, human error, equipment failure or other causes. Environmental, health and safety laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business. Further, violations of present and future environmental, health and safety laws could restrict our ability to expand facilities and pursue certain technologies, as well as require us to acquire costly equipment or to incur potentially significant costs to comply with environmental, health and safety regulations and other requirements.
We have made, and will continue to make, expenditures to comply with current and future environmental, health and safety laws. We anticipate that we could incur additional capital and operating costs in the future to comply with existing environmental, health and safety laws and new requirements arising from new or amended statutes and regulations. In addition, because the applicable regulatory agencies have not yet promulgated final standards for some existing environmental, health and safety programs, we cannot at this time reasonably estimate the cost for compliance with these additional requirements. The
amount of any such compliance costs could be material. We cannot predict the impact that future regulations will impose upon our business.
EmployeesHuman Capital Management
We seek to fulfill our mission by attracting talented people, fostering innovation and managing aspects of our business in an ethical manner that benefits our stakeholders, including the communities in which we operate. We promote and empower a diverse workforce who are dedicated to helping solve our customers’ toughest challenges. As of December 31, 2017,2022, we had approximately 198 total337 full-time employees and 7 part-time employees, including approximately 10923% employed in research, development and engineering positions, approximately 4852% employed in operations, approximately 1611% employed in sales and marketing, and approximately 25employed 14% in administrative positions. None of our employees are covered by a collective bargaining agreement, and we consider our relationship with our employees to be good.
Backlog
We have historically had a backlog of contracts, primarily within our Technology Development segment, for which work has been scheduled, but for which a specified portion of work has not yet been completed. The approximate value of our backlog was $23.5 million and $17.6 million at December 31, 2017 and 2016, respectively.
We define backlog as the dollar amount of obligations payable to us under negotiated contracts upon completion of a specified portion of work that has not yet been completed, exclusive of revenues previously recognized for work already performed under these contracts, if any. Total backlog includes funded backlog, which is the amount for which money has been directly authorized by the U.S. government or for which a purchase order has been received from a commercial customer, and unfunded backlog, which represents firm orders for which funding has not yet been appropriated. Unfunded backlog was $5.5 million and $2.1 million as of December 31, 2017 and 2016, respectively. Indefinite delivery and quantity contracts and unexercised options are not reported in total backlog. Our backlog is subject to delays or program cancellations that may be beyond our control.
Our backlog of purchase orders received for which the related goods have not been shipped or recognized as revenue within our Products and Licensing segment was $6.9 million and $7.2 millionat December 31, 2017 and 2016, respectively.
Research, Development and Engineering
We incur research, development and engineering expenses that are not related to our contract performance. These expenses were $3.5 million for the years ended December 31, 2017 and 2016. In addition, during these years, we spent $14.0 million and $12.5 million, respectively, on customer-sponsored research activities, which amounts are reimbursed as part of our performance of customer contracts.
Operating Segments and Geographic Areas
For information with respect to our operating segments and geographic markets, see Note 14 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Website Access to Reports
Our website address is www.lunainc.com. We make available, free of charge under “SEC Filings” on the Investor Relations portion of our website, access to our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, as well as amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Information appearing on our website is not incorporated by reference in and is not a part of this annual report. A copy of this annual report, as well as our other periodic and current reports, may be obtained from the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding our filings at www.sec.gov.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below before deciding whether to invest in our common stock. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations and financial results. If any of the following risks actually occurs, our business, financial condition or results of operations could be adversely affected. In such case, the trading price of our common stock could decline and you could lose all or part of your investment. Our filings with the Securities and Exchange Commission also contain forward-looking statements that involve risks or uncertainties. Our actual results could differ materially from those anticipated or contemplated by these forward-looking statements as a result of a number of factors, including the risks we face described below, as well as other variables that could affect our operating results. Past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
RISKS RELATING TO OUR BUSINESS GENERALLY
Our technology is subject to a license from Intuitive, which is revocable in certain circumstances. Without this license, we cannot continue to market, manufacture or sell certain of our fiber-optic products.
As a part of the sale of certain assets to Intuitive, we entered into a license agreement with Intuitive pursuant to which we received rights to use all of our transferred technology outside the field of medicine and in respect of our existing non-shape sensing products in certain non-robotic medical fields. This license back to us is revocable if after notice and certain time periods, we were to (i) challenge the validity or enforceability of the transferred patents and patent applications, (ii) commercialize our fiber optical shape sensing and localization technology in the field of medicine (except to perform on a development and supply project for Hansen Medical, Inc.), (iii) violate our obligations related to our ability to sub-license in the field of medicine or (iv) violate our confidentiality obligations in a manner that advantages a competitor in the field of medicine and not cure such violation. Maintaining this license is necessary for us to conduct our fiber-optic products business, both for our telecom products and our ODiSI sensing products. If this license were to be revoked by Intuitive, we would no longer be able to market, manufacture or sell these products which could have a material adverse effect on our operations.
We depend on third-party vendors for specialized components in our manufacturing operations, making us vulnerable to supply shortages and price fluctuations that could harm our business.
We primarily rely on third-party vendors for the manufacture of the specialized components used in our products. The highly specialized nature of our supply requirements poses risks that we may not be able to locate additional sources of the specialized components required in our business. For example, there are few manufacturers who produce the special lasers used in our optical test equipment. Our reliance on these vendors subjects us to a number of risks that could negatively affect our ability to manufacture our products and harm our business, including interruption of supply. Although we are now manufacturing tunable lasers in low-rate initial production, we expect our overall reliance on third-party vendors to continue. Any significant delay or interruption in the supply of components, or our inability to obtain substitute components or materials from alternate sources at acceptable prices and in a timely manner could impair our ability to meet the demand of our customers and could harm our business.
We depend upon outside contract manufacturers for a portion of the manufacturing process for some of our products. Our operations and revenue related to these products could be adversely affected if we encounter problems with these contract manufacturers.
Many of our products are manufactured internally. However, we also rely upon contract manufacturers to produce the finished portion of some of our optoelectronic componentscertain products and certain lasers. Our reliance on contract manufacturers for these products makes us vulnerable to possible capacity constraints and reduced control over delivery schedules, manufacturing yields, manufacturing quality
control and costs. If the contract manufacturer for our products were unable or unwilling to manufacture our products in required volumes and at high quality levels or to continue our existing supply arrangement, we would have to identify, qualify and select an acceptable alternative contract manufacturer or move these manufacturing operations to internal manufacturing facilities. An alternative contract manufacturer may not be available to us when needed or may not be in a position to satisfy our quality or production requirements on commercially reasonable terms, including price. Any significant interruption in manufacturing our products would require us to reduce the supply of products to our customers, which in turn would reduce our revenue, harm our relationships with the customers of these products and cause us to forego potential revenue opportunities.
As a provider of contract research to the U.S. government contractor, we are subject to federal rules, regulations, audits and investigations, the violation or failure of which could adversely affect our business.
We must comply with and are affected by laws and regulations relating to the award, administration and performance of U.S. government contracts. Government contract laws and regulations affect how we do business with our government customers and, in some instances, impose added costs on our business. A violation of a specific law or regulation could result in the imposition of fines and penalties, termination of our contracts or debarment from bidding on future contracts. In some instances, these laws and regulations impose terms or rights that are more favorable to the government than those typically available to commercial parties in negotiated transactions. Such terms or rights many allow government customers, among others, to:
•terminate existing contracts for convenience with short notice;
•reduce orders or otherwise modify contracts;
•for contracts subject to the Truth in Negotiations Act, reduce the contract price or cost where it was increased because a contractor or subcontractor furnished cost or pricing data during negotiations that was not complete, accurate, and current;
•For example,some contracts, (i) demand a refund, make a forward price adjustment, or terminate a contract for default if a contractor provided inaccurate or incomplete data during the U.S. government may terminate anycontract negotiation process, and (ii) reduce the contract price under triggering circumstances, including the revision of our governmentprice lists or other documents upon which the contract award was predicated;
•cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;
•decline to exercise an option to renew a multi-year contract or issue task orders in general, subcontracts, atconnection with indefinite delivery/indefinite quantity (“IDIQ”) contracts;
•claim rights in solutions, systems, or technology produced by us, appropriate such work-product for their convenience, as well ascontinued use without continuing to contract for defaultour services, and disclose such work-product to third parties, including other government agencies and our competitors, which could harm our competitive position;
•prohibit future procurement awards with a particular agency due to a finding of organizational conflicts of interest based on performance.upon prior related work performed for the agency that would give a contractor an unfair advantage over competing contractors, or the existence of conflicting roles that might bias a contractor’s judgment;
•subject the award of contracts to protest by competitors, which may require the contracting federal agency or department to suspend our performance pending the outcome of the protest and may also result in a requirement to resubmit offers for the contract or in the termination, reduction, or modification of the awarded contract; and suspend or debar us from doing business with the applicable government.
In addition, U.S. government agencies, including the Defense Contract Audit Agency and the Department of Labor, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. The U.S. government also may review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit uncovers the inclusion of certain claimed costs deemed to be expressly unallowable, or improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. In addition, our reputation could suffer serious harm if allegations of impropriety were made against us. In June 2015, we received a determination from the Defense Contract Management Agency ("DCMA")
In addition to the risk of government audits and investigations, U.S. government contracts and grants impose requirements on contractors and grantees relating to ethics and business practices, which carry civil and criminal penalties
including monetary fines, assessments, loss of the ability to do business with the U.S. government and certain other criminal penalties.
We may also be prohibited from using certain foreign-sourced parts, components, materials, or other items in the performance of our government contracts or from commercially selling certain products that we develop under our Technology Development segment or related products based on the same core technologies if the U.S. government determines that the commercial availability of those products could pose a risk to national security. For example, certain
Some of our wireless technologies have been classified as secret by the U.S. government and as a resulttechnology is in-licensed from Intuitive Surgical, Inc., which is revocable in certain circumstances. Without this license, we cannot continue to market, manufacture or sell them commercially. Anya portion of these determinations would limitour fiber-optic products.
As a part of the sale of certain assets to Intuitive Surgical, Inc. ("Intuitive") in 2014, we entered into a license agreement with Intuitive pursuant to which we received rights to use all of our transferred technology outside the field of medicine and in respect of our existing non-shape sensing products in certain non-robotic medical fields. This license back to us generally covers our Phoenix laser, OVA, OBR and ODiSI products. This license is revocable if after notice and certain time periods, we were to (i) challenge the validity or enforceability of the transferred patents and patent applications, (ii) commercialize our fiber optical shape sensing and localization technology in the field of medicine, (iii) violate our obligations related to our ability to generate product salessublicense in the field of medicine or (iv) violate our confidentiality obligations in a manner that advantages a competitor in the field of medicine and not cure such violation. Maintaining this license revenues.
We rely and will continueis necessary for us to rely on contracts and grants awarded underconduct our business related to the SBIR program for a significant portion of our revenues. A findingaforementioned products. If this license were to be revoked by the SBA thatIntuitive, we would no longer qualifybe able to receive SBIR awardsmarket, manufacture or sell these products, which could adversely affect our business.
We compete as a small business for some of our government contracts. Our revenues derived from the SBIR program account for a significant portion of our consolidated total revenues, and contract research, including SBIR contracts, will remain a significant portion of our consolidated total revenues for the foreseeable future. For the year ended December 31, 2017, 37% of our total revenues were generated under the SBIR program, compared to 34% in for the year ended December 31, 2016.
We may not continue to qualify to participate in the SBIR program or to receive new SBIR awards from federal agencies. In order to qualify for SBIR contracts and grants, we must meet certain size and ownership eligibility criteria. These eligibility criteria are applied as of the time of the award of a contract or grant. A company can be declared ineligible for a contract award as a result of a size challenge filed with the SBA by a competitor or a federal agency.
In order to be eligible for SBIR contracts and grants, under current SBA rules we must be more than 50% owned and controlled by individuals who are U.S. citizens or permanent resident aliens, and/or other small business concerns (each of which is more than 50% owned and controlled by individuals who are U.S. citizens or permanent resident aliens) or certain qualified investment companies. In the event our institutional ownership significantly increases, either because of increased buying by institutions or selling by individuals, we could lose eligibility for new SBIR contracts and grants.
Also, in order to be eligible for SBIR contracts and grants, the number of our employees, including those of any entities that are considered to be affiliated with us, cannot exceed 500. As of December 31, 2017, we had approximately 198 full and part-time employees. In determining whether we are affiliated with any other entity, the SBA may analyze whether another entity controls or has the power to control us. Carilion Clinic is our largest institutional stockholder. Since early 2011, a formal size determination by the SBA that focused on whether or not Carilion is or was our affiliate has been outstanding. Although we do not believe that Carilion has or had the power to control our company, we cannot assure you that the SBA will interpret its regulations in our favor on this question. If the SBA were to make a determination that we are or were affiliated with Carilion, we would exceed the size limitations, as Carilion has over 500 employees. In that case, we would lose eligibility for new SBIR contracts and grants and other awards that are set aside for small businesses based on the criterion of number of employees, and the relevant government agency would have the discretion to suspend performance on existing SBIR grants. The loss of our eligibility to receive SBIR awards would have a material adverse impacteffect on our revenues, cash flows and our ability to fund our growth.
Moreover, as our business grows, it is foreseeable that we will eventually exceed the SBIR size limitations, in which case we may be required to seek alternative sources of revenues or capital.
A decline in government research contract awards or government funding for existing or future government research contracts, including SBIR contracts, could adversely affect our revenues, cash flows and ability to fund our growth.
Technology Development segment revenues, which consist primarily of government-funded research, accounted for 40% and 39% of our total revenues for the years ended December 31, 2017 and 2016, respectively. As a result, we are vulnerable to adverse changes in our revenues and cash flows if a significant number of our research contracts and subcontracts were to be simultaneously delayed or canceled for budgetary, performance or other reasons. For example, the U.S. government may cancel these contracts at any time without cause and without penalty or may change its requirements, programs or contract budget, any of which could reduce our revenues and cash flows from U.S. government research contracts.Our revenues and cash flows from U.S. government research contracts and subcontracts could also be reduced by declines or other changes in U.S. defense, homeland security and other federal agency budgets. In addition, we compete as a small business for some of these contracts, and in order to maintain our eligibility to compete as a small business, we, together with any affiliates, must continue to meet size and revenue limitations established by the U.S. government.
Our contract research customer base includes government agencies, corporations and academic institutions. Our customers are not obligated to extend their agreements with us and may elect not to do so. Also, our customers’ priorities regarding funding for certain projects may change and funding resources may no longer be available at previous levels.
In addition to contract cancellations and changes in agency budgets, our future financial results may be adversely affected by curtailment of or restrictions on the U.S. government’s use of contract research providers, including curtailment due to government budget reductions and related fiscal matters or any legislation or resolution limiting the number or amount of awards we may receive. These or other factors could cause U.S. defense and other federal agencies to conduct research internally rather than through commercial research organizations or direct awards to other organizations, to reduce their overall contract research requirements or to exercise their rights to terminate contracts. Alternatively, the U.S. government may discontinue the SBIR program or its funding altogether. Also, SBIR regulations permit increased competition for SBIR awards from companies that may not have previously been eligible, such as those backed by venture capital operating companies, hedge funds and private equity firms. Any of these developments could limit our ability to obtain new contract awards and adversely affect our revenues, cash flows and ability to fund our growth.operations.
Our failure to attract, train and retain skilled employees or members of our senior management and to obtain necessary security clearances for such persons or maintain a facility security clearance would adversely affect our business and operating results.
The availability of highly trained and skilled technical and professional personnel is critical to our future growth and profitability. Competition for scientists, engineers, technicians and professional personnel is intense and our competitors aggressively recruit key employees. In the past, we have experienced difficulties in recruiting and hiring these personnel as a result of the tight labor market in certain fields. Any difficulty in hiring or retaining qualified employees, combined with our growth strategy and future needs for additional experienced personnel, particularly in highly specialized areas such as nanomaterial manufacturing and fiber optic sensing technologies, may make it more difficult to meet all of our needs for these employees in a timely manner. Although we intend to continue to devote significant resources to recruit, train and retain qualified employees, we may not be able to attract and retain these employees, especially in technical fields in which the supply of experienced qualified candidates is limited, or at the senior management level. Any failure to do so would have an adverse effect on our business. Any loss of key personnel could have a material adverse effect on our ability to meet key operational objectives, such as timely and effective project milestones and product introductions, which in turn could adversely affect our business, results of operations and financial condition.
We provide certain services to the U.S. government that require us to maintain a facility security clearance and for certain of our employees and our board chairmanmembers to hold security clearances. In general, theour failure for necessary persons to obtain or retain sufficient security clearances, any loss by us of a facility security clearance or any public reprimand related to security matters could result in a U.S. government customer terminating an existing contract, or choosing not to renew a contract or prevent us from bidding on or winning certain new government contracts.
In addition, our future success depends in a large part upon the continued service of key members of our senior management team. We do not maintain any key-person life insurance policies on our officers. The loss of any members of our management team or other key personnel could seriously harm our business.
Our business is subject to the cyclical nature of the markets in which we compete and any future downturn may reduce demand for our products and revenue.
Many factors beyond our control affect our business, including consumer confidence in the economy, interest rates, inflation, fuel prices, health crises, such as the COVID-19 pandemic, international conflicts, such as the current hostilities between Russia and Ukraine, and the general availability of credit. The overall economic climate and changes in Gross National Product growth have a direct impact on some of our customers and the demand for our products. We cannot be sure that our business will not be adversely affected as a result of an industry or general economic downturn.
Our customers may reduce capital expenditures and have difficulty satisfying liquidity needs because of continued turbulence in the U.S. and global economies, resulting in reduced sales of our products and harm to our financial condition and results of operations.
In particular, our historical results of operations have been subject to substantial fluctuations, and we may experience substantial period-to-period fluctuations in future results of operations. Any future downturn in the markets in which we compete, could significantly reduce the demand for our products and therefore may result in a significant reduction in revenue or increase the volatility of the price of our common stock. Our revenue and results of operations may be adversely affected in the future due to changes in demand from customers or cyclical changes in the markets utilizing our products.
In addition, the telecommunications industry has, from time to time, experienced, and may again experience, a pronounced downturn. To respond to a downturn, many service providers may slow their capital expenditures, cancel or delay new developments, reduce their workforces and inventories and take a cautious approach to acquiring new equipment and technologies from original equipment manufacturers, which would have a negative impact on our business. Weakness in the
global economy or a future downturn in the telecommunications industry may cause our results of operations to fluctuate from quarter-to-quarter and year-to-year, harm our business, and may increase the volatility of the price of our common stock.
Customer acceptance of our products is dependent on our ability to meet changing requirements, and any decrease in acceptance could adversely affect our revenue.
Customer acceptance of our products is significantly dependent on our ability to offer products that meet the changing requirements of our customers, including telecommunication, military, medical and industrial corporations, as well as government agencies. Any decrease in the level of customer acceptance of our products could harm our business.
Our products must meet exacting specifications, and defects and failures may occur, which may cause customers to return or stop buying our products.
Our customers generally establish demanding specifications for quality, performance and reliability that our products must meet. However, our products are highly complex and may contain defects and failures when they are first introduced or as new versions are released. Our products are also subject to rough environments as they are integrated into our customer products for use by the end customers. If defects and failures occur in our products, we could experience lost revenue, increased costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or shipments, product returns or discounts, diversion of management resources or damage to our reputation and brand equity, and in some cases consequential damages, any of which would harm our operating results. In addition, delays in our ability to fill product orders as a result of quality control issues may negatively impact our relationship with our customers. We cannot assure you that we will have sufficient resources, including any available insurance, to satisfy any asserted claims.
Rapidly changing standards and regulations could make our products obsolete, which would cause our revenue and results of operations to suffer.
We design products to conform to our customers’ requirements and our customers’ systems may be subject to regulations established by governments or industry standards bodies worldwide. Because some of our products are designed to conform to current specific industry standards, if competing or new standards emerge that are preferred by our customers, we would have to make significant expenditures to develop new products. If our customers adopt new or competing industry standards with which our products are not compatible, or the industry groups adopt standards or governments issue regulations with which our products are not compatible, our existing products would become less desirable to our customers and our revenue and results of operations would suffer.
The markets for many of our products are characterized by changing technology which could cause obsolescence of our products, and we may incur substantial costs in delivering new products.
The markets for many of our products are characterized by changing technology, new product introductions and product enhancements, and evolving industry standards. The introduction or enhancement of products embodying new technology or the emergence of new industry standards could render existing products obsolete, and result in a write down to the value of our inventory, or result in shortened product life cycles. Accordingly, our ability to compete is in part dependent on our ability to continually offer enhanced and improved products.
The success of our new product offerings will depend upon several factors, including our ability to:
•accurately anticipate customer needs;
•innovate and develop new technologies and applications;
•successfully commercialize new technologies in a timely manner;
•price products competitively and manufacture and deliver products in sufficient volumes and on time; and
•differentiate our product offerings from those of our competitors.
Our inability to find new customers or retain existing customers could harm our business.
Our business is reliant on our ability to find new customers and retain existing customers. In particular, customers normally purchase certain of our optoelectronic products and incorporate them into products that they, in turn, sell in their own markets on an ongoing basis. As a result, the historical sales orof these products have been dependent upon the success of our customers’
products and theour future performance of the optoelectronic business is dependent upon our success in finding new customers and receiving new orders from existing customers.
In several markets, the quality and reliability of our products are a major concern for our customers, not only upon the initial manufacture of the product, but for the life of the product. Many of our products are used in remote locations for higher value assembly, making servicing of our products unfeasible. Any failure of the quality or reliability of our products could harm our business.
If our customers do not qualify our products or if their customers do not qualify their products, our results of operations may suffer.
Most of our customers do not purchase our optoelectronics products prior to qualification of the products and satisfactory completion of factory audits and vendor evaluation. Our existing products, as well as each new product, must pass through varying levels of qualification with our customers. In addition, because of the rapid technological changes in some markets, a customer may cancel or modify a design project before we begin large-scale manufacturing and receiving revenues from the customer. It is difficult to predict with any certainty whether our customers will delay or terminate product qualification or the frequency with which customers will cancel or modify their projects. Any such delay, cancellation or modification could have a negative effect on our results of operations.
In addition, once a customer qualifies a particular supplier’s product or component, these potential customers design the product into their system, which is known as a design-in win. Suppliers whose products or components are not designed in are unlikely to make sales to that customer until at least the adoption of a future redesigned system. Even then, many customers may be reluctant to incorporate entirely new products into their new systems, as doing so could involve significant additional redesign efforts and increased costs. If we fail to achieve design-in wins in potential customers’ qualification processes, we will likely lose the opportunity for significant sales to those customers for a lengthy period of time.
If the end user customers that purchase systems from our customers fail to qualify or delay qualifications of any products sold by our customers that contain our products, our business could be harmed. The qualification and field testing of our customers’ systems by end user customers is long and unpredictable. This process is not under our control or that of our customers and, as a result, the timing of our sales may be unpredictable. Any unanticipated delay in qualification of one of our customers’ products could result in the delay or cancellation of orders from our customers for products included in their equipment, which could harm our results of operations.
Customer demand for our products is difficult to accurately forecast and, as a result, we may be unable to optimally match production with customer demand, which could adversely affect our business and financial results.
We make planning and spending decisions, including determining the levels of business that we will seek and accept, production schedules, inventory levels, component procurement commitments, personnel needs and other resource requirements, based on our estimates of customer requirements. The short-term nature of commitments by many of our customers and the possibility of unexpected changes in demand for their products reduce our ability to accurately estimate future customer requirements. On occasion, customers may require rapid increases in production, which can strain our resources, cause our manufacturing to be negatively impacted by materials shortages, necessitate higher or more restrictive procurement commitments, increase our manufacturing yield loss and scrapping of excess materials, and reduce our gross margin. We may not have sufficient capacity at any given time to meet the volume demands of our customers, or one or more of our suppliers may not have sufficient capacity at any given time to meet our volume demands. Conversely, a downturn in the markets in which our customers compete can cause, and in the past have caused, our customers to significantly reduce or delay the amount of products ordered or to cancel existing orders, leading to lower utilization of our facilities. Because many of our costs and operating expenses are relatively fixed, reduction in customer demand due to market downturns or other reasons would have a negative effect on our gross margin, operating income and cash flow.
Customer orders
Rapidly changing standards and forecasts areregulations could make our products obsolete, which would cause our revenue and results of operations to suffer.
We design products to conform to our customers’ requirements and our customers’ systems may be subject to cancellationregulations established by governments or modification at any time which could result in higher manufacturing costs.
Our salesindustry standards bodies worldwide. Because some of our products are made primarily pursuantdesigned to standard purchase orders for delivery of products. However, byconform to current specific industry practice, some orders may be canceledstandards, if competing or modified at any time. When a customer cancels an order, they may be responsible for all finished goods, all costs, direct and indirect, incurred by us, as well as a reasonable allowance for anticipated profits. No assurance can be givennew standards emerge that we will receive these amounts after cancellation. Furthermore, uncertainty in customer forecasts of their demands and other factors may lead to delays and disruptions in manufacturing, which could result in delays in product shipments to customers and could adversely affect our business.
Fluctuations and changes in customer demand are common in our business. Such fluctuations, as well as quality control problems experienced in manufacturing operations, may cause delays and disruptions in our manufacturing process and overall operations and reduce output capacity. As a result, product shipments could be delayed beyond the shipment schedules
requestedpreferred by our customers, we would have to make significant expenditures to develop new products. If our customers adopt new or could be canceled,competing industry standards with which our products are not compatible, or the industry groups adopt standards or governments issue regulations with which our products are not compatible, our existing products would negatively affectbecome less desirable to our sales, operating income, strategic position at customers market share and reputation. In addition, disruptions, delays or cancellations could cause inefficient production which in turn could result in higher manufacturing costs, lower yieldsour revenue and potential excess and obsolete inventory or manufacturing equipment. In the past, we have experienced such delays, disruptions and cancellations.results of operations would suffer.
The results of our operations could be adversely affected by economic and political conditions and the effects of these conditions on our customers’ businesses and levels of business activity.
Global economic and political conditions affect our customers’ businesses and the markets they serve. A severe or prolonged economic downturn, including during and following the COVID-19 pandemic, or a negative or uncertain political climate could adversely affect our customers’ financial conditions and the timing or levels of business activity of our customers and the industries we serve. This may reduce the demand for our products or depress pricing for our products and have a material adverse effect on our results of operations. Changes in global economic conditions could also shift demand to products or services for which we do not have competitive advantages, and this could negatively affect the amount of business we are able to obtain. For example, inflation rates, particularly in the United States, the United Kingdom and Germany, have increased recently to levels not seen in years, and increased inflation may result in decreased demand for our products, increases in our operating costs (including our labor costs), reduced liquidity and limits on our ability to access credit or otherwise raise capital. In addition, the Federal Reserve has raised, and may again raise, interest rates in response to concerns about inflation, which coupled with reduced government spending and volatility in financial markets may have the effect of further increasing economic uncertainty and heightening these risks. Additionally, financial markets around the world have experienced volatility in connection with the current hostilities between Russia and the Ukraine. In addition, if we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, and our business could be negatively affected as a result.
We have a history ofexperienced net losses in the past, and because our strategy for expansion may be costly to implement, we may experience continuing losses and may never achieve ornot maintain profitability or positive cash flow.
We realized ahave experienced net loss from continuing operations of less than $0.1 million and a net loss from continuing operations of $2.7 million forlosses in the years ended December 31, 2017 and 2016, respectively.past. We expect to continue to incur significant expenses as we pursue our strategic initiatives, including increased expenses for research and development, sales and marketing and manufacturing. We may also grow our business in part through acquisitions of additional companies and complementary technologies which could cause us to incur greater than anticipated transaction expenses, amortization or write-offs of intangible assets and other acquisition-related expenses. As a result, we may incur net losses forin the foreseeable future, and these losses could be substantial. At a certain level, continued net losses could impair our ability to comply with NASDAQNasdaq continued listing standards, as described further below.
Our ability to generate additional revenues and to becomeremain profitable will depend on our ability to execute our key growth initiative regarding the development, marketing and sale of sensing products, develop and commercialize innovative technologies, expand our contract research capabilities and sell the products that result from those development initiatives. We are unable to predict when or if we will be able to achieve profitability. If our revenues do not increase, or if our expenses increase at a greater rate than our revenues, we will continue to experience losses. Even if we do achieve profitability, we may not be able to sustain or increase our profitability on a quarterly or annual basis.
We have obtained capital by borrowing money under a term loan and revolving line of credit and we might require additional capital to support and expand our business; our term loan hasand revolving line of credit have various loan covenants with which we must comply.
We intend to continue to make investments to support our business growth, including developing new products, enhancing our existing products, obtaining important regulatory approvals, enhancing our operating infrastructure, completing our development activities and building our commercial scale manufacturing facilities. To the extent that we are unable to become or remain profitable and to finance our activities from our continuing operations, we may require additional funds to support these initiatives and to grow our business.
If we are successful in raising additional funds through issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, including as the result of the issuance of warrants in connection with the financing, and any new equity securities we issue could have rights, preferences and privileges superior to those of our existing common stock. Furthermore, such financings may jeopardize our ability to apply for SBIR grants or qualify for SBIR contracts or grants, and our dependence on SBIR grants may restrict our ability to raise additional outside capital. If we raise additional funds through debt financings, these financings may involve significant cash payment obligations and covenants that restrict our ability to operate our business and make distributions to our stockholders.
We have a term loan and borrowings under a revolving line of credit with Silicon ValleyPNC Bank, National Association ("SVB"PNC"), which requiresrequire us to observe certain financialcomply with a number of affirmative and operationalrestrictive covenants 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 a minimum cash balancegovernment compliance, and restrictive covenants regarding dispositions of $4.0 million, protectionproperty, acquisitions, incurrence of additional indebtedness or liens, investments and registrationtransactions with affiliates. We are also restricted from paying dividends or making other distributions or payments on our capital stock, subject to limited exceptions. Upon the occurrence of intellectual property rights,certain events, including our failure to satisfy its payment obligations, failure to adhere to the financial covenants, the breach of certain of our other covenants, cross defaults to other indebtedness or material agreements, judgment defaults and certain customary negative covenants, as well asdefaults related to failure to maintain governmental approvals, PNC will have the right, among other customary events of default. If any event of default occurs SVB mayremedies, to declare all principal and interest immediately due immediately all borrowings under our term loan and foreclose on the collateral. Furthermore, an event of default would result in an increase in the interest rate on any amounts outstanding.payable, and to exercise secured party remedies.
If we are unable to obtain adequate financing or financing terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.
We face and will face substantial competition in several different markets that may adversely affect our results of operations.
We face and will face substantial competition from a variety of companies in several different markets. As we focus on developing marketing and selling fiber optic sensing products, we may also face substantial and entrenched competition in that market.
Many of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. In addition, current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers or other third parties. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share. We cannot assure you that we will be able to compete successfully against current or new competitors, in which case our revenues may fail to increase or may decline.
Intense competition in our markets could result in aggressive business tactics by our competitors, including aggressively pricing their products or selling older inventory at a discount. If our current or future competitors utilize aggressive business
tactics, including those described above, demand for our products could decline, we could experience delays or cancellations of customer orders, or we could be required to reduce our sales prices.
Decreases in average selling prices of our products may increase operating losses and net losses, particularly if we are not able to reduce expenses commensurately.
The market for optical components and subsystems continues to be characterized by declining average selling prices resulting from factors such as increased price competition among optical component and subsystem manufacturers, excess capacity, the introduction of new products and increased unit volumes as manufacturers continue to deploy network and storage systems. In recent years, we have observed a significant decline of average selling prices, primarily in the telecommunications market. We anticipate that average selling prices will continue to decrease in the future in response to product introductions by competitors or by us, or in response to other factors, including price pressures from significant customers. In order to sustain profitable operations, we must, therefore, reduce the cost of our current designs or continue to develop and introduce new products on a timely basis that incorporate features that can be sold at higher average selling prices. Failure to do so could cause our sales to decline and operating losses to increase.
Our cost reduction efforts may not keep pace with competitive pricing pressures. To remain competitive, we must continually reduce the cost of manufacturing our products through design and engineering changes. We may not be successful in redesigning our products or delivering our products to market in a timely manner. We cannot assure you that any redesign will result in sufficient cost reductions enabling us to reduce the price of our products to remain competitive or positively contribute to operating results.
Shifts in product mix may result in declines in gross profit.
Our gross profit margins vary among our product platforms and are generally highest on our test &and measurement instruments. Our overall gross profit may fluctuate from period to period as a result of a variety of factors including shifts in product mix, the introduction of new products, and decreases in average selling prices for older products. If our customers decide to buy more of our products with low gross profit margins or fewer of our products with high gross profit margins, our total gross profits could be harmed.
Risks RelatingRISKS RELATING TO OUR OPERATIONS AND BUSINESS STRATEGY
If we fail to properly evaluate and execute our Operationsstrategic initiatives, including the integration of acquired businesses, it could have an adverse effect on our future results and Business Strategythe market price of our common stock.
We evaluate strategic opportunities related to products, technology and business transactions, including acquisitions and divestitures. In the past, we have acquired businesses to support our growth strategy, including the acquisition of LIOS Sensing in March 2022. If we choose to enter into such transactions in the future, we face certain risks including:
•the failure of the acquired business to meet our performance and financial expectations;
•difficulty integrating an acquired business's operations, personnel and financial and reporting systems into our current business
•potential unknown liabilities associated with the acquisition;
•lost sales and customers as a result of customers deciding not to do business with us;
•complexities associated with managing the larger combined company with distant business locations;
•integrating personnel while maintaining focus on providing consistent, high quality products;
•loss of key employees; and
•performance shortfalls as a result of the division of management's attention caused by completing the acquisition and integrating operations.
If any of these events were to occur, our ability to maintain relationships with the customers, suppliers and employees or our ability to achieve the anticipated benefits of the acquisition could be adversely affected, or could reduce our future earnings or otherwise adversely affect our business and financial results and, as a result, adversely affect the market price of our common stock.
If we cannot successfully transition our revenue mix from contract research revenues to product sales and license revenues, we may not be able to fully execute our business model or grow our business.
Our business model and future growth depend on our ability to transition to a revenue mix that contains significantly larger product sales and revenues from the provision of services or from licensing. Product sales and these revenues potentially offer greater scalability than contract research revenues. Our current plan is to increase our sales of commercial products, our licensing revenues and our provision of non-research services to customers so as to represent a larger percentage of our total revenues. If we are unable to develop and grow our product sales and revenues from the provision of services or from licensing to augment our contract research revenues, however, our ability to execute our business model or grow our business could suffer. There can be no assurance that we will be able to achieve increased revenues in this manner.
Failure to develop, introduce and sell new products or failure to develop and implement new technologies, could adversely impact our financial results.
Our success will depend on our ability to develop and introduce new products that customers choose to buy. The new products the market requires tend to be increasingly complex, incorporating more functions and operating at faster speeds than old products. If we fail to introduce new product designs or technologies in a timely manner or if customers do not successfully introduce new systems or products incorporating our products, our business, financial condition and results of operations could be materially harmed.
If we are unable to manage growth effectively, our revenues and net loss could be adversely affected.
We may need to expand our personnel resources to grow our business effectively. We believe that sustained growth at a higher rate will place a strain on our management as well as on our other human resources. To manage this growth, we must continue to attract and retain qualified management, professional, scientific and technical and operating personnel. If we are unable to recruit a sufficient number of qualified personnel, we may be unable to staff and manage projects adequately, which in turn may slow the rate of growth of our contract research revenues or our product development efforts.
We may not be successful in identifying market needs for new technologies or in developing new products.
Part of our business model depends on our ability to correctly identify market needs for new technologies. We intend to identify new market needs, but we may not always have success in doing so in part because our contract research largely centers on identification and development of unproven technologies, often for new or emerging markets. Furthermore, we must identify the most promising technologies from a sizable pool of projects. If our commercialization strategy process fails to identify projects with commercial potential or if management does not ensure that such projects advance to the commercialization stage, we may not successfully commercialize new products and grow our revenues.
Our growth strategy requires that we also develop successful commercial products to address market needs. We face several challenges in developing successful new products. Many of our existing products and those currently under development are technologically innovative and require significant and lengthy product development efforts. These efforts include planning, designing, developing and testing at the technological, product and manufacturing-process levels. These activities require us to make significant investments. Although there are many potential applications for our technologies, our resource constraints require us to focus on specific products and to forgo other opportunities. We expect that one or more of the potential products we choose to develop will not be technologically feasible or will not achieve commercial acceptance, and we cannot predict which, if any, of our products we will successfully develop or commercialize. The technologies we research and develop are new and steadily changing and advancing. The products that are derived from these technologies may not be applicable or compatible with the state of technology or demands in existing markets. Our existing products and technologies may become uncompetitive or obsolete if our competitors adapt more quickly than we do to new technologies and changes in customers’ requirements. Furthermore, we may not be able to identify if and when new markets will open for our products given that future applications of any given product may not be readily determinable, and we cannot reasonably estimate the size of any markets that may develop. If we are not able to successfully develop new products, we may be unable to increase our product revenues.
We face risks associated with our international business.
We currently conduct business internationally and we might considerably expand our international activities in the future. Our international business operations are subject to a variety of risks associated with conducting business internationally, including:
•having to comply with U.S. and other export control and economic trade sanctions regulations and policies that restrict our ability to communicate withcertain operations and work involving non-U.S. employees and sale and supply of our products to foreign affiliates and customers;
•changes in or interpretations of foreign regulations that may adversely affect our ability to sell our products, perform services or repatriate profits to the United States;
•the imposition of tariffs;
•hyperinflation or economic or political instability in foreign countries;
•imposition of limitations on, or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures;
•conducting business in places where business practices and customs are unfamiliar and unknown;
•the imposition of restrictive trade policies;
•the imposition of inconsistent laws or regulations;
•the imposition or increase of investment and other restrictions or requirements by foreign governments;
•uncertainties relating to foreign laws and legal proceedings;
•potential changes in a specific country's or region's political or economic climate, including the current hostilities between Russia and Ukraine;
•having to comply with a variety of U.S.anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act ("FCPA");, the UK Bribery Act 2010, and similar laws and regulations in other jurisdiction; and
•having to comply with licensing requirements.
We do not know the impact that these regulatory, geopolitical and other factors may have on our international business in the future. It is unknown how global supply chains may continue to be affected from the COVID-19 pandemic.
We may dispose of or discontinue existing product lines and technology developments, which may adversely impact our future results.
On an ongoing basis, we evaluate our various product offerings and technology developments in order to determine whether any should be discontinued or, to the extent possible, divested. In addition, if we are unable to generate the amount of cash needed to fund the future operations of our business, we may be forced to sell one or more of our product lines or technology developments.
We cannot guarantee that we have correctly forecasted, or that we will correctly forecast in the future, the right product lines and technology developments to dispose or discontinue or that our decision to dispose of or discontinue various investments, productsproduct lines and technology developments is prudent if market conditions change. In addition, there are no assurances that the discontinuance of various product lines will reduce operating expenses or will not cause us to incur material charges associated with such decision. Furthermore, the discontinuance of existing product lines entails various risks, including the risk that we will not be able to find a purchaser for a product line or the purchase price obtained will not be equal to at least the book value of the net assets for the product line. Other risks include managing the expectations of, and maintaining good relations with, our historical customers who previously purchased products from a disposed or discontinued product line, which could prevent us from selling other products to them in the future. We may also incur other significant liabilities and costs associated with disposal or discontinuance of product lines, including employee severance costs and excess facilities costs.
We are experiencing impacts from inflationary pressures, including with respect to labor and materials costs, which could adversely impact our profitability and cash flow.
We are experiencing, and may continue to experience, the general impact of inflationary market pressures on our business, particularly with respect to labor and materials costs. We are experiencing pressures on materials and certain labor costs as a result of the inflationary environment and current general labor shortage, which has resulted in increased competition for skilled labor and wage inflation. It is possible that our labor, fuel and materials costs could continue to increase as we expand our operations and volume of work. We have not been, and may not be liableable to, fully adjust our contract pricing to compensate for damages based on product liability claims relatingthese cost increases, which has affected, and may continue to defectsaffect, our profitability and cash flows. Inflationary pressures and related recessionary concerns in our products, which might be brought against us directly, or against our customers in their end-use markets. Such claimslight of governmental and central bank efforts to mitigate inflation could result in a loss of customers in addition to substantial liability in damages.
Our products are complex and undergo quality testing as well as formal qualification, both byalso cause uncertainties for our customers and affect the level of their project activity, which could also adversely affect our profitability and cash flows.
Health epidemics, including the COVID-19 pandemic, have had, and could in the future have, an adverse impact on our business, operations, and the markets and communities in which we and our customers and suppliers operate.
The ongoing global COVID-19 pandemic has impacted, and will likely continue to impact, the way we conduct our business, including the way in which we interface with customers, suppliers and our employees. The COVID-19 pandemic has affected how we interact with our customers by us. However, defects may occur from time to time. Our customers’ testing procedures may be limited to evaluatingreducing face-to-face meetings and increasing our products under likelyon-line and foreseeable failure scenariosvirtual presence. While increasing our on-line and over varying amounts of time. For various reasons, such as the occurrence of performance problems thatvirtual presence has proven effective, we are unforeseeable in testing or that are detected only when products age or are operated under peak stress conditions, our products may fail to perform as expected long after customer acceptance. Failures could result from faulty components or design, problems in manufacturing or other unforeseen reasons. As a result, we could incur significant costs to repair or replace defective products under warranty, particularly when such failures occur in installed systems. In addition, we may in certain circumstances honor warranty claims after the warranty has expired or for problems not covered by warranty in order to maintain customer relationships. Any significant product failure could result in lost future salesunsure of the affected productimpact if these conditions continue for an extended period. During 2021 and other products, as well as customer relations problems, litigation2022, we experienced an increased level of disruption in our supply chain and damage to our reputation.
In addition, many of our products are embedded in, or deployed in conjunction with, our customers’ products, which incorporate a variety of components, modules and subsystems and may be expected to interoperate with modules produced by third parties. As a result, not all defects are immediately detectable, and, when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from internal product development efforts and cause significant customer relations problems or loss ofcertain customers all of which would harm our business.
Furthermore, many ofhave resulted in delayed revenue. While we believe these disruptions are temporary, there is no guarantee we will be able to manage through these disruptions. If the demand for our products, may provideor our access to critical performance attributes to our customers’ products that will be sold to end users who could potentially bring product liability suits in which we could be named as a defendant. The sale of these products involves the risk of product liability claims. If a personcomponents were to bring a product liability suit against one of our customers, this customer may attempt to seek contribution from us. A person may also bring a product liability claim directly against us. A successful product liability claim or series of claims against us in excess of our insurance coverage for payments, for which we are not otherwise indemnified,be interrupted, it could have a material adverse effect on our financial condition or results of operations.
We could be negatively affected by a security breach, either through cyber-attack, cyber-intrusion or other significant disruption of our IT networks and related systems.
We face the risk, as does any company, of a security breach, whether through cyber-attack or cyber-intrusion over the internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, or other significant disruption of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.
As a technology company, and particularly as a government contractor, we may face a heightened risk of a security breach or disruption from threats to gain unauthorized access to our proprietary, confidential or classified information on our IT networks and related systems. These types of information and IT networks and related systems are critical to the operation of our business and essential to our ability to perform day-to-day operations, and, in some cases, are critical to the operations of certain of our customers. In addition, as certain of our technological capabilities become widely known, it is possible that we may be subjected to cyber-attack or cyber-intrusion as third parties seek to gain improper access to information regarding these capabilities and cyber-attacks or cyber-intrusion could compromise our confidential information or our IT networks and systems generally, as it is not practical as a business matter to isolate all of our confidential information and trade secrets from email and internet access. To date, we have not experienced a significant cyber-intrusion or cyber-attack. There can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging.
A security breach or other significant disruption involving these types of information and IT networks and related systems could disrupt the proper functioning of these networks and systems and therefore our operations, compromise our confidential information and trade secrets, or damage our reputation among our customers and the public generally. Any of these developments could have a negative impact on our results of operations.
In response to the COVID-19 pandemic, many state, local, and foreign governments have put in place, and others in the future may put in place, quarantines, executive orders, shelter-in-place orders, and similar government orders and restrictions in order to control the spread of the disease. Such orders or restrictions, or the perception that such orders or restrictions could occur, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions, and cancellation or postponement of events, among other effects that could negatively impact productivity and disrupt our operations financial condition and cash flows.those of our customers and suppliers. We have implemented alternate work arrangements, including staggered
schedules and shifts, distancing within our offices and working from home for most of our employees, and we may take further actions that alter our operations as may be required by federal, state, or local authorities, or which we determine are in our best interests. While most of our operations can be performed under these alternate work arrangements, there is no guarantee that we will be as effective while working under them because our team is dispersed, many employees may have additional personal needs to attend to (such as looking after children as a result of school closures or family who become sick), and employees may become sick themselves and be unable to work. Decreased effectiveness of our team could adversely affect our results due to our Regulatory Environmentinability to meet in person with potential customers, longer time periods for supply, longer time periods for manufacturing and other decreases in productivity that could seriously harm our business.
In addition, while the potential impact and duration of the COVID-19 pandemic on the global economy and our business in particular may be difficult to assess or predict, the pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital, which could negatively affect our liquidity in the future.
The global impact of COVID-19 continues to rapidly evolve, and we will continue to monitor the situation closely. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, operations, or the global economy as a whole. While the spread of COVID-19 may eventually be contained or mitigated, there is no guarantee that a future outbreak of this or any other widespread epidemics will not occur, or that the global economy will recover, either of which could seriously harm our business.
RISKS RELATING TO OUR REGULATORY ENVIRONMENT
Our operations are subject to domestic and foreign laws, regulations and restrictions, and noncompliance with these laws, regulations and restrictions could expose us to fines, penalties, suspension or debarment, which could have a material adverse effect on our profitability and overall financial position.
Our operations, particularly our international sales, subject us to numerous U.S. and foreign laws and regulations, including, without limitation, regulations relating to imports, exports (including the Export Administration Regulations and the International Traffic in Arms Regulations), technology transfer restrictions, anti-boycott provisions, economic sanctions and anti-corruption.
Our products and solutions are subject to export control and import laws and regulations, including the FCPA. The numberU.S. Export Administration Regulations, the U.S. International Traffic in Arms Regulations (ITAR), U.S. Customs regulations, and the economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls. Exports of our various emergingproducts, services, and technology must be made in compliance with these laws and regulations, and in some cases, certain registration, licensing, authorization, or reporting requirements may need to be performed. In addition, these laws may restrict or prohibit altogether the sale or supply of certain of our products, services, and technologies to certain governments, persons, entities, countries, and territories, including those that are the developmenttarget of manycomprehensive sanctions, unless there are license exceptions that apply or specific licenses are obtained. Any future changes in export control, import, or economic sanctions laws and regulations may adversely impact our ability to sell our products, services, and technologies in certain markets or, in some cases, prevent the export or import of our products, services, and technologies to or from certain countries, governments, or persons altogether, which hascould adversely affect our business, results of operations, and growth prospects.
Our products, services, and technologies may have in the past been funded byprovided, and could in the Departmentfuture be provided, in violation of Defense, presentsexport control, import, or sanctions laws and regulations, despite the precautions we take. As a result, we have submitted, and from time to time may continue to submit as warranted, voluntary self-disclosures regarding compliance with U.S. export control and sanctions laws and regulations to relevant governmental authorities. Any failure to comply with applicable export control and sanctions laws may materially affect us with many regulatory challenges. through reputational harm, as well as other negative consequences, including government investigations, substantial civil or criminal penalties, and possible loss of export or import privileges.
We are also subject to the FCPA, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act, the United Kingdom Bribery Act 2010, the Proceeds of Crime Act 2002, and possibly other state and national anti-bribery and anti-money laundering laws in countries in which we conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees, third-party intermediaries, and other associated persons from authorizing, promising, offering, providing, soliciting, or accepting directly or indirectly, improper payments or benefits to or from any person whether in the public or private sector. These laws also require us to make and keep books and records that accurately and fairly reflect our transactions and to devise and maintain an adequate system of internal accounting controls. We
can be held liable for the corrupt or other illegal activities of our employees, representatives, contractors, business partners, and agents, even if we do not explicitly authorize or have actual knowledge of such activities.
Failure by us or our sales representatives or consultants to comply with thesethe above laws and regulations could result in administrative, civil, or criminal liabilities and could result in suspension of our export privileges, which could have a material adverse effect on our business. Changes in regulation or political environment may affect our ability to conduct business in foreign markets including investment, procurement and repatriation of earnings.
Environmental regulations could increase operating costs and additional capital expenditures and delay or interrupt operations.
The photonics industry, as well as the semiconductor industry, are subject to governmental regulations for the protection of the environment, including those relating to air and water quality, solid and hazardous waste handling, and the promotion of occupational safety. Various federal, state and local laws and regulations require that we maintain certain environmental permits. While we believe that we have obtained all necessary environmental permits required to conduct our manufacturing processes, if we are found to be in violation of these laws, we could be subject to governmental fines and liability for damages resulting from such violations.
Changes in the aforementioned laws and regulations or the enactment of new laws, regulations or policies could require increases in operating costs and additional capital expenditures and could possibly entail delays or interruptions of our operations.
If our manufacturing facilities do not meet Federal, state or foreign country manufacturing standards, we may be required to temporarily cease all or part of our manufacturing operations, which would result in product delivery delays and negatively impact revenues.
Our manufacturing facilities are subject to periodic inspection by regulatory authorities and our operations will continue to be regulated by the FDA for compliance with Good Manufacturing Practice requirements contained in the quality systems
regulations. We are also required to comply with International Organization for Standardization ("ISO"), quality system standards in order to produce certain of our products for sale in Europe. If we fail to continue to comply with Good Manufacturing Practice requirements or ISO standards, we may be required to cease all or part of our operations until we comply with these regulations. Obtaining and maintaining such compliance is difficult and costly. We cannot be certain that our facilities will be found to comply with Good Manufacturing Practice requirements or ISO standards in future inspections and audits by regulatory authorities. In addition, if we cannot maintain or establish manufacturing facilities or operations that comply with such standards or do not meet the expectations of our customers, we may not be able to realize certain economic opportunities in our current or future supply arrangements.
Medical products are subject to various international regulatory processes and approval requirements. If we do not obtain and maintain the necessary international regulatory approvals for any such potential products, we may not be able to market and sell our medical products in foreign countries.
To be able to market and sell medical products in other countries, we must obtain regulatory approvals and comply with the regulations of those countries. These regulations, including the requirements for approvals and the time required for regulatory review, vary from country to country. Obtaining and maintaining foreign regulatory approvals are expensive, and we cannot be certain that we will have the resources to be able to pursue such approvals or whether we would receive regulatory approvals in any foreign country in which we plan to market our products. For example, the European Union requires that manufacturers of medical products obtain the right to affix the CE mark to their products before selling them in member countries of the European Union, which we have not yet obtained and may never obtain. If we fail to obtain regulatory approval in any foreign country in which we plan to market our products, our ability to generate revenues will be harmed.
We are subject to additional significant foreign and domestic government regulations, including environmental and health and safety regulations, and failure to comply with these regulations could harm our business.
Our facilities and current and proposed activities involve the use of a broad range of materials that are considered hazardous under applicable laws and regulations. Accordingly, we are subject to a number of foreign, federal, state and local laws and regulations relating to health and safety, protection of the environment and the storage, use, disposal of, and exposure to, hazardous materials and wastes. We could incur costs, fines and civil and criminal penalties, personal injury and third partythird-party property damage claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental, health and safety laws. Moreover, a failure to comply with environmental laws could result in fines and the revocation of environmental permits, which could prevent us from conducting our business. Liability under environmental laws can be joint and several and without regard to fault. There can be no assurance that violations of environmental and health and safety laws will not occur in the future as a result of the inability to obtain permits, human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business. Accordingly, violations of present and future environmental laws could restrict our ability to expand facilities, pursue certain technologies, and could require us to acquire costly equipment or incur potentially significant costs to comply with environmental regulations.
Compliance with foreign, federal, state and local environmental laws and regulations represents a small part of our present budget. If we fail to comply with any such laws or regulations, however, a government entity may levy a fine on us or require us to take costly measures to ensure compliance. Any such fine or expenditure may adversely affect our development. We cannot predict the extent to which future legislation and regulation could cause us to incur additional operating expenses, capital expenditures or restrictions and delays in the development of our products and properties.
We are or may become subject to stringent and evolving U.S. and foreign laws, regulations, rules, contractual obligations, policies and other obligations related to data privacy and security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; and other adverse business consequences.
In the ordinary course of business we collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, and share (collectively, processing) personal data and other sensitive information, including proprietary and confidential business data, intellectual property, sensitive third-party data, business plans, and transactions (collectively, sensitive data) in connection with our business customers and our employees.
Our data processing activities may subject us to numerous data privacy and security obligations, such as various laws, regulations, guidance, industry standards, external and internal privacy and security policies, contractual requirements, and other obligations relating to data privacy and security.
In the United States, federal, state, and local governments have enacted numerous data privacy and security laws, including data breach notification laws, personal data privacy laws, consumer protection laws (e.g., Section 5 of the Federal Trade Commission Act), and other similar laws (e.g., wiretapping laws).
For example, the California Consumer Privacy Act, or the CCPA, requires businesses to provide specific disclosures in privacy notices and honor requests of California residents to exercise certain privacy rights. The CCPA provides for civil penalties of up to $7,500 per violation, as well as a private right of action for individuals affected by certain data breaches to recover significant statutory damages. Additionally, the California Privacy Rights Act, or CPRA, which became effective on January 1, 2023, expands the CCPA’s requirements, including applying to personal information of business representatives and employees and creating a new regulatory agency that will be vested with authority to implement and enforce the CCPA and the CPRA.
Other states, such as Virginia and Colorado, have also passed comprehensive privacy laws, and similar laws are being considered in several other states, as well as at the federal and local levels. These developments may further complicate compliance efforts, and may increase legal risk and compliance costs for us and the third parties upon whom we rely. Outside the United States, an increasing number of laws, regulations, and industry standards may govern data privacy and security. For example, under the European Union’s General Data Protection Regulation, or EU GDPR, and the United Kingdom’s so-called ‘UK GDPR’ companies may face temporary or definitive bans on data processing and other corrective actions; fines of up to 20 million Euros under the EU GDPR / 17.5 million pounds sterling under the UK GDPR or 4% of annual global revenue, whichever is greater; or private litigation related to processing of personal data brought by classes of data subjects or consumer protection organizations authorized at law to represent their interests.
In addition, we may be unable to transfer personal data from Europe and other jurisdictions to the United States or other countries due to data localization requirements or limitations on cross-border data flows. Europe and other jurisdictions have enacted laws requiring data to be localized or limiting the transfer of personal data to other countries. In particular, the European Economic Area, or EEA, and the United Kingdom, or UK, have significantly restricted the transfer of personal data to the United States and other countries whose privacy laws it believes are inadequate. Other jurisdictions may adopt similarly stringent interpretations of their data localization and cross-border data transfer laws. Although there are currently various mechanisms that may be used to transfer personal data from the EEA and UK to the United States in compliance with law, such as the EEA and UK’s standard contractual clauses, these mechanisms are subject to legal challenges, and there is no assurance that we can satisfy or rely on these measures to lawfully transfer personal data to the United States. If there is no lawful manner for us to transfer personal data from the EEA, the UK, or other jurisdictions to the United States, or if the requirements for a legally-compliant transfer are too onerous, we could face significant adverse consequences, including the interruption or degradation of our operations, the need to relocate part of or all of our business or data processing activities to other jurisdictions at significant expense, increased exposure to regulatory actions, substantial fines and penalties, the inability to transfer data and work with partners, vendors and other third parties, and injunctions against our processing or transferring of personal data necessary to operate our business. Some European regulators have ordered certain companies to suspend or permanently cease certain transfers of personal data to recipients outside Europe for allegedly violating the EU GDPR’s cross-border data transfer limitations. Additionally, companies that transfer personal data to recipients outside of the EEA and/or UK to other jurisdictions, particularly to the United States, are subject to increased scrutiny from regulators individual litigants and activist groups.
In addition to data privacy and security laws, we may be contractually subject to industry standards adopted by industry groups and may become subject to such obligations in the future. We may also be bound by other contractual obligations related to data privacy and security, and our efforts to comply with such obligations may not be successful.
We may publish privacy policies, marketing materials, and other statements, such as compliance with certain certifications or self-regulatory principles, regarding data privacy and security. If these policies, materials or statements are found to be deficient, lacking in transparency, deceptive, unfair, or misrepresentative of our practices, we may be subject to investigation, enforcement actions by regulators, or other adverse consequences.
Obligations related to data privacy and security are quickly changing, becoming increasingly stringent, and creating regulatory uncertainty. Additionally, these obligations may be subject to differing applications and interpretations, which may be inconsistent or conflict among jurisdictions. Preparing for and complying with these obligations may require us to; modify our data processing practices and policies; put in place additional mechanisms ensuring compliance with the new data protection rules; divert resources from other initiatives and projects; and restrict the way products and services involving data are offered, all of which could significantly harm our business, financial condition, results of operations and prospects.
Further, compliance with these and any other applicable privacy and data security laws and regulations is a rigorous and time-intensive process. Moreover, despite our efforts, our personnel or third parties on whom we rely may fail to comply with any such laws or regulations, which could adversely affect our business, financial condition and results of operations. If we or the third parties on which we rely fail, or are perceived to have failed, to address or comply with applicable data privacy and security obligations, we could face significant consequences, including but not limited to: government enforcement actions (e.g., investigations, fines, penalties, audits, inspections, and similar); litigation (including class-action claims); additional reporting requirements and/or oversight; bans on processing personal data; and orders to destroy or not use personal data. Any of these events could have a material adverse effect on our reputation, business, or financial condition, including but not limited to: loss of customers; inability to process personal data or to operate in certain jurisdictions; limited ability to develop or commercialize our products; expenditure of time and resources to defend any claim or inquiry; adverse publicity; or substantial changes to our Intellectual Propertybusiness model or operations.
RISKS RELATING TO OUR INTELLECTUAL PROPERTY
Our proprietary rights may not adequately protect our technologies.
Our commercial success will depend in part on our obtaining and maintaining patent, trade secret, copyright and trademark protection of our technologies in the United States and other jurisdictions as well as successfully enforcing this intellectual property and defending it against third-party challenges. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable intellectual property protections, such as patents or trade secrets, cover them. In particular, we place considerable emphasis on obtaining patent and trade secret protection for significant new technologies, products and processes. The degree of future protection of our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. The degree of future protection of our proprietary rights is also uncertain for products that are currently in the early stages of development because we cannot predict which of these products will ultimately reach the commercial market or whether the commercial versions of these products will incorporate proprietary technologies.
Our patent position is highly uncertain and involves complex legal and factual questions. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. For example:
•we or our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;
•we or our licensors might not have been the first to file patent applications for these inventions;
•others may independently develop similar or alternative technologies or duplicate any of our technologies;
•it is possible that none of our pending patent applications or the pending patent applications of our licensors will result in issued patents;
•patents may issue to third parties that cover how we might practice our technology;
•our issued patents and issued patents of our licensors may not provide a basis for commercially viable technologies, may not provide us with any competitive advantages, or may be challenged and invalidated by third parties; and
•we may not develop additional proprietary technologies that are patentable.
Patents may not be issued for any pending or future pending patent applications owned by or licensed to us, and claims allowed under any issued patent or future issued patent owned or licensed by us may not be valid or sufficiently broad to protect our technologies. Moreover, protection of certain of our intellectual property may be unavailable or limited in the United States or in foreign countries, and we have not sought to obtain foreign patent protection for certain of our products or technologies due to cost, concerns about enforceability or other reasons. Any issued patents owned by or licensed to us now or in the future may be challenged, invalidated, or circumvented, and the rights under such patents may not provide us with competitive advantages. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, and in the case of certain products no foreign
patents were filed or can be filed. This could make it easier for competitors to capture or increase their market share with respect to related technologies. We could incur substantial costs to bring suits in which we may assert our patent rights against others or defend ourselves in suits brought against us. An unfavorable outcome of any litigation could have a material adverse effect on our business and results of operations.
We also rely on trade secrets to protect our technology, especially where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. We regularly attempt to obtain confidentiality agreements and contractual provisions with our collaborators, employees and consultants to protect our trade secrets and proprietary know-how. These agreements may be breached or may not have adequate remedies for such breach. While we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors or scientific and other advisors, or those of our strategic partners, may unintentionally or willfully disclose our information to competitors. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, our enforcement efforts would be expensive and time consuming, and the outcome would be unpredictable. In addition, courts outside the United States are sometimes unwilling to protect trade secrets. Moreover, if our competitors independently develop equivalent knowledge, methods and know-how, it will be more difficult for us to enforce our rights and our business could be harmed.
If we are not able to defend the patent or trade secret protection position of our technologies, then we will not be able to exclude competitors from developing or marketing competing technologies and we may not generate enough revenues from product sales to justify the cost of developing our technologies and to achieve or maintain profitability.
We also rely on trademarks to establish a market identity for our company and our products. To maintain the value of our trademarks, we might have to file lawsuits against third parties to prevent them from using trademarks confusingly similar to or dilutive of our registered or unregistered trademarks. Also, we might not obtain registrations for our pending trademark applications, and we might have to defend our registered trademark and pending trademark applications from challenge by third parties. Enforcing or defending our registered and unregistered trademarks might result in significant litigation costs and damages, including the inability to continue using certain trademarks.
Third parties may claim that we infringe their intellectual property, and we could suffer significant litigation or licensing expense as a result.
Various U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in our technology areas. Such third parties may claim that we infringe their patents. Because patent applications can take several years to result in a patent issuance, there may be currently pending applications, unknown to us, which may later result in issued patents that our technologies may infringe. For example, we are aware of competitors with patents in technology areas applicable to our optical test equipment products. Such competitors may allege that we infringe these patents. There could also be existing patents of which we are not aware that our technologies may inadvertently infringe. We have from time to time been, and may in the future be, contacted by third parties, including patent assertion entities or intellectual property advisors, about licensing opportunities that also contain claims that we are infringing on third party patent rights. If third parties assert
these claims against us, we could incur extremely substantial costs and diversion of management resources in defending these claims, and the defense of these claims could have a material adverse effect on our business, financial condition and results of operations. Even if we believe we have not infringed on a third party’s patent rights, we may have to settle a claim on unfavorable terms because we cannot afford to litigate the claim. In addition, if third parties assert claims against us and we are unsuccessful in defending against these claims, these third parties may be awarded substantial damages as well as injunctive or other equitable relief against us, which could effectively block our ability to make, use, sell, distribute or market our products and services in the United States or abroad.
Commercial application of nanotechnologies in particular, or technologies involving nanomaterials, is new and the scope and breadth of patent protection is uncertain. Consequently, the patent positions of companies involved in nanotechnologies have not been tested, and there are complex legal and factual questions for which important legal principles will be developed or may remain unresolved. In addition, it is not clear whether such patents will be subject to interpretations or legal doctrines that differ from conventional patent law principles. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our nanotechnology-related intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our nanotechnology-related patents or in third party patents. In the event that a claim relating to intellectual property is asserted against us, or third parties not affiliated with us hold pending or issued patents that relate to our products or technology, we may seek licenses to such intellectual property or challenge those patents. However, we may be unable to obtain these licenses on commercially reasonable terms, if at all, and our challenge of the patents may be unsuccessful. Our failure to obtain the necessary licenses or other rights could prevent the sale, manufacture or distribution of our products and, therefore, could have a material adverse effect on our business, financial condition and results of operations.
A substantial portion of our technology is subject to retained rights of our licensors, and we may not be able to prevent the loss of those rights or the grant of similar rights to third parties.
A substantial portion of our technology is licensed from academic institutions, corporations and government agencies. Under these licensing arrangements, a licensor may obtain rights over the technology, including the right to require us to grant a license to one or more third parties selected by the licensor or that we provide licensed technology or material to third parties for non-commercial research. The grant of a license for any of our core technologies to a third party could have a material and adverse effect on our business. In addition, some of our licensors retain certain rights under the licenses, including the right to
grant additional licenses to a substantial portion of our core technology to third parties for non-commercial academic and research use. It is difficult to monitor and enforce such non-commercial academic and research uses, and we cannot predict whether the third-party licensees would comply with the use restrictions of such licenses. We have incurred and could incur substantial expenses to enforce our rights against them. We also may not fully control the ability to assert or defend those patents or other intellectual property which we have licensed from other entities, or which we have licensed to other entities.
In addition, some of our licenses with academic institutions give us the right to use certain technology previously developed by researchers at these institutions. In certain cases, we also have the right to practice improvements on the licensed technology to the extent they are encompassed by the licensed patents and are within our field of use. Our licensors may currently own and may in the future obtain additional patents and patent applications that are necessary for the development, manufacture and commercial sale of our anticipated products. We may be unable to agree with one or more academic institutions from which we have obtained licenses whether certain intellectual property developed by researchers at these academic institutions is covered by our existing licenses. In the event that the new intellectual property is not covered by our existing licenses, we would be required to negotiate a new license agreement. We may not be able to reach agreement with current or future licensors on commercially reasonable terms, if at all, or the terms may not permit us to sell our products at a profit after payment of royalties, which could harm our business.
Some of our patents may cover inventions that were conceived or first reduced to practice under, or in connection with, U.S. government contracts or other federal funding agreements. With respect to inventions conceived or first reduced to practice under a federal fundingsuch agreement, the U.S. government may retain a non-exclusive, non-transferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the invention throughout the world. We may not succeed in our efforts to retain title in patents, maintain ownership of intellectual property or in limiting the U.S. government’s rights in our proprietary technologies and intellectual property when an issue exists as to whether such intellectual property was developed in the performance of a federal fundingsuch agreement or developed at private expense.
If we fail to obtain the right to use the intellectual property rights of others which are necessary to operate our business, and to protect their intellectual property, our business and results of operations will be adversely affected.
In the past, we have licensed certain technologies for use in our products. In the future, we may choose, or be required, to license technology or intellectual property from third parties in connection with the development of our products. We cannot
assure you that third-party licenses will be available on commercially reasonable terms, if at all. Our competitors may be able to obtain licenses, or cross-license their technology, on better terms than we can, which could put us at a competitive disadvantage. Also, we often enter into confidentiality agreements with such third parties in which we agree to protect and maintain their proprietary and confidential information, including at times requiring our employees to enter into agreements protecting such information. There can be no assurance that the confidentiality agreements will not be breached by any of our employees or that such third parties will not make claims that their proprietary information has been disclosed.
RISKS RELATING TO OUR COMMON STOCK
Our common stock price has been volatile and we expect that the price of our common stock will fluctuate substantially in the future, which could cause you to lose all or a substantial part of your investment.
The United States Tax Cutspublic trading price for our common stock is volatile and Jobs Actmay fluctuate significantly. Since January 1, 2009, our common stock has traded between a high of 2017$12.85 per share and a low of $0.26 per share. Among the factors, many of which we cannot control, that could cause material fluctuations in the market price for our common stock are:
•sales of our common stock by our significant stockholders, or the perception that such sales may occur;
•changes in earnings estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ earnings estimates;
•quarterly variations in our or our competitors’ results of operations;
•challenges integrating our recent or future acquisitions, including the inability to realize any expected synergies;
•general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors;
•announcements by us, or by our competitors, of acquisitions, new products, significant contracts, commercial relationships or capital commitments;
•pending or threatened litigation;
•any major change in our board of directors or management or any competing proxy solicitations for director nominees;
•changes in governmental regulations or in the status of our regulatory approvals;
•announcements related to patents issued to us or our competitors;
•a lack of, limited or negative industry or securities analyst coverage;
•health epidemics, including the COVID-19 pandemic;
•political, economic and social instability, including, for example, the military incursion of Russia into Ukraine, terrorist activities and any disruption these events may cause to the broader global industrial economy;
•discussions of our company or our stock price by the financial and scientific press and online investor communities; and
•general developments in our industry.
In addition, the stock prices of many technology companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These factors may materially and adversely affect the market price of our businesscommon stock.
If our estimates relating to our critical accounting policies are based on assumptions or judgments that change or prove to be incorrect, our operating results could fall below expectations of financial analysts and financial condition.investors, resulting in a decline in our stock price.
The preparation of financial statements in conformity with U.S. Tax CutsGAAP requires our management to make estimates, assumptions and Jobs Act (the "TCJA") significantly reformsjudgments that affect the US Internalamounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of financial analysts and investors, resulting in a decline in our stock price. Significant assumptions and estimates used in preparing our consolidated financial statements include those related to revenue recognition, stock-based compensation and income taxes. Moreover, the revenue recognition guidance, ASC Topic 606, Revenue Code. The TCJA, amongfrom Contracts with Customers, requires more judgment than did the prior guidance.
Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws and Delaware law could discourage or prevent a change in control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management.
Our amended and restated certificate of incorporation and bylaws and Delaware law contain provisions that might delay or prevent a change in control, discourage bids at a premium over the market price of our common stock and adversely affect the market price of our common stock and the voting and other things, contains significant changes to U.S. federal corporate income taxation, including reductionrights of the U.S. federal corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Federal net operating losses arising in taxable year ending after December 31, 2017, will be carried forward indefinitely pursuant to the TCJA. We continue to examine the impact this tax reform legislation may have on our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the TCJA is uncertain and our business and financial condition could be adversely affected. The impact of this tax reform on holders of our common stock. These provisions include:
•a classified board of directors serving staggered terms;
•advance notice requirements to stockholders for matters to be brought at stockholder meetings;
•a supermajority stockholder vote requirement for amending certain provisions of our amended and restated certificate of incorporation and bylaws; and
•the right to issue preferred stock is also uncertain andwithout stockholder approval, which could be adverse. used to dilute the stock ownership of a potential hostile acquirer.
We urgeare also subject to provisions of the Delaware General Corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years unless the holder’s acquisition of our stock was approved in advance by our board of directors or certain other conditions are satisfied.
The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.
Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware and the U.S. federal district courts will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to consultobtain a favorable judicial forum for disputes with their legalus or our directors, officers or employees.
Our amended and tax advisors with respectrestated bylaws provide that the Court of Chancery of the State of Delaware is the exclusive forum for the following types of actions or proceedings under Delaware statutory or common law:
•anyderivativeclaimorcauseofactionbroughtonourbehalf;
•anyclaimorcauseofactionassertingabreachoffiduciaryduty;
•anyclaimorcauseofactionagainstusarisingunderDGCL;
•any claim or cause of action arisingunder orseeking tointerpretouramended andrestated certificate of incorporationorouramended and restated bylaws;and
•anyclaimorcauseofactionagainstusthatisgovernedbytheinternalaffairsdoctrine.
The provisions would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such legislationSecurities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the potential tax consequencesthreat of investinginconsistent or contrary rulings by different courts, among other considerations, our amended and restated bylaws further provide that, unless we consent to the selection of an alternate forum, the U.S. federal district courts will be the exclusive forum for resolving any complaint asserting a cause or causes of action arising under the Securities Act.
While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated bylaws. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.
These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision in our common stock.amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur further significant additional costs associated with resolving the dispute in other jurisdictions, all of which could seriously harm our business.
GENERAL RISK FACTORS
If our information technology systems or data, or those of third parties upon which we rely, are or were compromised, we could experience adverse consequences resulting from such compromise.
In the ordinary course of our business, we and the third parties upon which we rely, face a variety of evolving cybersecurity related threats, including but not limited to phishing, malware, or ransomware attacks, which could cause security incidents. Cyber-attacks, malicious internet-based activity, online and offline fraud, and other similar activities threaten the confidentiality, integrity, and availability of our sensitive data and information technology systems, and those of the third parties upon which we rely. Such threats are prevalent and continue to rise, are increasingly difficult to detect, and come from a variety of sources, including traditional computer “hackers,” threat actors, “hacktivists,” organized criminal threat actors, personnel (such as through theft or misuse), sophisticated nation states, and nation-state-supported actors. Any of these or similar threats could cause a security incident or other interruption that could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our sensitive data or our information technology systems, or those of the third parties upon whom we rely. A security incident or other interruption could disrupt our ability (and that of third parties upon whom we rely) to provide our services.
As the numerous and evolving cybersecurity threats continue to become increasingly more complex and sophisticated, it becomes necessary for us to become cyber incident resilient. We have experienced security incidents in the past, and may do so in the future, resulting in the unauthorized, unlawful, or inappropriate access to sensitive and/or confidential data. For example, in January 2023, we detected a cyber incident impacting certain of our technology systems. Promptly upon our detection of the incident, we launched an investigation, notified federal law enforcement and engaged the services of incident response professionals (including a nationally recognized third-party forensic investigator) and specialized cybersecurity legal counsel. Where necessary, we disclosed the incident to customers in accordance with our contractual requirements regarding cyber incident disclosure. While we were able to manage this incident without any significant disruption to our operations, there is no guarantee that we will have similar success with other attacks in the future should one occur.
In addition, our reliance on third-party service providers could introduce new cybersecurity risks and vulnerabilities, including supply-chain attacks, and other threats to our business operations. We rely on third-party service providers and technologies to operate critical business systems to process sensitive data in a variety of contexts, including, without limitation, cloud-based infrastructure, data center facilities, encryption and authentication technology, employee email, content delivery to customers, and other functions. We also rely on third-party service providers to provide other products, services, parts, or otherwise to operate our business. Our ability to monitor these third parties’ information security practices is limited, and these third parties may not have adequate information security measures in place. If our third-party service providers experience a security incident or other interruption, we could experience adverse consequences.
If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences such as government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing sensitive data (including personal data); litigation (including class claims); indemnification obligations; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. Security incidents and attendant consequences may cause customers to stop using our services, deter new customers from using our services, and negatively impact our ability to grow and operate our business.
While we have implemented security measures designed to protect against security incidents and take steps to become increasingly cyber incident resilient, there can be no assurance that these measures will be effective against an ever-evolving cyber threat landscape. We take steps designed to detect and mitigate vulnerabilities, but we may not be able to detect and remediate all vulnerabilities because the threats and techniques used to exploit the vulnerability change frequently and are often sophisticated in nature. Therefore, such vulnerabilities could be exploited but may not be detected until after a security incident has occurred. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. These vulnerabilities pose material risks to our business. While we maintain cyber insurance coverage to mitigate against the costs associated with a cyber incident, we cannot be certain that our cyber insurance coverage will be adequate or sufficient to protect us from or to mitigate liabilities arising out of our privacy and security practices, that such coverage will continue to be available on commercially reasonable terms or at all, or that such coverage will pay future claims.
If there are substantial sales of our common stock, or the perception that such sales may occur, our stock price could decline.
If any of our stockholders were to sell substantial amounts of our common stock, the market price of our common stock may decline, which might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Substantial sales of our common stock, or the perception that such sales may occur, may have a material adverse effect on the prevailing market price of our common stock.
Carilion Clinic holds approximately 3.5 million shares of our common stock (including approximately 1.3 million shares issuable to Carilion upon conversion of shares of Series A Convertible Preferred Stock that Carilion holds). All of these shares have been registered for resale on a Form S-3 registration statement and, accordingly, may generally be freely sold by Carilion at any time. Any sales of these shares, or the perception that future sales of shares may occur by Carilion or any of our other significant stockholders, may have a material adverse effect on the market price of our stock. Any such continuing material adverse effect on the market price of our stock could impair our ability to comply with NASDAQ’s continuing listing standards in respect of our minimum stock price, as further described below.
We may become involved in securities class action litigation that could divert management’s attention and harm our business and our insurance coverage may not be sufficient to cover all costs and damages.
The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of technology companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. Securities class litigation also often follows certain significant business transactions, such as the sale of a business division or a change in control transaction. We may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect our business.
We may not be ableare obligated to comply with all applicable listing requirements or standards of The NASDAQ Capital Marketdevelop and NASDAQ could delist our common stock.
Our common stock is listed on The NASDAQ Capital Market. In ordermaintain proper and effective internal controls over financial reporting and any failure to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards. One such requirement is that we maintain a minimum bid pricethe adequacy of at least $1.00 per share for our common stock. Although we currently comply with the minimum bid requirement, in the recent past, our minimum bid price has fallen below $1.00 per share, and it could again do so in the future. If our bid price falls below $1.00 per share for 30 consecutive business days, we will receive a deficiency notice from NASDAQ advising us
that we have 180 days to regain compliance by maintaining a minimum bid price of at least $1.00 for a minimum of ten consecutive business days. Under certain circumstances, NASDAQ could require that the minimum bid price exceed $1.00 for more than ten consecutive days before determining that a company complies.
In the event that our common stock is not eligible for continued listing on NASDAQ or another national securities exchange, trading of our common stock could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reductionthese internal controls may adversely affect investor confidence in our coverage by security analystscompany and, as a result, the news media, which could cause the price of our common stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange.
Our common stock price has been volatile and we expect that the price of our common stock will fluctuate substantially in the future, which could cause you to lose all or a substantial part of your investment.
The public trading price for our common stock is volatile and may fluctuate significantly. Since January 1, 2009, our common stock has traded between a high of $5.00 per share and a low of $0.26 per share. Among the factors, many of which we cannot control, that could cause material fluctuations in the market price for our common stock are:
sales of our common stock by our significant stockholders, or the perception that such sales may occur;
changes in earnings estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ earnings estimates;
changes in our status as an entity eligible to receive SBIR contracts and grants;
quarterly variations in our or our competitors’ results of operations;
general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors;
announcements by us, or by our competitors, of acquisitions, new products, significant contracts, commercial relationships or capital commitments;
pending or threatened litigation;
any major change in our board of directors or management or any competing proxy solicitations for director nominees;
changes in governmental regulations or in the status of our regulatory approvals;
announcements related to patents issued to us or our competitors;
a lack of, limited or negative industry or securities analyst coverage;
discussions of our company or our stock price by the financial and scientific press and online investor communities; and
general developments in our industry.
In addition, the stock prices of many technology companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These factors may materially and adversely affect the market pricevalue of our common stock.
If our internal control over financial reporting is found notWe are required, pursuant to be effective or if we make disclosure of existing or potential material weaknesses in those controls, investors could lose confidence in our financial reports, and our stock price may be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include an internal controlfurnish a report with our Annual Reportby management on, Form 10-K. That report must include management’s assessment ofamong other things, the effectiveness of our internal control over financial reporting ason an annual basis. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
During the endevaluation and testing process of the fiscal year.
We evaluate our existinginternal controls, if we identify one or more material weaknesses in our internal control over financial reporting, based on the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. During the course ofwe will be unable to assert that our ongoing evaluation of the internal controls,control over financial reporting is effective. While we may identify areas requiring improvement, and may have to design enhanced processesestablished certain procedures and controls to address issues identified through this review. Remedying any deficiencies, significant deficiencies or material weaknesses thatover our financial reporting processes, we identify may require us to incur significant costs and expend significant time and management resources. We cannot assure you that anythese efforts will prevent restatements of the measures we implement to remedy any such deficiencies will effectively mitigate or remedy such deficiencies. Investors could lose confidence in our financial reports,statements in the future. We may not be able to remediate any future material weaknesses, or to complete our evaluation, testing and our stock price may be adversely affected, if ourany required remediation in a timely fashion.
Any failure to maintain internal controlscontrol over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If we are found notunable to beconclude that our internal control over financial reporting is effective, by management or if we make disclosurecould lose investor confidence in the accuracy and completeness of existing or potential significant deficiencies or material weaknesses in those controls.
Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws and Delaware law could discourage or prevent a change in control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management.
Our amended and restated certificate of incorporation and bylaws and Delaware law contain provisions that might delay or prevent a change in control, discourage bids at a premium overfinancial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the Nasdaq Stock Market, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.
Uncertainties in the interpretation and application of existing, new and proposed tax laws and regulations could materially affect our tax obligations and effective tax rate.
The tax regimes to which we are subject or under which we operate are unsettled and may be subject to significant change. The issuance of additional guidance related to existing or future tax laws, or changes to tax laws or regulations proposed or implemented by the current or a future U.S. presidential administration, Congress, or taxing authorities in other jurisdictions, including jurisdictions outside of the United States, could materially affect our tax obligations and effective tax rate. To the extent that such changes have a negative impact on us, our suppliers, manufacturers, or our customers, including as a result of related uncertainty, these changes may adversely affectimpact our business, financial condition, results of operations, and cash flows. For example, beginning in 2022, the market priceTax Cuts and Jobs Act of 2017 eliminated the option to deduct research and development expenditures immediately in the year incurred and requires taxpayers to amortize such expenditures over five years for tax purposes. While the most significant impact of this provision is to cash tax liability for 2022, the tax year in which the provision took effect, the impact will decline annually over the five-year amortization period to an immaterial amount in year six.
The amount of taxes we pay in different jurisdictions depends on the application of the tax laws of various jurisdictions, including the United States, to our international business activities, tax rates, new or revised tax laws, or interpretations of tax laws and policies, and our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for pricing intercompany transactions pursuant to our intercompany arrangements or disagree with our determinations as to the income and expenses attributable to specific jurisdictions. If such a challenge or disagreement were to occur, and our position was not sustained, we could be required to pay additional taxes, interest, and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows, and lower overall profitability of our common stockoperations. Our financial statements could fail to reflect adequate reserves to cover such a contingency. Similarly, a taxing authority could assert that we are subject to tax in a jurisdiction where we believe we have not established a taxable connection, often referred to as a “permanent establishment” under international tax treaties, and such an assertion, if successful, could increase our expected tax liability in one or more jurisdictions.
Our ability to use our net operating loss carryforwards may be limited.
We have incurred net operating losses during our history. Subject to the votinglimitations described below, unused net operating losses generally may carry forward to offset future taxable income if we achieve profitability in the future, unless such net operating losses expire under applicable tax laws. Under current law, unused U.S. federal net operating losses generated in tax years beginning after December 31, 2017, will not expire and other rightsmay be carried forward indefinitely, but the deductibility of such federal net operating loss carryforwards is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to current federal tax law. In addition, our ability to utilize our federal net operating carryforwards may be limited under Section 382 of the holdersInternal Revenue Code of 1986, as amended, or the Code. The limitations apply if we experience an “ownership change,” which is generally defined as a greater than 50 percentage point change (by value) in the ownership of our common stock. These provisions include:
equity by certain stockholders or groups of stockholders over a classified board of directors serving staggered terms;
advance notice requirements to stockholders for matters to be brought at stockholder meetings;
a supermajority stockholder vote requirement for amending certainrolling three-year period. Similar provisions of state tax law may also apply to limit the use of our amended and restated certificate of incorporation and bylaws; and
the right to issue preferred stock without stockholder approval, which could be used to dilute thestate net operating loss carryforwards. Past or future changes in our stock ownership, including as a result of a potential hostile acquirer.
We are alsoour initial public offering, some of which may be outside of our control, may have triggered or may trigger an ownership change that materially impacts our ability to utilize pre-change net operating loss carryforwards. Moreover, there may be periods during which the use of net operating loss carryforwards in various jurisdictions is suspended or otherwise subject to provisions ofadditional limitations. Accordingly, our ability to use our net operating loss carryforwards to offset taxable income may be subject to such limitations or special rules that apply at the Delaware General Corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years unless the holder’s acquisition of our stock was approved in advance by our board of directors or certain other conditions are satisfied.
The existence of these provisionsstate level, which could adversely affect the voting powerour results of holdersoperations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We lease approximately 4,400The following table summarizes the location, ownership status and total square feet of office space in Roanoke, Virginia, which serves as our corporate headquarters and is used for general and administrative functions. This lease expires March 31, 2020.
We lease approximately 42,000 square feetfootage of space in Blacksburg, Virginia, near Virginia Tech, which is used by bothutilized for our Technology Development segmentoperations and our Products and Licensing segment. This lease expiresprincipal corporate offices as of December 31, 2024.2022:
We lease approximately 11,000 square feet of space in Ann Arbor, Michigan, for research, development and manufacturing | | | | | | | | | | | | | | |
| Location | | Square Footage | |
| Operations facilities | 11 locations in 5 US states, 2 UK counties, 1 CAN province, 1 GER county and 1 UAE city | | 171,500 | |
| Principal corporate offices: | | | | |
| Corporate headquarters | Roanoke, Virginia (US) | | 6,500 | |
| OptaSense corporate office | Farnborough, Hampshire (UK) | | 6,200 | |
| Lios corporate office | Cologne, Germany | | 2,400 | |
All of our THz product platform. This lease expires December 31, 2018.
We lease approximately 29,000 square feet of space in Camarillo, California, for development and manufacturing of our custom optoelectronic solutions operations. This lease expires March 31, 2019.
We lease approximately 16,000 square feet of space in Charlottesville, Virginia, near the University of Virginia, for use by certain groups in our Technology Development segment. This lease expires December 31, 2020.
We lease approximately 900 square feet of space in Quebec, Canada for sales related functions. This lease expires in April 30, 2020.
We own a 24,000 square foot facility in Danville, Virginia for use by certain groups in our Technology Development segment.
properties are leased with various end dates through 2026. We believe that our existing facilities are adequate for our current needs and suitable additional or substitute space will be available as needed to accommodate expansion of our operations.
ITEM 3. LEGAL PROCEEDINGS
In June 2015, we received a letter of final determination from the Defense Contract Management Agency ("DCMA") regarding the allowability of certain costs we included in our billings under cost-plus type research contracts during 2007. In
conjunction with DCMA's determination of those costs as expressly unallowable under the provisions of the Federal Acquisition Regulations ("FAR"), DCMA assessed penalties and interest to us totaling $1.1 million. In July 2015, we filed an appeal of the assessed penalties and interest with the Armed Services Board of Contract Appeals ("ASBCA"). A hearing was held with respect to this appeal in January 2017. On November 29, 2017, ASBCA ruled that the claimed costs were unallowable for reimbursement but were not considered to be expressly unallowable under the FAR, and accordingly were not subject to the penalties assessed by DCMA. The ruling is subject to appeal by DCMA.
Additionally, fromFrom time to time, we may become involved in litigation or claims arising out offrom our operations in the normal course of business. Management currently believes the amount of ultimate liability, if any, with respect to these actions will not materially affect our financial position, results of operations, or liquidity.
Refer to Note 15, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements included herein for information relating to certain legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON STOCKSTOCKHOLDERS
Our common stock tradesis listed on The NASDAQthe Nasdaq Capital Market. The following table sets forthMarket under the high and low sales pricessymbol "LUNA." As of our common stock for each period indicated as reported by NASDAQ.
|
| | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 |
| Fiscal Period | | High | | Low | | High | | Low |
| First Quarter | | $ | 2.33 |
| | $ | 1.38 |
| | $ | 1.25 |
| | $ | 0.74 |
|
| Second Quarter | | $ | 1.79 |
| | $ | 1.31 |
| | $ | 1.32 |
| | $ | 0.97 |
|
| Third Quarter | | $ | 1.75 |
| | $ | 1.16 |
| | $ | 1.69 |
| | $ | 1.08 |
|
| Fourth Quarter | | $ | 2.60 |
| | $ | 1.47 |
| | $ | 1.55 |
| | $ | 1.22 |
|
We have a single classMarch 14, 2023, we had 33,420,773 shares of common stock outstanding. Asoutstanding held by 83 holders of March 15, 2018 there were approximately 97record. The actual number of stockholders is greater than this number of record of our common stock. Theholders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders of record of our common stockalso does not reflect the number of beneficial holdersinclude stockholders whose shares aremay be held in trust by depositories, brokers or other nominees.entities.
STOCK PERFORMANCE GRAPH
The graph set forth below compares the cumulative total stockholder return on our common stock for the previous five years, during which our common stock was traded on the NASDAQNasdaq Capital Market, as compared to the cumulative total return of the NASDAQNasdaq Composite Index and the Russell 2000 Index over the same period. This graph assumes the investment of $100,000 in our common stock at the closing price on January 1, 2013,2018, and an equivalent amount in the NASDAQNasdaq Composite Index and the Russell 2000 Index on that date, and assumes the reinvestment of dividends, if any. We have never paid dividends on our common stock and have no present plans to do so.
Since there is no published industry or line-of-business index for our business reflective of our performance, nor do we believe we can reasonably identify a peer group, we measure our performance against issuers with similar market capitalizations. We selected the Russell 2000 Index because it measures the performance of a broad range of companies with lower market capitalizations than those companies included in the S&P 500 Index.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.
The preceding Stock Performance Graph is not deemed filed with the Securities and Exchange Commission and shall not be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
DIVIDEND POLICY
Since our inception, we have never declared or paid any cash dividends on our common stock. We currently expect to retain any future earnings for use in the operation and expansion of our business, and therefore do not anticipate paying any cash dividends in the foreseeable future. In addition, our debt facility with Silicon ValleyPNC Bank restricts us from paying cash dividends on our capital stock without the bank’s prior written consent.
Unregistered Sales of Equity Securities
Common Stock Dividend Payable to CarilionNot applicable.
We issued 1,321,514 shares
Table of Series A Preferred Stock, par value $0.001 per share, to Carilion Clinic in January 2010, which shares were issued in reliance on the exemptions from registration under the Securities Act provided by Sections 3(a)(9) and 4 (a)(2) thereof. The Series A Preferred Stock accrues dividends at the rate of $0.2815 per share per annum, payable quarterly in arrears. Accrued dividends are payable in shares of our common stock, with the number of shares being equal to the quotient of (i) the cumulative aggregate balance of accrued but unpaid dividends on each share of Series A Preferred Stock divided by (ii) the conversion price of the Series A Preferred Stock, which is currently $4.69159 per share. For the period from January 12, 2010, the original issue date of the Series A Preferred Stock, through December 31, 2017, the Series A Preferred Stock issued to Carilion has accrued $1,160,331 in dividends. The accrued dividend as of December 31, 2017 will be paid by the issuance of 631,693 shares of our common stock, which we will issue at Carilion’s written request. As the Series AContents
Preferred Stock was issued in reliance on the exemption provided by Section 3(a)(9), the shares of common stock payable as dividends will also be exempt from registration in reliance on Section 3(a)(9) of the Securities Act.
Purchases of Equity Securities by the Issuer and Affiliated Parties
Parties-
The following table summarizes repurchases of our common stock during the three months ended December 31, 2017.2022.
| | | | | | | | | | | | | | |
| | | Total Number of | Approximate Dollar |
| | | Shares Purchased as | Value of Shares that |
| Total Number of | Average Price Paid | Part of a Publicly | May Yet be Purchased |
| Period | Shares Purchased | per Share | Announced Program | Under the Program |
| 10/1/2022 - 10/31/2022 | 1,360 (1) | $ | 4.85 | | — | | $ | — | |
| 11/1/2022 - 11/30/2022 | 5,036 (1) | $ | 5.23 | | — | | $ | — | |
| 12/1/2022 - 12/31/2022 | 5,509 (1) | $ | 8.37 | | — | | $ | — | |
|
| | | | | | | | | | |
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of a Publicly Announced Program (1) | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program |
| 10/1/2017-10/31/2017 | 193,323 |
| $ | 1.62 |
| 193,323 |
| $ | 1,601,059 |
|
| 11/1/2017-11/30/2017 | 130,120 |
| $ | 1.68 |
| 130,120 |
| $ | 1,382,150 |
|
| 12/1/2017-12/31/2017 | 159,634 |
| $ | 2.35 |
| 59,636 |
| $ | 1,239,174 |
|
| Total | 483,077 |
| $ | 1.88 |
| 383,079 |
| $ | 1,239,174 |
|
(1) On September 20, 2017, we announced that our boardThese shares of directors authorized acommon stock repurchase program for the repurchasewere repurchased from employees to satisfy tax withholding obligations triggered upon vesting of up to $2.0 million of our common stock. Unless extended, therestricted stock repurchase authorization expires on September 19, 2018 and may be terminated, increased or decreased by our board of directors at any time.units.
ITEM 6. SELECTED FINANCIAL DATARESERVED
The consolidated statement of operations data for each of the years ended December 31, 2017 and 2016 and the consolidated balance sheet data as of December 31, 2017 and 2016 have been derived from our audited consolidated financial statements appearing elsewhere in this report. The consolidated statement of operations data for the years ended December 31, 2015, 2014 and 2013 and the consolidated balance sheet data as of December 31, 2015, 2014 and 2013 have been derived from our audited consolidated financial statements that do not appear in this report. The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included at Part II, Item 7 in this Annual Report on Form 10-K. The selected data in this section is not intended to replace the consolidated financial statements, and the historical results are not necessarily indicative of the results to be expected in any future period.
|
| | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| In thousands, except share and per share data | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Consolidated Statement of Operations Data: | | | | | | | | | |
| Revenues: | | | | | | | | | |
| Technology development | $ | 18,576 |
| | $ | 16,281 |
| | $ | 13,599 |
| | $ | 12,206 |
| | $ | 11,422 |
|
| Products and licensing | 27,661 |
| | 25,587 |
| | 20,851 |
| | 9,054 |
| | 6,912 |
|
| Total revenues | 46,237 |
| | 41,868 |
| | 34,450 |
| | 21,260 |
| | 18,334 |
|
| Cost of revenues: | | | | | | | | | |
| Technology development | 13,988 |
| | 12,473 |
| | 10,379 |
| | 9,376 |
| | 8,882 |
|
| Products and licensing | 14,120 |
| | 13,590 |
| | 10,616 |
| | 4,047 |
| | 3,403 |
|
| Total cost of revenues | 28,108 |
| | 26,063 |
| | 20,995 |
| | 13,423 |
| | 12,285 |
|
| Gross profit | 18,129 |
| | 15,805 |
| | 13,456 |
| | 7,837 |
| | 6,049 |
|
| Operating expense | 18,240 |
| | 18,304 |
| | 19,041 |
| | 12,342 |
| | 14,084 |
|
| Operating loss | (111 | ) | | (2,499 | ) | | (5,586 | ) | | (4,505 | ) | | (8,035 | ) |
| Other (expense)/income, net | (4 | ) | | 13 |
| | (10 | ) | | 111 |
| | 347 |
|
| Interest expense, net | (219 | ) | | (319 | ) | | (220 | ) | | (96 | ) | | (208 | ) |
| Loss from continuing operations before income taxes | (334 | ) | | (2,805 | ) | | (5,816 | ) | | (4,490 | ) | | (7,896 | ) |
| Income tax benefit | (296 | ) | | (136 | ) | | (602 | ) | | (1,137 | ) | | (2,387 | ) |
| Net loss from continuing operations | (39 | ) | | (2,669 | ) | | (5,214 | ) | | (3,353 | ) | | (5,509 | ) |
| Income from discontinued operations, net of income taxes | 14,654 |
| | 300 |
| | 7,531 |
| | 9,347 |
| | 4,705 |
|
| Net income/(loss) | 14,615 |
| | (2,369 | ) | | 2,317 |
| | 5,994 |
| | (804 | ) |
| Preferred stock dividend | 147 |
| | 105 |
| | 86 |
| | 112 |
| | 102 |
|
| Net income/(loss) attributable to common stockholders | $ | 14,468 |
| | $ | (2,474 | ) | | $ | 2,231 |
| | $ | 5,882 |
| | $ | (906 | ) |
| Net loss per share from continuing operations: | | | | | | | | | |
| Basic and diluted | $ | — |
| | $ | (0.10 | ) | | $ | (0.23 | ) | | $ | (0.23 | ) | | $ | (0.38 | ) |
| Net income per share from discontinued operations: | | | | | | | | | |
| Basic and diluted | $ | 0.53 |
| | $ | 0.01 |
| | $ | 0.33 |
| | $ | 0.63 |
| | $ | 0.33 |
|
| Net income/(loss) per share attributable to common stockholders: | | | | | | | | | |
| Basic and diluted | $ | 0.52 |
| | $ | (0.09 | ) | | $ | 0.10 |
| | $ | 0.40 |
| | $ | (0.06 | ) |
| Weighted-average shares: | | | | | | | | | |
| Basic and diluted | 27,579,988 |
| | 27,547,217 |
| | 23,026,494 |
| | 14,880,697 |
| | 14,336,135 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| In thousands | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 36,982 |
| | $ | 12,802 |
| | $ | 17,464 |
| | $ | 14,117 |
| | $ | 7,779 |
|
| Working capital | 44,185 |
| | 21,129 |
| | 23,417 |
| | 15,413 |
| | 10,106 |
|
| Total assets | 66,223 |
| | 54,997 |
| | 58,132 |
| | 27,584 |
| | 19,704 |
|
| Total current liabilities | 14,826 |
| | 15,968 |
| | 15,334 |
| | 8,473 |
| | 7,206 |
|
| Total debt | 2,436 |
| | 4,253 |
| | 6,125 |
| | 625 |
| | 2,125 |
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this report.
Sale of High Speed Optical Receiver Business
On August 9, 2017, we completed the sale of our high speed optical receivers ("HSOR") business, which was part of our Products and Licensing segment, to an unaffiliated third party for an initial purchase price of $33.5 million, of which $29.5 million in cash has been received, and $4.0 million was placed into escrow until December 15, 2018 for possible working capital adjustments to the purchase price and potential satisfaction of certain post-closing indemnification obligations (the "Transaction"). As part of the Transaction, the buyer also hired approximately 49 of our employees who were engaged in the development, manufacture, and sale of HSOR products in addition to certain corporate administrative functions. The buyer provided certain transition services to us with respect to infrastructure and administration for which we paid $0.3 million per month for a period of five months, for a total of $1.5 million, following the closing of the Transaction. We recorded this obligation as a reduction of the value of the purchase price. In assessing the fair value of the services expected to be received by us versus those we expect to deliver to the buyer, we concluded that the transition service payments were more closely aligned with the fair value of the assets sold versus the services received and thus should be part of the consideration reconciliation versus operating activities.
Business Overview
We are a leader in advanced optical technology, providing unique capabilities in high speed optoelectronics and high performance fiber optic test, measurement and control products for the telecommunications industryand 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. Our test and measurement products accelerate the aerospacedevelopment of high speed fiber optic components like photonic integrated circuits ("PICs"), coherent receivers and automotive industries. short-run fiber networks.
Our distributed fiber optic sensing products provide criticalhelp designers and manufacturers more efficiently develop new and innovative products by measuring stress, strain, and temperature information to designersat a high resolution for new designs or manufacturing processes. In addition, our distributed fiber optic sensing products ensure the safety and manufacturers working with advanced materials.structural integrity or operational health of critical assets in the field, by monitoring stress, strain, temperature and vibration in large civil and industrial infrastructure such as bridges, roads, pipelines and borders. We manufacture and sell “terahertz” (THz) products for layer thickness measurements for materials like plastics, rubber, and paint. Our custom optoelectronicTHz products are sold to scientific instrumentation manufacturers for various applications such as metrology, missile guidance, flame monitoring,used in the aerospace and temperature sensing. In addition, weautomotive/EV sectors. We also provide applied research services, typicallyprimarily under researchfederally funded development programs funded by the U.S. government, in areas of advanced materials,that leverage our 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 ofinstrumentation technologies to perform applied research services for companiesmeet the specific needs and for government funded projects. We continueapplications of our customers.
Prior to invest in product development and commercialization, whichSeptember 30, 2021, we anticipate will lead to increased product sales growth.
We arewere organized into two main businessreporting segments, our Products and LicensingLightwave segment and our Technology DevelopmentLuna Labs segment. We 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. Our ProductsLightwave segment consists of our fiber optics testing, measurement and Licensingsensing solutions. 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.
Our Lightwave segment develops, manufactures and markets optical measurement technologies, including the following:
•Sensing, including
–short, medium and long-range distributed fiber optic sensing products, as well assolutions; and
–Terahertz, “THz” measurement products.
•Communications test & measurement products, and also conducts applied research in the fiber optic sensing areaphotonic control, including
–test equipment for both corporatecommunications devices and government customers. We are continuing to developnetworks; and commercialize our fiber optic technology for strain
–specialty laser and temperature sensing applications for the aerospace, automotive, and energy industries. Our Products and Licensing segment revenues represented approximately 60% and 61% of our total revenues for the years ended December 31, 2017 and 2016, respectively.photonic components.
Our Technology DevelopmentLightwave segment also performs applied research principally in the areas of optical sensing & instrumentation, advanced materials, and health sciences. Our Technology Development segment comprised approximately 40% and 39% of our total revenues for the years ended December 31, 2017 and 2016, respectively. Most of the government funding for our Technology Development segment isTHz technologies. Revenues from product sales are mostly derived from the Small Business Innovation Research ("SBIR"), program coordinated by the U.S. Small Business Administration ("SBA").sales of our sensing and communications test, measurement and control products that make use of light-transmitting optical fibers, or fiber optics.
As we develop and commercialize new products, our revenues will reflect a broader and more diversified mix of products. Our Technology Development segment revenueskey initiative for long term growth is to become a leading provider of fiber optic communications test, measurement, control and sensing equipment. Recent acquisitions have added strategic technologies and products that complement our existing suite of sensing products and provided for expansion into high-growth markets such as security and perimeter detection, smart infrastructure monitoring and oil and gas.. Our products have historically accountedbeen strong in long-range, discrete sensing and short range, fully distributed sensing which are best when specific, known locations need to be monitored. Additional product offerings from these strategic acquisitions have helped us fill a gap for a large portionlong range, fully distributed acoustic, temperature and strain measurement, which is best for applications where signals can occur anywhere along the length of the sensor.
We may incur increasing expenses as we seek to expand our total revenues,business, including expenses for research and we expect that they willdevelopment, sales and marketing and manufacturing capabilities. We may continue to representgrow our business in part through acquisitions of additional companies and complementary technologies, which could cause us to incur transaction expenses, amortization or write-offs of intangible assets and goodwill and other acquisition-related expenses. As a significant portion of our total revenues for the foreseeable future. Within the Technology Development segment,result, we have historically had amay incur net losses in future periods, and these losses could be substantial.
Backlog
Our backlog of contractspurchase orders received for which work hasthe related goods have not been scheduled, but for which a specified portion of work has not yet been completed.shipped or recognized as revenue was $52.9 million and $38.4 million at December 31, 2022 and 2021, respectively. We define backlog as the dollar amount of obligations payable to us under negotiated contracts upon completion of a specified portion of work that has not yet been completed, exclusive of revenues previously recognized for work already performed under these contracts, if any. Total backlog includes funded backlog, which is the amount for which money has been directly authorized by the U.S. government andor for which a purchase order has been received byfrom a commercial customer, and unfunded backlog, representingwhich represents firm orders for which funding has not yet been appropriated. Indefinite delivery and quantity contracts and unexercised options are not reported in total backlog. The approximate value
Discontinued Operations
On March 8, 2022, we completed the sale of substantially all of our Technology Developmentequity 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 fees. We had been actively marketing our Luna Labs segment backlog was $23.5 million and $17.6 million at December 31, 2017 and 2016, respectively. The approximate valueto prospective buyers during 2021 as part of our Products and Licensing segment backlog was $6.9 million and $7.2 million at December 31, 2017 and 2016, respectively.
Revenues from product sales are mostly derived fromgrowth strategy for our Lightwave segment. We have separately reported the salesresults of our optoelectronics, sensing and test & measurement products that make useLuna Labs segment as discontinued operations in our consolidated statement of light-transmitting optical fibers, or fiber optics. We continue to invest in product development and commercialization, which we anticipate will lead to increased product sales growth. Although we have been successful in licensing certain technology in past years, we do not expect license revenues to represent a significant portion of future revenues. Over time, however, we do intend to gradually increase such revenues. In the near term, we expect revenues from product sales to continue to be primarily in areas associated with our optoelectronics, fiber optic test & measurement and sensing platforms. In the long term, we expect that revenues from product sales will represent a larger portion of our total
revenues and that as we develop and commercialize new products, these revenues will reflect a broader and more diversified mix of products.
We realized net income attributable to common stockholders of approximately $14.5 millionoperations for the year ended December 31, 20172022 and net loss attributable to common stockholders2021, and presented the related assets and liabilities as held for sale in the consolidated balance sheet as of approximately $2.5 million for the year ended December 31, 2016. Excluding2021.
Acquisition of LIOS Sensing
On March 10, 2022, we acquired NKT Photonics GmbH and LIOS Technology Inc. (collectively, “LIOS Sensing”) for €20.0 million, or $22.1 million. LIOS Sensing, based in Cologne, Germany and formerly owned by NKT Photonics A/S, provides temperature and strain sensing products which are highly complementary to our existing portfolio of fiber optic offerings. Similar to past acquisitions, we believe the effectsacquisition of LIOS Sensing will accelerate our HSOR business, which we sold in 2017, we incurred a net loss from continuing operationstechnology roadmap and overall growth.
We may incur increasing expenses as we seek to expand our business, including expenses for research and development, sales and marketing and manufacturing capabilities. We may also grow our business in part through acquisitions of additional companies and complementary technologies, which could cause us to incur transaction expenses, amortization or write-offs of intangible assets and other acquisition-related expenses. As a result, we may incur net losses for the foreseeable future, and these losses could be substantial.
Description of Our Revenues, Costs and Expenses
Revenues
We generate revenues from technology development, product sales, and commercial product development and licensing and technology development activities. We derive Technology Development segment revenues from providing research and development services to third parties, including government entities, academic institutions and corporations, and from achieving milestones established by some of these contracts and in collaboration agreements. In general, we complete contracted research over periods ranging from six months to three years, and recognize these revenues over the life of the contract as costs are incurred. Our Technology Development segment revenues represented approximately 40% and 39% of our total revenues for the years ended December 31, 2017 and 2016, respectively.
Our Products and LicensingLightwave segment revenues reflect amounts that we receive from sales of our products or development of products for third parties and, to a lesser extent, fees paid to us in connection with licenses or sub-licenses of certain patents and other intellectual property. Products
We derived Luna Labs segment revenues, which are presented as discontinued operations, from providing research and licensingdevelopment services to third parties, including government entities, academic institutions and corporations, and from achieving milestones established by some of these contracts and in collaboration agreements. In general, we completed contracted research over periods ranging from six months to three years and recognize these revenues represented approximately 60% and 61%over the life of the contract as costs are incurred. Following our totalsale of Luna Labs in March 2022, we no longer derive revenues for the years ended December 31, 2017 and 2016, respectively.from Luna Labs.
Cost of Revenues
Cost of revenues associated with Technology Development segment revenues consists of costs associated with performing the related research activities including direct labor, amounts paid to subcontractors and overhead allocated to Technology Development segment activities.
Cost of revenues associated with Products and LicensingLightwave segment revenues consists of license fees for use of certain technologies, product manufacturing costs including all direct material and direct labor costs, amounts paid to our contract manufacturers, manufacturing, shipping and handling, provisions for product warranties and inventory obsolescence, as well as overhead allocated to each of these activities.
Cost of revenues associated with Luna Labs segment revenues, which are presented as discontinued operations, consisted of costs associated with performing the related research activities including direct labor, amounts paid to subcontractors and overhead allocated to Luna Labs segment activities.
Operating Expense
Operating expense consists of selling, general and administrative expenses,expense, as well as expenses related to research, development and engineering, depreciation of fixed assets, and amortization of intangible assets.assets and costs related to merger and acquisitions activities. These expenses also include compensation for employees in executive and operational functions including certain non-cash charges related to expenses from equity awards, facilities costs, professional fees, salaries, commissions, travel expense and related benefits of personnel engaged in sales, marketing, and administrative activities; costs of marketing programs and promotional materials; salaries, bonuses and related benefits of personnel engaged in our own research and development beyond the scope and activities of our Technology Developmenthistorical Luna Labs segment; product development activities not provided under contracts with third parties; and overhead costs related to these activities. The operating expense of our Luna Labs segment is presented in discontinued operations.
Investment Income
Investment income consists of amounts earned on our cash equivalents. We sweep, on a daily basis, a portion of our cash on hand into a fund invested in U.S. government obligations.
Interest Expense Net
We have twoInterest expense is composed of interest paid under our term and revolving loans with Silicon Valley Bank ("SVB") with scheduled maturities in 2018 and 2019. The term loans carry interest at a variable rate of prime plus 2%. At December 31, 2017, we had $2.5 million in the aggregate outstanding on these term loans.
During the years ended December 31, 2017 and 2016, interest expense primarily includedas well as interest accrued on our outstanding SVB loans and interest incurred with respect to our capitalfinance lease obligations.
Critical Accounting Policies and Estimates
Revenue Recognition
Technology Development Revenues
Products and Services
We perform researchevaluate whether two or more contracts should be combined and developmentaccounted for U.S. Federal government agencies, educational institutionsas one single contract and commercial organizations.whether the combined or single contract should be accounted for as more than one performance obligation. We recognize revenue under research contracts when a contractthe performance obligation has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collectabilitysatisfied by transferring control of the contract priceproduct or service to the customer. For tangible products that contain software that is considered reasonably assuredessential to the tangible product’s functionality, we consider the product and can be reasonably estimated. Revenue is earned under cost reimbursable, time and materials and fixed price contracts. Direct contract costs are expensed as incurred.
Under cost reimbursable contracts, we are reimbursed for costs that are determinedsoftware to be reasonable, allowablea single performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation based on their relative stand-alone selling prices. In such circumstances, we use the observable price of goods or services which are sold separately in similar circumstances to similar customers.If these prices are not observable, then we will estimate the stand-alone selling price using information that is reasonably available.For the majority of our standard products and allocableservices, price list and discount structures related to customer type are available. Shipping and handling activities primarily occur after a customer obtains control and are considered fulfillment costs rather than separate performance obligations.
For standard products, we recognize revenue at a point in time when control passes to the contract and paid a fixed fee representing the profit negotiated between us and the contracting agency. Revenue from cost reimbursable contractscustomer.Absent substantial product acceptance clauses, this is recognized as costs are incurred plus an estimate of applicable fees earned. We consider fixed fees under cost reimbursable contracts to be earned in proportion to the allowable costs incurred in performance of the contract.
Revenue from time and materials contracts is recognized based on direct labor hours expended at contract billing rates plus other billable direct costs.
Fixed price contracts may include either a product delivery or specific service performance throughout a period. For fixed price contracts that are based on the proportional performanceshipping terms. In instances where acceptance of the product is specified by the customer, revenue for the product and any related installation services is deferred until such required acceptance criteria have been met. For custom products that require engineering and development based on customer requirements, we will recognize revenue over time using the input method based on cost incurred to date.For extended warranties and involve a specified number of deliverables, we recognizeproduct rentals, revenue is recognized over time using the output method based on the proportion of the cost of the deliverables compared to the cost of all deliverables included in the contract as this method more accurately measures performance under these arrangements. For fixed price contracts that providetime elapsed for the development and deliverywarranty or service period. In the case of warranties, we record a specific prototype or product,contract liability for amounts billed but that are not recognized until subsequent periods.For monitoring services where we are performing monitoring of an asset the customer controls, revenue is recognized over time based uponon the percentageduration of completion method.the underlying contract.
Research and Development Contracts
Our contracts with agencies of the U.S. government are subject to periodic funding by the respective contracting agency. Funding for a contract may be provided in full at inception of the contract or ratably throughout the contract as the services are provided. In evaluating the probability of funding for purposes of assessing collectability of the contract price, we consider our previous experience with our customers, communication with our customers regarding funding status and our knowledge of available funding for the contract or program. If funding is not assessed as probable it is not included in the transaction price and the related revenue recognition is deferrednot recorded until realizationit is reasonably assured.determined that it is probable we will collect the consideration for the related goods or services.
Contract
Because of control transferring over time, revenue recognition inherently involves estimation, includingis recognized based on the contemplated levelextent of effort to accomplish the tasks under the contract, the costprogress towards completion of the effortperformance obligation. The selection of the method to measure progress towards completion requires judgment and an ongoing assessmentis based on the nature of the services to be provided. We generally use the input method, more specifically the cost-to-cost measure of progress toward completingfor our contracts because it best depicts the contract. From timetransfer of control to time,the customer, which occurs as partwe incur costs on our contracts. Under the cost-to-cost measure of normal management processes, facts may change, causing revisionsprogress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated total costs or revenues expected. The cumulative impactat completion of any revisions to estimates and the full impact of anticipated losses on any type of contract are recognized in the period in which they become known.
performance obligation. The underlying bases for estimating our contract research revenues are measurable expenses, such as labor, subcontractor costs and materials, and data that are updated on a regular basis for purposes of preparing our cost estimates. Our research contracts generally have a period of performance of six months to three years, and our estimates of contract costs have historically been consistent with actual results. Revisions in these estimates between accounting periods to reflect changing facts and circumstances have not had a material impact on our operating results, and we do not expect future changes in these estimates to be material. The cumulative impact of any revisions to estimates and the full impact of anticipated losses on any type of contract are recognized in the period in which they become known.
Whether certain costs under government contracts are allowable is subject to audit by the government. Certain indirect costs are charged to contracts using provisional or estimated indirect rates, which
Income Taxes
We are subject to later revision based on government audits of those costs. Management is ofincome taxes primarily in the opinion that costs subsequently disallowed, if any, would not likely have a significant impact on revenues recognized for those contracts.
ProductsUnited States, United Kingdom and Licensing Revenues
We recognize revenue relating to our product sales when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collectability of the resulting receivable is reasonably assured. For tangible products that contain software that is essential to the tangible product’s functionality, we consider the product and software to be a single unit of accounting and recognize revenue accordingly. We evaluate product sales that are a part of multiple-element revenue arrangements to determine whether separate units of accounting exist, and we follow appropriate revenue recognition policies for each separate unit. For multi-element arrangements we allocate revenue to all significant deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE"), and (iii) best estimate of the selling price ("ESP"). VSOE exists only when we sell the deliverable separately and is the price actually charged by us for that deliverable. Our product sales often include bundled products, options, and services and therefore VSOE is not readily determinable. In addition, we believe that because of unique features of our products, TPE also is not available. ESP, which is used when VSOE and TPE does not exist, reflects our best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. We also sell extended warranties from time to time. In this case, we accrue warranty costs based on our estimate of future expense and defer revenue associated with the warranty. The deferred warranty revenue is recognized over the period of the warranty.
Our process for determining ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered in developing the ESPs include prices charged by us for similar offerings, our historical pricing practices, the nature of the deliverables, and the relative ESP of all of the deliverables as compared to the total selling price of the product. We may also consider, when appropriate, the impact of other products and services, on selling price assumptions when developing and reviewing our ESPs.
Income Taxes
Germany. We estimate our tax liability through calculating our current tax liability, together with assessing temporary and permanent differences resulting from the different treatment of items for tax and accounting purposes. TheseThe temporary differences result in deferred tax assets and liabilities, which we record on our balance sheet. Management then assesses the likelihood that deferred tax assets will be recovered in future periods. In assessing the need for a valuation allowance against the net deferred tax asset, management considers factors such as future reversals of existing taxable temporary differences, taxable income in prior carry back years, whether carry back is permitted under the tax law, tax planning strategies and estimated future taxable income exclusive of reversing temporary differences and carry forwards.carryforwards. To the extent that we cannot conclude that it is more likely than not that the benefit of such assets will be realized, we establish a valuation allowance to reduce their net carrying value.
As we assessof December 31, 2022, our projections of future taxable income or other factors that may impact our ability to generate taxable income in future periods, our estimate of the required valuation allowance may change,was $3.6 million.
The tax rates used to determine deferred tax assets or liabilities are the enacted tax rates in effect for the year in which could havethe differences are expected to reverse. Based on the evaluation of all available information, we recognize future tax benefits, such as net operating loss ("NOL") carryforwards, to the extent that realizing these benefits is considered more likely than not. Although a material impact on future earnings or losses.portion of NOLs included in deferred taxes are subject to limitation under IRC Section 382, there is no expectation that realization will not occur.
We recognize tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities. While it is often difficult to predict the final outcome of timing of the resolution of any particular tax matter, we establish a liability at the time we determine it is probablemore likely than not we will be required to pay additional taxes related to certain matters. These liabilities are recorded in accrued liabilities in our consolidated balance sheets. We adjust this provision, including any impact on the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit. A number of years may elapse before a particular matter for which we have established a liability is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. Settlement of any particular issue would usually require the use of cash. We recognize favorable resolutions of tax matters for which we have previously established liabilities as a reduction to our income tax expense when the amounts involved become known.
Due to differences between federal and stateOur future effective tax law, and accounting principles generally acceptedrates could be adversely affected if actual earnings are different than our estimates, by changes in the United Statesvaluation of America ("GAAP") certain items are included in the tax return at different times than when those items are reflected in the consolidated financial statements. Therefore, the annual tax rate reflected in our consolidated financial statements is different than that reported in our tax return. Some of these differences are permanent, such as expenses that are not deductible in our tax return. Some differences, such as depreciation expense, reverse over time and create deferred tax assets and liabilities. The tax rates used to determine deferred tax assets or liabilities, are the enactedoutcomes resulting from income tax ratesexaminations, or by changes or interpretations in effect for the year in which the differences are expected to reverse. Based on the evaluation of all available information, we recognize future tax benefits, such as net operating loss carry forwards, to the extent that realizing these benefits is considered more likely than not.laws, regulations or accounting principles.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. This legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rates, changes
to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current rate of 35% to 21%. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the enacted rate. This revaluation resulted in a $1.9 million reduction in the deferred tax asset and a corresponding reduction in the valuation allowance. The other provisions of the Tax Cuts and Jobs Act did not have a material impact on the 2017 financial statements.
Stock-Based Compensation
We recognize stock-based compensation expense based upon the fair value of the underlying equity award on the date of the grant. The calculation of the fair value of our awards requires certain inputs that are subjective and changes to the estimates used will cause the fair values of our stock awards and related stock-based compensation expense to vary. We have elected to use the Black-Scholes-Merton ("Black-Scholes") option pricing model to determine the fair value of stock options. The fair value of a stock option award is affected by our stock price on the date of the grant as well as other assumptions used as inputs in the valuation model including the estimated volatility of our stock price over the term of the awards, the estimate period of time that we expect employees to hold their stock options and the risk-free interest rate assumption. In addition, we are required to reduce stock-based compensation expense for the effects of estimated forfeitures of awards over the expense recognition period. Although we estimate the rate of future forfeitures based on historical experience, actual forfeitures may differ.
Long-lived and Intangible Assets
Long-livedDefinite-lived intangible assets are amortized over their respective estimated useful lives and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future un-discountedundiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired,fail the recoverability test, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported atIf the lowerestimates of the useful lives should change, we will amortize the remaining book value over the remaining useful lives. As of December 31, 2022, our intangible assets, which were primarily acquired from previous acquisitions, consisted of developed technology, trade names / trademarks, backlog and customer relationships with a total carrying amount or fair value less cost to sell.of $18.8 million.
Goodwill
Goodwill is reviewedtested annually for impairment at least annually, or more frequently ifas of the first day of our fourth quarter (October 1st) and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. As of December 31, 2022, we had one reporting unit which contained goodwill. Our goodwill impairment evaluation consisted of a qualitative assessment. A qualitative assessment can be performed to determine whether it is more likely than not the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, we compare the fair value of each reporting unit to its carrying value using a quantitative assessment. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired. If the fair value of the reporting unit is less than the carrying value, the difference is recorded as an impairment loss.
For the quantitative assessment, we estimate the fair value of each reporting unit using a combination of an income approach using a discounted cash flow ("DCF") analysis and a market-based valuation approach based on comparable public company trading values. Determining the fair value of a reporting unit requires the exercise of significant management judgments, including the amount and timing of projected future revenues, earnings and cash flows after considering factors
such as recent operating performance, general market and industry conditions, existing and expected future contracts, changes in working capital and long-term business plans and growth initiatives. The carrying value of each reporting unit includes the assets and liabilities employed in its operations and goodwill.
As of December 31, 2022, the carrying value of our goodwill was $26.9 million. We completed our annual goodwill impairment test in the fourth quarter of 2022 and determined that goodwill might be impaired. no impairment existed.
Business Combinations
We have established October 1account for business combinations 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 our specified annual date for impairment testing.of the acquisition date. Any excess of the fair value of acquisition consideration over the fair value of identifiable assets acquired and liabilities assumed is recorded as goodwill. Determining the fair value of acquired intangible assets is judgmental in nature and requires the use of significant estimates and assumptions, including the discount rate, revenue growth rates, projected gross margins, estimated research and development expenses, and operating profit margins.
Results of Operations
The following table shows information derived from our consolidated statements of operations expressed as a percentage of total revenues for the periods presented. |
| | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 |
| Revenues: | | | |
| Technology development | 40.2 | % | | 38.9 | % |
| Products and licensing | 59.8 |
| | 61.1 |
|
| Total revenues | 100.0 |
| | 100.0 |
|
| Cost of revenues: | | | |
| Technology development | 30.3 |
| | 29.8 |
|
| Products and licensing | 30.5 |
| | 32.5 |
|
| Total cost of revenues | 60.8 |
| | 62.3 |
|
| Gross profit | 39.2 |
| | 37.7 |
|
| Operating expense | 39.4 |
| | 43.7 |
|
| Operating loss | (0.2 | ) | | (6.0 | ) |
| Total other expense | (0.5 | ) | | (0.7 | ) |
| Loss from continuing operations before income taxes | (0.7 | ) | | (6.7 | ) |
| Income/(loss) from continuing operations, net of income taxes | (0.1 | ) | | (6.4 | ) |
| Income from discontinued operations, net of income taxes | 31.7 |
| | 0.7 |
|
| Net income/(loss) | 31.6 | % | | (5.7 | )% |
| | | | | | | | | | | | | |
| | Years ended December 31, | | |
| | 2022 | | 2021 | | |
| Revenue | 100.0 | % | | 100.0 | % | | |
| Cost of revenue | 39.3 | | | 41.1 | | | |
| Gross profit | 60.7 | | | 58.9 | | | |
| Operating expense | 62.5 | | | 61.9 | | | |
| Operating loss | (1.8) | | | (3.0) | | | |
| Total other expense | (0.6) | | | (0.5) | | | |
| Loss from continuing operations before income taxes | (2.4) | | | (3.5) | | | |
| Income tax benefit | 0.2 | | | 2.3 | | | |
| Net loss from continuing operations | (2.2) | | | (1.2) | | | |
| Income from discontinued operations, net of income taxes | 10.6 | | | 2.8 | | | |
| Net income | 8.4 | % | | 1.6 | % | | |
| | | | | |
Year Ended December 31, 20172022 Compared to Year Ended December 31, 20162021
|
| | | | | | | | | | | | | | |
| | Years ended December 31, | | | | |
| | 2017 | | 2016 | | $ Difference | | % Difference |
| Technology development revenues | $ | 18,576,383 |
| | $ | 16,280,582 |
| | $ | 2,295,801 |
| | 14.1 | % |
| Products and licensing revenues | 27,660,891 |
| | 25,587,187 |
| | 2,073,704 |
| | 8.1 | % |
| Total revenues | $ | 46,237,274 |
| | $ | 41,867,769 |
| | $ | 4,369,505 |
| | 10.4 | % |
Our Technology Development segment revenues Revenues for the year ended December 31, 2022 increased $2.3$22.0 million, or 25%, to $18.6$109.5 million compared to $87.5 million for the year ended December 31, 2017 compared2021. The increase in revenues was due to $16.3the revenues from Lios, which was acquired in March 2022, and growth in our sensing and communications test product sales.
Cost of Revenues and Gross Margin
Cost of revenues increased $7.0 million, or 20%, to $43.0 million for the year ended December 31, 2016. This increase was attributable primarily2022 compared to growth in our intelligent systems and biomedical technologies groups. Revenues within these groups increased due to additional contract awards, including higher value Phase II SBIR contracts.
Our Products and Licensing segment revenues increased $2.1 million to $27.7$36.0 million for the year ended December 31, 20172021. This increase in cost of revenues was in line with our sales growth. Our overall gross margin for the year ended December 31, 2022 was 61% compared to $25.659% for the year ended December 31, 2021. This increase in gross margin was primarily due to product sales representing a larger portion of our total sales.
Operating Expense
| | | | | | | | | | | | | | | | | | | | | | | |
| Years ended December 31, | | | | |
| (in thousands) | 2022 | | 2021 | | $ Difference | | % Difference |
| Selling, general and administrative expense | $ | 57,544 | | | $ | 43,956 | | | $ | 13,588 | | | 30.9 | % |
| Research, development and engineering expense | 10,837 | | | 10,190 | | | 647 | | | 6.3 | % |
| | | | | | | |
| | | | | | | |
| Total operating expense | $ | 68,381 | | | $ | 54,146 | | | $ | 14,235 | | | 26.3 | % |
Selling, general and administrative expense increased $13.6 million to $57.5 million for the year ended December 31, 2016. This increase was primarily driven by an increase in our sales of optical backscatter reflectometer instruments and optoelectronic components.
Cost of Revenues
|
| | | | | | | | | | | | | | |
| | Years ended December 31, | | | | |
| | 2017 | | 2016 | | $ Difference | | % Difference |
| Technology development costs | $ | 13,988,378 |
| | $ | 12,473,211 |
| | $ | 1,515,167 |
| | 12.1 | % |
| Products and licensing costs | 14,120,071 |
| | 13,589,858 |
| | 530,213 |
| | 3.9 | % |
| Total costs of revenues | $ | 28,108,449 |
| | $ | 26,063,069 |
| | $ | 2,045,380 |
| | 7.8 | % |
Our Technology Development segment costs increased $1.5 million,2022 compared to $14.0$44.0 million for the year ended December 31, 2017 compared2021. Selling, general and administrative expense increased primarily due to $12.5the acquired Lios operations, higher variable costs supporting our sales growth and higher share-based compensation.
Research, development and engineering expenses increased $0.6 million to $10.8 million for the year ended December 31, 2016. The overall increase in Technology Development
segment costs was driven by increases in direct labor and subcontractor costs consistent with the rate of growth in Technology Development segment revenues.
Our Products and Licensing segment costs increased $0.5 million2022 compared to $14.1$10.2 million for the year ended December 31, 20172021 primarily due to the acquired Lios operations.
Loss from Continuing Operations Before Income Taxes
During the year end December 31, 2022, we recognized a loss from continuing operations before income taxes of $2.5 million compared to $13.6$3.1 million for the year ended December 31, 2016. The increase in product and licensing cost is attributable to the component costs associated with increased volume of optical backscatter reflectometer instrument sales. Products and Licensing segment costs increased in accordance with the increase in Products and Licensing segment revenues over the same period taking into account the gross margin effect of the product mix.2021.
Operating ExpenseIncome Tax Benefit
|
| | | | | | | | | | | | | | |
| | Years ended December 31, | | | | |
| | 2017 | | 2016 | | $ Difference | | % Difference |
| Selling, general and administrative expense | $ | 14,770,986 |
| | $ | 14,763,709 |
| | $ | 7,277 |
| | — | % |
| Research, development and engineering expense | 3,469,193 |
| | 3,540,227 |
| | (71,034 | ) | | (2.0 | )% |
| Total operating expense | $ | 18,240,179 |
| | $ | 18,303,936 |
| | $ | (63,757 | ) | | (0.3 | )% |
Selling, general and administrative expenses remained substantially unchanged at $14.8 million for For the years ended December 31, 20172022 and 2016.December 31, 2021, we recorded an income tax benefit of $0.2 million and $2.0 million, respectively. The income tax benefit for 2022 was primarily related to the benefit from pre-tax losses, research and development credits and foreign derived intangible income, partially offset by losses in jurisdictions where those losses are not expected to be realized. The income tax benefit for 2021 was primarily related to the pre-tax loss and deductions on vested RSUs and stock option exercises during the year.
Research, development and engineering expenses also remained substantially unchanged at $3.5 million forNet Income from Discontinued Operations
For the years ended December 31, 20172022 and 2016.
Interest Expense, Net
Our net interest expense was approximately $0.2 million for the year ended December 31, 2017 compared to approximately $0.3 million for the year ended December 31, 2016. The average monthly loan balance for the year ended December 31, 2017 was $3.3 million as compared to $5.1 million for the year ended December 31, 2016, resulting in this decrease in interest expense.
Income Tax Benefit from Continuing Operations
For the year ended December 31, 2017, we recorded income tax benefit of $0.3 million, or 88.5% of our loss from continuing operations, compared to an income tax benefit of $0.1 million, or 4.8% of our loss from continuing operations for the year ended December 31, 2016. The change resulted from the decrease in our loss from continuing operations. The income tax benefit recognized in the current period is primarily driven by the discrete gain associated with the discontinued operations of HSOR and related intraperiod tax allocation requirements. Absent this discrete transaction we would expect the Company to have an immaterial provision related to certain state income taxes.
Net Loss From Continuing Operations
For the year ended December 31, 2017, we recognized a loss from continuing operations before income taxes of $0.3 million compared to a loss from continuing operations before income taxes of $2.8 million for the year ended December 31, 2016. After tax, our net loss from continuing operations was less than $0.1 million for the year ended December 31, 2017, compared to a net loss from continuing operations of $2.7 million for the year ended December 31, 2016.
Income from Discontinued Operations, Net of Income Taxes
For the year ended December 31, 2017,2021, we recognized income from discontinued operations, net of income taxes, of $14.7 million. For$11.6 million and $2.5 million, respectively. The results of our discontinued operations for both years include the operations of our former Luna Lab segment that were classified as held for sale. The results of our discontinued operations for the year ended December 31, 2016, we recognized net income from discontinued operations,2022 included a gain of $9.8 million, net of income taxes, of $0.3 million. For the year ended December 31, 2017, our net income from discontinued operations included a $15.7 million after tax, gain recognized on the sale of the HSOR business, partially offset by a net loss of $1.0 million associated with the operations of the HSOR business prior to its sale. For the year ended December 31, 2016, our net income from discontinued operations consisted of the after tax income associated with the operations of HSOR during the year.Luna Labs.
Preferred Stock Dividend
In January 2010, we issued 1,321,514 shares of our newly designated Series A Convertible Preferred Stock to Carilion. The Series A Convertible Preferred Stock carries an annual cumulative dividend of 6%, or approximately 79,292 shares of
common stock per year. During each of 2017 and 2016, we accrued $0.1 million for the dividends payable to Carilion. The dividends are not payable in cash, but rather in shares of our common stock, until liquidation event occurs. During each of 2017 and 2016, 79,292 shares of common stock became issuable to Carilion as dividends and have been recorded in the statement of stockholders’ equity.
Liquidity and Capital Resources
At December 31, 2017,2022, our total cash and cash equivalents were $37.0$6.0 million. We require cash to: (i) fund our operating expenses, working capital requirements, and outlays for strategic acquisitions and investments, (ii) service our debt, including principal and interest; (iii) conduct research and development; (iv) incur capital expenditures; and (v) repurchase our common stock. As part of our business strategy, we review acquisition and divestiture opportunities on a regular basis. In March 2022, we completed the disposition of Luna Labs and the acquisition of LIOS Sensing, which are discussed elsewhere in this Form 10-K. The LIOS Sensing acquisition price of $22.1 million was funded from $13.0 million of initial proceeds from the disposition of Luna Labs with the remainder of funding coming from availability under our revolver and operating cash. In June 2022, we completed a refinancing of our previous credit facility to, among other things, extend the maturity date of our Term Loan and Revolving Line and increase our total borrowing capacity.
We have two term loans with SVB which, at December 31, 2017, had an aggregate balancebelieve that the key factors that could affect our internal and external sources of $2.5 million. One term loan, with a balance of $0.3 million as of December 31, 2017, matures on December 1, 2018. The other term loan with a balance of $2.1 million as of December 31, 2017, matures on May 1, 2019.cash include:
We may prepay amounts due under the term loans at any time, subject to prepayment penalties of up to 2% of the amount of prepayment.
Amounts due under the term loans are secured by substantially all•Changes in demand for our products, competitive pricing pressures, supply chain constraints, effective management of our assets,manufacturing capacity, our ability to achieve further reductions in operating expenses, our ability to make progress on the achievement of our business strategy goals, and our ability to make the research and development expenditures required to remain competitive in our business.
•Our access to bank financing and the debt and equity capital markets that could impair our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including intellectual property, personal propertyinterest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing and bank accounts.
The term loans contain customary events of default, including nonpayment of principal, interest or other amounts, violation ofour ability to maintain compliance with covenants material adverse change, an event of default under any subordinatedour debt documents, incorrectness of representations and warranties in any material respect, bankruptcy, judgments in excess of a threshold amount, and violations of other agreements in excess of a threshold amount. If any event of default occurs SVB may declare due immediately all borrowings under the credit facility and foreclose on the collateral. Furthermore, an event of default under the credit facility would result in an increase in the interest rate on any amounts outstanding. The credit facility requires useffect from time to comply with certain operational and financial covenants, including maintaining a minimum cash balance of at least $4.0 million. time.
As of December 31, 2017,2022, we were in compliance with all covenantshad outstanding borrowings under our Term Loan and Revolving Loan of $18.9 million and $4.3 million, respectively. We may repay and reborrow advances under the credit facility.Revolving Line from time to time pursuant to the Revolving Line of Credit Note.
We maintain
The Term Loan matures on June 21, 2027. The Term Loan amortizes at a letter-of-creditrate equal to 10% for the first year, 15% for years two and three and 20% in years four and five, in each case paid on a quarterly basis. Accrued interest is 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 financing rate, or 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% depending on the Net Leverage Ratio (as defined in the amountLoan Agreement). We may prepay the Term Loan without penalty or premium.
The Revolving Line expires on June 21, 2027. Borrowings under the Revolving Line bear interest at a floating per annum rate equal to the sum of $1.0(a) Daily Simple SOFR, plus (b) a 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 the 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 will
be due and payable on June 21, 2027. The unused portion of the Revolving Line will accrue a fee equal to 0.20% per annum multiplied by the quarterly average unused amount. The unused Revolving Line totaled $10.7 million as a conditionat December 31, 2022.
Additional details of our lease onLoan Agreement can be found in Note 10, "Debt" in the notes to our Blacksburg office.audited consolidated financial statements included elsewhere in this Form 10-K.
We believe that our cash and cash equivalents as of December 31, 20172022 in addition to amounts available to us under our Revolving Line will provide adequate liquidity for us to meet our working capital needs over the next twelve months.months from the date of issuance of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Additionally, we believe that should we have the need for increased capital spending to support our planned growth, we will be able to fund such growth through either third-party financing on competitive market terms or through our available cash. However, these estimates are based on assumptions that may prove to be incorrect. If we require additional capital beyond our current balances of cash and cash equivalents.equivalents and borrowing capacity under the Revolving Line described above, this additional capital may not be available when needed, on reasonable terms, or at all. Moreover, our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.
|
| | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 |
| Net cash provided by/(used in) operating activities | $ | 915,042 |
| | $ | (399,837 | ) |
| Net cash provided/(used in) by investing activities | 26,181,400 |
| | (2,000,184 | ) |
| Net cash used in financing activities | (2,917,367 | ) | | (2,261,561 | ) |
| Net increase/(decrease) in cash and cash equivalents | $ | 24,179,075 |
| | $ | (4,661,582 | ) |
| | | | | | | | | | | | | |
| | Years ended December 31, | | |
| (in thousands) | 2022 | | 2021 | | |
| Net cash (used in)/provided by operating activities | $ | (8,567) | | | $ | 4,483 | | | |
| Net cash used in investing activities | (11,055) | | | (1,768) | | | |
| Net cash provided by/(used in) financing activities | 9,512 | | | (1,264) | | | |
| Effect of exchange rate changes on cash and cash equivalents | (994) | | | 311 | | | |
| Net (decrease)/increase in cash and cash equivalents | $ | (11,104) | | | $ | 1,762 | | | |
During 2017, operations provided $0.9 million of2022, net cash asused in operating activities was $8.6 million, compared to 2016, when operations used $0.4 million of net cash. In 2017, our net income of $14.6 million included a gain on the sale of our HSOR business, net of income tax, of $15.7 million, and non-cash expenses which do not impact cash flow for the period. These non-cash expenses were depreciation and amortization of $2.5 million, stock-based compensation of $0.7 million, and bad debt of $0.1 million. Additionally, changes in working capital resulted in a net cash outflowprovided by operating activities of $1.4$4.5 million principallyduring 2021. Overall, this net increase in use of operating cash was driven by an increase in working capital, including higher inventory levels to support our sales growth and to mitigate longer order lead times because of $1.9global supply chain issues.
During 2022, cash used in investing activities was $11.1 million and a decreasewhich was an increase from $1.8 million in accounts payable and accrued expensescash used in investing activities during 2021. The increase in net cash used in investing activities was primarily due to the acquisition of $0.9LIOS totaling $22.1 million partially offset by a decrease in accounts receivable of $1.2 million and an increase in deferred revenue of $0.2 million.
In 2016, our net loss of $2.4 million included charges for depreciation and amortization of $3.7 million and stock-based compensation of $0.9 million, each of which are non-cash items that do not impact cash flow forfrom the period. Additionally, changes in working capital resulted in a net cash outflow of $2.9 million, principally driven by an increase in accounts receivable of $3.6 million, partially offset by an increase in accounts payable and accrued liabilities of $0.6 million.
Cash provided by investing activities in 2017 included proceeds from the sale of our HSOR business of $28.0 million, partially offsetLuna Labs totaling $14.0 million.
During 2022, cash provided by $1.4 million of fixed asset additions and $0.5 million of capitalized intellectual property costs.
Cash used in investing activities in 2016 consisted of a cash outflow of $2.0 million related to the purchase of property and equipment to expand our manufacturing capability as well as capitalized costs associated with securing intellectual property rights.
Cash used in financing activities for the year ended December 31, 2017 was $2.9$9.5 million, compared to cash used in financing activities of $2.3$1.3 million in 2016. During 2017, we repaid $1.82021. This increase is primarily due to net proceeds of $7.4 million onfrom new borrowings used to partially fund the acquisition of Lios in March 2022. The remaining change in borrowing activity was due to the refinancing of our term loans with SVB. We also used $1.1 million to repurchase our common stock under our stock repurchase program. During 2016, we repaid $1.9 million on our outstanding term loan with SVB and also used $0.3 million to repurchase our common stock under our stock repurchase program.credit facility in the second quarter of 2022.
Summary of Contractual ObligationsCash Requirements
The following table sets forth information concerning our known contractual obligationscurrent and long-term material cash requirements as of December 31, 20172022 that are fixed and determinable.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | Total | | Less than 1
year | | 1 - 3 years | | 3 - 5 years | | |
| Debt financing (1) | $ | 23,226 | | | $ | 2,500 | | | $ | 6,500 | | | $ | 14,226 | | | |
| Operating facility leases (2) | 5,386 | | | 2,484 | | | 2,762 | | | 140 | | | |
| Finance leases (3) | 153 | | | 53 | | | 100 | | | — | | | |
| Purchase order obligation (4) | 6,560 | | | 6,560 | | | — | | | — | | | |
| | | | | | | | | |
| Total | $ | 35,325 | | | $ | 11,597 | | | $ | 9,362 | | | $ | 14,366 | | | |
(1)In December 2020, we entered into a Loan Agreement with the Lender which provided us with a $12.5 million Term Loan and a $15.0 million Revolving Line. We borrowed the full amount of the Term Loan, subject to quarterly repayments, and $7.6 million against the Revolving Line. In March 2022 and in June 2022 we amended the Loan
|
| | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
| Long-term debt obligations (1) | $ | 2,458,333 |
| | $ | 1,833,333 |
| | $ | 625,000 |
| | $ | — |
| | $ | — |
|
| Operating facility leases (2) | 5,012,282 |
| | 1,284,525 |
| | 1,548,941 |
| | 1,089,408 |
| | 1,089,408 |
|
| Other leases (3) | 125,257 |
| | 49,257 |
| | 72,960 |
| | 3,040 |
| | — |
|
| Purchase order obligation (4) | 1,006,526 |
| | 892,456 |
| | 114,070 |
| | — |
| | — |
|
| Other liabilities (5) | 660,000 |
| | 220,000 |
| | 440,000 |
| | — |
| | — |
|
| Total | $ | 9,262,398 |
| | $ | 4,279,571 |
| | $ | 2,800,971 |
| | $ | 1,092,448 |
| | $ | 1,089,408 |
|
_________________________
| |
(1)
| Amounts due under our debt obligations to SVB are payable in monthly installments, plus accrued interest, through May 2019. |
| |
(2)
| We lease our facilities in Blacksburg, Charlottesville and Roanoke, Virginia, Ann Arbor, Michigan, Camarillo California, and Quebec, Canada under operating leases that as of December 31, 2017, are scheduled to expire between December 2018 and December 2024. Upon expiration of our office leases, we may exercise certain renewal options as specified in the leases. Rental payments associated with these option periods are not included in the table above. |
| |
(3)
| In August 2013 and January 2016, we executed leases in the amounts of $51,000, and $207,000, respectively, for office equipment. These equipment leases expire in 2018 and 2021, respectively. |
| |
(4)
| Purchase order obligations included outstanding orders for inventory purchases. In 2017, our Luna Technologies subsidiary executed a non-cancelable purchase order in the amounts of $0.5 million for multiple shipments of tunable lasers to be delivered over an 18-month period beginning in November 2017. |
| |
(5)
| Other liabilities include remaining amounts payable for minimum royalty payments for certain licensed technologies payable over the remaining patent terms of the underlying technology. |
(2)We lease our facilities for all of our locations under operating leases that as of December 31, 2022, are scheduled to expire between September 2023 and August 2026. Upon expiration of our office leases, we may exercise certain renewal options as specified in the leases. Rental payments associated with these option periods are not included in the table above.
(3)Our office equipment leases expire in 2023 and 2025, respectively.
(4)Purchase order obligations included outstanding orders for inventory purchases. In 2022, we executed non-cancelable purchase orders for a total amount of $9.4 million for multiple shipments of tunable lasers and component parts to be delivered over periods up to 15 months between in January 2023 and December 2024. Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii).
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. We do not hold or issue financial instruments for trading purposes or have any derivative financial instruments. Our exposure to market risk is limited to interest rate fluctuations, due to changes in the general level of U.S. interest rates, and foreign currency exchange rates.
Interest Rate Risk
We do not use derivative financial instruments as a hedge against interest rate fluctuations, and, as a result, interest income earned on our cash and cash equivalents and short-term investments iswe are subject to changes in interest rates. However, we believe that the impact of these fluctuations does not have a material effect on our financial position due to the immediate available liquidity or short-term nature of these financial instruments.
We are exposed to interest rate fluctuationsrisk on our Term Loan and Revolving Line with interest rates at a floating per annum rate equal to the sum of (a) Daily Simple SOFR, plus (b) a 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 the Net Leverage Ratio as a result of our SVB debt facility having a variable interest rate. We do not currently use derivative instruments to alterdefined in the interest rate characteristics of our debt. The principal amount of $2.5 million outstanding undercredit agreement governing the term loan asTerm Loan and Revolving Loan. As of December 31, 2017, is scheduled to amortize in monthly installments through May 2019. A change2022, we had outstanding borrowings under our Term Loan and Revolving Loan of 1% in$18.9 million and $4.3 million, respectively, at the applicableweighted-average variable interest rate during 2017of 6.7%. At this borrowing level, a 0.25% increase in interest rates would have had an unfavorable annual impact ofon our pre-tax earnings and cash flows by approximately $15,000 in our annual interest expense under the SVB debt facility.$0.06 million.
Foreign Currency Exchange Rate Risk
As of December 31, 2017, all payments made underOur foreign currency exposure is primarily related to our research contracts have been denominated in U.S. dollars. Our product sales to foreign customers are also generally denominated in U.S. dollars, and we do not receive paymentsnet investment in foreign currency. As such, we are not directly exposed to significant currencysubsidiaries. Foreign exchange rate gains or losses resulting from fluctuations inthe translation of our foreign exchange rates.operations into U.S. dollars are reflected as a cumulative translation adjustment and do not affect our results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Luna Innovations Incorporated
Index to Consolidated Financial Statements
|
| | | | |
| (PCAOB ID Number 42) | |
| Report of Predecessor Independent Registered Public Accounting Firm (PCAOB ID Number 248) | |
Consolidated Balance Sheets at December 31, 20172022 and 20162021 | |
| 2021 | |
| Consolidated Statements of Comprehensive Income | |
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 20172022 and 20162021 | |
| 2021 | |
| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Luna Innovations Incorporated
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Luna Innovations Incorporated (the Company) as of December 31, 2022, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for the year ended December 31, 2022, and the related notes and financial statement schedule included under Item 15 (a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022, and the results of its operations and its cash flows for the year ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | | | | | | | |
| | Revenue recognition – Identification of Performance Obligations and Allocation of Transaction Price to Performance Obligations |
| Description of the Matter | | As described in Notes 1 and 13 to the consolidated financial statements, the Company primarily recognizes revenue from sales of commercial products and services. Some of the Company’s contracts contain multiple performance obligations. For these contracts, the Company assesses the performance obligations and accounts for those obligations separately if they are distinct. In such cases, the transaction price is allocated to the distinct performance obligations based on a relative standalone selling price.
Auditing the Company’s determination of distinct performance obligations and the allocation of the transaction price to these performance obligations was challenging. For example, there were nonstandard terms and conditions that required judgment to determine the distinct performance obligations and relative standalone selling prices. |
| | | | | | | | |
| How We Addressed the Matter in Our Audit | | To test the Company’s identification of distinct performance obligations and determination of estimated standalone selling prices, our audit procedures included, among others, reading a sample of contracts to evaluate management’s conclusions regarding distinct performance obligations and the assumptions used in the allocation of the transaction price. As part of our procedures, we also evaluated the accuracy and completeness of the underlying data used in management's determination of the relative standalone selling prices. |
| | Accounting for the Acquisition of Lios |
| Description of the Matter | | As discussed in Note 3 to the consolidated financial statements, in March 2022, the Company completed its acquisition of NKT Photonics GmbH and LIOS Technologies, Inc. (collectively “Lios”) for aggregate consideration of $22.1 million. The transaction was accounted for as a business combination. As part of the allocation of the purchase price, the Company estimated the fair value of intangible assets other than goodwill to be $6.4 million, comprised primarily of customer relationships and developed technology intangible assets.
Auditing the Company’s accounting for its business combination was complex due to the significant estimation uncertainty in the determination of the fair value of identified intangible assets. Significant estimation was required due to the application of the valuation models and assumptions used to measure the fair value of the customer relationships and developed technology intangible assets. The significant assumptions used in determining the fair value included the revenue growth rates and operating profit margins. These assumptions relate to the future performance of the acquired businesses and are forward-looking.
|
How We Addressed the Matter in Our Audit | | To test the estimated fair value of the acquired customer-related and developed technology intangible assets, our audit procedures included, among others, evaluating the models and significant assumptions used by the Company’s valuation specialist. For example, we tested the completeness and accuracy of the underlying data and compared the significant assumptions to current industry, market and economic trends, historical results of the acquired business, and other guideline public companies within the same industry. We involved our valuation specialists to assist in evaluating the Company’s use of its valuation models and significant assumptions included in the fair value estimates. We performed a sensitivity analysis of the significant assumptions to evaluate the change in the fair values that would result from changes in assumptions. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2022.
Richmond, Virginia
March 16, 2023
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and ShareholdersStockholders
Luna Innovations Incorporated
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Luna Innovations Incorporated (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 20172021 and 2016,2020, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the two years in the periodthen ended, December 31, 2017, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172021 and 2016,2020, and the results of its operations and its cash flows for each of the two years in the periodthen ended, December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition for fixed price contracts
As described further in Note 1 to the consolidated financial statements, the Company performs technology research under fixed price contracts with the associated revenue recognized over time. The Company has revenue from fixed price contracts in both revenue from continuing operations as well as in net loss from discontinued operations. For fixed price revenue contracts recognized over time, management utilizes the input method to measure progress toward the complete satisfaction of the performance obligations based upon the cost incurred to date as a percentage of the total estimated cost. We identified revenue recognition for fixed price contracts as a critical audit matter.
The principal consideration for our determination that revenue recognition for fixed price contracts was a critical audit matter is that the measure of progress towards completion utilizes assumptions for future costs to complete the performance obligations, and those assumptions have significant estimation uncertainty. A significant change in the assumptions could affect the profitability of the contract. Auditing such assumptions required extensive audit effort due to the volume and complexity of these contracts and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.
Our audit procedures related to testing revenue recognition of fixed-price contracts included the following, among others.
•We evaluated the design effectiveness of controls over the Company’s process for recognizing revenue over time.This included the design of controls over the initial budgeting process and proportional performance determination.
•For a sample of contracts, we inquired regarding the status of the project and obtained an understanding for significant changes in budgeted to actual costs.
•For a sample of contracts, we tested the completeness and accuracy of costs incurred to date.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2005.
Arlington, VirginiaPhiladelphia, Pennsylvania
March 21, 201814, 2022
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 36,981,533 |
| | $ | 12,802,458 |
|
| Accounts receivable, net | 9,857,009 |
| | 10,269,012 |
|
| Receivable from sale of HSOR business | 4,000,976 |
| | — |
|
| Inventory | 6,951,110 |
| | 6,848,835 |
|
| Prepaid expenses and other current assets | 1,220,650 |
| | 1,375,659 |
|
| Current assets held for sale | — |
| | 5,801,629 |
|
| Total current assets | 59,011,278 |
| | 37,097,593 |
|
| Property and equipment, net | 3,453,741 |
| | 3,482,687 |
|
| Intangible assets, net | 3,237,593 |
| | 3,367,217 |
|
| Goodwill | 502,000 |
| | 502,000 |
|
| Other assets | 18,024 |
| | 38,194 |
|
| Non-current assets held for sale | — |
| | 10,509,282 |
|
| Total assets | $ | 66,222,636 |
| | $ | 54,996,973 |
|
| Liabilities and stockholders’ equity | | | |
| Current liabilities: | | | |
| Current portion of long term debt obligations | $ | 1,833,333 |
| | $ | 1,833,333 |
|
| Current portion of capital lease obligations | 43,665 |
| | 52,128 |
|
| Accounts payable | 2,962,863 |
| | 2,954,742 |
|
| Accrued liabilities | 8,959,935 |
| | 7,913,544 |
|
| Deferred revenue | 1,026,339 |
| | 837,906 |
|
| Current liabilities held for sale | — |
| | 2,376,703 |
|
| Total current liabilities | 14,826,135 |
| | 15,968,356 |
|
| Long-term portion of deferred rent | 1,184,438 |
| | 1,319,402 |
|
| Long-term debt obligations | 603,007 |
| | 2,420,032 |
|
| Long-term capital lease obligations | 71,275 |
| | 114,940 |
|
| Non-current liabilities held for sale | — |
| | 84,555 |
|
| Total liabilities | 16,684,855 |
| | 19,907,285 |
|
| Commitments and contingencies |
| |
|
| Stockholders’ equity: | | | |
| Preferred stock, par value $0.001, 1,321,514 shares authorized, issued and outstanding at December 31, 2017 and 2016 | 1,322 |
| | 1,322 |
|
| Common stock, par value $0.001, 100,000,000 shares authorized, 28,354,822 and 27,988,104 shares issued, 27,283,918 and 27,541,277 shares outstanding at December 31, 2017 and 2016, respectively | 29,186 |
| | 28,600 |
|
| Treasury stock at cost, 1,070,904 and 446,827 shares at December 31, 2017 and 2016, respectively | (1,649,746 | ) | | (517,987 | ) |
| Additional paid-in capital | 83,563,208 |
| | 82,451,958 |
|
| Accumulated deficit | (32,406,189 | ) | | (46,874,205 | ) |
| Total stockholders’ equity | 49,537,781 |
| | 35,089,688 |
|
| Total liabilities and stockholders’ equity | $ | 66,222,636 |
| | $ | 54,996,973 |
|
Luna Innovations Incorporated
Consolidated Balance Sheets
(in thousands, except share data) | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | |
| Assets | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | $ | 6,024 | | | $ | 17,128 | | | |
| Accounts receivable, net | 33,249 | | | 20,913 | | | |
| | | | | |
| Contract assets | 7,691 | | | 5,166 | | | |
| Inventory | 36,582 | | | 22,493 | | | |
| Prepaid expenses and other current assets | 4,328 | | | 3,793 | | | |
| Assets held for sale | — | | | 12,952 | | | |
| Total current assets | 87,874 | | | 82,445 | | | |
| Property and equipment, net | 4,893 | | | 2,988 | | | |
| Intangible assets, net | 18,750 | | | 17,177 | | | |
| Goodwill | 26,927 | | | 18,984 | | | |
| | | | | |
| Operating lease right-of-use asset | 4,661 | | | 5,075 | | | |
| | | | | |
| Other non-current assets | 3,255 | | | 247 | | | |
| Deferred tax assets | 4,647 | | | 3,321 | | | |
| | | | | |
| Total assets | $ | 151,007 | | | $ | 130,237 | | | |
| Liabilities and stockholders’ equity | | | | | |
| Current liabilities: | | | | | |
| Current portion of long-term debt obligations | $ | 2,500 | | | $ | 4,167 | | | |
| | | | | |
| Accounts payable | 8,109 | | | 2,809 | | | |
| Accrued and other current liabilities | 16,694 | | | 9,258 | | | |
| Contract liabilities | 4,089 | | | 4,649 | | | |
| Current portion of operating lease liability | 2,239 | | | 2,101 | | | |
| | | | | |
| | | | | |
| Current liabilities held for sale | — | | | 9,703 | | | |
| Total current liabilities | 33,631 | | | 32,687 | | | |
| | | | | |
| Long-term debt obligations | 20,726 | | | 11,673 | | | |
| Long-term portion of operating lease liability | 2,804 | | | 3,509 | | | |
| | | | | |
| Other long-term liabilities | 444 | | | 445 | | | |
| | | | | |
| | | | | |
| Total liabilities | 57,605 | | | 48,314 | | | |
| Commitments and contingencies (Note 15) | | | | | |
| Stockholders’ equity: | | | | | |
| | | | | |
| Common stock, par value $0.001, 100,000,000 shares authorized, 34,901,954 and 33,855,725 shares issued, 33,105,080 and 32,116,270 shares outstanding at December 31, 2022 and 2021, respectively | 35 | | | 34 | | | |
| Treasury stock at cost, 1,796,862 and 1,744,206 shares at December 31, 2022 and 2021, respectively | (5,607) | | | (5,248) | | | |
| Additional paid-in capital | 104,893 | | | 98,745 | | | |
| Accumulated deficit | (2,296) | | | (11,575) | | | |
| Accumulated other comprehensive loss | (3,623) | | | (33) | | | |
| Total stockholders’ equity | 93,402 | | | 81,923 | | | |
| Total liabilities and stockholders’ equity | $ | 151,007 | | | $ | 130,237 | | | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 |
| Revenues: | | | |
| Technology development | $ | 18,576,383 |
| | $ | 16,280,582 |
|
| Products and licensing | 27,660,891 |
| | 25,587,187 |
|
| Total revenues | 46,237,274 |
| | 41,867,769 |
|
| Cost of revenues: | | | |
| Technology development | 13,988,378 |
| | 12,473,211 |
|
| Products and licensing | 14,120,071 |
| | 13,589,858 |
|
| Total cost of revenues | 28,108,449 |
| | 26,063,069 |
|
| Gross profit | 18,128,825 |
| | 15,804,700 |
|
| Operating expense: | | | |
| Selling, general and administrative | 14,770,986 |
| | 14,763,709 |
|
| Research, development and engineering | 3,469,193 |
| | 3,540,227 |
|
| Total operating expense | 18,240,179 |
| | 18,303,936 |
|
| Operating loss | (111,354 | ) | | (2,499,236 | ) |
| Other income/(expense): | | | |
| Other (expense)/income, net | (4,498 | ) | | 13,071 |
|
| Interest expense, net | (218,506 | ) | | (319,334 | ) |
| Total other expense | (223,004 | ) | | (306,263 | ) |
| Loss from continuing operations before income taxes | (334,358 | ) | | (2,805,499 | ) |
| Income tax benefit | 295,753 |
| | 135,567 |
|
| Net loss from continuing operations | (38,605 | ) | | (2,669,932 | ) |
| Operating (loss)/income from discontinued operations, net of income tax expense of $23,762 and $210,933 | (1,017,518 | ) | | 300,440 |
|
| Gain on sale, net of $912,298 of related income taxes | 15,671,028 |
| | — |
|
| Income from discontinued operations, net of income tax expense of $0.9 and $0.2 million | 14,653,510 |
| | 300,440 |
|
| Net income/(loss) | 14,614,905 |
| | (2,369,492 | ) |
| Preferred stock dividend | 146,889 |
| | 105,258 |
|
| Net income/(loss) attributable to common stockholders | $ | 14,468,016 |
| | $ | (2,474,750 | ) |
| | | | |
| Net loss per share from continuing operations: | | | |
| Basic and diluted | $ | — |
| | $ | (0.10 | ) |
| Net income per share from discontinued operations: | | | |
| Basic and diluted | $ | 0.53 |
| | $ | 0.01 |
|
| Net income/(loss) per share attributable to common stockholders: | | | |
| Basic and diluted | $ | 0.52 |
| | $ | (0.09 | ) |
| Weighted average shares: | | | |
| Basic and diluted | 27,579,988 |
| | 27,547,217 |
|
Luna Innovations Incorporated
Consolidated Statements of Operations
(in thousands, except share and per share data) | | | | | | | | | | | | | |
| | Years ended December 31, | | |
| | 2022 | | 2021 | | |
| | | | | |
| Revenue | $ | 109,497 | | | $ | 87,513 | | | |
| Cost of revenue (exclusive of amortization) | 43,000 | | | 35,957 | | | |
| Gross profit | 66,497 | | | 51,556 | | | |
| Operating expense: | | | | | |
| Selling, general and administrative | 57,544 | | | 43,956 | | | |
| Research, development and engineering | 10,837 | | | 10,190 | | | |
| | | | | |
| | | | | |
| Total operating expense | 68,381 | | | 54,146 | | | |
| Operating loss | (1,884) | | | (2,590) | | | |
| Other income/(expense): | | | | | |
| Other income, net | 216 | | | — | | | |
| Investment income | 46 | | | — | | | |
| Interest expense | (898) | | | (479) | | | |
| Total other expense | (636) | | | (479) | | | |
| Loss from continuing operations before income taxes | (2,520) | | | (3,069) | | | |
| Income tax benefit | 220 | | | 1,980 | | | |
| Net loss from continuing operations | (2,300) | | | (1,089) | | | |
| Operating income from discontinued operations, net of income tax expenses of $516 and $584 | 1,730 | | | 2,471 | | | |
| Gain on sale of discontinued operations, net of income tax expenses of $3,189 | 9,849 | | | — | | | |
| Income from discontinued operations, net of income taxes | 11,579 | | | 2,471 | | | |
| Net income | $ | 9,279 | | | $ | 1,382 | | | |
| | | | | |
| | | | | |
| | | | | |
| Net loss per share from continuing operations: | | | | | |
| Basic | $ | (0.07) | | | $ | (0.03) | | | |
| Diluted | $ | (0.07) | | | $ | (0.03) | | | |
| Net income per share from discontinued operations: | | | | | |
| Basic | $ | 0.36 | | | $ | 0.08 | | | |
| Diluted | $ | 0.36 | | | $ | 0.08 | | | |
| Net income per share attributable to common stockholders: | | | | | |
| Basic | $ | 0.28 | | | $ | 0.04 | | | |
| Diluted | $ | 0.28 | | | $ | 0.04 | | | |
| Weighted average shares: | | | | | |
| Basic | 32,591,973 | | | 31,658,085 | | | |
| Diluted | 32,591,973 | | | 31,658,085 | | | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Common Stock | | Treasury Stock | Additional Paid in Capital | | Accumulated Deficit | | Total |
| | Shares | | $ | | Shares | | $ | | Shares | | $ | $ | | $ | | $ |
| Balance—January 1, 2016 | 1,321,514 |
| | $ | 1,322 |
| | 27,477,181 |
| | $ | 28,178 |
| | 167,652 |
| | $ | (184,934 | ) | $ | 81,461,907 |
| | $ | (44,399,455 | ) | | $ | 36,907,018 |
|
| Stock-based compensation | — |
| | — |
| | 319,000 |
| | 319 |
| | — |
| | — |
| 859,896 |
| | — |
| | 860,215 |
|
| Non-cash compensation | — |
| | — |
| | 24,271 |
| | 24 |
| | — |
| | — |
| 24,976 |
| | — |
| | 25,000 |
|
| Stock dividends (1) | — |
| | — |
| | — |
| | 79 |
| | — |
| | — |
| 105,179 |
| | (105,258 | ) | | — |
|
| Purchase of treasury stock | — |
| | — |
| | (279,175 | ) | | — |
| | 279,175 |
| | (333,053 | ) | — |
| | — |
| | (333,053 | ) |
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | (2,369,492 | ) | | (2,369,492 | ) |
| Balance—December 31, 2016 | 1,321,514 |
| | $ | 1,322 |
| | 27,541,277 |
| | $ | 28,600 |
| | 446,827 |
| | $ | (517,987 | ) | $ | 82,451,958 |
| | $ | (46,874,205 | ) | | $ | 35,089,688 |
|
| Exercise of stock option | — |
| | $ | — |
| | 83,888 |
| | $ | 84 |
| | — |
| | $ | — |
| $ | 99,769 |
| | $ | — |
| | $ | 99,853 |
|
| Stock-based compensation | — |
| | $ | — |
| | 147,333 |
| | $ | 287 |
| | — |
| | $ | — |
| $ | 714,807 |
| | $ | — |
| | $ | 715,094 |
|
| Non-cash compensation | — |
| | $ | — |
| | 135,497 |
| | $ | 136 |
| | — |
| | $ | — |
| $ | 149,864 |
| | $ | — |
| | $ | 150,000 |
|
| Stock dividends (1) | — |
| | $ | — |
| | — |
| | $ | 79 |
| | — |
| | $ | — |
| $ | 146,810 |
| | $ | (146,889 | ) | | $ | — |
|
| Purchase of treasury stock | — |
| | $ | — |
| | (624,077 | ) | | $ | — |
| | 624,077 |
| | $ | (1,131,759 | ) | $ | — |
| | $ | — |
| | $ | (1,131,759 | ) |
| Net income | — |
| | $ | — |
| | — |
| | $ | — |
| | — |
| | $ | — |
| $ | — |
| | $ | 14,614,905 |
| | $ | 14,614,905 |
|
| Balance—December 31, 2017 | 1,321,514 |
| | 1,322 |
| | 27,283,918 |
| | 29,186 |
| | 1,070,904 |
| | (1,649,746 | ) | 83,563,208 |
| | (32,406,189 | ) | | 49,537,781 |
|
Luna Innovations Incorporated
Consolidated Statements of Comprehensive Income
| |
(1) | The stock dividends payable in connection with the Series A Convertible Preferred Stock are issuable upon the request of Carilion. |
(in thousands) | | | | | | | | | | | | | |
| | Years ended December 31, | | |
| | 2022 | | 2021 | | |
| Net income | $ | 9,279 | | | $ | 1,382 | | | |
| Other comprehensive (loss)/income | (3,590) | | | 215 | | | |
| Total other comprehensive income | $ | 5,689 | | | $ | 1,597 | | | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Luna Innovations Incorporated
Consolidated Statements of Changes in Stockholders' Equity
(in thousands, except share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Common Stock | | Treasury Stock | | Additional
Paid in
Capital | | Accumulated
Deficit | | Accumulated Other Comprehensive Loss | | Total |
| | | | | | Shares | | $ | | Shares | | $ | | $ | | $ | | | | $ |
| Balance, December 31, 2020 | | | | | 31,024,537 | | | $ | 33 | | | 1,699,975 | | | $ | (4,789) | | | $ | 92,403 | | | $ | (12,957) | | | $ | (248) | | | $ | 74,442 | |
| Exercise of stock option | | | | | 818,267 | | | 1 | | | — | | | — | | | 2,256 | | | — | | | — | | | 2,257 | |
| Stock-based compensation | | | | | 169,793 | | | — | | | — | | | — | | | 2,955 | | | — | | | — | | | 2,955 | |
| | | | | | | | | | | | | | | | | | | |
| ESPP issuance | | | | | 147,724 | | | — | | | — | | | — | | | 1,131 | | | — | | | — | | | 1,131 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Purchase of treasury stock | | | | | (44,051) | | | — | | | 44,051 | | | (459) | | | — | | | — | | | — | | | (459) | |
| Net income | | | | | — | | | — | | | — | | | — | | | — | | | 1,382 | | | — | | | 1,382 | |
| Foreign currency translation adjustment | | | | | — | | | — | | | — | | | — | | | — | | | — | | | 215 | | | 215 | |
| Balance, December 31, 2021 | | | | | 32,116,270 | | | $ | 34 | | | 1,744,026 | | | $ | (5,248) | | | $ | 98,745 | | | $ | (11,575) | | | $ | (33) | | | $ | 81,923 | |
| Exercise of stock option | | | | | 577,129 | | | 1 | | | — | | | — | | | 1,587 | | | — | | | — | | | 1,588 | |
| Stock-based compensation | | | | | 278,677 | | | — | | | — | | | — | | | 3,617 | | | — | | | — | | | 3,617 | |
| | | | | | | | | | | | | | | | | | | |
| ESPP issuance | | | | | 185,840 | | | — | | | — | | | — | | | 944 | | | — | | | — | | | 944 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Purchase of treasury stock | | | | | (52,836) | | | — | | | 52,836 | | | (359) | | | — | | | — | | | — | | | (359) | |
| Net income | | | | | — | | | — | | | — | | | — | | | — | | | 9,279 | | | — | | | 9,279 | |
| Foreign currency translation adjustment | | | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,590) | | | (3,590) | |
| Balance, December 31, 2022 | | | | | 33,105,080 | | | $ | 35 | | | 1,796,862 | | | $ | (5,607) | | | $ | 104,893 | | | $ | (2,296) | | | $ | (3,623) | | | $ | 93,402 | |
|
| | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 |
| Cash flows provided by/(used in) operating activities: | | | |
| Net income/(loss) | $ | 14,614,905 |
| | $ | (2,369,492 | ) |
| Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: | | | |
| Depreciation and amortization | 2,526,609 |
| | 3,713,879 |
|
| Stock-based compensation | 715,094 |
| | 860,215 |
|
| Loss on disposal of fixed assets | 3,640 |
| | — |
|
| Gain on sale of discontinued operations, net of income taxes | (15,671,028 | ) | | — |
|
| Bad debt | 99,888 |
| | 305,593 |
|
| Changes in operating assets and liabilities: | | | |
| Accounts receivable | 1,152,055 |
| | (3,568,761 | ) |
| Inventory | (1,902,311 | ) | | 492,932 |
|
| Other assets | 83,428 |
| | (238,736 | ) |
| Accounts payable and accrued expenses | (896,534 | ) | | 564,689 |
|
| Deferred revenue | 189,296 |
| | (160,156 | ) |
| Net cash provided by/(used in) operating activities | 915,042 |
| | (399,837 | ) |
| Cash flows provided by/(used in) investing activities: | | | |
| Acquisition of property and equipment | (1,352,531 | ) | | (1,509,984 | ) |
| Proceeds from sale of property and equipment | 3,000 |
| | — |
|
| Intangible property costs | (495,597 | ) | | (490,200 | ) |
| Proceeds from sale of discontinued operations, net | 28,026,528 |
| | — |
|
| Net cash provided by/(used in) investing activities | 26,181,400 |
| | (2,000,184 | ) |
| Cash flows used in financing activities: | | | |
| Payments on debt obligations | (1,833,333 | ) | | (1,871,635 | ) |
| Payments on capital lease obligations | (52,128 | ) | | (56,873 | ) |
| Purchase of treasury stock | (1,131,759 | ) | | (333,053 | ) |
| Proceeds from the exercise of options | 99,853 |
| | — |
|
| Net cash used in financing activities | (2,917,367 | ) | | (2,261,561 | ) |
| Net change in cash and cash equivalents | 24,179,075 |
| | (4,661,582 | ) |
| Cash and cash equivalents—beginning of period | 12,802,458 |
| | 17,464,040 |
|
| Cash and cash equivalents—end of period | $ | 36,981,533 |
| | $ | 12,802,458 |
|
| Supplemental disclosure of cash flow information | | | |
| Cash paid for interest | $ | 209,497 |
| | $ | 308,116 |
|
| Cash paid for income taxes | $ | 377,907 |
| | $ | 233,732 |
|
| Cash received for income tax refunds | $ | — |
| | $ | 67,127 |
|
| Dividend on preferred stock, 79,292 shares of common stock issuable for each of the years ended December 31, 2017 and 2016 | $ | 146,889 |
| | $ | 105,258 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Luna Innovations Incorporated
Consolidated Statements of Cash Flows
(in thousands, except share data) | | | | | | | | | | | | | |
| Years ended December 31, | | |
| 2022 | | 2021 | | |
| Cash flows (used in)/provided by operating activities: | | | | | |
| Net income | $ | 9,279 | | | $ | 1,382 | | | |
| Adjustments to reconcile net income to net cash (used in)/provided by operating activities: | | | | | |
| Depreciation and amortization | 5,449 | | | 4,628 | | | |
| Stock-based compensation | 4,232 | | | 2,955 | | | |
| Loss on disposal of property and equipment | 53 | | | — | | | |
| Gain from discontinued operations, net of tax | (9,849) | | | — | | | |
| Deferred tax benefit | (2,363) | | | (1,501) | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | (9,151) | | | 113 | | | |
| Contract assets | (5,008) | | | (1,672) | | | |
| Inventory | (10,028) | | | 939 | | | |
| Prepaid expenses and other current assets | (386) | | | 582 | | | |
| Other long-term assets | 1,108 | | | — | | | |
| Accounts payable and accrued liabilities | 6,122 | | | (3,213) | | | |
| Contract liabilities | 1,973 | | | 186 | | | |
| Other long-term liabilities | 2 | | | 84 | | | |
| | | | | |
| Net cash (used in)/provided by operating activities | (8,567) | | | 4,483 | | | |
| Cash flows used in investing activities: | | | | | |
| Acquisition, net of cash acquired | (22,085) | | | — | | | |
| Acquisition of property and equipment | (2,888) | | | (1,412) | | | |
| | | | | |
| Purchase of intangibles | (50) | | | (356) | | | |
| Proceeds from sale of discontinued operations | 13,968 | | | — | | | |
| Net cash used in investing activities | (11,055) | | | (1,768) | | | |
| Cash flows provided by/(used in) financing activities: | | | | | |
| Proceeds from debt obligations | 24,150 | | | — | | | |
| Payments on debt obligations | (16,763) | | | (4,144) | | | |
| Payments on finance lease obligations | (48) | | | (48) | | | |
| Repurchase of common stock | (359) | | | (459) | | | |
| Proceeds from ESPP | 944 | | | 1,131 | | | |
| Proceeds from the exercise of options | 1,588 | | | 2,256 | | | |
| Net cash provided by/(used in) financing activities | 9,512 | | | (1,264) | | | |
| Net change in cash and cash equivalents | (10,110) | | | 1,451 | | | |
| Effect of exchange rate changes on cash and cash equivalents | (994) | | | 311 | | | |
| Cash and cash equivalents—beginning of period | 17,128 | | | 15,366 | | | |
| Cash and cash equivalents—end of period | $ | 6,024 | | | $ | 17,128 | | | |
| Supplemental disclosure of cash flow information | | | | | |
| Cash paid for interest | $ | 805 | | | $ | 458 | | | |
| Net cash received for income taxes | $ | 39 | | | $ | 113 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Luna Innovations Incorporated (“we”("we," "our" 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 unique capabilities in high speed optoelectronics and high performance fiber optic test, measurement and control products for the telecommunications industryand 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. Our test and measurement products accelerate the aerospacedevelopment of high speed fiber optic components like photonic integrated circuits, coherent receivers and automotive industries.short-run fiber networks. Our distributed fiber optic sensing products provide criticalhelp designers and manufacturers more efficiently develop new and innovative products by measuring stress, strain, and temperature information to designersat a high resolution for new designs or manufacturing processes. Our distributed fiber optic sensing products ensure the safety and manufacturers working with advanced materials.structural integrity or operational health of critical assets in the field, by monitoring stress, strain, temperature, and vibration in large civil and industrial infrastructure such as bridges, roads, pipelines and borders. We manufacture and sell "terahertz" (THz) products for layer thickness measurements for materials like plastics, rubber, and paint. Our custom optoelectronicTHz products are sold to scientific instrumentation manufacturers for various applications such as metrology, missile guidance, flame monitoring,used in the aerospace and temperature sensing. In addition, weautomotive/EV sector. We also provide applied research services, typicallyprimarily under researchfederally funded development 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 usethat leverage our in-house technical expertise to perform applied research services on government funded projects across a range of technologies and also for corporate customers in the fiber optic sensing area. We are organized into two business segments: our Technology Development segment and our Products and Licensing segment. Our Technology Development segment performs applied research principally on government-funded projects. Most of the government funding in our Technology Development segment is derived from the U.S. government’s Small Business Innovation Research ("SBIR") program coordinated by the U.S. Small Business Administration ("SBA"). Our Products and Licensing segment focuses on fiber optic test & measurement, sensing and instrumentation products and also conducts applied research in the fiber optic sensing area to corporate and government customers.
We have a history of net losses. We have historically managed our liquidity through cost reduction initiatives, debt financings, capital markets transactions and the sale of assets.
Although there can be no guarantees, we believe that our current cash and cash equivalents balance provides adequate liquidity for ustechnologies to meet the specific needs and applications of our working capital needs for the foreseeable future.customers.
Consolidation Policy
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and include our accounts and the accounts of the Company and its wholly ownedour wholly-owned subsidiaries. We eliminate from our financial results all intercompany transactions.
Use of Estimates
The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements and accompanying notes.
Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may differ from such estimates and assumptions.
Technology Development RevenuesRevenue Recognition
We perform researchProducts and development for U.S. government agencies, educational institutions and commercial organizations. We recognize revenues under research contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred and collection of the contract price is considered reasonably assured. Revenue is earned under cost reimbursable, time and materials and fixed price contracts. Direct contract costs are expensed as incurred.
Under cost reimbursable contracts, we are reimbursed for costs that are determined to be reasonable, allowable and allocable to the contract and are paid a fixed fee representing the profit negotiated between us and the contracting agency. Revenue from cost reimbursable contracts is recognized as costs are incurred plus a portion of the fee earned. Revenue from time and materials contracts is recognized based on direct labor hours expended at contract billing rates plus other billable direct costs.
Revenue from fixed price research contracts that involve the delivery of services and a prototype model is recognized under the percentage of completion method by determining proportional performance based upon the ratio of costs incurred to achieve contract milestones to total estimated cost as this method more accurately measures performance under these arrangements. Losses on contracts, if any, are recognized in the period in which they become known and estimable.
Product Sales RevenuesServices
Revenues from product sales are generated by the sale of commercial products and services under various sales programs to the end user and through distribution channels. We sell fiber optic test and sensing systems to end users for use in numerous fiber optic basedoptic-based measurement applications. Revenues are recorded net of applicable sales taxes collected from customers and payable to state or local governmental entities.
We evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. We recognize revenue relating to our products when persuasive evidence of an arrangement exists, deliverythe performance obligation has occurred, the selling price is fixed or determinable and collectabilitybeen satisfied by transferring control of the resulting receivable is reasonably assured.
product or service to the customer. For multi-element arrangements that include tangible products that contain software that is essential to the tangible product’s functionality, we consider the product and software to be a single performance obligation. For contracts with multiple performance obligations, we allocate revenuethe contract’s transaction price to all deliverableseach performance obligation based on their relative stand-alone selling prices. Other deliverables include extended warranty, training and various add-on products. In such circumstances, we use the observable price of goods or services which are sold separately in similar circumstances to similar customers. If these prices are not observable, then we will estimate the stand-alone selling price using information that is reasonably available. For the majority of our standard products and services, price list and discount structures related to customer type are available. Shipping and handling activities primarily occur after a hierarchycustomer obtains control and are considered fulfillment costs rather than separate performance obligations.
For standard products, we recognize revenue at a point in time when control passes to the customer. Absent substantial product acceptance clauses, this is based on the shipping terms. In instances where acceptance of the product is specified by the customer, revenue for the product and any related installation services is deferred until such required acceptance criteria have
been met. For custom products that require engineering and development based on customer requirements, we will recognize revenue over time using the input method based on cost incurred to date. For extended warranties and product rentals, revenue is recognized over time using the output method based on the time elapsed for the warranty or service period. In the case of warranties, we record a contract liability for amounts billed but that are not recognized until subsequent periods. For monitoring services where we are performing monitoring of an asset the customer controls, revenue is recognized over time based on the duration of the underlying contract.
Research and Development Contracts
We perform research and development for U.S. Federal government agencies, educational institutions and commercial organizations. We account for a research contract when a contract has been executed, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of the contract price is considered probable. Revenue is earned under cost reimbursable, time and materials and fixed price contracts. Direct contract costs are expensed as incurred.
Our contracts with agencies of the U.S. government are subject to periodic funding by the respective contracting agency. Funding for a contract may be provided in full at inception of the contract or ratably throughout the contract as the services are provided. In evaluating the probability of funding for purposes of assessing collectability of the contract price, we consider our previous experience with our customers, communication with our customers regarding funding status and our knowledge of available funding for the contract or program. If funding is not assessed as probable it is not included in the transaction price and the related revenue is not recorded until it is determined that it is probable we will collect the consideration for the related goods or services.
Under the typical payment terms of our U.S. government contracts, the customer pays us either performance-based payments ("PBPs") or progress payments. PBPs, which are typically used in firm fixed price contracts, are interim payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments, which are typically used in our cost type contracts, are interim payments based on costs incurred as the work progresses. For our U.S. government cost-type contracts, the customer generally pays us during the performance period for 80% to 90% of our actual costs incurred. Because the customer retains a small portion of the contract price until completion of the contract and audit of allowable costs, cost type contracts generally result in revenue recognized in excess of billings which we present as contract assets on the balance sheet. Amounts billed and due from our customers are classified as receivables on the balance sheet. For non-U.S. government contracts, we typically receive interim payments as work progresses, although for some contracts, we may be entitled to receive an advance payment. We recognize a liability for these advance payments and PBPs paid in advance which are in excess of the revenue recognized and present these amounts as contract liabilities on the balance sheet.
To determine the selling price toproper revenue recognition method for research and development contracts, we evaluate whether two or more contracts should be usedcombined and accounted for allocating revenue to deliverables: (i) vendor-specific objective evidenceas one single modified contract and whether the combined or single contract should be accounted for as more than one performance obligation. For instances where a contract has options that were bid with the initial contract and awarded at a later date, we combine the options with the original contract when options are awarded. For most of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE"), and (iii) best estimateour contracts, the customer contracts for research with multiple milestones that are interdependent. Consequently, the entire contract is accounted for as one performance obligation. The effect of the sellingcombined or modified contract on the transaction price ("ESP"). VSOE exists only whenand measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
Contract revenue recognition is measured over time as we sellperform because of continuous transfer of control to the deliverable separatelycustomer. For U.S. government contracts which are typically subject to the Federal Acquisition Regulation, this continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for cost incurred plus a reasonable profit and take control of any work in process. From time to time, as part of normal management processes, facts may change, causing revisions to estimated total costs or revenues expected. The cumulative impact of any revisions to estimates and the full impact of anticipated losses on any type of contract are recognized in the period in which they become known.
Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is the price actually charged by us for that deliverable. Our product sales often include bundled products, options, and services and therefore VSOE is not readily determinable. In addition, we believe that because of unique features of our products, TPE also is not available. Also, due to the uniqueness of our products comparable third party evidence is generally not available. ESP, which is used when VSOE and TPE does not exist, reflects our best estimates of what the selling prices of elements would be if they were sold regularlybased on a stand-alone basis.
Our process for determining our ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered in developing the ESPs include prices charged by us for similar offerings, our historical pricing practices, the nature of the deliverables, andservices to be provided. We generally use the relative ESPinput method, more specifically the cost-to-cost measure of allprogress for our contracts because it best depicts the transfer of control to the deliverablescustomer, which occurs as comparedwe incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio
of costs incurred to date to the total selling priceestimated costs at completion of the product. We may also consider, when appropriate, theperformance obligation. The underlying bases for estimating our contract research revenues are measurable expenses, such as labor, subcontractor costs and materials, and data that are updated on a regular basis for purposes of preparing our cost estimates. Our research contracts generally have a period of performance of six months to three years, and our estimates of contract costs have historically been consistent with actual results. Revisions in these estimates between accounting periods to reflect changing facts and circumstances have not had a material impact on our operating results, and we do not expect future changes in these estimates to be material. The cumulative impact of other productsany revisions to estimates and servicesthe full impact of anticipated losses on selling price assumptions when developing and reviewing our ESPs.
Revenues from product sales that require no ongoing obligationsany type of contract are recognized as revenues when shippedin the period in which they become known.
Under cost reimbursable contracts, we are reimbursed for costs that are determined to be reasonable, allowable and allocable to the customer, title has passedcontract and collectionpaid a fixed fee representing the profit negotiated between us and the contracting agency. Revenue from cost reimbursable contracts is reasonably assured.recognized as costs are incurred plus an estimate of applicable fees earned. We consider fixed fees under cost reimbursable contracts to be earned in proportion to the allowable costs incurred in performance of the contract. Revenue from time and materials contracts is recognized based on direct labor hours expended at contract billing rates plus other billable direct costs. Fixed price contracts may include either a product delivery or specific service performance throughout a period. For fixed price contracts that provide for the development and delivery of a specific prototype or product, revenue is recognized over time using the input method based upon the percentage of completion of costs incurred to date versus total estimated costs.
Whether certain costs under government contracts are allowable is subject to audit by the government. Certain indirect costs are charged to contracts using provisional or estimated indirect rates, which are subject to later revision based on government audits of those costs. Management is of the opinion that costs subsequently disallowed, if any, would not likely have a significant impact on revenues recognized for those contracts.
Allowance for Uncollectible Receivables
Accounts receivable are recorded at their face amount, less an allowance for doubtful accounts. We review the status of our uncollected receivables on a regular basis. In determining the need for an allowance for uncollectible receivables, we consider our customers’ financial stability, past payment history and other factors that bear on the ultimate collection of such amounts. The allowance was $0.3$0.8 million and $0.9 million at December 31, 20172022 and $0.2 million at December 31, 2016.2021, respectively.
Cash and Cash Equivalents
We consider all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. To date, we have not incurred losses related to cash and cash equivalents. CashOur foreign currency risk on cash and cash equivalents atheld outside of the US is not material. At December 31, 2017 and 2016 include $25.22022 there were no cash equivalents invested in U.S. Treasury obligations. At December 31, 2021, $1.0 million and $0, respectively,was invested in U.S. Treasury obligations through a sweep account with our bank. The full value of amounts invested through the sweep account are convertible to cash on a daily basis. Our cash transactions are processed through reputable commercial banks. We regularly maintain cash balances with financial institutions which exceed Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At December 31, 20172022 and December 31, 2016,2021, we had approximately $11.5$1.6 million and $12.6$9.5 million, respectively, in excess of FDIC insured limits.
We have outstanding term loans that require us to comply with certain financial covenants, including maintaining a minimum cash balance of at least $4.0 million.
Fair Value Measurements
Our financial assets and liabilities are measured at fair value, which is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. Valuation techniques are based on observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs have created the following fair value hierarchy:
•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, and accounts payable and accrued liabilities approximate fair value because of the short-term nature of these instruments. The carrying amount of lease liabilities approximate fair value because these financial instruments bear interest at rates that approximate current market rates for similar agreements with similar maturities and credit. We consider the terms of the Silicon ValleyPNC Bank, ("SVB")National Association debt
facility, including its interest rate of primeSOFR plus 2%a margin ranging from 1.75% to 2.50%, to be at market based upon similar instruments that would be available to us.
Property and Equipment, net
Property and equipment, net, are stated at cost less accumulated depreciation. We record depreciation using the straight-line method over the following estimated useful lives:
|
| | | | |
| Equipment | 3 – 7 years |
| Furniture and fixtures | 7 years |
| Software | 3 years |
| Leasehold improvements | Lesser of lease term or life of improvements |
Intangible Assets, net
Intangible assets consist of patents related to certain intellectual property that we have developed or acquired, and identifiable intangible assets recognized in connection with our merger with Advanced Photonix,acquisition of LIOS Technologies Inc. ("API"Lios"). in March 2022 and other companies prior to 2022. We amortize our identified intangible assets over their estimated useful lives ranging between one and eleven years, and analyze the reasonablenessfifteen years.
Goodwill is tested annually for impairment as of the remaining useful lifefirst day of our fourth quarter (October 1st) and whenever events or changes in circumstances indicate that the carrying amountvalue of goodwill may not be recoverablerecoverable. Goodwill is tested for impairment at the reporting unit level. As of December 31, 2022, we had one reporting unit which contained goodwill. When changes occur in the composition of one or more reporting units, goodwill is reassigned to the reporting units affected based on their relative fair value. Our goodwill impairment evaluation consisted of a qualitative assessment. A qualitative assessment can be performed to determine whether theirit is more likely than not the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, we compare the fair value of each reporting unit to its carrying value has beenusing a quantitative assessment. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired. If the fair value of the reporting unit is less than the carrying value, the difference is recorded as an impairment loss.
For the quantitative assessment, the fair value of each reporting unit is estimated using a combination of an income approach using a discounted cash flow ("DCF") analysis and a market-based valuation approach based on comparable public company trading values. Determining the fair value of a reporting unit requires the exercise of significant management judgment, including the amount and timing of projected future revenues, earnings and cash flows after considering factors such as recent operating performance, general market and industry conditions, existing and expected future contracts, changes in working capital and long-term business plans and growth initiatives. The carrying value of each reporting unit includes the assets and liabilities employed in its operations and goodwill. We have not recorded any goodwill impairment for the years ended December 31, 2022 and 2021.
Research, Development and Engineering
Research, development and engineering expensesexpense not related to contract performance areis expensed as incurred. We expensed $3.5$10.8 million and $10.2 million of non-contract related research, development and engineering expensesexpense for each of the years ended December 31, 20172022 and 2016.2021, respectively.
ValuationImpairment of Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired,fail the recovery test, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of by sale are reflected at the lower of their carrying amount or fair value less cost to sell.
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 market.net realizable value.
Net Income/(Loss)Income per Share
Basic per share data is computed by dividing net income/(loss) attributable to common stockholdersincome by the weighted average number of shares outstanding during the period. Diluted per share data is computed by dividing net income/(loss)income attributable to common stockholders 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 common shares 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 effect of 4.3 million and $5.5 million There were no adjustments for common stock equivalents (which include outstanding warrants, preferred stock and stock options) are not included for the yeardiluted per share data for the years ended December 31, 20172022 and 2016, as they are anti-dilutive to earnings per share due to us having a net loss2021.
The following shares have been excluded from continuing operations.the computation of diluted weighted average shares outstanding because the effect would be anti-dilutive:
| | | | | | | | | | | |
| Years ended December 31, |
| | 2022 | | 2021 |
| Stock options | 680,000 | | 1,234,000 |
| Restricted stock units | 1,124,000 | | 814,000 |
Stock-Based Compensation
We have two stock-based compensation plans, which are described further in Note 9.12. We recognize compensation expense based upon the fair value of the underlying equity award as of the date of grant. We have elected to use the Black-Scholes option pricing model to value any stock options granted. Restricted stock and restricted stock units awarded are valued at the closing price of our common stock on the date of the award. We recognize stock-based compensation for such awards on
a straight-line methodbasis over the requisite service period of the awards taking into account the effects of the employees’ expected exercise and post-vesting employment termination behavior.
exercise. We recognizereduce stock-based compensation expense for equity instruments issued to non-employees based upon the fair value of the equity instruments issued.
Advertising
We expense the costany forfeitures of advertisingunvested awards as incurred. Advertising expenses were $0.1 million for each of the years ended December 31, 2017 and 2016.such forfeitures occur.
Income Taxes
We account for income taxes using the liability method. Deferred tax assets or liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates, which will be in effect when the differences reverse. A valuation allowance against net deferred tax assets is provided unless we conclude it is more likely than not that the deferred tax assets will be realized.
We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We evaluate our ability to benefit from all deferred tax assets and establish valuation allowances for amounts we believe are not more-likely-than-not to be realizable. For uncertain tax positions, we use a more-likely-than-not threshold, 51% or greater than 50%, based on the technical merits of the income tax position taken. Income tax positions that meet the more-likely-than-not recognition threshold are measured in order to determine the tax benefit recognized in the financial statements. Penalties, if probable and reasonably estimable, and interest expense related to uncertain tax positions are recognized as a component of the tax provision.
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. Revenues 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.
Business Combinations
We account for income taxes usingbusiness combinations under the liability method. Deferred taxacquisition 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 orand assumed liabilities are determined based on their estimated fair values as of the difference betweenacquisition date. Any excess of the financial statement and tax basisfair value of acquisition consideration over the fair value of identifiable assets acquired and liabilities assumed is recorded as measured bygoodwill. Determining the enacted taxfair value of acquired intangible assets is judgmental in nature and requires the use of significant estimates and assumptions, including the discount rate, revenue growth rates, projected gross margins, estimated research and development expenses, and operating profit margins.
Recently Issued Pronouncements
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 in effect whenfor fiscal years beginning after December 15, 2022. We do not expect the differences reverse. A valuation allowance against net deferred tax assets is provided unless we conclude it is more likely than not that the deferred tax assets will be realized.
Recent Accounting Pronouncements
Effective January 1, 2017, we adopted Accounting Standards Update ("ASU") No. 2016-09, Improvements to Employee Share-Based Payment Accounting. These amendments apply to several aspects of accounting for share-based compensation including the recognition of excess tax benefits and deficiencies and their related presentation in the statement of cash flows as well as accounting for forfeitures. The adoption of ASU No. 2016-09 did notthis new accounting pronouncement to have a significant impact on our consolidated financial statements.
Effective January 1, 2017, weIn October 2021, the FASB issued ASU 2021-08 Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which improves the accounting acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to (1) recognition of an acquired contract and (2) payment terms and their effect on subsequent revenue recognized by the acquirer. We early adopted ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies2021-08 during the presentation of deferred taxes by requiring that deferred tax assets and liabilities be classified as noncurrentyear ended December 31, 2022 in any classified balance sheet rather than being separated into current and non-current amounts.conjunction with a business combination. The adoption of ASU No. 2015-17adaptation did not have a significantmaterial impact on our consolidated financial statements.
In February 2016,
2. Discontinued Operations
On March 8, 2022, we completed the FASB issued ASU No. 2016-02, Leases, which requires a lesseesale of substantially all of our equity interests in our Luna Labs business to recognize in its statementcertain members of financial position an asset and liability for most leases with a term greater than 12 months. Lessees should recognize a liability to make lease paymentsLuna Labs’ senior management team and a right-of-use asset representinggroup 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 lessee's right to useform of a convertible note, $1.7 million in the underlying assetform of 60-day promissory notes and an earn out potential of $1.0 million in future payments from Luna Labs upon the achievement by Luna Labs of certain financial goals. The full amount of the 60-day promissory notes has been collected as of December 31, 2022. The convertible note is included in the other non-current assets line item of the consolidated balance sheet. During the fourth quarter of 2022, it was determined that the earn out potential was not achieved. The gain on the transaction was $9.8 million, net of taxes of $3.2 million.
We have separately reported the financial results of Luna Labs as discontinued operations in our consolidated statements of operations for the lease term. The amendment is effectiveyears ended December 31, 2022 and 2021, respectively, and presented the related assets and liabilities as held for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how cash receipts and cash payments are presentedsale in the statementconsolidated balance sheet as of cash flows. ASU 2016-15 is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The amendments should be31, 2021. These changes have been applied retrospectively 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 segment are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
| | | Years ended December 31, | | |
| | | | | | 2022 | | 2021 | | |
| Revenues | | | | | $ | 6,473 | | | $ | 23,722 | | | |
| Cost of revenues | | | | | 3,692 | | | 19,009 | | | |
| Gross profit | | | | | 2,781 | | | 4,713 | | | |
| Selling, general and administrative expenses | | | | | 535 | | | 1,634 | | | |
| Research, development & engineering expenses | | | | | — | | | 24 | | | |
| | | | | | | | | |
| Operating income | | | | | 2,246 | | | 3,055 | | | |
| Income tax expense | | | | | 516 | | | 584 | | | |
| Net income from discontinued operations, net of tax | | | | | $ | 1,730 | | | $ | 2,471 | | | |
Assets and liabilities of discontinued operations classified as held for sale in the consolidated balance sheets as of December 31, 2021 consist of the following (in thousands):
| | | | | | | |
| | | December 31, 2021 |
| Accounts receivable, net | | | $ | 2,967 | |
| Inventory, net | | | 282 | |
| Contract assets | | | 4,051 | |
| Prepaid expenses and other current assets | | | 132 | |
| Property and equipment, net | | | 330 | |
| Intangible assets, net | | | 165 | |
| Operating lease right-of-use asset | | | 4,884 | |
| Other non-current assets | | | 141 | |
| Assets held for sale | | | $ | 12,952 | |
| | | |
| Accounts payable | | | 1,042 | |
| Accrued and other current liabilities | | | 821 | |
| Contract liabilities | | | 2,626 | |
| Current portion of operating lease liability | | | 388 | |
| Long-term portion of operating lease liability | | | 4,826 | |
| Liabilities associated with assets held for sale | | | $ | 9,703 | |
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 years ended December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | |
| Years ended December 31, | | |
| | 2022 | | 2021 | | |
| Depreciation and amortization | $ | 23 | | | $ | 112 | | | |
| Share-based compensation | 177 | | | 129 | | | |
| Acquisition of property and equipment | 34 | | | — | | | |
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). Subsequent to the acquisition, the name of the Lios parent company was changed to Luna Innovations Germany GmbH. 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.
During the fourth quarter of 2022, we completed the purchase accounting for Lios after recording a number of measurement period adjustments since the initial purchase price allocation reported in our first quarter Form 10-Q. These adjustments to the fair values of assets and liabilities resulted in a cumulative decrease in goodwill of $1.5 million as of December 31, 2022.
The following table summarizes the allocation of the purchase consideration for the acquisition of Lios:
| | | | | | | | |
| | (in thousands) |
| Accounts receivable | | $ | 3,069 | |
| Inventory | | 5,176 | |
| Prepaid expenses and other current assets | | 96 | |
| Property and equipment | | 858 | |
| Intangible assets | | 6,437 | |
| Goodwill | | 8,788 | |
| Operating lease right-of-use asset | | 512 | |
| Accounts payable and accrued expenses | | (903) | |
| Accrued and other current liabilities | | (1,073) | |
| Contract liabilities | | (314) | |
| Current portion of operating lease liability | | (322) | |
| Long-term portion of operating lease liability | | (191) | |
| Other long-term liabilities | | (48) | |
| Total purchase consideration | | $ | 22,085 | |
The identifiable intangible assets and their estimated useful lives were as follows:
| | | | | | | | | | | | | | |
| | Estimated | | |
| | Useful Life | | (in thousands) |
| Developed technology | | 6 years | | $ | 1,998 | |
| Customer relationships | | 8 years | | 3,662 | |
| Trade names and trademarks | | 7 years | | 333 | |
| Backlog | | 1 year | | 444 | |
| | | | $ | 6,437 | |
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. 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. 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. 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 acquisition was primarily attributable to expected synergies from future customer and sales growth. We do not expect ASU 2016-15 will have a material impact on our financial statements.
In December 2016, the FASB issued ASU No. 2016-20, Technical corrections and improvements to Topic 606, Revenue from Contracts with Customers. This update provides additional clarification and implementation guidance on the previously issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expectsthis goodwill to be entitleddeductible for those goods or services. ASU 2014-09 defines a five step process to achieve this core principletax purposes. We incurred $1.1 million of acquisition-related costs that have been included in selling, general and in doing
so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard, as subsequently updated in July 2015, is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).
We have completed our assessment of the impact of Topic 606 and have reached the following conclusions regarding its impact on our revenue recognition policies and procedures. Contracts in our Technology Development segment primarily provide research services. We have concluded that revenue specific to this segment will not be materially impacted upon the adoption of Topic 606 as revenue will continue to be recognized over time using an input model. Contracts in our Products and Licensing segment generally provide for the following revenue sources: standard product sales, custom product development and sales, product rental, extended warranties, training/service, and certain royalties. We expect revenues for this segment to be recognized using either the “point in time” or “over time” methods of Topic 606, depending upon the revenue source. We expect the pattern of recognition of custom optoelectronic products to change from “point in time” to “over time” upon the adoption of Topic 606. Our revenue recognized specific to custom products approximates $10 million annually. This change will result in the acceleration of revenue when compared to existing standards with the cumulative adjustment relating to contracts that are not complete as of December 31, 2017 recognized as an adjustment to opening retained earnings on January 1, 2018. Our revenue for our standard products will be recognized using the "point in time" criteria of Topic 606, and the timing of such revenue recognition is not expected to differ materially from our historical revenue recognition. Other immaterial adjustments related to the products segment that are sometimes offered to customers include discounts on future purchases related to rental agreements, customer rights of return, and volume discounts. We are adopting the standard using the modified retrospective transition method. Under the modified retrospective approach, the new standard will, for the period beginning January 1, 2018, apply to new contracts and those that were not completed as of January 1, 2018. For those contracts not completed as of January 1, 2018, this method will result in a cumulative adjustment to increase retained earnings in the amount of $0.4 million. Prior periods will not be retrospectively adjusted, but we will maintain dual reportingadministrative expenses for the year of initial application in order to disclose the effect on revenue of adopting the new guidance.ended December 31, 2022.
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This update simplifies the subsequent measurement of goodwill. The guidance removes Step 2
4. Accounts Receivable, net
Accounts receivable, net, consists of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The accounting standard will be effective for reporting periods beginning after December 15, 2019. We do not expect ASU 2017-04 will have a material impact on our financial statements.following: | | | | | | | | | | | | | |
| | December 31, | | |
| (in thousands) | 2022 | | 2021 | | |
| Billed | $ | 33,542 | | | $ | 21,790 | | | |
| | | | | |
| Other | 487 | | | 48 | | | |
| 34,029 | | | 21,838 | | | |
| Less: allowance for doubtful accounts | (780) | | | (925) | | | |
| Accounts receivable, net | $ | 33,249 | | | $ | 20,913 | | | |
2.5. 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 market.
Components of inventory are as follows:
| | | | | | | | | | | | | |
| December 31, | | |
| (in thousands) | 2022 | | 2021 | | |
| Finished goods | $ | 9,930 | | | $ | 10,087 | | | |
| Work-in-process | 3,113 | | | 2,318 | | | |
| Raw materials | 23,539 | | | 10,088 | | | |
| Inventory | $ | 36,582 | | | $ | 22,493 | | | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Finished goods | $ | 2,143,953 |
| | $ | 1,952,885 |
|
| Work-in-process | 578,195 |
| | 714,867 |
|
| Raw materials | 4,228,962 |
| | 4,181,083 |
|
| | $ | 6,951,110 |
| | $ | 6,848,835 |
|
3. Debt
Silicon Valley Bank Facility
We currently have a Loan and Security Agreement with SVB under which we have a term loan with an original borrowing amountTable of $6.0 million (the “Term Loan”). The Term Loan was to be repaid by us in 48 monthly installments, plus accrued interest payable monthly in arrears and matured on May 1, 2015. On May 8, 2015, in connection with the merger with Advanced Photonics, Inc. ("API"), we entered into the Joinder, Consent and Sixth Loan Modification Agreement (the "2015 Term Loan") under which we borrowed $6.0 million and used the proceeds principally to repay the then outstanding debt of API at the time of the Merger. The 2015 Term Loan is to be repaid by us in 48 monthly installments, plus accrued interest payable monthly in arrears and matures at the earlier of May 1, 2019, or upon an event of a default under the loan agreement. The term loan carries a floating annual interest rate equal to prime rate then in effect, as published in the Wall Street Journal, plus 2%. We may prepay amounts due under the 2015 Term Loan at any time, subject to an early termination fee of up to 2% of the amount of prepayment.On September 29, 2015, we entered into the Waiver and Seventh Loan Modification Agreement with SVB, under which we borrowed an additional $1.0 million in December 2015 to fund certain anticipated capital expenditures (the "2015 Equipment Term Loan"). The principal amount plus accrued interest of the 2015 Equipment Term Loan is to be repaid by us in 36 monthly installments. The 2015 Equipment Term Loan carries a floating annual interest rate equal to the prime rate then in effect, as published in the Wall Street Journal, plus 2%. We may prepay amounts due under the 2015 Equipment Term Loan at any time, subject to an early termination fee of up to 2% of the amount of prepayment.
In December 2016, we entered into the Eighth Loan Modification Agreement with SVB, under which the financial covenants were modified.
Amounts due under the 2015 Term Loan and the 2015 Equipment Term Loan (collectively, the "Term Loans") are secured by substantially all of our assets, including intellectual property, personal property and bank accounts.
In addition, the Term Loans contain customary events of default, including nonpayment of principal, interest or other amounts, violation of covenants, material adverse change, an event of default under any subordinated debt documents, incorrectness of representations and warranties in any material respect, bankruptcy, judgments in excess of a threshold amount, and violations of other agreements in excess of a threshold amount. The Term Loans require that we meet certain financial covenants, including a minimum cash balance of $4.0 million, and a minimum liquidity coverage ratio, each as defined in the 2015 Equipment Term Loan. If any event of default occurs, SVB may declare due immediately all borrowings under the Term Loans and foreclose on the collateral. Furthermore, an event of default under the Term Loans would result in an increase in the interest rate on any amounts outstanding. As of December 31, 2017, we were in compliance with all covenants under the Term Loans.
The balance under the Term Loans at December 31, 2017 was $2.5 million, of which $1.8 million was classified as short-term. The effective rate of our Term Loans at December 31, 2017 was 6.5%.
The following table presents a summary of debt outstanding as of December 31, 2017 and 2016:
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Silicon Valley Bank Term Loans | $ | 2,458,333 |
| | $ | 4,291,667 |
|
| Less: unamortized debt issuance costs | 21,993 |
| | 38,302 |
|
| Less: current portion | 1,833,333 |
| | 1,833,333 |
|
| Total long-term debt obligations | $ | 603,007 |
| | $ | 2,420,032 |
|
Debt issuance costs associated with the issuance of the SVB Term Loans totaled $55 thousand. Amortization of debt issuance costs is computed using the straight line method and is included in interest expense. Amortization of the debt issuance costs totaled $16 thousand for the year ended December 31, 2017.
Maturities on long-term debt are as follows:
|
| | | |
| Year | Amount |
| 2018 | $ | 1,833,333 |
|
| 2019 | 625,000 |
|
| Total | $ | 2,458,333 |
|
Interest expense for the years ended December 31, 2017 and 2016 consisted of the following:
|
| | | | | | | | |
| | Years ended December 31, |
| | | 2017 | | 2016 |
| Interest expense on Term Loans | | $ | 202,850 |
| | $ | 287,491 |
|
| Amortization of debt issuance costs | | 16,308 |
| | 16,308 |
|
| Other interest (income)/expense | | (652 | ) | | 15,535 |
|
| Total interest expense | | $ | 218,506 |
| | $ | 319,334 |
|
4. Accounts Receivable—Trade
Accounts receivable consist of the following:
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Billed | $ | 8,186,961 |
| | $ | 8,519,581 |
|
| Unbilled | 1,921,256 |
| | 1,977,191 |
|
| Other | 35,509 |
| | 19,479 |
|
| | 10,143,726 |
| | 10,516,251 |
|
| Less: allowance for doubtful accounts | (286,717 | ) | | (247,239 | ) |
| | $ | 9,857,009 |
| | $ | 10,269,012 |
|
Unbilled receivables result from contract retainages and revenues that have been earned in advance of billing and can be invoiced at contractually defined intervals, milestones, or at completion of the contract. Unbilled amounts are expected to be billed in future periods and are classified as current assets in accordance with industry practice.
5.6. Property and Equipment, net
Property and equipment, net, consists of the following:
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Building | $ | 69,556 |
| | $ | 69,556 |
|
| Equipment | 9,246,094 |
| | 8,649,886 |
|
| Furniture and fixtures | 592,258 |
| | 591,569 |
|
| Software | 1,139,715 |
| | 1,137,043 |
|
| Leasehold improvements | 4,984,010 |
| | 4,973,556 |
|
| | 16,031,633 |
| | 15,421,610 |
|
| Less—accumulated depreciation | (12,577,892 | ) | | (11,938,923 | ) |
| | $ | 3,453,741 |
| | $ | 3,482,687 |
|
| | | | | | | | | | | | | |
| | December 31, | | |
| (in thousands) | 2022 | | 2021 | | |
| Building | $ | 219 | | | $ | 226 | | | |
| Equipment | 15,801 | | | 10,255 | | | |
| Furniture and fixtures | 1,017 | | | 1,316 | | | |
| Software | 126 | | | 72 | | | |
| Leasehold improvements | 2,466 | | | 2,292 | | | |
| Construction in process | 1,383 | | | 646 | | | |
| 21,012 | | | 14,807 | | | |
| Less—accumulated depreciation | (16,119) | | | (11,819) | | | |
| Property and equipment, net | $ | 4,893 | | | $ | 2,988 | | | |
Depreciation for the years ended December 31, 20172022 and 20162021 was approximately $0.7$1.7 million and $0.8$1.4 million, respectively.respectively, and is included primarily in selling, general and administrative expense in our consolidated statements of operations.
6.
7. Intangible Assets, net
The following is a summary
Intangible assets, net consist of intangible assets, net:
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Patent costs | $ | 4,668,577 |
| | $ | 4,263,386 |
|
| Developed technology | 2,200,000 |
| | 2,200,000 |
|
| Customer base | 1,200,000 |
| | 1,200,000 |
|
| Backlog | 200,000 |
| | 200,000 |
|
| | 8,268,577 |
| | 7,863,386 |
|
| Accumulated amortization | (5,030,984 | ) | | (4,496,169 | ) |
| | $ | 3,237,593 |
| | $ | 3,367,217 |
|
| | | | | | | | | | | | | | | | | |
| | | | December 31, |
| (in thousands) | Estimated Life | | 2022 | | 2021 |
| Patent costs | 1 - 18 years | | $ | 9,086 | | | $ | 9,230 | |
| Developed technology | 6 - 10 years | | 15,924 | | | 14,440 | |
| In-process research and development | N/A | | 2,631 | | | 2,732 | |
| Customer relationships | 5 - 8 years | | 4,117 | | | 700 | |
| Trade names | 7 - 15 years | | 880 | | | 550 | |
| Backlog | 1 - 3 years | | 331 | | | — | |
| | | 32,969 | | | 27,652 | |
| | | | | |
| Patent costs | | | (4,128) | | | (3,254) | |
| Developed technology | | | (6,830) | | | (5,043) | |
| In-process research and development | | | (1,763) | | | (1,476) | |
| Customer relationships | | | (574) | | | (170) | |
| Trade names | | | (586) | | | (532) | |
| Backlog | | | (338) | | | — | |
| Accumulated amortization | | | (14,219) | | | (10,475) | |
| Intangible assets, net | | | $ | 18,750 | | | $ | 17,177 | |
Amortization for the years ended December 31, 20172022 and 20162021 was approximately $0.5$3.7 million and $0.6$3.1 million, respectively. respectively, and is included primarily in selling, general and administrative expense in our consolidated statements of operations.
Estimated aggregate amortization, based on the net value of intangible assets at December 31, 2017,2022, for each of the next five years and beyond is as follows:
|
| | | |
| Year Ending December 31, | |
| 2018 | 466,193 |
|
| 2019 | 397,132 |
|
| 2020 | 373,032 |
|
| 2021 | 362,038 |
|
| 2022 | 354,733 |
|
| 2023 and beyond | 1,284,465 |
|
| $ | 3,237,593 |
|
| | | | | |
| (in thousands) | |
| Year Ending December 31, | |
| 2023 | $ | 3,800 | |
| 2024 | 3,270 | |
| 2025 | 2,942 | |
| 2026 | 2,801 | |
| 2027 | 2,023 | |
| 2028 and beyond | 3,914 | |
| $ | 18,750 | |
We did not recognize any intangible asset impairment charges during the years ended December 31, 2022 or 2021. 7.
8. Goodwill
The change in the carrying value of goodwill during the years ended December 31, 2022 and December 31, 2021 were as follows:
| | | | | | | |
| (in thousands) | | | |
| Balance as of December 31, 2020 | | | $ | 18,121 | |
| Measurement period adjustment | | | 929 | |
| Foreign currency translation | | | (66) | |
| Balance as of December 31, 2021 | | | 18,984 | |
| Goodwill resulting from business acquisition | | | 8,788 | |
| Foreign currency translation | | | (845) | |
| Balance as of December 31, 2022 | | | $ | 26,927 | |
After completing a qualitative assessment of our goodwill during the fourth quarter of 2022, we concluded the carrying value of goodwill was not impaired as of December 31, 2022.
9. Accrued Liabilities
Accrued liabilities consist of the following: | | | | | | | | | | | |
| December 31, |
| (in thousands) | 2022 | | 2021 |
| Accrued compensation | $ | 8,962 | | | $ | 6,798 | |
| | | |
| | | |
| Contingent consideration | — | | | 225 | |
| Accrued professional fees | 720 | | | 503 | |
| Accrued income tax | 3,788 | | | 328 | |
| Current portion of finance lease liability | 50 | | | 48 | |
| Accrued interest | 64 | | | 17 | |
| | | |
| | | |
| | | |
| | | |
| Accrued liabilities-other | 3,110 | | | 1,339 | |
| | | |
| | | |
| Total accrued liabilities | $ | 16,694 | | | $ | 9,258 | |
|
| | | | | | | | |
| | | December 31, |
| | | 2017 | | 2016 |
| | Accrued compensation | $ | 5,274,005 |
| | $ | 4,742,760 |
|
| | Claims reserve | 1,637,118 |
| | 1,577,123 |
|
| | Accrued sub-contracts | 544,342 |
| | 483,477 |
|
| | Accrued professional fees | 117,445 |
| | 67,719 |
|
| | Accrued income tax | 403,548 |
| | — |
|
| | Deferred rent | 144,741 |
| | 155,138 |
|
| | Royalties | 290,235 |
| | 345,895 |
|
| | Warranty reserve | 210,599 |
| | 185,125 |
|
| | Accrued liabilities-other | 337,902 |
| | 356,307 |
|
| Total accrued liabilities | $ | 8,959,935 |
| | $ | 7,913,544 |
|
10. Debt
8. Income Taxes
Income tax expense/(benefit) from continuing operations consistedLong-term debt consists of the following forfollowing:
| | | | | | | | | | | | | | |
| | Years ended December 31, |
| (in thousands) | | 2022 | | 2021 |
| Term Loan (net of debt issuance costs of $74, 6.65% at December 31, 2022) | | $ | 18,926 | | | $ | 8,290 | |
| Revolving Loan (6.65% at December 31, 2022) | | 4,300 | | | 7,550 | |
| | 23,226 | | | 15,840 | |
| Less: Current portion of long-term debt obligations | | (2,500) | | | (4,167) | |
| Long-term debt obligations | | $ | 20,726 | | | $ | 11,673 | |
PNC Bank Facility
On June 21, 2022 (the “Effective Date”), we entered into a Loan Modification Agreement (the “Second Amendment”) in respect of our 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 periods indicated:
|
| | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 |
| Current: | | | |
| Federal | $ | (320,560 | ) | | $ | — |
|
| State | 24,807 |
| | (135,567 | ) |
| Deferred federal | — |
| | — |
|
| Deferred state | — |
| | — |
|
| Income tax benefit | $ | (295,753 | ) | | $ | (135,567 | ) |
Deferred tax assetsSecond Amendment, the “Loan Agreement”) with PNC Bank, National Association, as lender (the “Lender”) and liabilities consistcertain of our domestic subsidiaries as guarantors, to, among other things, extend the maturity date of the following components:
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| | Current | | Long-Term | | Current | | Long-Term |
| Bad debt and inventory reserve | $ | — |
| | $ | 226,358 |
| | $ | 382,075 |
| | $ | — |
|
| Inventory adjustment | — |
| | 405,242 |
| | — |
| | 940,885 |
|
| UNICAP | — |
| | 32,579 |
| | — |
| | 46,593 |
|
| Deferred revenue |
|
| | 84,669 |
| | — |
| | 154,608 |
|
| Deferred rent | — |
| | 340,199 |
| | — |
| | 550,419 |
|
| Depreciation and amortization | — |
| | (1,238,458 | ) | | — |
| | (3,490,869 | ) |
| Charitable contributions | — |
| | 3,385 |
| | — |
| | 5,741 |
|
| Net operating loss carryforwards- Luna | — |
| | 349,421 |
| | — |
| | 4,779,976 |
|
| Net operating loss carryforwards- API | — |
| | 1,436,568 |
| | — |
| | 9,783,512 |
|
| Net operating loss carryforwards - state | — |
| | 534,194 |
| | — |
| | 281,799 |
|
| Net operating loss carryforwards- Canada | — |
| | 10,503 |
| | — |
| | 10,503 |
|
| Research and development credits | — |
| | 235,613 |
| | — |
| | 4,250,803 |
|
| California manufacturing credit | — |
| | 15,554 |
| | — |
| | 15,554 |
|
| Accrued liabilities | — |
| | 504,472 |
| | 1,067,019 |
| | — |
|
| Deferred compensation | — |
| | 223,607 |
| | — |
| | 267,897 |
|
| Stock-based compensation | — |
| | 1,275,371 |
| | — |
| | 1,867,947 |
|
| AMT credit | — |
| | 581,467 |
| | — |
| | 395,083 |
|
| Total | — |
| | 5,020,744 |
| | 1,449,094 |
| | 19,860,451 |
|
| Valuation allowance | — |
| | (5,020,744 | ) | | (1,449,094 | ) | | (19,860,451 | ) |
| Net deferred tax asset | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Term Loan and Revolving Line (each as defined below) to June 21, 2027 and increase the total commitments to us.
The benefit from income taxes from continuing operations differsLoan 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 amount computed by applying the federal statutory income tax rateLender according to our loss from continuing operations before income taxes as follows for the periods indicated:
|
| | | | | | |
| | | Years ended December 31, |
| | 2017 | | 2016 |
| Income tax expense at federal statutory rate | | 34.00 | % | | 34.00 | % |
| State taxes, net of federal tax effects | | (102.48 | )% | | (0.93 | )% |
| Change in tax rate from Tax Cuts and Jobs Act | | (568.11 | )% | | — | % |
| Change in valuation allowance | | 796.72 | % | | (18.17 | )% |
| Incentive stock options | | (69.26 | )% | | (9.00 | )% |
| Provision to return adjustments | | 27.75 | % | | (0.82 | )% |
| Meals and entertainment | | (4.69 | )% | | (0.64 | )% |
| Capitalized merger costs | | — | % | | — | % |
| Windfall deduction | | — | % | | — | % |
| Other permanent differences | | (25.48 | )% | | 0.35 | % |
| Income tax benefit | | 88.45 | % | | 4.79 | % |
The realization of our deferred income tax assets is dependent upon sufficient taxable income in future periods. In assessing whether deferred tax assets may be realized, we consider whether it is more likely than not that some portion, or all, of the deferred tax asset will be realized. We consider scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies that we can implement in making our assessment. We have U.S. federal income tax net operating loss carryforwards at December 31, 2017 of approximately $1.7 million for Luna and net operating loss carryforwards of approximately $6.8 million for API expiring at varying dates through 2025. We have research and development tax credit carryforwards at December 31, 2017 of approximately $0.2 million, which expire at varying dates through 2024.
In 2015, we performed a formal section 382 study and determined that we do not have a limitation on our net operating loss available to offset future income for the Luna net operating losses. As a result of the acquisition of API, the API net operating loss carryover and research and development credits will be subject to the Section 382 limitation. A formal Section 382 study was prepared in 2017, and it was determined that there was no ownership changes in 2017 resulting in a limitation on NOLs, butterm note (the “Term Note”), a portion of the net operating losses will expire unutilized. As there is a full valuation allowance against allproceeds of which were used to refinance the API deferred tax assets, there will not be a statement of operations impact to any expiration of the net operating losses or research and development credits.
The U.S. federal statute of limitations remains open for the year 2014 and onward. We currently have no federal income tax returns under examination. U.S. state jurisdictions have statutes of limitation generally ranging from three to seven years. We currently have no state income or franchise tax returns under examination. We currently do not file tax returns in any foreign tax jurisdiction other than Canada.
We currently have no positions for which we expect that the amount of unrecognized tax benefit will increase or decrease significantly within twelve months of the reporting date or for which we believe there is significant risk of disallowance upon audit. We have no tax interest or penalties reported in either our statement of operations or statement of financial position for any year reported herein. Management believes it is not more likely than not that the deferred tax assets at December 31, 2017 or December 31, 2016 will not be realized, and as a result a valuation allowance was established against all such deferred tax assets.
Effective January 1, 2017, we adopted Accounting Standards Update ("ASU") No. 2016-09, Improvements to Employee Share-Based Payment Accounting. These amendments apply to several aspects of accounting for share-based compensation including the recognition of excess tax benefits and deficiencies and their related presentation in the statement of cash flows as well as accounting for forfeitures. The adoption of ASU No. 2016-09 did not have a significant impact on our financial condition, results of operations or cash flows.
Effective January 1, 2017, we adopted ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred taxes by requiring that deferred tax assets and liabilities be classified as noncurrent in
any classified balance sheet rather than being separated into current and non-current amounts. The adoption of ASU No. 2015-17 did not have a significant impact on our consolidated financial statements.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. This legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the current rate of 35% to 21%. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the enacted rate. This revaluation resulted in a $1.9 million reduction in the deferred tax asset and a corresponding reduction in the valuation allowance. The other provisions of the Tax Cuts and Jobs Act did not have a material impact on the 2017 financial statements.
9. Stockholders’ Equity
Series A Convertible Preferred Stock
In January 2010, we entered into a transaction with Carilion, in which Carilion agreed to exchange all of its Senior Convertible Promissory Notes with an originalremaining principal amount of $5.0the $12.5 million plus allin 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 totaling $1.2will 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 $10.7 million for 1,321,514 sharesat December 31, 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. We were in compliance with these covenants as of December 31, 2022.
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 newly designated Series A Convertible Preferred Stock.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 |
| 2023 | $ | 2,500 | |
| 2024 | 3,000 | |
| 2025 | 3,500 | |
| 2026 | 4,000 | |
| 2027 | 10,300 | |
| Total maturities | $ | 23,300 | |
| Less: deferred issuance costs | (74) | |
| Total | $ | 23,226 | |
Interest expense, net for the years ended December 31, 2022 and 2021 consisted of the following: | | | | | | | | | | | | | | |
| | Years ended December 31, |
| (in thousands) | | 2022 | | 2021 |
| Interest expense on Term Loans | | $ | 642 | | | $ | 247 | |
| Interest expense on Revolving Line of Credit | | 210 | | | 164 | |
| Amortization of debt issuance costs | | 43 | | | 44 | |
| Other interest expense | | 5 | | | 27 | |
| Interest income | | (2) | | | (3) | |
| Total interest expense, net | | $ | 898 | | | $ | 479 | |
11. Leases
We have operating leases for our facilities, which have remaining terms ranging from 1 to 5 years. Our leases do not have an option to extend the lease period beyond the stated term unless the new term is agreed 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 Series A Convertible Preferred Stock is non-voting, carrieschange in rent expense resulting from changes in these indices are included within variable rent.
We also have finance leases for equipment which have remaining terms ranging from 1 to 4 years. These lease agreements are for general office equipment with a dividend5-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 6% payable interest expense and amortization, and are included primarily in sharesselling, general and administrative expense in our consolidated statement of common stockoperations.
The discount rate for both our operating and maintainsfinance leases was not readily determinable in the specific lease agreements. As a liquidation preference up to $6.2 million.result, our incremental borrowing rate was used as the discount rate when establishing the ROU assets and corresponding lease liabilities. As of December 31, 2017, 631,693 shares of common stock were issuable to Carilion as dividends and2022, we had no operating or finance leases that have been recorded innot yet commenced.
Rent expense is recognized on a straight-line basis over the statement of stockholders’ equity. These dividends are issuable on demand. Each share of Series A Convertible Preferred Stock may be converted into one share of our common stock at the optionlife of the holder. We recordedlease. For the fair value of the Series A Convertible Preferred Stock, determined based upon the conversion value immediately prior to the exchange, the fair value of the new warrant issued to Carilion, determined using the Black-Scholes valuation model, and the incremental fair value of the prior warrant due to the re-pricing and extension of maturity to stockholders’ equity.
Warrants
Carilion Clinic holds unexercised warrants for 366,000 shares of our common stock. The warrants have an exercise price of $2.50 per share and expire onyear ended December 31, 2020.2022 and 2021, rent expense consisted of operating lease costs that totaled $2.5 million and $2.1 million, respectively.
Future minimum lease payments under non-cancelable operating and finance leases were as follows as of December 31, 2022:
| | | | | | | | | | | |
| (in thousands) | | | |
| Year Ending December 31, | Operating Leases | | Finance Leases |
| 2023 | $ | 2,484 | | | $ | 53 | |
| 2024 | 1,735 | | | 52 | |
| 2025 | 1,027 | | | 48 | |
| 2026 | 140 | | | — | |
| 2027 | — | | | — | |
| 2028 and beyond | — | | | — | |
| Total future minimum lease payments | 5,386 | | | 153 | |
| Less: Interest | 343 | | | 5 | |
| Total lease liabilities | $ | 5,043 | | | $ | 148 | |
| | | |
| Current lease liability | $ | 2,239 | | | $ | 50 | |
| Long-term lease liability | 2,804 | | | 98 | |
| Total lease liabilities | $ | 5,043 | | | $ | 148 | |
Other information related to leases is as follows:
| | | | | | | | | | | |
| Year Ended |
| (in thousands, except weighted-average data) | December 31, 2022 | | December 31, 2021 |
| Finance lease cost: | | | |
| Amortization of right-of-use assets | $ | 53 | | | $ | 48 | |
| Interest on lease liabilities | (4) | | | (4) | |
| Total finance lease cost | $ | 49 | | | $ | 44 | |
| | | |
| Other information: | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | 2,064 | | | $ | 2,115 | |
| Finance cash flows from finance leases | $ | 48 | | | $ | 48 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 782 | | | $ | 865 | |
| | | |
| Weighted-average remaining lease term (years) - operating leases | 6.0 | | 8.0 |
| Weighted-average remaining lease term (years) - finance leases | 3.2 | | 3.9 |
| Weighted-average discount rate - operating leases | 8 | % | | 9 | % |
| Weighted-average discount rate - finance leases | 3 | % | | 3 | % |
12. Stockholders’ Equity
Equity Incentive Plans
In April 2016, we adopted our 2016 Equity Incentive Plan (the "2016 Plan") as a successor to the 2006 Plan. Under the 2016 Plan, our Board of Directors is authorized to grant both incentive and non-statutory stock options to purchase common stock and restricted stock awards to our employees, directors, and consultants. The 2016 Plan provides for the issuance of 3,500,000 shares plus any amounts forfeited from grants under the 2006 Plan after the expiration date of the 2006 Plan. Options generally have a life of 10 years and exercise price equal to or greater than the fair market value of the Common Stock as determined by the Board of Directors.
Vesting for employees typically occurs over a four-year period.
The following table sets forth the activity of the options to purchase common stock under the 2006 Plan and the 2016 Plan. The prices represent the closing price of our Common Stock on the NASDAQNasdaq Capital Market on the respective dates.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
| | Number of
Shares | | Price per
Share Range | | Weighted
Average
Exercise
Price | | Aggregate
Intrinsic
Value (1) | | Number of Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (1) |
| Balance at January 1, 2016 | 3,800,728 |
| | $0.61 - 8.43 | | $ | 2.17 |
| | $ | 111,314 |
| | 3,045,150 |
| | $ | 2.39 |
| | $ | 103,603 |
|
| Forfeited | (963,614 | ) | | $1.18 - 8.43 | | $ | 2.99 |
| | | | | | | | |
| Exercised | — |
| | 0 | | $ | — |
| | | | | | | | |
| Granted | 20,000 |
| | $1.15 | | $ | 1.15 |
| | | | | | | | |
| Balance at December 31, 2016 | 2,857,114 |
| | $0.61 - 6.83 | | $ | 1.89 |
| | $ | 107,063 |
| | 2,367,630 |
| | $ | 1.93 |
| | $ | 101,071 |
|
| Forfeited | (178,665 | ) | | $1.27 - 6.83 | | $ | 2.24 |
| | | | | | | | |
| Exercised | (83,888 | ) | | $0.82 - 1.40 | | $ | 1.19 |
| | | | | | | | |
| Granted | 120,000 |
| | $1.51 - 2.40 | | $ | 1.82 |
| | | | | | | | |
| Balance at December 31, 2017 | 2,714,561 |
| | $0.61 - 6.55 | | $ | 1.88 |
| | $ | 2,098,195 |
| | 2,590,030 |
| | $ | 1.89 |
| | $ | 2,013,034 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
| | Number of
Shares | | Price per
Share Range | | Weighted
Average
Exercise
Price | | Aggregate
Intrinsic
Value (1) | | Number of
Shares | | Weighted
Average
Exercise
Price | | Aggregate
Intrinsic
Value (1) |
| (in thousands, except share, per share and weighted-average data) | | | | | | | | | | | | | |
| Balance at December 31, 2020 | 2,329,416 | | | $1.18 - 7.59 | | $ | 2.76 | | | $ | 16,574 | | | 1,408,119 | | | $ | 2.26 | | | $ | 10,734 | |
| Forfeited | (58,860) | | | $3.37 - 11.40 | | 5.91 | | | | | | | | |
| Exercised | (818,267) | | | $1.18 - 7.59 | | 2.73 | | | | | | | | | |
| Granted | 80,735 | | | $11.00 - 11.94 | | 9.13 | | | | | | | | | |
| Balance at December 31, 2021 | 1,533,024 | | | $1.18 - 11.40 | | $ | 3.00 | | | $ | 8,439 | | | 1,050,177 | | | $ | 2.45 | | | $ | 6,314 | |
| Forfeited | (96,858) | | | $3.04 - $11.40 | | 6.03 | | | | | | | | |
| Exercised | (577,129) | | | $1.27 - $7.37 | | 2.48 | | | | | | | | | |
| | | | | | | | | | | | | |
| Balance at December 31, 2022 | 859,037 | | | $1.27 - 11.40 | | $ | 3.01 | | | $ | 5,040 | | | 797,529 | | | $ | 2.74 | | | $ | 4,856 | |
| |
(1) | The intrinsic value of an option represents the amount by which the market value of the stock exceeds the exercise price of the option of in-the-money options only. |
(1)The intrinsic value of an option represents the amount by which the market value of the stock exceeds the exercise price of the option of in-the-money options only.
The fair value of each option granted is estimated as of the grant date using the Black-Scholes option pricing model with the following assumptions:
|
| | | | |
| | | Years ended December 31, |
| | | 2017 | | 2016 |
| Risk-free interest rate range | | 2.1% | | 1.5% |
| Expected life of option-years | | 6.5 | | 7.5 |
| Expected stock price volatility | | 69% | | 73% |
| Expected dividend yield | | —% | | —% |
| | | | | | | | | | | | |
| | | Years ended December 31, |
| | | | 2021 |
| Risk-free interest rate range | | | | 0.975% |
| Expected life of option-years | | | | 7 |
| Expected stock price volatility | | | | 55% |
| | | | |
| | | | |
| | | | |
The risk-free interest rate is based on U.S. Treasury interest rates, the terms of which are consistent with the expected life of the stock options. Expected volatility is based upon the average historical volatility of our common stock over the period commensurate with the expected term of the related instrument. The expected life and estimated post-employment termination behavior is based upon historical experience of homogeneous groups, executives and non-executes,non-executives, within our company. We do not currently pay dividends on our common stock nor do we expect to in the foreseeable future.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Options Outstanding | | Options Exercisable |
| | Range of
Exercise Prices | | Options
Outstanding | | Weighted
Average
Remaining
Life in
Years | | Weighted
Average
Exercise
Price | | Options
Exercisable | | Weighted
Average
Remaining
Life in
Years | | Weighted
Average
Exercise
Price of
Options
Exercisable |
| Year ended December 31, 2021 | $1.18 - 11.40 | | 1,533,024 | | | 4.73 | | $3.00 | | 1,050,177 | | | 3.95 | | $2.45 |
| Year ended December 31, 2022 | $1.27 - 11.40 | | 859,037 | | | 4.00 | | $3.01 | | 797,529 | | | 3.76 | | $2.74 |
| | | | | | | | | | | |
| (in thousands) | Total Intrinsic Value of
Options Exercised | | Total Fair Value of
Options Vested |
| Year ended December 31, 2021 | $ | 6,288 | | | $ | 2,571 | |
| Year ended December 31, 2022 | $ | 2,173 | | | $ | 2,189 | |
|
| | | | | | | | | | | | | |
| | | | Options Outstanding | | Options Exercisable |
| | Range of Exercise Prices | | Options Outstanding | | Weighted Average Remaining Life in Years | | Weighted Average Exercise Price | | Options Exercisable | | Weighted Average Exercise Price of Options Exercisable |
| Year ended December 31, 2016 | $0.61 - 6.83 | | 2,857,114 |
| | 5.09 | | $1.89 | | 2,637,630 |
| | $1.93 |
| Year ended December 31, 2017 | $0.61 - 6.55 | | 2,714,561 |
| | 4.23 | | $1.88 | | 2,590,030 |
| | $1.89 |
|
| | | | | | | |
| | Total Intrinsic Value of Options Exercised | | Total Fair Value of Options Vested |
| Year ended December 31, 2016 | $ | — |
| | $ | 370,654 |
|
| Year ended December 31, 2017 | $ | 62,549 |
| | $ | 3,962,746 |
|
For the yearsyear ended December 31, 2017 and 2016,2021, the weighted average grant date fair value of options granted was $1.18 and $1.15, respectively,$11.30 per share. We estimate the fair value of options at the grant date using the Black-Scholes model. For all stock options granted through December 31, 2017,2021, the weighted average remaining service period is 3.27.0 years. There were no new stock options granted during the year ended December 31, 2022.
Unamortized stock option expense at December 31, 2022 that will be amortized over the weighted-average remaining service period of 0.6 years.
totaled $0.2 million.
Restricted Stock and Restricted Stock Units
In 2017 and 2016,Historically, we issued 349,000 and 319,000, respectively,have granted shares of restricted stock to certain employees. Shares issued to employees vestthat have vested in three equal annual installments on the anniversary dates of their grant. In 2017 and 2016, 530,542 and 245,583 shares, respectively,However, beginning in 2019, we altered our approach for these grants to replace the grant of restricted stock subject to time-based vesting with the grant of a combination of restricted stock units ("RSUs") subject to time-based vesting and performance-based vesting. Each RSU represents the contingent right to receive a single share of our common stock upon the vesting of the award. For the year ended December 31, 2022, we granted an aggregate of 930,661 RSUs to certain employees. Of the RSUs granted during 2022, 816,740 of such RSUs are subject to time-based vesting and are scheduled to vest in three equal annual installments on the anniversary dates of the grant. The remaining 113,921 RSUs are performance-based awards that will vest based on our achievement of long-term performance goals, in particular, based on our levels of 2023 revenue and operating income. The 113,921 shares issuable upon vesting of the performance-based RSUs represent the probable payout under our performance-based awards, based upon 100% of our target performance for 2023 revenue and operating income. In the case of the time-based and performance-based RSUs, vesting is also subject to the employee's continuous service with us through vesting. In 2022, 169,576 shares of restricted stock and 52,174 RSUs granted to employees vested.
In addition, in 2017conjunction with our 2020, 2021 and 2016,2022 Annual Meetings of Stockholders, we issued 129,865 and 86,956, respectively, restricted stock unitsgranted RSUs to certain members of our Board of Directors. RestrictedDirectors in respect of the annual equity compensation under our non-employee director compensation policy (other members of our Board of Directors elected to receive their annual equity compensation for Board service in the form of stock units issuedunder our Deferred Compensation Plan as described below). RSUs granted to our Board ofnon-employee Directors vest at the earlier of the one yearone-year anniversary of their grant or the next annual stockholders' meeting. In 20172022 and 2016, 86,9562021, we granted 11,819 and 48,542 restricted stock units,3,384, respectively, RSUs to non-employee members of our Board of Directors in respect of the annual equity compensation under our non-employee director compensation policy. In 2022 and 2021, 3,384 and 10,652 RSUs granted to directors, respectively, vested.
The following table summarizes the number of unvested shares underlying our aggregate restricted stock awards and RSUs and the value of our unvested restricted stock unit activityawards and RSUs in 20162022 and 2017:2021:
| | | | Number of Unvested Shares | | Weighted Average Grant Date Fair Value | | Aggregate Value of Unvested Shares | |
| Balance at January 1, 2016 | 718,167 |
| | $1.22 | | $ | 874,186 |
| |
| (in thousands, except share and weighted-average share data) | | (in thousands, except share and weighted-average share data) | Number of Unvested Shares | | Weighted Average Grant Date Fair Value | | Aggregate Grant Date Fair Value of Unvested Shares |
| Balance at January 1, 2020 | | Balance at January 1, 2020 | 429,467 | | | $ | 4.48 | | | $ | 1,924 | |
| Granted | 405,956 |
| | $1.15 | | $ | 466,849 |
| Granted | 281,384 | | | 10.71 | | | 3,014 | |
| Vested | (294,125 | ) | | $1.20 | | $ | (352,272 | ) | Vested | (234,367) | | | 4.22 | | | (989) | |
| Forfeitures | — |
| | $0.00 | | $ | — |
| Forfeitures | (7,500) | | | 11.94 | | | (90) | |
| Balance at December 31, 2016 | 829,998 |
| | $1.19 | | $ | 988,763 |
| |
| Balance at December 31, 2021 | | Balance at December 31, 2021 | 468,984 | | | $ | 8.58 | | | $ | 3,859 | |
| Granted | 478,865 |
| | $1.63 | | $ | 780,252 |
| Granted | 930,661 | | | 6.17 | | | 5,742 | |
| Vested | (617,498 | ) | | $1.23 | | $ | (758,653 | ) | Vested | (225,134) | | | 6.96 | | | (1,567) | |
| Forfeitures | (201,667 | ) | | $1.35 | | $ | (272,017 | ) | Forfeitures | (111,588) | | | 9.54 | | | (1,065) | |
| Balance at December 31, 2017 | 489,698 |
| | $1.51 | | $ | 738,345 |
| |
| Balance at December 31, 2022 | | Balance at December 31, 2022 | 1,062,923 | | | $ | 6.72 | | | $ | 6,969 | |
We recognized $0.7$4.2 million and $0.9$3.0 million in stock-based compensation expense, which is recorded in selling, general and administrative expensesexpense on the consolidated statementstatements of operations for the years ended December 31, 20172022 and 2016, respectively, and we2021, respectively.
Unamortized RSUs expense at December 31, 2022 that will recognize $0.5 millionbe amortized over the weighted-average remaining requisite service period.period of 2.1 years totaled $5.1 million.
Employee Stock Purchase Plan
On April 7, 2020, our board of directors approved, and on May 11, 2020, our stockholders approved, the Luna Innovations Incorporated 2020 Employee Stock Purchase Plan (the "2020 ESPP"). The 2020 ESPP grants our eligible employees a purchase right to purchase up to that number of shares of common stock purchasable either with a percentage or with a maximum dollar amount, as designed by the Board of Directors, during the period that begins on the offering date and ends on the date stated in the offering. The maximum number of shares of common stock that may be issued under the 2020 ESPP is 1,200,000 shares. The 2020 ESPP is considered a compensatory plan and the fair value of the discount and the look-back period will be estimated using the Black-Scholes option pricing model and expense will be recognized over the six-month withholding period prior to the purchase date. For the years ended December 31, 2022 and 2021, we recognized $0.3 million and $0.4 million in share-based compensation expense related to the 2020 ESPP, respectively, which is included in our selling, general and administrative expense in the accompanying consolidated statements of operations.
Non-employee Director Deferred Compensation Plan
We maintain a non-employee director deferred compensation plan (the “Deferred Compensation Plan”) that permits our non-employee directors to defer receipt of certain of the compensation that they receive for serving on our board and board committees. During the years ended December 31, 2017 and 2016, theThe Deferred Compensation Plan has historically permitted the participants to elect to defer cash fees to which they were entitled for board and committee service. For participating directors, in lieu of payment of cash fees, we credit their accounts under the Deferred Compensation Plan with a number of stock units based on the trading price of our common stock as of the date of the deferral. These stock units are vestedvest immediately, although the participating directors do not receive the shares represented by such units until a future qualifying event. A summary of stock unit activity under the Deferred Compensation Plan for 2016 and 2017 is as follows.
|
| | | | | | | | |
| | Number of Stock Units | | Weighted Average Grant Date Fair Value per Share | | Intrinsic Value Outstanding |
| January 1, 2016 | 315,382 |
| | $1.38 | | |
| Granted | 101,901 |
| | $1.21 | | |
| Vested | — |
| | $1.01 | | |
| Converted | (24,271 | ) | | $1.01 | | |
| December 31, 2016 | 393,012 |
| | $1.37 | | $ | 577,728 |
|
| Granted | 73,690 |
| | $1.54 | | |
| Vested | — |
| | $1.15 | | |
| Converted | — |
| | $0.00 | | |
| December 31, 2017 | 466,702 |
| | $1.40 | | $1,134,086 |
In December 2017, we amended and restatedPursuant to our Deferred Compensation Plan, to also permit participating non-employee directors tocan also elect beginning in 2018, to defer the receipt of some or all of the equity compensation that they receive for board and committee service. Stock units representing this equity compensation vest at the earlier of the one-year anniversary of their grant or the next annual stockholders' meeting.
The following is a summary of our stock unit activity under the Deferred Compensation Plan for 2022 and 2021: | | | | | | | | | | | | | | | | | |
| (in thousands, except stock units and weighted-average share data) | Number of Stock Units | | Weighted Average Grant Date Fair Value per Share | | Intrinsic Value Outstanding |
| Balance, December 31, 2020 | 635,383 | | | 2.41 | | | $ | 6,278 | |
| Granted | 40,576 | | | 10.6 | | | |
| | | | | |
| Issued | (47,377) | | | 2.4 | | | |
| Balance, December 31, 2021 | 628,582 | | | 3.06 | | | $ | 5,334 | |
| Granted | 118,175 | | | 5.64 | | | |
| | | | | |
| Issued | (47,377) | | | 1.15 | | | |
| Balance, December 31, 2022 | 699,380 | | | 3.61 | | | $ | 6,148 | |
As of December 31, 2022, 68,476 outstanding stock units had not yet vested.
Stock Repurchase ProgramRepurchases
In May 2016, our board of directors authorized us to repurchase up to $2.0 million
We have historically repurchased shares of our common stock through May 31, 2017. As of May 31, 2017, we had repurchased a total of 205,500 shares for an aggregate purchase price of $0.2 million under thisduring previous stock repurchase program, after which this stock repurchase program expired.
In September 2017, our board of directors authorized a new stock repurchase program and providing for the repurchase of up to $2.0 million of our common stock through September 19, 2018. Our stock repurchase program does not obligate us to acquire any specific number of shares. Under the program, shares may be repurchased in privately negotiated or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. As of December 31, 2017, we had repurchased a total of 433,179 shares for an aggregate purchase price of $0.8 million under this stock repurchase program. In addition, in December 2017 we repurchased 100,000 shares directly from a member of our Board of Directors outside of the repurchase program.programs. We currently maintain all repurchased shares under thesethose stock repurchase programs as treasury stock. The following chart detailsIn addition, we repurchased 52,836 and 44,051 shares of our common stock at an aggregate cost of $0.4 million and $0.5 million, or an average price of $6.79 and $10.41 per share, repurchases duringin connection with the year ended December 31, 2017:net settlement of shares issued as a result of the vesting of restricted stock units in 2022 and 2021, respectively.
|
| | | | |
| | Total Number of Shares Repurchased | | Average Price Paid per Share |
| January 1 - September 30, 2017 | 141,000 |
| | $1.62 |
| October 2017 | 193,323 |
| | $1.62 |
| November 2017 | 130,120 |
| | $1.68 |
| December 2017 | 159,634 |
| | $2.35 |
Disaggregation of Revenue
We currently maintain these repurchased sharesdisaggregate our revenue from contracts with customers by geographic location, customer type, contract type, timing of recognition, and major categories, as treasury stock.
10. Commitmentswe believe it best depicts how the nature, amount, timing and Contingencies
Obligation under Operating Leases
uncertainty of our revenue and cash flows are affected by economic factors. We lease facilities in Virginia, Michigan, California, and Canada under operating leases that asdisaggregate revenue on the basis of December 31, 2017 were scheduled to expire between March 2019 and December 2024. Certainwhere 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 leasesdiversity 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 subjectconsidered 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 escalationsprice. 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 provide for possible termination prior to their expiration dates. We recognize rent expense on such leases onservice, we attribute revenue from a straight-line basis over the lease term. The difference between the straight line method and cash paid is reflected in changesclient to the deferred rent balancemajor product or service that we believe to be the client's primary market.
The details are listed in our consolidated balance sheets. Deferred rent primarily resulted from recognition of the value of certain leasehold improvements associated with our Blacksburg, Virginia facility at the inception of the lease. Rent expense under these leases recorded in selling, general and administrative expense on our statements of operations totaled approximately $1.1 million and $1.5 million, respectively,table below for the years ended December 31, 20172022 and 2016.2021:
Minimum future payments, | | | | | | | | | | | | | | |
| | Years ended December 31, |
| (in thousands) | 2022 | | 2021 |
| Total Revenue by Geographic Location | | |
| United States | $ | 48,256 | | | $ | 45,334 | |
| Asia | 22,327 | | | 17,183 | |
| Europe | 29,340 | | | 16,928 | |
| Canada, Central and South America | 8,516 | | | 8,068 | |
| All others | 1,058 | | | — | |
| Total | $ | 109,497 | | | $ | 87,513 | |
| | | | |
| Total Revenue by Major Customer Type | | |
| Sales to the U.S. government | $ | 8,700 | | | $ | 9,525 | |
| U.S. direct commercial sales and other | 39,556 | | | 35,410 | |
| Foreign commercial sales & other | 61,241 | | | 42,578 | |
| Total | $ | 109,497 | | | $ | 87,513 | |
| | | | |
| Total Revenue by Contract Type | | |
| Fixed-price contracts | $ | 105,919 | | | $ | 84,490 | |
| Cost-type contracts | 3,578 | | | 3,023 | |
| Total | $ | 109,497 | | | $ | 87,513 | |
| | | | |
| Total Revenue by Timing of Recognition | | |
| Goods transferred at a point in time | $ | 91,982 | | | $ | 69,522 | |
| Goods/services transferred over time | 17,515 | | | 17,991 | |
| Total | $ | 109,497 | | | $ | 87,513 | |
| | | | |
| Total Revenue by Major Products/Services | | |
| Technology development | $ | 7,608 | | | $ | 7,136 | |
| Test, measurement and sensing systems | 99,419 | | | 78,528 | |
| | | | |
| Other | 2,470 | | | 1,849 | |
| Total | $ | 109,497 | | | $ | 87,513 | |
Contract Balances
Our contract assets consist of unbilled amounts for research contracts as well as custom product contracts. Contract liabilities include excess billings, subcontractor accruals, and customer deposits. During the year ended December 31, 2022, we recognized $2.7 million of revenue that was included in contract liabilities as of December 31, 2017, under2021.
As of December 31, 2022, contract assets reflect $1.9 million of additional revenue following the aforementioned operating leases for eachapproval of our 2021 Incurred Cost Submission (ICS) from the Defense Contract Management Agency (DCMA). A portion of the corresponding revenue related to our former Luna Labs segment is classified as discontinued operations.
The following table shows the components of our contract balances as of December 31, 2022 and 2021:
| | | | | | | | | | | | |
| December 31, | |
| (in thousands) | 2022 | | 2021 | |
| Contract assets | $ | 7,691 | | | $ | 5,166 | | |
| Contract liabilities | (4,089) | | | (4,649) | | |
| Net contract assets/(liabilities) | $ | 3,602 | | | $ | 517 | | |
Performance Obligations
Unfulfilled performance obligations represent amounts expected to be earned on executed contracts. Indefinite delivery and quantity contracts and unexercised options are not reported in total unfulfilled performance obligations. Unfulfilled performance obligations include funded obligations, which is the amount for which money has been directly authorized by the U.S. government and for which a purchase order has been received by a commercial customer, and unfunded obligations represent firm orders for which funding has not yet been appropriated. The approximate value of our unfulfilled performance obligations was $52.9 million at December 31, 2022. We expect to satisfy 64% of the performance obligations in 2023, 33% in 2024 and the remainder by 2025.
14. Income Taxes
Income tax benefit from continuing operations consisted of the following for the periods indicated:
| | | | | | | | | | | | | |
| Years ended December 31, | | |
| (in thousands) | 2022 | | 2021 | | |
| Current: | | | | | |
| Federal | $ | 1,701 | | | $ | 28 | | | |
| State | 470 | | | (40) | | | |
| Foreign | — | | | 118 | | | |
| Current | $ | 2,171 | | | $ | 106 | | | |
| Deferred: | | | | | |
| Federal | (1,985) | | | (1,692) | | | |
| State | (355) | | | (390) | | | |
| Foreign | $ | (51) | | | $ | (4) | | | |
| Deferred | $ | (2,391) | | | $ | (2,086) | | | |
| Income tax benefit | $ | (220) | | | $ | (1,980) | | | |
Deferred tax assets and liabilities consist of the following components:
| | | | | | | | | | | |
| | Years ended December 31, |
| (in thousands) | 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Bad debt and inventory reserve | $ | 303 | | | $ | 405 | |
| UNICAP | 598 | | | 130 | |
| Deferred revenue | 210 | | | 156 | |
| ASC842 lease accounting (DTA) | 1,243 | | | 1,236 | |
| Net operating loss carryforwards | 8,225 | | | 6,984 | |
| Accrued liabilities | 779 | | | 559 | |
| Stock-based compensation | 1,247 | | | 899 | |
| R&D credit carryforward | — | | | 500 | |
| Section 174 capitalization | 2,081 | | | — | |
| Other, net | — | | | 360 | |
| Total deferred income tax assets before valuation allowance | 14,686 | | | 11,229 | |
| Less: Valuation allowance | (3,593) | | | (3,806) | |
| Total deferred income tax assets | 11,093 | | | 7,423 | |
| Deferred income tax liabilities: | | | |
| ASC842 lease accounting (DTL) | (1,152) | | | (1,090) | |
| Depreciation and amortization | (3,762) | | | (3,012) | |
| Deferred gain | (548) | | | — | |
| Investment in partnership | (67) | | | — | |
| Other, net | (917) | | | — | |
| Total deferred income tax liabilities | $ | (6,446) | | | $ | (4,102) | |
| Net deferred tax assets | $ | 4,647 | | | $ | 3,321 | |
The benefit from income taxes from continuing operations differs from the amount computed by applying the federal statutory income tax rate to our (loss)/income from continuing operations before income taxes as follows for the periods indicated:
| | | | | | | | | | | |
| Years ended December 31, |
| 2022 | | 2021 |
| Income tax expense at federal statutory rate | 21.00 | % | | 21.00 | % |
| Effect of foreign operations | 3.06 | | | 28.79 | |
| State taxes, net of federal tax effects | (0.64) | | | 9.48 | |
| Change in valuation allowance | (23.55) | | | (24.66) | |
| Provision to return adjustments | (0.88) | | | (0.04) | |
| Meals and entertainment | (0.60) | | | (0.11) | |
| Other permanent differences | (3.92) | | | (14.71) | |
| Equity compensation | 3.08 | | | 34.43 | |
| Current year R&D credit | 14.86 | | | 8.80 | |
| Prior year R&D credit | (2.18) | | | 1.52 | |
| Foreign derived intangible income benefit | 8.82 | | | 3.31 | |
| Reserve for uncertain tax positions | (1.90) | | | (2.73) | |
| Other | (8.41) | | | (0.56) | |
| Income tax benefit | 8.74 | % | | 64.52 | % |
The realization of our deferred income tax assets is dependent upon sufficient taxable income in future periods. In assessing whether deferred tax assets may be realized, we consider whether it is more likely than not that some portion, or all, of the deferred tax asset will be realized. We consider scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies that we can implement in making our assessment. We continue to be in a three year cumulative net income position, and based on all available positive and negative evidence, we believe the net deferred tax asset will be fully realizable.
In March 2022, we acquired the stock of Lios, which included a German entity and a US entity, both of which had deferred tax assets that were recorded as of the acquisition date. Based on all available evidence, including cumulative history of losses, we have realized deferred tax assets only to the extent they are supported by the reversal of existing temporary differences. Due to taxable temporary differences exceeding the NOLs in existence at the acquisition date, no valuation allowance was recorded at the acquisition date for the German entity. Subsequent to the acquisition, a valuation allowance was recorded in the amount of $0.2 million to income tax benefit for the year ended December 31, 2022. A valuation allowance of $0.5 million was recorded on the opening balance sheet for the US entity.
In December 2020, Luna acquired the stock of OptaSense Holdings Limited and its wholly owned subsidiaries ("OptaSense"), which included a UK entity and US entity. Both of these entities had deferred tax assets that were recorded as of the acquisition date. Based on all available evidence, including cumulative history of losses, we have realized deferred tax assets only to the extent they are supported by the reversal of existing temporary differences. This results in a valuation allowance of $2.5 million and $3.8 million as of December 31, 2022 and 2021 respectively.
As of December 31, 2022, we have net operating loss ("NOL") carryforwards of approximately $31.9 million, of which approximately $21.0 million is in foreign jurisdictions. These NOLs were primarily from past acquisitions. A portion of these NOLs begin to expire in 2025. The domestic NOLs are subject to limitation under IRC Section 382.
The following table summarizes the activity related to our gross unrecognized tax benefits:
| | | | | | | | | | | |
| | Years ended December 31, |
| (in thousands) | 2022 | | 2021 |
| Unrecognized tax benefits, beginning of period | $ | 295 | | | $ | 211 | |
| Increases related to current period tax positions | 56 | | | 75 | |
| Increases related to prior period tax positions | — | | | 9 | |
| Decreases related to prior period tax positions | (8) | | | — | |
| Unrecognized tax benefits, end of period | $ | 343 | | | $ | 295 | |
As of December 31, 2022 we had $0.3 million of unrecognized tax benefits. If these amounts are recognized in future periods, it would impact the effective tax rate on income from continuing operations for the years in which they are recognized. Interest and penalties released related to uncertain tax positions was immaterial for the year ended December 31, 2022. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision in the period for which the event occurs requiring the adjustment. The accrued interest and penalties as of December 31, 2022, is recorded in other long-term liabilities on the consolidated balance sheets. Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense.
We file numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. The U.S. federal statute of limitations remains open for the year 2018 and onward. U.S. state jurisdictions have statutes of limitation generally ranging from three to seven years. Our Optasense companies have open years for audit including UK - 2018 and forward; US - 2018 and forward; and Canada 2017 and forward. Given that certain subsidiaries have federal or state net operating loss carryforwards, the statute for examination by the taxing authorities will typically remain open for a period following the use of such net operating loss carryforwards, extending the period for examination beyond the years indicated above. We currently have no income tax returns under examination, we do not believe that there are any positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months.
We consider undistributed earnings of certain foreign subsidiaries to be indefinitely reinvested outside of the U.S. No taxes have been recorded with respect to our indefinitely reinvested earnings in accordance with the relevant accounting guidance for income taxes. Should the earnings be remitted as dividends, we may be subject to additional foreign withholding
and state income taxes. As of December 31, 2022, the cumulative amount of U.S. GAAP foreign unremitted earnings upon which additional income taxes have not been provided is not material to the financial statements. It is not practicable to estimate the amount of any additional taxes which may be payable on the undistributed earnings.
On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Securities Act (the "CARES Act"). The CARES Act includes significant business tax provisions that, among other things, include the removal of certain limitations on utilization of net operating losses, increase the loss carryback period for certain losses to five years, and thereafter are:
|
| | | |
| 2018 | 1,284,524 |
|
| 2019 | 833,094 |
|
| 2020 | 715,848 |
|
| 2021 | 544,704 |
|
| 2022 | 544,704 |
|
| Thereafter | 1,089,408 |
|
| | $ | 5,012,282 |
|
Purchase Commitment
increase the ability to deduct interest expense, as well as amending certain provisions of the previous of the previously enacted Tax Cuts and Jobs Act. We do not expect the CARES Act to have a significant impact on our tax obligations. In 2016 we executed two non-cancelable purchase orders totaling $1.5 millionDecember 2020, the Consolidated Appropriations Act, 2021 ("CAA") was signed into law. The CAA included additional funding through tax credits as part of its economic package for multiple shipments2021. As of tunable lasers to be delivered over an 18-month period beginning in the third quarter of 2016. At December 31, 2017, approximately $0.1 million of this commitment remained under these purchase agreements. In the third quarter of 2017 we executed a non-cancelable purchase order totaling $0.5 million for multiple shipments of tunable lasers to be delivered over an 18-month period beginning the third quarter of 2017. At2022, and December 31, 2017, approximately $0.5 million of this commitment remained under this purchase order.2021, we evaluated these items in our tax computation and determined that the items did not have a material impact on our financial statements.
Royalty Agreement
We have licensed certain third-party technologies from vendors for which we owe minimum royalties aggregating $0.7 million payable over the remaining patent terms of the underlying technology.
15. Commitments and Contingencies 11. Employee Profit Sharing Plan
We maintain a salary reduction/profit-sharing plan under provisions of Section 401(k) of the Internal Revenue Code. The plan is offered to all permanent employees of Luna Innovations Incorporated and its wholly-owned subsidiaries. We contribute 25% of the salary deferral elected by each employee up to a maximum deferral of 10% of annual salary.
We contributed approximately $0.3 million to the plan for each of the years ended December 31, 2017 and 2016.
12. Litigation and Other Contingenciesother contingencies
From time to time, we may become involved in litigation in relation to claims arising out offrom our operations in the normal course of business. While management currently believes it is not reasonably possible the amount of ultimate liability, if any, with respect to these actions will have a material adverse effect on our financial position, results of operations or liquidity, the ultimate outcome of any litigation is uncertain.
In September 2014, we received a preliminary audit report from the Defense Contract Audit Agency ("DCAA"), with respect to our 2007 incurred cost submission and questioning $0.8 million of claimed costs that the DCAA believes are expressly unallowable under the Federal Acquisition Regulations and, therefore, subject to potential penalty. In June 2015, we received from the Defense Contract Management Agency (the "DCMA") a final determination and demand for payment of penalties, interest, and over billing in the aggregate amount of $1.1 million. In July 2015, we filed an appeal with the Armed Services Board of Contract Appeals ("ASBCA"). On November 29, 2017, ASBCA ruled that the claimed costs were unallowable for reimbursement but were not considered to be expressly unallowable under the FAR, and accordingly were not subject to the penalties assessed by the DCMA. The ruling is subject to appeal by the DCMA.
We have made, and will continue to make, efforts to comply with current and future environmental laws. We anticipate that we could incur additional capital and operating costs in the future to comply with existing environmental laws and new requirements arising from new or amended statutes and regulations. In addition, because the applicable regulatory agencies have not yet promulgated final standards for some existing environmental programs, we cannot at this time reasonably estimate the cost for compliance with these additional requirements. The amount of any such compliance costs could be material. We cannot predict the impact that future regulations will impose upon our business.
Obligation under Operating Leases
See Note 11 - Leases for discussion of our lease obligations. 13.
Purchase Commitments
We executed multiple non-cancelable purchase orders totaling $4.8 million in the second quarter of 2022 and a non-cancelable purchase order totaling $4.6 million in the fourth quarter of 2022 for multiple shipments of tunable lasers and components to be delivered over an 9-15-month period. At December 31, 2022, approximately $6.6 million of these commitments remained and are expected to be delivered by December 30, 2024.
Guarantees
As of December 31, 2022, we had a total of $0.3 million in performance bond guarantees outstanding in favor of certain third parties to ensure performance of its obligations under certain customer contracts and lease arrangements. These guarantees expire at various dates through September 2027. To date, we have not incurred any charges associated with non-performance covered by such guarantees and have not accrued any liabilities as of December 31, 2022.
16. Employee Profit Sharing Plan
We maintain a salary reduction/profit-sharing plan under provisions of Section 401(k) of the Internal Revenue Code. The plan is offered to all permanent employees. We contribute 30% of the salary deferral elected by each employee up to a maximum deferral of 10% of annual salary.
We contributed approximately $0.6 million and $0.7 million to the plan for the years ended December 31, 2022 and December 31, 2021, respectively.
17. Relationship with Major Customers
During the years ended December 31, 20172022 and 2016,2021, approximately 48%8% and 41%11%, respectively, of our consolidated revenues were attributable to contracts with the U.S. government.
At December 31, 20172022 and 2016,2021, receivables with respect to contracts with the U.S. government represented 20%4% and 14%6% of total trade receivables, respectively.
14. Financial Information About Segments
Our operations are divided into two operating segments: Technology Development and Products and Licensing. Our engineers and scientists collaborate with our network of government, academic and industry experts to identify technologies and ideas with promising market potential. We then compete to win fee-for-service contracts from government agencies and industrial customers who seek innovative solutions to practical problems that require new technology. The Technology Development segment derives its revenue primarily from services. The Technology Development segment provides applied research to customers in our areas of focus.
The Products and Licensing segment develops and sells products or licenses technologies based on commercially viable concepts developed by the Technology Development segment. The Products and Licensing segment derives its revenue from product sales, funded product development and technology licenses.
Our President and Chief Executive Officer and his direct reports collectively represent our chief operating decision makers, and they evaluate segment performance based primarily on revenue and operating income or loss.
Information about the results of operations for each segment is set forth in the table below. There were no significant inter-segment sales during the years ended December 31, 2017 and 2016.
During the years ended December 31, 2017 and 2016, 20% and 19%, respectively, of our total sales took place outside the United States. No single country, outside of the United States, represented more than 10% of total revenues during the years ended December 31, 2017 or 2016.
|
| | | | | | | | |
| | Years ended December 31, |
| | | 2017 | | 2016 |
| Technology Development revenue | | $ | 18,576,383 |
| | $ | 16,280,582 |
|
| Products and Licensing revenue | | 27,660,891 |
| | 25,587,187 |
|
| Total revenue | | 46,237,274 |
| | 41,867,769 |
|
| Technology Development operating loss | | (120,417 | ) | | (499,583 | ) |
| Products and Licensing operating loss | | 9,063 |
| | (1,999,653 | ) |
| Total operating loss | | $ | (111,354 | ) | | $ | (2,499,236 | ) |
| Depreciation, Technology Development | | $ | 359,626 |
| | $ | 352,435 |
|
| Depreciation, Products and Licensing | | $ | 747,216 |
| | $ | 1,148,195 |
|
| Amortization, Technology Development | | $ | 139,067 |
| | $ | 195,619 |
|
| Amortization, Products and Licensing | | $ | 1,280,699 |
| | $ | 2,017,629 |
|
Products and licensing depreciation includes amounts from discontinued operations of $0.4 million and $0.7 million for the years ended December 31, 2017 and 2016, respectively. Products and licensing amortization includes amounts from discontinued operations of $0.9 million and $1.6 million for the years ended December 31, 2017 and 2016, respectively.
Additional segment information is as follows:
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Total segment assets: | | | |
| Technology Development | $ | 32,011,084 |
| | $ | 16,923,090 |
|
| Products and Licensing | 34,211,552 |
| | 38,073,883 |
|
| Total | $ | 66,222,636 |
| | $ | 54,996,973 |
|
| Property plant and equipment and intangible assets, Technology Development | $ | 2,361,663 |
| | $ | 2,602,803 |
|
| Property plant and equipment and intangible assets, Products and Licensing | $ | 4,831,671 |
| | $ | 4,749,101 |
|
For December 31, 2016, the products and licensing segment assets include assets held for sale in the amount of $16.3 million. Property plant and equipment, and intangible assets excludes HSOR amounts for December 31, 2017 and December 31, 2016.
15. Quarterly Results (unaudited)
The following table sets forth our unaudited historical revenues, operating loss and net (loss)/income by quarter during 2017 and 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended |
(Dollars in thousands, except per share amounts) | March 31,
2017 | | June 30,
2017 | | September 30,
2017 | | December 31,
2017 | | March 31,
2016 | | June 30,
2016 | | September 30,
2016 | | December 31,
2016 |
| Revenues: |
| |
| |
| |
| | | | | | | | |
| Technology development | $ | 4,235 |
| | $ | 4,602 |
| | $ | 4,591 |
| | $ | 5,148 |
| | $ | 3,607 |
| | $ | 4,047 |
| | $ | 4,118 |
| | $ | 4,509 |
|
| Products and licensing | 5,851 |
| | 6,691 |
| | 7,052 |
| | 8,067 |
| | 5,381 |
| | 5,854 |
| | 7,067 |
| | 7,285 |
|
| Total revenues | 10,086 |
| | 11,293 |
| | 11,643 |
| | 13,215 |
| | 8,988 |
| | 9,901 |
| | 11,185 |
| | 11,794 |
|
| Gross margin | 3,876 |
| | 4,368 |
| | 4,533 |
| | 5,352 |
| | 3,148 |
| | 3,628 |
| | 4,358 |
| | 4,671 |
|
| Operating (loss)/income | (774 | ) | | 180 |
| | 446 |
| | 37 |
| | (1,760 | ) | | (922 | ) | | (271 | ) | | 454 |
|
| Net (loss)/income from continuing operations | (865 | ) | | 78 |
| | 514 |
| | 234 |
| | (1,711 | ) | | (919 | ) | | (388 | ) | | 348 |
|
| (Loss)/income from discontinued operations net of income taxes | (491 | ) | | (299 | ) | | 15,243 |
| | 201 |
| | 250 |
| | 149 |
| | (57 | ) | | (42 | ) |
| Net (loss)/income | (1,356 | ) | | (221 | ) | | 15,757 |
| | 435 |
| | (1,461 | ) | | (770 | ) | | (445 | ) | | 306 |
|
| Net (loss)/income attributable to common stockholders | $ | (1,390 | ) | | $ | (251 | ) | | $ | 15,723 |
| | $ | 386 |
| | $ | (1,481 | ) | | $ | (796 | ) | | $ | (474 | ) | | $ | 276 |
|
| Net (loss)/income per share from continuing operations: | | | | | | | | | | | | | | | |
| Basic | $ | (0.03 | ) | | $ | — |
| | $ | 0.02 |
| | $ | 0.01 |
| | $ | (0.06 | ) | | $ | (0.03 | ) | | $ | (0.01 | ) | | $ | 0.01 |
|
| Diluted | $ | (0.03 | ) | | $ | — |
| | $ | 0.02 |
| | $ | 0.01 |
| | $ | (0.06 | ) | | $ | (0.03 | ) | | $ | (0.01 | ) | | $ | 0.01 |
|
| Net (loss)/income per share from discontinued operations: |
| |
| |
| |
| |
| |
| |
| |
|
| Basic | $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 0.55 |
| | $ | 0.01 |
| | $ | 0.01 |
| | $ | 0.01 |
| | $ | — |
| | $ | — |
|
| Diluted | $ | (0.02 | ) | | $ | (0.01 | ) | | $ | 0.47 |
| | $ | 0.01 |
| | $ | 0.01 |
| | $ | 0.01 |
| | $ | — |
| | $ | — |
|
| Net (loss)/income attributable to common stockholders: |
| |
| |
| |
| |
| |
| |
| |
|
| Basic | $ | (0.05 | ) | | $ | (0.01 | ) | | $ | 0.57 |
| | $ | 0.01 |
| | $ | (0.05 | ) | | $ | (0.03 | ) | | $ | (0.02 | ) | | $ | 0.01 |
|
| Diluted | $ | (0.05 | ) | | $ | (0.01 | ) | | $ | 0.48 |
| | $ | 0.01 |
| | $ | (0.05 | ) | | $ | (0.03 | ) | | $ | (0.02 | ) | | $ | 0.01 |
|
| Weighted average shares: |
| |
| |
| |
| |
| |
| |
| |
|
| Basic | 27,541,356 |
| | 27,600,147 |
| | 27,692,539 |
| | 27,485,278 |
| | 27,477,181 |
| | 27,557,960 |
| | 27,605,028 |
| | 27,543,882 |
|
| Diluted | 27,541,356 |
| | 32,579,379 |
| | 32,714,389 |
| | 31,790,418 |
| | 27,477,181 |
| | 27,557,960 |
| | 27,605,028 |
| | 32,568,289 |
|
16. Discontinued Operations
On August 9, 2017, we completed the sale of our high speed optical receivers ("HSOR") business, which was part of our Products and Licensing segment, to an unaffiliated third party for an initial purchase price of $33.5 million, of which $29.5 million in cash has been received, and $4.0 million was placed into escrow until December 15, 2018 for possible working capital adjustments to the purchase price and potential satisfaction of certain post-closing indemnification obligations (the "Transaction"). The purchase price is subject to adjustment in the future based upon a determination of final working capital, as defined in the asset purchase agreement. The HSOR business was a component of the operations of Advanced Photonix, Inc., which we acquired in May 2015. As part of the Transaction, the buyer also hired approximately 49 of our employees who were engaged in the development, manufacture, and sale of HSOR products in addition to certain corporate administrative functions. The buyer provided certain transition services to us with respect to infrastructure and administration for which we paid $0.3 million per month for a period of five months, for a total of $1.5 million. We recorded this obligation as a reduction of the value of the purchase price. In assessing the fair value of the services expected to be received by us in relation to those we expected to deliver to the buyer, we concluded that the transition service payments were more closely aligned with the fair value of the assets sold than the services received and, thus, should be accounted for as part of the consideration reconciliation rather than operating activities. Our HSOR business accounted for 16.1% of revenues and 18.5% of our costs of revenues for the twelve months ended December 31, 2017.
We have reported the results of operations of our HSOR business as discontinued operations in our consolidated financial statements. We allocated a portion of the consolidated tax (benefit)/expense to discontinued operations based on the ratio of the discontinued business's loss/(income) before allocations.
The following table presents a summary of the transactions related to the sale.
|
| | | |
| | December 31, 2017 |
| Sale price | $ | 33,500,000 |
|
| Less: transition services payments | (1,500,000 | ) |
| Adjusted purchase price | 32,000,000 |
|
| | |
| Assets held for sale | (16,851,540 | ) |
| Liabilities held for sale | 2,330,052 |
|
| Transaction costs | (895,186 | ) |
| Income tax expense | (912,298 | ) |
| Gain on sale of discontinued operations | $ | 15,671,028 |
|
Assets and liabilities held for sale as of December 31, 2016 were as follows:
|
| | | | |
| | | December 31, 2016 |
| | | |
| Assets | | |
| Current assets: | | |
| Accounts receivable, net | | $ | 4,028,713 |
|
| Inventory | | 1,521,400 |
|
| Prepaid expenses and other current assets | | 251,516 |
|
| Total current assets | | 5,801,629 |
|
| Property and equipment, net | | 3,298,151 |
|
| Intangible assets, net | | 5,314,046 |
|
| Goodwill | | 1,846,331 |
|
| Other assets | | 50,754 |
|
| Total non-current assets | | 10,509,282 |
|
| Total assets held for sale | | $ | 16,310,911 |
|
| Liabilities | | |
| Current liabilities: | | |
| Accounts payable | | $ | 1,511,450 |
|
| Accrued liabilities | | 753,556 |
|
| Deferred revenue | | 111,697 |
|
| Total current liabilities | | 2,376,703 |
|
| Long-term deferred rent | | 84,555 |
|
| Total non-current liabilities | | 84,555 |
|
| Total liabilities held for sale | | $ | 2,461,258 |
|
The key components of income from discontinued operations were as follows:
|
| | | | | | | |
| | Twelve Months Ended December 31, |
| | 2017 | | 2016 |
| Net revenues | $ | 6,356,237 |
| | $ | 17,343,227 |
|
| Cost of revenues | 4,599,042 |
| | 11,413,166 |
|
| Operating expenses | 2,750,951 |
| | 5,368,160 |
|
| Other expenses | — |
| | 50,528 |
|
| (Loss)/income before income taxes | (993,756 | ) | | 511,373 |
|
| Allocated tax expense | 23,762 |
| | 210,933 |
|
| Operating (loss)/income from discontinued operations | (1,017,518 | ) | | 300,440 |
|
| Gain on sale, net of related income taxes | 15,671,028 |
| | — |
|
| Net income from discontinued operations | $ | 14,653,510 |
| | $ | 300,440 |
|
For the years ended December 31, 2017 and 2016, depreciation and amortization from discontinued operations were $1.3 million and $2.3 million, respectively. For the years ended December 31, 2017 and 2016, the acquisition of property plant and equipment for discontinued operations was $0.1 million and $1.4 million, respectively. For the years ended December 31, 2017 and 2016, intangible property costs associated with discontinued operations were $0.1 million in each period. Proceeds from the sale of the HSOR business which are included in cash flows from investing activities for 2017 were $28.0 million. The gain on sale of discontinued operations included in non-cash adjustments to cash flows from operating activities for 2017 was $15.7 million.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES.PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensureprovide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Overconditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.
Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of December 31, 2017,2022, our disclosure controls and procedures were effective at the reasonable assurance level.
effective.
Changes in Internal Control over Financial Reporting
There have beenwere no changes in our internal control over financial reporting identified(as defined in connection with the evaluation required by paragraph (d) of Securities Exchange Act Rule 13a-15(e)Rules 13a-15(f) and Rule 15d-15(e)15d-15(f) under the Exchange Act) that occurred induring the quarter ended December 31, 20172022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed, under the supervision of our principal executive and principal financial officers, and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
There are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Under the supervision and with the participation of our management, including our President and Chief Executive Officer, and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017.2022. This evaluation was based on the criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our evaluation under the framework established in the 2013 Internal Control—Integrated Framework, our President and Chief Executive officer, and our Chief Financial Officer concluded that our internal control over financial reporting was effective as of December 31, 20172022 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
ITEM 9B. OTHER INFORMATION.INFORMATION
On March 14, 2023, our board of directors approved updated indemnification agreements with each of our directors and executive officers. With certain exceptions, these agreements provide that we will indemnify each of our directors and executive officers against any and all expenses incurred because of his or her status as one of our directors or executive officers to the fullest extent permitted by Delaware law, our certificate of incorporation and bylaws. In addition, the indemnification agreements provide that, to the fullest extent permitted by Delaware law, we will advance all expenses incurred by our directors and executive officers in connection with a legal proceeding involving his or her status as a director or executive officer.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 of Form 10-K will be included in the proxy statement related to our 20182023 Annual Meeting of Stockholders, (the "2018"2023 Proxy Statement"), anticipated to be filed with the SEC within 120 days after December 31, 2017,2022, and is incorporated into this report by reference.
ITEM 11. EXECUTIVE COMPENSATION.COMPENSATION
The information required by Item 11 of Form 10-K is incorporated into this report by reference to the information to be provided in our 20182023 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Other than the information below relating to securities authorized for issuance under our equity compensation plans, theThe information required by Item 12 of Form 10-K is incorporated into this report by reference to the information to be provided in our 20182023 Proxy Statement.
EQUITY COMPENSATION PLANS
The following table summarizes our equity compensation plans as of December 31, 2017: |
| | | | | | | | | |
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | Weighted- average exercise price of outstanding options, warrants and rights (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
| Equity compensation plans approved by security holders | 2,813,089 |
| | $ | 1.73 |
| | 3,593,712 |
|
| Total | 2,813,089 |
| | $ | 1.73 |
| | 3,593,712 |
|
Our 2016 Equity Incentive Plan allows for forfeited awards to be added back to our pool of available awards, including awards forfeited from the 2006 Plan after the expiration date of our 2006 Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 of Form 10-K is incorporated into this report by reference to the information to be provided in our 20182023 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated into this report by reference to the information to be provided in our 20182023 Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
| |
(a) | The following documents are filed as part of this Annual Report on Form 10-K: |
| |
(1) | Financial Statements. See Index to Consolidated Financial Statements at Item 8 of this Report on Form 10-K. |
(a)The following documents are filed as part of this Annual Report on Form 10-K: (i)Financial Statements. See Index to Consolidated Financial Statements at Item 8 of this Report on Form 10-K.
(ii)Schedules.
Schedule II
Luna Innovations Incorporated
Valuation and Qualifying Accounts
|
| | | | | | | | | | | | | | | |
| Column A | Column B | | Column C | | Column D | | Column E |
| | Balance at beginning of Period | | Additions | | Deductions | | Balance at end of period |
| Year Ended December 31, 2016 | | | | | | | |
| Reserves deducted from assets to which they apply: | | | | | | | |
| Deferred tax valuation allowance | $ | 20,759,102 |
| | $ | 550,444 |
| | $ | — |
| | $ | 21,309,546 |
|
| Allowances for doubtful accounts | 129,411 |
| | 305,593 |
| | (187,765 | ) | | 247,239 |
|
| | $ | 20,888,513 |
| | $ | 856,037 |
| | $ | (187,765 | ) | | $ | 21,556,785 |
|
| Year Ended December 31, 2017 | | | | | | | |
| Reserves deducted from assets to which they apply: | | | | | | | |
| Deferred tax valuation allowance | $ | 21,309,546 |
| |
|
| | $ | (16,288,802 | ) | | $ | 5,020,744 |
|
| Allowances for doubtful accounts | 247,239 |
| | 99,888 |
| | (60,410 | ) | | 286,717 |
|
| | $ | 21,556,785 |
| | $ | 99,888 |
| | $ | (16,349,212 | ) | | $ | 5,307,461 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Column A | Column B | | Column C | | Column D | | | | Column E |
| (in thousands) | Balance
at beginning
of period | | Additions | | Deductions | | | | Balance at
end
of period |
| Year Ended December 31, 2021 | | | | | | | | | |
| Reserves deducted from assets to which they apply: | | | | | | | | | |
| Deferred tax valuation allowance | $ | 2,850 | | | $ | 2,815 | | | $ | (1,859) | | | | | $ | 3,806 | |
| Allowances for doubtful accounts | $ | 886 | | | $ | 880 | | | $ | (841) | | | | | $ | 925 | |
| $ | 3,736 | | | $ | 3,695 | | | $ | (2,700) | | | | | $ | 4,731 | |
| Year Ended December 31, 2022 | | | | | | | | | |
| Reserves deducted from assets to which they apply: | | | | | | | | | |
| Deferred tax valuation allowance | $ | 3,806 | | | $ | 554 | | | $ | (767) | | | | | $ | 3,593 | |
| Allowances for doubtful accounts | $ | 925 | | | $ | 564 | | | $ | (709) | | | | | $ | 780 | |
| $ | 4,731 | | | $ | 1,118 | | | $ | (1,476) | | | | | $ | 4,373 | |
| | | | | | | | | |
All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements and notes thereto in Item 8 of Part II of this Annual Report on Form 10-K.
◦Exhibits. The exhibits filed as part of this report are listed under “Exhibits” at subsection (b) of this Item 15.
(b) Exhibits
EXHIBIT INDEX | | | | | |
(3)Exhibit No. | Exhibits. The exhibits filed as part of this report are listed under “Exhibits” at subsection (b) of this Item 15. |
| Exhibit Document |
(b) | Exhibits |
EXHIBIT INDEX
|
| |
Exhibit No. | Exhibit Document |
2.6(2)2.1# | |
| 2.2# | |
3.1(3)2.3# | |
| 3.1 | |
3.2(4)3.2 | |
3.3(5)3.3 | |
3.4(6)4.1 | |
3.4(2) | |
4.1(7) | |
4.2(8)4.2 | |
4.3(5)4.3 | |
4.4(30)4.4 | |
4.5(30)4.5 | |
4.6(30)4.6 | |
4.7(31)4.7 | |
10.1(9)4.8* | |
| 10.1* | |
10.2(7)10.2*** | |
10.3(7)** | |
10.4(7)** | |
10.5(10) | |
10.6(11)** | |
10.8(12)10.3 | |
10.9(4) | |
10.10(4) | |
10.11(4) | |
10.12(4) | |
10.13 | |
10.14(13)10.4*** | |
10.15(13)** | |
10.16(13)10.5 | |
10.17(13) | |
10.18(14) | |
|
| |
10.19(15) | |
10.20(16) | |
10.21(17) | |
10.22(18) | |
10.23(18) | |
10.24(18) | |
10.25 | |
10.26(19)10.6** | |
10.27(20) | |
10.28(21) | |
10.29(1)** | |
| | | | | |
10.30(1)**10.7 | |
10.31(22) | |
10.32(22) | |
10.33(22) | |
10.34(23)10.8 | |
10.35(24) | |
10.36(25) | |
10.37(26) | |
10.38(27)10.9 | |
| 10.10 | |
| 10.11 | |
| 10.12 | |
10.39(28)10.13 | |
| 10.14 | |
| 10.15 | |
| 10.16 | |
21.110.17 | |
| 10.18 | |
| 10.19 | |
| 10.20 | |
| 10.21* | |
| 21.1* | |
23.123.1* | |
24.123.2* | |
| 24.1 | Power of Attorney (see signature page) |
31.131.1* | |
31.231.2* | |
| 32.1*** | |
|
| 101 | |
101 | The following materials from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2017,2022, are formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 20172022 and 2016,2021, (ii) Consolidated Statements of Operations for the years ended December 31, 20172022 and 2016,2021, (iii) Consolidated Statements of Changes in Stockholder’s Equity for the years ended December 31, 20172022 and 20162021 (iv) Consolidated Statements of Cash Flows for the years ended December 31, 20172022 and 2016,2021, and (v) Notes to Audited Consolidated Financial Statements. |
| |
(1) | Incorporated by reference to the exhibit to the Registrant's Quarterly Report on Form 10-A, Commision File No. 000-52008, filed on May 13, 2014. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
| |
(2) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on February 2, 2015. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
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(3) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on June 8, 2006. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
| |
(4) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on January 15, 2010 (reporting under Items 1.01, 3.02, 3.03, 5.03 and 9.01). The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
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(5) | Incorporated by reference to the exhibit to the Registrant’s Registration Statement on Form S-1, Commission File No. 333-131764, filed on February 10, 2006. The number given in parentheses indicates the corresponding exhibit number in such Form S-1. |
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(6) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed with the Securities and Exchange Commission on May 10, 2010. The number in parentheses indicates the corresponding exhibit number in such Form 8-K. |
| |
(7) | Incorporated by reference to the exhibit to Amendment No. 5 of the Registrant’s Registration Statement on Form S-1, Commission File No. 333-131764, filed on May 19, 2006. The number given in parentheses indicates the corresponding exhibit number in such Form S-1. |
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(8) | Incorporated by reference to the exhibit to Amendment No. 3 of the Registrant's Registration Statement on Form S-1, Commission File No. 333-131764, filed on April 28, 2006. The number given in parentheses indicates the corresponding exhibit number in such Form S-1. |
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(9) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on July 17, 2009 (reporting under Items 1.01, 5.02 and 9.01). The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
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(10) | Incorporated by reference to the exhibit to Amendment No. 1 to Registrant’s Annual Report on Form 10-K, Commission File No. 000-52008, filed on April 6, 2007. The number given in parentheses indicates the corresponding exhibit number in such Form 10-K/A. |
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(11) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on June 14, 2007. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
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(12) | Incorporated by reference to the exhibit to Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on May 9, 2008. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
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(13) | Incorporated by reference to the exhibit to Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on May 17, 2010. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
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(14) | Incorporated by reference to the exhibit to Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on August 16, 2010. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
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(15) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on March 9, 2011. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
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(16) | Incorporated by reference to the exhibit to Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on May 16, 2011. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
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(17) | Incorporated by reference to the exhibit to Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on August 12, 2011. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
| |
(18) | Incorporated by reference to the exhibit to the Registrant’s Annual Report on Form 10-K, Commission File No. 000-52008, filed on March 29, 2012. The number given in parentheses indicates the corresponding exhibit number in such Form 10-K. |
| |
(19) | Incorporated by reference to the exhibit to the Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on August 9, 2012. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
| |
(20) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on July 11, 2012. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
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(21) | Incorporated by reference to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on March 27, 2013. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
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(22) | Incorporated by reference to the exhibit to the Registrant's Quarterly Report on Form 10-K, Commission File No. 000-52008, filed on March 16, 2015. The number given in parentheses indicates the corresponding exhibit number in such Form 10-K. |
| |
(23) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on May 11, 2015. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
| |
(24) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on October 5, 2015. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
| |
(25) | Incorporated by reference to the exhibit to the Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on May 14, 2015. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
| |
(26) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 10-Q, Commission File No. 000-52008, filed on August 14, 2015. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
| |
(27) | Incorporated by reference to the exhibit to the Registrant's Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on November 13, 2015. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
| |
(28) | Incorporated by reference to the exhibit to the Registrant's Annual Report on Form 10-K, Commission File No. 000-52008, filed on March 20, 2017. The number given in parentheses indicates the corresponding exhibit number in such Form 10-K. |
| |
(29) | Incorporated by reference to the exhibit to the Registrant’s Registration Statement on Form S-8, Commission File No. 333-211802, filed on June 3, 2016. The number given in parentheses indicates the corresponding exhibit number in such Form S-8. |
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(30) | Incorporated by reference to the exhibit to the Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on August 10, 2016. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
| |
* | Confidential treatment has been granted with respect to portions of this exhibit, indicated by asterisks, which has been filed separately with the Securities and Exchange Commission. Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and exhibits to this agreement are omitted, but will be furnished to the Securities and Exchange Commission upon request. |
| |
** | Confidential treatment has been granted with respect to portions of this exhibit, indicated by asterisks, which has been filed separately with the Securities and Exchange Commission. |
| |
*** | These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
* Filed herewith
# Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and exhibits to this agreement are omitted, but will be furnished to the Securities and Exchange Commission upon request.
** Confidential treatment has been granted with respect to portions of this exhibit, indicated by asterisks, which has been filed separately with the Securities and Exchange Commission.
*** These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
| |
ITEM 16. | FORM 10-K SUMMARY |
ITEM 16.FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| LUNA INNOVATIONS INCORPORATED |
| | | |
| LUNA INNOVATIONS INCORPORATED
By: | | /s/ Eugene J. Nestro |
| | | |
| By: | | /s/ Dale E. Messick |
| | | Dale E. Messick
Eugene J. Nestro
Chief Financial Officer
(Principal Financial and Accounting Officer) |
March 21, 201816, 2023
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Scott A. Graeff and Dale E. Messick,Eugene J. Nestro, and each of them acting individually, as his true and lawful attorneys-in-fact and agents, with full power of each to act alone, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
Signature | | Title | | Date |
| | | | |
| /s/ Scott A. Graeff | | President, Chief Executive Officer and Director (Principal Executive Officer) | | March 21, 201816, 2023 |
| Scott A. Graeff | | |
/s/ Dale E. MessickEugene J. Nestro | | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | | March 21, 201816, 2023 |
Dale E. MessickEugene J. Nestro | | |
/s/ Michael W. Wise | | Director | | March 21, 2018 |
Michael W. Wise | | |
/s/ Donald Pastor | | Director | | March 21, 2018 |
Donald Pastor | | |
/s/ John B. Williamson III | | Director | | March 21, 2018 |
John B. Williamson III | | |
| /s/ N. Leigh Anderson | | Director | | March 21, 201816, 2023 |
| N. Leigh Anderson | | |
| /s/ Warren B. Phelps, III | | Director | | March 21, 201816, 2023 |
| Warren B. Phelps, III | | |
| /s/ Pamela Coe | | Director | | March 16, 2023 |
| Pamela Coe | | |
| /s/ Gary Spiegel | | Director | | March 21, 201816, 2023 |
| Gary Spiegel | | |
| /s/ Mary Beth Vitale | | Director | | March 16, 2023 |
| Mary Beth Vitale | | |
| /s/ Richard W. Roedel | | Chairman of the Board of Directors | | March 21, 201816, 2023 |
| Richard W. Roedel | | |
