Luna(LUNA) - 2020 Q4 - Annual Report

Part I Business Luna Innovations, an advanced optical technology company, operates through Lightwave and Luna Labs segments, expanding via acquisitions and securing significant government contracts - The company operates through two main segments: Lightwave (fiber optics testing, measurement, and sensing) and Luna Labs (applied research)[24][25] Revenue Contribution by Segment (FY 2020 vs. FY 2019) | Segment | 2020 Revenue % | 2019 Revenue % | | :--- | :--- | :--- | | Lightwave | 71% | 70% | | Luna Labs | 29% | 30% | - Acquired OptaSense Holdings Limited in December 2020 for $38.9 million to add distributed acoustic sensing (DAS) technology and expand into markets like security, infrastructure monitoring, and oil & gas[27][30] - Acquired General Photonics Corporation in March 2019 for $20.0 million, enhancing its portfolio of components and test equipment for polarization control[28] - A significant portion of revenue comes from U.S. government contracts, accounting for 35% of total revenues in 2020, down from 40% in 2019; the SBIR program alone contributed 32% of total revenues in 2020[26] Backlog at Year-End (in millions) | Segment | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Lightwave | $28.2 | $16.1 | | Luna Labs | $26.8 | $31.3 | Risk Factors The company faces various risks including reliance on technology licenses, government contracts, operational disruptions, intellectual property challenges, financial covenants, and stock price volatility - Business Risks: The company's fiber-optic products depend on a license from Intuitive Surgical, which is revocable under certain conditions; loss of this license would prevent the marketing and sale of these products[75] - Government Contract Risks: A significant portion of revenue (32% in 2020) comes from the SBIR program; the company risks losing eligibility for these contracts if it no longer meets SBA size and ownership criteria, which would materially impact revenues and cash flows[83][88] - Operational Risks: The COVID-19 pandemic poses risks of business disruption, including potential delays in customer purchasing decisions and supply chain difficulties, which could adversely impact results[130][131][132] - Intellectual Property Risks: The company's success depends on protecting its proprietary technologies; it faces risks that patents may not be issued or may be challenged, and trade secrets may be difficult to protect[152][153][154] - Financial Risks: The company has a term loan and revolving line of credit with PNC Bank that include various financial and restrictive covenants; failure to comply could result in the acceleration of debt[113] - Stock Risks: The company's common stock price has been volatile and is subject to substantial fluctuations due to market conditions, operational performance, and other factors[164] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - Not applicable[179] Properties As of December 31, 2020, the company leases all its properties, totaling approximately 199,000 square feet across 12 locations, including headquarters in Virginia and the UK Summary of Leased Facilities (as of Dec 31, 2020) | Facility Type | Location(s) | Total Square Footage | | :--- | :--- | :--- | | Operations | 12 locations (US, UK, CN, UAE) | 199,000 | | Corporate HQ | Roanoke, Virginia (US) | 4,400 | | OptaSense HQ | Farnborough, Hampshire (UK) | 7,500 | - All properties are leased, with lease end dates extending through 2030[180] Legal Proceedings Management believes any potential liability from occasional litigation arising from normal business operations will not materially affect the company's financial position - Management believes that any potential liability from ongoing litigation will not materially affect the company's financial condition[181] Mine Safety Disclosures This section is not applicable to the company - Not applicable[183] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with no history or plans for cash dividends, and limited share repurchases for tax obligations - The company's common stock is listed on the Nasdaq Capital Market under the symbol "LUNA"[186] - As of March 10, 2021, there were 31,397,642 shares of common stock outstanding[186] - The company has never paid cash dividends and does not plan to in the foreseeable future, with its debt facility also restricting such payments[193] Common Stock Repurchases (Q4 2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | 12/1/2020 - 12/31/2020 | 12,534 | $9.87 | Selected Financial Data This section provides a five-year summary of the company's key consolidated financial data, highlighting consistent revenue growth and financial trends Five-Year Selected Financial Data (in thousands, except per share data) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | $82,681 | $70,516 | $42,917 | $33,082 | $29,604 | | Gross profit | $42,188 | $35,183 | $19,438 | $13,369 | $11,714 | | Operating income/(loss) | $4,983 | $3,316 | $878 | $(2,208) | $(4,126) | | Net income/(loss) from continuing operations | $4,727 | $5,343 | $1,238 | $(1,251) | $(4,279) | | Net income/(loss) attributable to common stockholders | $3,291 | $5,057 | $10,747 | $14,468 | $(2,475) | | Diluted EPS attributable to common stockholders | $0.10 | $0.16 | $0.33 | $0.52 | $(0.09) | | Total assets | $131,002 | $86,524 | $75,599 | $66,223 | $54,997 | | Total debt | $19,984 | $— | $619 | $2,436 | $4,253 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's 2020 financial performance, highlighting revenue growth, increased operating income, and strengthened liquidity through new credit facilities Results of Operations (2020 vs. 2019) Total revenues increased 17.3% to $82.7 million in 2020, driven by growth in both Lightwave and Luna Labs segments, leading to higher gross profit and operating income Revenue Comparison (in thousands) | Segment | 2020 | 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Lightwave | $59,115 | $49,117 | $9,998 | 20.4% | | Luna Labs | $23,566 | $21,399 | $2,167 | 10.1% | | Total | $82,681 | $70,516 | $12,165 | 17.3% | Operating Expense Comparison (in thousands) | Expense Category | 2020 | 2019 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Selling, general and administrative | $27,644 | $23,344 | $4,300 | 18.4% | | Research, development and engineering | $6,713 | $7,496 | $(783) | (10.4)% | | Acquisition related expense | $2,204 | $1,027 | $1,177 | 114.6% | | Total Operating Expense | $37,205 | $31,867 | $5,338 | 16.8% | - Net income from continuing operations was $4.7 million in 2020, compared to $5.3 million in 2019; the decrease was primarily due to a $1.7 million tax benefit in 2019 that did not recur, compared to a $0.3 million tax expense in 2020[259][260] - A net loss from discontinued operations of $1.4 million was recognized in 2020 related to the final settlement of the 2017 sale of the High Speed Optical Receiver (HSOR) business[261] Liquidity and Capital Resources As of December 31, 2020, the company had $15.4 million in cash, supported by a new credit facility, with management confident in adequate liquidity for the next twelve months - Entered into a new Loan Agreement with PNC Bank in December 2020, providing a $12.5 million term loan and a $15.0 million revolving credit facility, both maturing in December 2023[264][266][267] Summary of Cash Flows (in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,856 | $4,798 | | Net cash used in investing activities | $(34,159) | $(19,815) | | Net cash provided by/(used in) financing activities | $21,649 | $(2,437) | | Net decrease in cash | $(9,654) | $(17,454) | - Management believes that cash on hand plus availability under the revolving line of credit will provide adequate liquidity for working capital needs over the next twelve months[270] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate fluctuations on variable-rate debt and foreign currency exchange rates, though the latter was not material as of year-end 2020 - The company is exposed to interest rate risk on its $20.1 million of outstanding variable-rate debt; a hypothetical 0.25% increase in interest rates would negatively impact annual pre-tax earnings by $0.05 million[282] - Following the acquisition of OptaSense, the company has exposure to foreign currency exchange rate fluctuations, primarily from its UK operations, but this risk was not material as of December 31, 2020[283] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2020 and 2019, including the auditor's report and detailed notes - Includes the full audited consolidated financial statements for the years ended December 31, 2020 and 2019, and the accompanying notes[285] - The independent auditor's report identified two critical audit matters: 1) Revenue recognition on the company's fixed-price contracts due to estimation uncertainty in future costs, and 2) The valuation of intangible assets acquired in the OptaSense business combination due to the subjectivity of assumptions used[290][291][295] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None[449] Controls and Procedures Management concluded disclosure controls were not effective due to a late filing, but internal control over financial reporting was effective, excluding the recently acquired OptaSense - Management concluded that disclosure controls and procedures were not effective as of December 31, 2020, due to a late Form 8-K/A filing related to an acquisition[451] - Management concluded that internal control over financial reporting was effective as of December 31, 2020[457] - The recently acquired OptaSense business was excluded from the scope of management's assessment of internal control over financial reporting for 2020[454] Other Information There is no other information to report in this section - None[458] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's 2021 Annual Meeting Proxy Statement - Information is incorporated by reference from the registrant's 2021 Proxy Statement[460] Executive Compensation Information for this item is incorporated by reference from the company's 2021 Annual Meeting Proxy Statement - Information is incorporated by reference from the registrant's 2021 Proxy Statement[461] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's 2021 Annual Meeting Proxy Statement - Information is incorporated by reference from the registrant's 2021 Proxy Statement[462] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's 2021 Annual Meeting Proxy Statement - Information is incorporated by reference from the registrant's 2021 Proxy Statement[463] Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's 2021 Annual Meeting Proxy Statement - Information is incorporated by reference from the registrant's 2021 Proxy Statement[464] Part IV Exhibits, Financial Statement Schedules This section lists the documents filed as part of the Form 10-K, including financial statements, schedules, and a comprehensive index of all exhibits - This section contains the index to the Consolidated Financial Statements and lists all exhibits filed with the annual report[467][469] Schedule II - Valuation and Qualifying Accounts (in thousands) | Description | Balance at Beg. of 2020 | Additions | Deductions | Balance at End of 2020 | | :--- | :--- | :--- | :--- | :--- | | Deferred tax valuation allowance | $360 | $2,850 | $(360) | $2,850 | | Allowances for doubtful accounts | $930 | $127 | $(171) | $886 | Form 10-K Summary This section is not applicable - Not applicable[478]