Luna(LUNA) - 2022 Q1 - Quarterly Report

Part I: Financial Information Financial Statements Q1 2022 revenue increased 7% to $22.5 million, with a $9.6 million net income primarily from the Luna Labs sale, and assets grew due to the LIOS acquisition Consolidated Balance Sheets Total assets increased to $144.7 million by March 31, 2022, driven by the LIOS acquisition's impact on goodwill and intangible assets, while cash decreased Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $10,788 | $17,128 | | Total current assets | $77,981 | $82,445 | | Goodwill | $29,199 | $18,984 | | Intangible assets, net | $22,332 | $17,177 | | Total assets | $144,665 | $130,237 | | Total current liabilities | $30,601 | $32,687 | | Long-term debt obligations | $18,087 | $11,673 | | Total liabilities | $52,648 | $48,314 | | Total stockholders' equity | $92,017 | $81,923 | Consolidated Statements of Operations Q1 2022 revenue grew 7% to $22.5 million with improved gross margin, while a significant gain from discontinued operations led to a $9.6 million net income Q1 2022 vs Q1 2021 Performance (in thousands, except per share data) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Revenue | $22,481 | $20,997 | | Gross Profit | $14,279 | $12,271 | | Operating Loss | ($2,366) | ($1,580) | | Net Loss from Continuing Operations | ($1,343) | ($1,059) | | Net Income from Discontinued Operations | $10,924 | $740 | | Net Income/(Loss) | $9,581 | ($319) | | Diluted EPS | $0.30 | ($0.01) | Consolidated Statements of Cash Flows Net cash used in operating activities was $2.4 million in Q1 2022, with investing activities reflecting the LIOS acquisition and Luna Labs sale, resulting in a $6.3 million cash decrease Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | ($2,373) | ($2,934) | | Net cash used in investing activities | ($9,964) | ($409) | | Net cash provided by/(used in) financing activities | $6,429 | ($405) | | Net decrease in cash and cash equivalents | ($6,340) | ($3,572) | Notes to Financial Statements Key notes detail the Q1 2022 sale of Luna Labs for a $10.9 million gain, the $22.1 million acquisition of LIOS, and revenue disaggregation by geography, customer, and product - The company operates in advanced optical technology, providing fiber optic test, measurement, control, and distributed sensing solutions for various industries including telecommunications, aerospace, and automotive[23] - On March 8, 2022, the company sold its Luna Labs business for an initial price of $20.4 million, resulting in a gain of $10.9 million, net of taxes, with Luna Labs now reported as discontinued operations[34][35] - On March 10, 2022, the company acquired LIOS for $22.1 million (€20.0 million) to add long-range distributed temperature and strain sensing capabilities, adding $10.3 million in goodwill and $6.0 million in intangible assets[38][40] Revenue Disaggregation for Q1 2022 (in thousands) | Category | Amount | | :--- | :--- | | By Geographic Location | | | United States | $10,516 | | Asia | $4,830 | | Europe | $4,907 | | By Major Customer Type | | | Foreign commercial sales & other | $11,965 | | U.S. direct commercial sales and other | $8,881 | | Sales to the U.S. government | $1,635 | | By Major Products/Services | | | Test, measurement and sensing systems | $20,096 | | Technology development | $1,597 | Management's Discussion and Analysis (MD&A) Management attributes Q1 2022 revenue growth to the LIOS acquisition, improved gross margin to product mix, and increased operating expenses to acquisition and integration costs - The company now operates as a single reportable segment, Lightwave, after the sale of the Luna Labs segment was completed on March 8, 2022[89][93] - On March 10, 2022, the company acquired LIOS for €20.0 million ($22.1 million), adding complementary temperature and strain sensing products[92] - Backlog increased to $45.8 million at March 31, 2022, compared to $38.4 million at December 31, 2021[91] - The company is experiencing supply chain disruptions and expects potential revenue delays from customers in China due to COVID-19 shutdowns[94] Results of Operations Q1 2022 revenue increased 7% to $22.5 million due to the LIOS acquisition, gross margin improved to 64%, while SG&A expenses rose 29% due to acquisition and integration costs Operating Results Summary (in thousands) | Item | Q1 2022 | Q1 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues | $22,481 | $20,997 | 7% | | Gross Profit | $14,279 | $12,271 | 16% | | Gross Margin | 64% | 58% | +6 pts | | SG&A Expense | $14,102 | $10,934 | 29% | | RD&E Expense | $2,543 | $2,917 | (13)% | - The income from discontinued operations for Q1 2022 included a gain of $10.9 million, net of tax, on the sale of the Luna Labs business[112] Liquidity and Capital Resources As of March 31, 2022, the company had $10.8 million in cash, funding the LIOS acquisition through Luna Labs proceeds and revolving credit facility borrowings - The LIOS acquisition price of $22.1 million was funded by $13.0 million from the Luna Labs disposition, with the remainder from the revolver and operating cash[113] - As of March 31, 2022, outstanding borrowings were $7.3 million under the Term Loan and $15.0 million under the Revolving Line[114] - Cash provided by financing activities was $6.4 million in Q1 2022, primarily due to $7.5 million in new borrowings to partially fund the LIOS acquisition[121] Market Risk Disclosures The company's primary market risks are interest rate fluctuations on variable-rate debt and foreign currency exchange rates, with foreign currency risk not considered material - The company is subject to interest rate risk on its $22.3 million of variable-rate debt ($7.3 million Term Loan and $15.0 million Revolving Line), where a 0.25% increase in rates would have an unfavorable annual pre-tax impact of approximately $55,000[123] - Exposure to foreign currency exchange rate fluctuations was not material to the company's financial condition or results of operations as of March 31, 2022[124] Controls and Procedures As of March 31, 2022, the company's disclosure controls and procedures were deemed effective, with no material changes in internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that as of March 31, 2022, the company's disclosure controls and procedures were effective[128] - No changes occurred during Q1 2022 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[129] Part II: Other Information Risk Factors The company faces risks including dependence on a revocable technology license, reliance on third-party vendors, challenges in executing strategic initiatives, ongoing COVID-19 impacts, and intellectual property threats - The company's ability to market, manufacture, and sell its fiber-optic products depends on a technology license from Intuitive Surgical, which is revocable under certain circumstances[136] - The business is vulnerable to supply shortages and price fluctuations due to its dependence on third-party vendors for specialized components, such as special lasers[137] - Risks related to strategic initiatives include difficulties integrating acquired businesses (like LIOS), potential unknown liabilities, and loss of key employees or customers[170][171] - The COVID-19 pandemic has caused, and could continue to cause, disruptions in the supply chain, delayed revenue, and adverse impacts on operations[181] - The company faces risks from third-party claims of intellectual property infringement, which could result in significant litigation expenses or block the ability to sell products[207][208] Other Information On May 14, 2022, the Compensation Committee approved restricted stock unit grants as retention awards for certain employees, including key executives - On May 14, 2022, the Compensation Committee approved retention grants of restricted stock units for certain employees, including named executives, to incentivize retention in a competitive market[239]