A Roanoke company specializing in fiber-optic sensing and monitoring technology finished last year with a giant investment and a major acquisition.
Luna Innovations Inc. announced in December that New York City-based White Hat Capital is putting $50 million into the company, and Luna is using about half of that to buy a United Kingdom-based fiber-optic sensing company called Silixa.
The moves are part of Luna’s five-year plan to expand what its technology can do. Where the company once was limited to 100 meters of range — good for monitoring potential trouble in automobiles and aircraft, to name two uses — the goal was to become the world leader in optic sensors on bridges, tunnels, dams, pipelines and other large structures, Luna President and Chief Executive Officer Scott Graeff said in a recent interview.
[Disclosure: Scott Graeff’s wife, Quinn Graeff, is a member of the Cardinal Productions Inc. board of directors. The Graeffs are also contributors to Cardinal News. Neither board members nor donors have any influence or say in news decisions; see our policy.]
“For example, we’re on the bridge that connects Hong Kong to Macau,” Graeff said. “It’s the longest bridge in the world. It’s a [55]-kilometer bridge, right? And we have 20 systems on that bridge. And the whole thing is wired with fiber. And we monitor it in real time.”
Former Virginia Tech professor Kent Murphy founded Luna in 1990, then spun it off from the university and ran it for the next 20 years. It has grown to include offices and products spanning the globe and has a client history that includes Northrop Grumman and the Sistine Chapel. Luna uses fiber optics — in which pulsing light transmits data across silica glass strands thinner than human hair — in telecommunications test products, and in sensing and monitoring stress, strain and temperature.
Purchasing Silixa gets Luna into carbon capture and storage monitoring, among other aspects of the U.K. business, said Graeff, who has been with the company for more than 20 years, six of them as president and CEO. With the new company on board, Luna now has about 500 employees, with 16 in the Roanoke corporate office and about 70 in Blacksburg, which is one of its manufacturing sites.
Eighty of Luna’s employees have Ph.D.s, and another 300 have master’s degrees, he said.
“So we have the smart folks that are here that can do these things. It’s all timing-wise: How quickly can you do something and get it to market? Or does it make more sense to go out and acquire a business that already is doing it?”
Silixa, according to its website, is active in energy, defense and mining and provides “cost effective, low-impact monitoring of built and natural environments, as well as industrial assets and operations.”
To get the company, Luna reached out to White Hat. Graeff said he had been building a relationship over the past couple of years with its co-founders/managing partners, David Chanley and Mark Quinlan. With the investment, Chanley joins the Luna board of directors, expanding it to eight.
Among White Hat’s other investments are the Rosetta Stone language software company, satellite-centric Comtech Telecommunications Corp. and aerospace company Astronics, according to the firm’s website.
“A lot of this stuff is on the personal connection side,” Graeff said. “How does it feel? What’s your gut tell you, especially as it relates to private equity? It’s about the gut feeling. Are you bringing the fox into the henhouse? Or do you have a real partner in this?”
He said that Chanley and Quinlan traveled with him and his team to Luna offices in Germany and the U.K, as well as Roanoke, Blacksburg, Atlanta and two California locations.
“Because they need to know it’s more than me,” he said. “They need to know if my culture is carried out throughout the entire organization. They want to talk to [people] two, three layers down from me and see … do they say the same thing? Do they sing the same song? … Because everyone’s … an equity owner of Luna. The entire company has equity as owners of this business. … What are we doing? Are we the bad guys? I think we’re the good guys.”
Luna used what was left after the Silixa purchase to repay an outstanding $17 million term loan with PNC Bank and strengthen the company’s balance sheet, according to Luna’s December announcement.
The investment better positions Luna to further market its products to protect such “key assets” as bridges, tunnels and pipelines; increase manufacturing demand; and develop new intellectual property, according to the announcement.
Chanley, in the December announcement, said that White Hat’s evaluation showed quality and depth in Luna’s management and added promise via the Silixa acquisition. They are well positioned to address the rising demand for sensing solutions across multiple industries including electric vehicle adoption and specialized aerospace and defense applications.
“We are eager to partner with Luna as the company accelerates its mission of enabling the future with fiber,” Chanley said in the announcement.
After Luna made its announcement on Dec. 21, its stock on the NASDAQ rose to $6.95 a share from $6.51 the day before, and has traded at between $6 and $7 a share ever since.
It was part of what looked like a roller coaster ride for the year. On two occasions in 2023 — late February into early March and June 16-20 — Luna shares rose to more than $10 a share. That was the highest Luna had traded in more than 18 months.
It also dropped to $6 or less per share three times in 2023, with a low of $5.15 on Nov. 24.
Graeff said the June rise could be attributed, at least in part, to two events, though “you never really know why it went up or down.”
The company held its first investor day, in New York City, with presentations, Q&As and more at the Yale Club of New York. Graeff even rang the NASDAQ closing bell that day, May 23. Right after the stock’s June peak, it was added to the Russell 2000 index, a popular way for investors to track companies with small-market capitalization. Luna trades only a couple hundred thousand shares a day, Graeff said.
Both events served to keep investor interest high mid-year. But the company’s third quarter report, ending in September 2023, showed a net loss of $2.9 million in cash flows used in operating activities and a $1.8 million loss in net cash for investing. Luna released the report on Nov. 14, and the share price dropped to $5.15 that day.
“The going down was when you announce earnings, they start looking at your balance sheet and they start looking at, where are you cash-wise?” he said. “And you have these aspirations of going out and growing this market, growing the industry. What’s going to require cash?
“And we know that [with] everything going on, if you’re going to come out with new products and these new ideas, and you’re going to go on to all these different bridges and tunnels and dams that you weren’t on before, that’s got to be an investment. You’ve got to hire more engineers. You’ve got to spend more money. And sure enough, we were out hiring engineers. We hired, like 50 people last year … and that uses cash.”
Then came December.
“But until [investors] see that, they’re like, what’s this company’s doing, what’s the game plan?” Graeff said. “If they just look at the balance sheet, they go, I don’t like where they are. … So I’m going to get out, and that drives the stock down when people sell, and then I’ll get back in when they shore up the balance sheet.”
“Sure enough, you’ve seen the balance sheet get shored up and the stock is, I think, on its way up again.”
Other recent Luna purchases include German company LIOS Sensing in March 2022 and England-based OptaSense Holdings in December 2020.
The same month that Luna purchased LIOS, it divested more than 95% of its Luna Labs, in a $21 million deal that saw the Charlottesville-based labs’ management team join with private equity firms Mereo Capital Partners and Point Lookout Capital Partners. The LIOS and Luna Labs deals amounted to about the same amount of money.
Graeff said that the Luna Labs’ sale helped Luna Innovations focus on fiber optics markets. The labs focused on research in materials and medical fields, among others, he said.
“Now it was a great business, $25 million [a year] business that was pulling $5 million to the bottom line,” Graeff said. “It was a great business. It just didn’t fit with us anymore.”
With Luna Labs’ sale, Graeff’s company is what the financial world calls “pure play” in fiber-optic sensing, which means that is all that the company does.
“A lot of the companies that we’ve come together with are over in Europe,” Graeff said. “And the reason for that is in Europe … they’re just more advanced in setting regulations on these high value assets. They’re just not as okay with … a tunnel’s collapsing or a bridge’s falling down.
“We care about it in the U.S. And you know, we saw the bridge that collapsed in Pittsburgh, and [President Joe] Biden was there. A week or two later, we kind of forget about it a little bit. It becomes not the news. And in Europe, they’re saying: You’re going to have a system on all of our bridges, to monitor those bridges. We’re not going to put human life at risk because a bridge is falling down due to issues around its integrity, you know, whether it be rust or weather, age or whatever it may be.”
Silixa brings more versatility to what Luna Innovations can offer with sensing, Graeff said.
“Silixa brought us this carbon sequestration, the carbon capture stuff, that’s super helpful for the environment,” he said. “So the oil and gas guys, as they’re digging for oil, they build up carbon, and typically it gets released into the environment … and there’s a lot of incentives out there for them to capture that carbon and not release it into the environment.
“That’s what we’re able to monitor, to make sure. … Our technology tells the government [that is] giving them that additional funding to save the environment or slow down global warming … We’re able to prove that.”
It has grown the company, and the increased size is helpful to the brand as it sells itself around the world, he said.
“When you look at what we’ll do in 2024, with that many employees in that footprint, from Qatar to Germany to U.K. to California to Montana, that just means something, that you’re able to be out in front of customers in a short timeframe.”