Luna Innovations Inc., a publicly traded Roanoke-based technology company, will consider a sale or merger among its options going forward, in the wake of financial reporting irregularities that led to the resignations of its chief executive officer and chief financial officer, and the firing of its chief technology officer.
The company announced on Wednesday that it has found that former CEO Scott Graeff, who resigned in late March, had engaged in conduct that constituted “cause” under his contract, so Luna will cancel his severance payments and take back stock from him.
[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.]
Terminated for cause was Brian Soller, who was chief technology officer and executive vice president of corporate development, according to a report that Luna filed Thursday with the U.S. Securities and Exchange Commission. George Gomez-Quintero, Luna’s chief financial officer, resigned on Sunday and will receive neither severance nor benefits, according to the SEC document.
Luna also fired seven other employees, according to its Wednesday announcement. Luna Innovations, which develops fiber-optic sensors and measuring tools for the automotive, communications and energy industries, among other markets, had more than 375 employees internationally at the beginning of 2024.
Gomez-Quintero joined Luna in October 2023, after his predecessor, Eugene Nestro, left under an agreement that he would remain available until mid-2024 to “ensure a smooth transition,” according to the company. It was unclear whether Nestro, who joined the company in late 2019, was still assisting Luna.
Luna media contacts did not reply Thursday afternoon to a series of questions, including queries about Nestro’s current status with the company, about what causes were found regarding Soller’s firing and the clawback of Graeff’s severance, and about whether the other seven unidentified employees who were terminated also were fired for cause.
Graeff, in an email exchange on Thursday, said: “Given the ongoing investigation, all I can say is that in my over 20 years in leadership roles with Luna, I strived to ensure each and every decision I made, and my conduct as a leader, was consistent with my values.”
The company’s shares were trading on the Nasdaq Stock Market at $2.25 at close of business Thursday, marking a 25% drop over the last month and about a 60% decline for the year.
Luna has brought on international investment banking firm Evercore Inc. for financial advice as its board of directors considers its future.
“Supported by Evercore, the Board will consider a wide range of options for the [c]ompany including, among other things, a potential sale, merger or other strategic transaction,” the company said in the news release. “There is no deadline or definitive timetable set for completion of the strategic alternatives process, and there is no assurance that this process will result in any specific transaction.”
The moves — and the announcement of options for the future — come in the wake of accounting errors that caused Luna to cancel indefinitely its 2023 annual report and its fourth quarter 2023 report, and rescind as unreliable financial statements dating back to 2022.
An independent review showed problems with revenue recognition, an accounting principle that deals with determining precisely when a company earns its revenue. Federal law generally requires that a company recognizes its revenue during the time period that products and services are delivered, not necessarily when payment is received.
A special committee consisting of some of the company’s board plus external legal and financial advisers continues to investigate Luna’s issues.
Meanwhile, the company has brought on a new CFO, John Roiko, whose resume includes National Instruments Corp. and Honeywell, at a $300,000 salary, according to the SEC filing.
Luna also announced that it has retained Alex Davern and Kevin Ilcisin as operations and strategy consultants, according to the Wednesday news release. Davern is a former National Instruments CEO, while Ilcisin, another former National Instruments executive, most recently founded Juniper Strategies. They will report to Richard Roedel, Luna’s interim executive chairman and interim president. Roedel, a Luna board member since 2010, has been at the helm since Graeff’s resignation.
According to a March 24 SEC filing, Luna’s board considered firing Graeff with or without cause, but decided to accept his retirement and provide him benefits in exchange for his assistance and compliance with a separation agreement. The agreement included nine months of base salary from March 24 forward and accelerated vesting of 10,000 Luna shares.
The agreement also included clawback provisions for all cash severance payments and accelerated shares, if the board determined that Graeff had engaged in conduct that constituted cause for termination during his employment.
Graeff was with Luna for 21 years, the last seven as its chief executive. His 2022 salary was $450,000, a $40,000 increase over the previous year, according to a Luna document. He also received $850,007 in stock awards in 2022 and $394,650 in non-equity incentive plan compensation, according to the document.
Soller, the technology officer, was paid $290,000 in 2022, with $753,002 in stock awards and $117,450 in incentive plan compensation, according to the document.
The company, which was founded in 1990 and spun off from Virginia Tech, announced on March 12 that it expected to report weaknesses in internal controls related to evaluating customer arrangements for proper revenue recognition. The following month, Nasdaq said Luna risks being delisted from the stock exchange because of its reporting delay.
A lawsuit filed in federal court in California last month alleges that Luna and executives Graeff, Gomez-Quintero and Nestro violated securities laws. The plaintiff seeks to form a class action.
The company announced Thursday that it had hired three people: Will Denman, senior vice president for North American sales; Matthew Friedman, vice president for product marketing; and Heather Matzke-Hamlin, public accounting adviser.
Matzke-Hamlin is a consultant brought on to evaluate, renew and document Luna’s business process controls, including controls established under the federal Sarbanes-Oxley law, according to Thursday’s news release. She will work closely with Roiko, the new CFO.
The 2002 Sarbanes-Oxley law requires in part that public companies adopt internal procedures ensuring financial statements’ accuracy, and it makes CEOs and CFOs responsible for the accuracy, documentation and submission of financial reports and internal control structure.