Shares of Roanoke-based fiber-optic technology company Luna Innovations Inc. have fallen this week, after the company reported that it is delaying its fourth quarter and annual reports.
Luna’s board of directors has formed a committee with outside legal and financial advisers to review “certain transactions for which revenue was recognized in the second and third quarters of 2023 that did not qualify for revenue recognition under U.S. generally accepted accounting principles,” according to a Tuesday news release.
“The Company currently anticipates reporting material weaknesses in internal controls related to evaluating customer arrangements for proper revenue recognition and other controls and will be working to remediate these issues,” according to the release.
The committee, which formed this month, is looking at whether revenue the company made was reported in an incorrect time period, said Luna’s president and chief executive officer, Scott Graeff.
“There’s no results of that yet,” he said. “That’s just what we’re looking into.”
The committee includes some members of Luna’s board of directors and external legal and financial advisers, among them representatives from the accounting firm Ernst & Young, he said.
He declined to comment on what information the company had already discovered.
[Disclosure: Quinn Graeff, who is married to Scott 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.]
The NASDAQ-listed company, which had been trading at between $6 and $8 a share this year, dropped from $6.26 on Tuesday to $3.91 on Wednesday. It closed at $4.02.
“I think the stock goes up and down depending on different news,” Graeff said. “If you say you can’t file on time, you’re going to have a negative reaction … that’s what you’re seeing there.”
“Revenue recognition,” the key term in Luna’s release, means that a business can report its revenue once the related “performance obligation” is satisfied, according to the Financial Accounting Standards Board.
According to a document that Luna filed Tuesday with the U.S. Securities and Exchange Commission, the independent review has not determined the full impact on the second and third quarter reports or whether the issue might impact statements from other periods. At any rate, reports to the SEC about the quarters that ended June 30 and Sept. 30, 2023, “should no longer be relied upon and should be restated,” according to the filing.
The fourth quarter and fiscal year 2023 financial results, and the subsequent conference call, are delayed indefinitely, Graeff said, and Luna filed notice of that delay with the SEC.
Luna — whose fiber-optic sensing and monitoring technology can spot potential trouble in a range of items including automobiles, aircraft, dams and pipelines — in December announced that it had received a $50 million investment from New York-based White Hat Capital. Luna used about half of that to buy a United Kingdom-based fiber-optic sensing company called Silixa, and turned the remaining $17 million toward repaying an outstanding term loan with PNC Bank and strengthening the company’s balance sheet.
As part of the White Hat deal, the investor’s co-founder and co-managing partner, David Chanley, has joined Luna’s board of directors. Graeff declined to say whether the filings would impact Luna’s relationship with White Hat, and he declined to identify which board members are on the committee investigating the matter.
Graeff said he was unaware of how the revenue recognition discrepancy happened.
“If we knew how it happened or when it happened — this is being brought to light now and we’re addressing it as we found out,” he said.
On Oct. 17, the company announced that a new chief financial officer, George Gomez-Quintero, was joining the company, succeeding Gene Nestro. There is no connection between that personnel change and the filings this week, Graeff said.
A former Virginia Tech professor, Kent Murphy, founded Luna in 1990, eventually spinning it off from the university. He left Luna in 2010. The company has grown to include offices and products worldwide.
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.
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