The president and CEO of the NASDAQ-listed Roanoke business Luna Innovations Inc. has retired from the company and left its board of directors, the company announced Monday.
Scott Graeff had been with the company for 21 years, the last seven at the helm. Graeff did not return a call made Monday to his company cellphone, which still played his greeting message.
Richard Roedel, chairman of Luna’s board since 2010, will serve as interim executive chairman and interim president, according to the company.
The announcement follows previous news that Luna had indefinitely delayed its fourth quarter and annual reports, due to concerns about the timing of recent transaction reports. Luna on March 12 announced that it had formed a special committee of its board of directors which, along with legal and financial advisers, began an independent review about transactions in the second and third quarters of 2023. The review may involve other time periods as well, according to the company.
At the time, Graeff said in an interview that the committee was looking at whether revenue the company made was reported in an incorrect time period.
“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,” Luna announced March 12.
According to the Financial Accounting Standards Board, revenue recognition means that a business can report money earned once the related “performance obligation” is satisfied.
According to a document that Luna filed March 12 with the U.S. Securities and Exchange Commission, the independent review had 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.
Luna has released no further details about the special committee’s investigation.
Graeff retired on Sunday, according to an email from FGS Global, a public relations company representing Luna. In the email exchange, a spokesman said that the company would not comment on whether Graeff’s departure was related to the SEC filings.
The company, founded in 1990 and spun off from Virginia Tech, has grown to include offices and products worldwide. Luna develops and markets fiber-optic sensing and monitoring technology that can spot potential trouble in a range of items including automobiles, aircraft, dams and pipelines. It 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.
The company announced in December 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, joined Luna’s board of directors. A person answering the phone at White Hat on Monday said that Chanley was not available to speak, and a message left for him was not immediately returned.
Luna shares, which had been trading at between $6 and $8 a share earlier this year, dropped from $6.26 on March 12 to $3.91 the next day before closing at $4.02. Luna dropped to $3.75 a share on March 18, and closed at $3.55 on Monday.
Roedel has been on the Luna board since 2005, and his board membership history includes Six Flags Entertainment and Sealy Corp.
“Our company’s success is rooted in ensuring we operate in a manner that reflects the highest standards of integrity and with the openness and transparency that reflects the trust our customers put in us,” Roedel said in the news release.
In other changes the company announced Monday, board member Mary Beth Vitale was designated lead independent director during Roedel’s interim tenure. According to the SEC, a lead independent director is required when the same person is both board chairman and company chief executive. The role provides an “intermediary between the chair, the board and the board’s stakeholders,” according to the Harvard Law School Forum on Corporate Governance.
The Colorado-based Vitale joined Luna’s board in 2019. Her resume includes service on multiple boards and a stint as a corporate officer at AT&T.
Chanley will be part of the board’s newly established operations committee, along with board members Barry Phelps and Gary Spiegel, “to provide focused oversight of the [c]ompany during this transition period,” according to the news release.
Federal law governing internal controls and material weaknesses dates to the early 2000s and the accounting scandals at companies including Enron and Worldcom, said Rob Warren, an assistant professor of accounting at Radford University. Congress responded by passing the Sarbanes-Oxley Act.
The 2002 law required in part that public companies adopt internal procedures ensuring financial statements’ accuracy, and it made CEOs and CFOs responsible for the accuracy, documentation and submission of financial reports and internal control structure, according to the Cornell Law School.
On Oct. 17, Luna announced that a new chief financial officer, George Gomez-Quintero, was joining the company, succeeding Gene Nestro. In the interview earlier this month, Graeff said that there was no connection between that personnel change and the company’s SEC filings.
“Whenever you have to say … we’re going to restate or we’re not going to provide the statements because we’re not sure if they’re accurate, that is never a good thing, never good,” said Warren, a retired Internal Revenue Service investigator.
By law, a company’s CEO and CFO must issue a report saying that they have maintained an appropriate system of internal controls that govern matters including when revenue is recognized and reported, said Warren, who is not associated with Luna but read the company’s recent SEC filing.
Warren believes that Graeff’s departure was “highly likely related” to the revenue reporting and internal controls. Despite that turnover and the company’s depressed share price, it is still possible for Luna to recover, he said.
“I think the compass can be regained,” Warren said. “But the auditors and the markets have to believe that the problem has been corrected, and that the system of internal controls which is so important to maintaining proper accounting is in place and functioning.”
[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.]
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