The Nasdaq Stock Market has extended the deadline for a Roanoke-based technology company that is in jeopardy of being delisted.
Luna Innovations Inc. this week filed a document with the Securities and Exchange Commission, notifying it that Nasdaq granted Luna’s request to continue its listing while it attempts to compile accurate financial statements. The fiber-optic sensing, testing and measuring company now has until Sept. 11 to file its 2023 annual and fourth quarter reports — along with reports from 2022 — with the SEC, or Nasdaq could remove it from the exchange.
Luna, formed in Blacksburg in 1991, has seen executive turnover since mid-March, when the company announced that it could not produce those reports due to an apparent lack of internal controls that led to revenue recognition discrepancies. Federal law requires that companies report their revenue at the time a service is delivered, and not before.
Nasdaq sent Luna notice in early April that the company was not compliant with the stock market’s rule requiring timely reports to the SEC. Luna filed notice the next month with the commission that it would not be able to supply a first-quarter 2024 report, either.
According to the new SEC filing, there is no assurance that Luna will be able to file its reports by Sept. 11, in which case Nasdaq staff will issue a delist determination. Luna could appeal that decision to a Nasdaq hearing panel and could keep its listing pending that hearing.
Luna representatives did not return a message sent Tuesday, and a Nasdaq spokeswoman did not return an email sent Wednesday. The company’s stock opened Monday trading at $3.15 a share, in the hours before the filing. It closed at $3.44 on Tuesday. Markets were closed Wednesday for Juneteenth.
Keeping its place on the Nasdaq exchange is crucial for Luna or any other company listed, said Rob Warren, an assistant professor of accounting at Radford University.
“It’s almost like the financial death penalty, because now all these stocks [are] out and you cannot trade it on an exchange,” Warren said.
“How can you sell those stocks? How can you value the stock? Because the value of stock means you have a willing buyer and a willing seller, and they have common ground to meet and negotiate a price.”
He added: “And if all of a sudden you’re restricted to private sales, where you’ve got to go out and find your own buyer, obviously the fewer buyers you have for your stock, the fewer people you have bidding for the price of the stock. The fewer bidders you have for the stock, the lower the price of the stock will be when you finally try to sell.”
Ultimately, Nasdaq doesn’t want to see Luna delisted, Warren said.
“Because the more stocks they have for sale through Nasdaq, the more profitable Nasdaq itself will be because they take a share of the transaction,” he said. “Nasdaq wants to remain healthy, which means they have to have healthy viable companies trading on their exchange. … So they’re going to work with Luna to make sure they stay listed. However, they have an interest in making sure that Luna complies with all the federal regulations.”
The company’s chief executive of seven years, Scott Graeff, resigned shortly after the company announced its reporting problems. The company announced May 1 that its investigation determined that Graeff had engaged in conduct that constituted “cause” under his contract, so Luna canceled his severance payments and took back stock from him.
[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.]
Luna announced on the same day that it had fired seven additional employees. On May 2, the company notified the SEC that it had terminated Brian Soller, its chief technology officer and executive vice president of corporate development for cause, and that the Chief Financial Officer George Gomez-Quintero had resigned and would not receive severance or benefits.
The company had more than 375 employees internationally at the beginning of 2024.
Luna and former officers Graeff, Gomez-Quintero and previous CFO Eugene Nestro are defendants in lawsuits that stockholders have filed, alleging securities fraud and seeking to make a class action. According to documents filed in the case in the Central District of California, plaintiff George Lang, a Utah resident, claims to have lost about $75,000 that he invested in the company — more than four times the loss reported by any of the other three plaintiffs.
The plaintiffs claim that Luna, Graeff and the CFOs made statements that were “materially false and misleading and/or lacked a reasonable basis at all times. When the true details entered the market,” the investors lost money, according to court documents.
Lawyers for the other plaintiffs didn’t contest Lang’s motion to be appointed as lead plaintiff. Once U.S. District Judge Consuelo Marshall rules and consolidates the complaints, the lead plaintiff’s attorney will file an amended complaint, after which Luna and the other defendants will have two weeks to respond.
Attorneys for Luna and Graeff did not respond Wednesday to emails. Lang’s attorney, Berkeley, California-based Lucas Gilmore, declined to comment on the case.
Still unclear are the circumstances that led Luna to delay filing major reports and declaring previously submitted financial statements as unreliable, as well as the “for cause” findings that caused the company to fire Soller and to rescind the terms of Graeff’s departure.
Graeff, in an early May email exchange, wrote: “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.”
A group of new executives is on board, including Richard Roedel, interim executive chairman and interim president, and a Luna board member since 2010. The company early on announced that a special committee of some board members and external legal and financial advisers, including representatives from the accounting firm Ernst & Young, was investigating the company’s issues.
“They bring in a big four [accounting] firm with lots of resources … who I’m sure have been working day and night on this problem,” said Warren, the Radford professor. “It has 60 days to figure it out. So by the very fact that they don’t have all their ducks in order in the [financial statements] shows you that there really is a deep-seated issue here. That is not a simple thing of, ‘We missed a couple transactions.’”