UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-52008
LUNA INNOVATIONS INCORPORATED
(Exact name of Registrant as Specified in its Charter)
Delaware | 54-1560050 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | |
1 Riverside Circle, Suite 400
Roanoke, VA 24016
(Address of Principal Executive Offices)
(540) 769-8400
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on which Registered | |
Common Stock, par value $0.001 per share | The NASDAQ Stock Market LLC | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company x | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2014, based upon the closing price of Common Stock on such date as reported by the NASDAQ Capital Market, was approximately $21.0 million.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of February 27, 2015 there were 15,095,017 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the registrant’s Proxy Statement with respect to its 2015 Annual Meeting of stockholders, anticipated to be filed within 120 days after the end of its fiscal year ended December 31, 2014, are incorporated by reference into Part III of this annual report on Form 10-K.
LUNA INNOVATIONS INCORPORATED
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2014
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operation” section in Item 7 of this report, and other materials accompanying this Annual Report on Form 10-K contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including those relating to future events or our future financial performance. In some cases, you can identify these forward- looking statements by words such as “intends,” “will,” “plans,” “anticipates,” “expects,” “may,” “might,” “estimates,” “believes,” “should,” “projects,” “predicts,” “potential” or “continue,” or the negative of those words and other comparable words, and other words or terms of similar meaning in connection with any discussion of future operating or financial performance. Similarly, statements that describe our business strategy, goals, prospects, opportunities, outlook, objectives, plans or intentions are also forward-looking statements. These statements are only predictions and may relate to, but are not limited to, expectations of future operating results or financial performance, capital expenditures, introduction of new products, regulatory compliance, plans for growth and future operations, as well as assumptions relating to the foregoing.
These statements are based on current expectations and assumptions regarding future events and business performance and involve known and unknown risks, uncertainties and other factors that may cause actual events or results to be materially different from any future events or results expressed or implied by these statements. These factors include those set forth in the following discussion and within Item 1A “Risk Factors” of this Annual Report on Form 10-K and elsewhere within this report.
You should not place undue reliance on these forward-looking statements, which apply only as of the filing date of this Annual Report on Form 10-K. You should carefully review the risk factors described in other documents that we file from time to time with the U.S. Securities and Exchange Commission, (“SEC”). Except as required by applicable law, including the rules and regulations of the SEC, we do not plan to publicly update or revise any forward-looking statements, whether as a result of any new information, future events or otherwise, other than through the filing of periodic reports in accordance with the Securities Exchange Act of 1934, as amended.
PART I
ITEM 1. BUSINESS
Company Overview and Business Model
Luna Innovations Incorporated ("we" or the "Company") develops, manufactures and markets fiber optic sensing and test & measurement products focused on bringing new and innovative technology solutions to measure, monitor, protect and improve critical processes in the aerospace, automotive, energy, composite, telecommunications, and defense industries. Our business model is designed to accelerate the process of bringing new and innovative products to market. In addition, we use our in-house technical expertise across a range of technologies to perform applied research services for companies and government-funded projects in the areas of sensing & instrumentation, advanced materials, and health sciences. We continue to invest in product development and commercialization, which we anticipate will lead to increased product sales growth.
Our corporate growth strategy is focused on becoming a leading provider of fiber optic strain and temperature sensing solutions and standard test methods for composite, as well as non-composite materials, structures and systems.
We are organized into two main business segments, our Products and Licensing segment and our Technology Development segment. Our Products and Licensing segment develops, manufactures and markets our fiber optic sensing, as well as test & measurement products. Historically this segment also included the funded development of our fiber optic shape sensing technology for minimally invasive medical applications. On January 21, 2014, we sold the assets associated with our fiber optic shape sensing technology in the medical field to affiliates of Intuitive Surgical, Inc. (as referring either to these affiliates in such capacity as buyers or to Intuitive Surgical, Inc., "Intuitive"), as described more fully below. As part of this transaction, we entered into a revocable license agreement with Intuitive pursuant to which we have the right to use all of our transferred technology outside the field of medicine and in respect of our existing non-shape sensing products in certain non-robotic medical fields. We are continuing to develop and commercialize our fiber optic technology for strain & temperature sensing applications for the aerospace, automotive, and energy industries. Our Products and Licensing segment revenues represented approximately 38%, and 43% of our total revenues for the years ended December 31, 2013 and 2014, respectively.
Our Technology Development segment performs applied research principally in the areas of sensing and instrumentation, advanced materials and health sciences. Our Technology Development segment revenues composed approximately 62% and 57% of our total revenues for the years ended December 31, 2013 and 2014, respectively. Historically, this segment also
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included our secure computing and communications group (“SCC”), which focused on technologies for ensuring the integrity of integrated circuits used in defense systems. On March 1, 2013, we sold the assets associated with SCC to MacAulay-Brown, Inc. (“Mac-B”), another defense contractor. Most of the government funding for our Technology Development segment outside of SCC is derived from the Small Business Innovation Research (“SBIR”) program coordinated by the U.S. Small Business Administration (“SBA”). Our SBIR research is focused on technological areas with commercial potential and we strive to commercialize any resulting scientific advancements. For the year ended December 31, 2013, approximately 54% of our total revenues were generated under the SBIR program, compared to 47% in 2014.
For the years ended December 31, 2013 and 2014, 62% and 54%, respectively, of our revenues were derived from the U.S. government.
Products and Licensing
In our Products and Licensing segment we have been successful in developing and marketing fiber optic test & measurement products which provide solutions primarily for the telecommunications industry. In 2011, we first introduced our ODiSI platform of products for distributed sensing of strain and temperature. Our key initiative for long term growth is to become a leading provider of fiber optic strain and temperature sensing systems and standard test methods based upon this product platform. Our Products and Licensing segment includes approximately 27 full-time employees. Our primary product lines and development services in this segment are described in more detail below.
Test & Measurement, Sensing, and Instrumentation Products
Test & Measurement Equipment for Fiber Optic Components and Sub-Assemblies
Our product lines in the test & measurement domain include our Optical Vector Analyzer (“OVA”), our Optical Backscatter Reflectometer (“OBR”), and the Phoenix family of tunable lasers.
Historically, our test & measurement products have primarily served the telecommunications industry, although most of our products have valuable applications in other fields. Our test & measurement products monitor the integrity of fiber optic network components and sub-assemblies. These products are designed for manufacturers and suppliers of optical components and sub-assemblies and allow them to reduce development, test and production costs and improve the quality of their products. Most manufacturers and suppliers of optical components and modules currently use a combination of different types of optical test equipment to identify and measure failures in optical networks, such as bad splices, bends, crimps and other reflective and non-reflective events that can cause defects and negatively impact product performance. Our optical test equipment products replace the need to employ multiple test products by addressing all stages of the end user’s product development lifecycle, including design verification, component qualification, assembly process verification and failure analysis. Our OVA platform allows manufacturers and suppliers of optical components and sub-assemblies to reduce development, test and production costs and time-to-market by replacing multiple, time consuming and expensive measurement platforms with a single, integrated and easy-to-use instrument.
Our OBR is a highly sensitive diagnostic device which has application in the telecommunications industry and flexibility to provide measurements in various other applications. Our OBR allows data and telecommunications companies and the service providers who maintain their own fiber optic networks to reduce test time and improve product quality. Our OBR provides the ability to inspect fiber networks with higher resolution and better sensitivity than is possible with other existing test products. Its user-friendly graphical user interface also makes the OBR product suitable for both research and manufacturing applications. The OBR gives end users a very high resolution view that is similar to an “X-Ray” into the inner workings of a fiber optic network. The OBR also has a feature that allows users to turn standard optical fiber into multiple sensors that could be used in a variety of temperature measurement and monitoring applications including power generation, civil structure monitoring, industrial process control; component-level heating in optical amplifiers, strain and load distribution measurements of aircraft harnesses and temperature monitoring inside telecommunications cabinets and enclosures.
ODiSI Sensing Solution; Optical Distributed Sensor Interrogator
In 2011, we launched our new sensing platform called ODiSI. These products provide fully distributed strain or temperature measurements and deliver an extraordinary amount of data by using an optical fiber as a continuous sensor for up to 50 meters of surface. Compared to traditional sensing methods, such as strain gages, this technology provides greater insight into the performance, tolerances and failure mechanisms of structures and vehicles. We believe the technology can provide exceptional value to the aerospace, automotive, and energy industries by providing solutions for composite, as well as non-composite materials, structures and systems.
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We have significant expertise in distributed sensing systems, such as ODiSI, which are products composed of multiple sensors whose inputs are integrated through a fiber optic network and software. These products use fiber optic sensing technology with an innovative monitoring system that allows several thousand sensors to be networked along a single optical fiber.
Potential key applications and markets of our fiber optic sensing solutions include the airframe industry, integrated structural monitoring of civil structures and space applications. For example, a major airframe manufacturer has explored the use of our system during fatigue testing to measure strain through a network of sensors distributed throughout an aircraft. Our ODiSI platform also enables the direct monitoring of temperature. Potential markets include automotive manufacturing, automotive component manufacturing, motorsports, industrial process control and electrical system monitoring.
Tunable Lasers
We have acquired the rights to manufacture a line of swept tunable lasers to allow us to compete more effectively in our existing fiber optic test & measurement as well as sensing markets. This laser is in production, and this technology is being integrated into current and new products to help us provide our customers with faster, more flexible and cost-effective test and measurement products. The laser has desirable properties in the quality of the laser light produced, the speed at which it can operate, the small size of the package, and the environmental conditions in which it can operate. We believe that these traits make it possible for us to move our fiber optic sensing capabilities out of the laboratory, and into more demanding environments such as aircraft structural health monitoring, automotive manufacturing, green energy, and industrial applications.
Sales & Marketing
We primarily market our fiber optic test & measurement products to telecommunications companies, defense agencies, government system integrators, researchers, original equipment manufacturers, distributors, testing labs and strategic partners worldwide. We have a regional sales force that markets and sells our products through manufacturer representative organizations to customers in North America and through partner and distribution channels for other sales around the world. We are building a dedicated sales force for direct marketing of our distributed sensing products, with an initial focus on customers in the automotive, aerospace, and energy industries.
We believe that we provide a high level of support in developing and maintaining our long-term relationships with our customers. Customer service and support are provided through our offices and those of our partners that are located throughout the world.
Fiber Optic Shape Sensing Solutions for Robotic, Non-Robotic, and Minimally Invasive Surgical Systems
In 2012, we entered into a development agreement with Philips Healthcare, acting through Philips Medical Systems Nederland BV (“Philips”). Under the development agreement, we conducted certain development work during 2012 and during 2013 in cooperation with Philips to advance our fiber-optic shape sensing technology towards commercialization in the non-robotic medical field. Under the development agreement, Philips agreed to pay us monthly on a time and materials basis, less a specified holdback amount, in accordance with corresponding milestones and estimated resource requirements. In addition, under the development agreement, Philips purchased specified prototype systems from us. Our agreement with Philips expired at the end of 2013 and was not renewed or extended. As a result of the sale of our shape sensing assets related to medical applications to Intuitive in January 2014, we do not expect to do any further work with Philips.
On January 21, 2014, we sold our assets associated with the development of fiber optic shape sensing for the medical field to affiliates of Intuitive. However, we have a development and supply agreement with Hansen Medical, Inc. ("Hansen") under which we are to develop localization and shape sensing solutions for Hansen’s medical robotics system and under which we would supply fiber optic shape sensing systems to Hansen. Although the terms of our sale to Intuitive generally preclude us from pursuing fiber optic shape sensing in medical applications in the future, we are specifically permitted to continue to develop this technology and supply related products to Hansen. At this time, however, Hansen is not requesting us to perform any development work towards this solution. Our business relationship with Hansen is further described below under “Litigation and Agreements with Hansen Medical, Inc.”
Technology Development
We provide applied research for customers in our primary areas of focus, including sensing and materials such as nanomaterials, coatings, adhesives, composites and bio-engineered materials. We generally compete to win contracts in these areas on a fee-for-service basis. Our Technology Development segment has a successful track record of evaluating innovative technologies to address the needs of our customers.
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We seek to maximize the benefits we derive from our contract research business, including revenue generation and identification of promising technologies for further development. We focus primarily on opportunities in which we develop intellectual property rights in areas that we believe have commercialization potential. We take a disciplined approach to contract research to try to ensure that the costs of any contract we undertake will be fully reimbursed. We believe that this model is cost-efficient and significantly reduces our development risk in that it enables us to defray the costs of higher risk technology development with third-party funding.
As of December 31, 2014, our Technology Development segment was engaged in more than 64 active contracts, with typical terms ranging from six months to three years. These projects span a wide range of applications across our areas of focus.
Although we conduct our applied research on a fee-for-service basis for third parties, we seek to retain full or partial rights to the technologies and patents developed under those contracts and to continuously enlarge and strengthen our intellectual property portfolio. New technology that we develop may complement existing technologies and enable us to develop applications and products that were not previously possible. In addition, the technologies we develop may also be applicable to commercial markets beyond the scope of the applications originally contemplated in the contract research stage, and we endeavor to capture the value of those opportunities.
As of December 31, 2014, our Technology Development segment consisted of approximately 52 full time employees, of whom 44 hold advanced degrees, including 18 Ph.D. degrees. We also utilize the knowledge and experience of researchers employed through the academic institutions, corporations and government agencies with which we subcontract. Our Technology Development segment is organized into subgroups according to areas of technology, with each subgroup being managed by its own director who is responsible for its financial performance. In addition, we have in place disciplined processes designed to ensure quality control of proposal preparation, program reviews, pipeline reviews, revenue tracking and financial reporting.
Each year, U.S. government federal agencies and departments are required to set aside a portion of their grant awards for SBIR-qualified organizations. SBIR contracts include Phase I feasibility contracts of up to $150,000 and Phase II proof-of-concept contracts, which can be as high as $1,000,000. We have won three National Tibbetts Awards from the SBA for outstanding SBIR performance. We have also won research contracts outside the SBIR program from corporations and government entities. These contracts typically have a longer duration and higher value than SBIR grants. In the future, we will seek to derive a larger portion of our contract research revenues from contracts outside of the SBIR program.
Materials
We are actively developing a wide variety of materials. For example, we have developed a range of coatings, including both hydrophobic and superoleophobic coatings. These coatings are being evaluated for use in a number of applications. Other coatings under development include anti-corrosion and damage-indicating coatings.
We are also working on a variety of bioengineered materials for homeostatic agents and wound healing. These materials must be approved by the FDA or similar foreign regulatory agencies before they can be marketed, which we do not expect to occur for at least several years, if at all.
Our nanomaterials activity is focused on fullerenes and tri-metal nitride endohedral fullerene (“Trimetasphere”®) materials. The Trimetasphere® nanomaterial is a carbon sphere with three metal atoms and an enclosed nitrogen atom. We have obtained an exclusive license from Virginia Tech to commercialize Trimetasphere® nanomaterials under an issued U.S. patent and pending U.S. patent applications.
We are also researching other applications for nanomaterial-based drugs based on the anti-oxidative characteristics of fullerenes. These products are in the early stages of development, but if successful, could offer new market opportunities for us.
In 2009, we acquired a patent portfolio from Tego Biosciences, Inc., including in- and out-licenses, generally for the use of carbon fullerene nanomolecules in the treatment of human health. We believe this acquisition strengthened our patent position in this area, but there can be no assurances that we will be able to obtain commercial success as a result of these patents and licenses.
Sensing
Our Technology Development segment also performs a significant amount of applied research towards developing new sensors. This includes sensors for the purpose of corrosion, temperature, strain, pressure, structural health, and chemical detection. Much of the work is directed to harsh environments and uses optics. Examples include measuring temperature and neutron flux in nuclear reactors, pressure and temperature in gas turbines, and temperatures of cryogenic lines. The effort
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utilizes both discrete and distributed sensors. Our technology development work in this area is closely aligned with our Products and Licensing segment and is directed at advancing the technology and the development of new applications.
Proposed Merger with Advanced Photonix, Inc.
On January 30, 2015, we, Advanced Photonix, Inc., a Delaware corporation (“API”), and API Merger Sub, Inc., a Delaware corporation and our wholly owned subsidiary ("API Merger Sub"), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), pursuant to which API Merger Sub will merge with and into API (the “Merger”), with API surviving as our wholly owned subsidiary.
API is a leading test and measurement company that packages optoelectronic semiconductors into high-speed optical receivers ("HSOR") products, custom optoelectronic sub systems ("Optosolutions products") and Terahertz ("THz products") instrumentation, serving the test and measurement, telecommunications, military/aerospace and medical markets. The company supports the customers from the initial concept and design phase of the product, through testing to full-scale production. The company has two manufacturing facilities located in Camarillo, California and Ann Arbor, Michigan.
Upon the effective time of the Merger, each share of the common stock of API will be converted into the right to receive shares of our common stock at an exchange ratio of 0.31782. In addition, unless otherwise provided by the terms of the warrant, each outstanding warrant to purchase API shares will be converted into the right to purchase shares of our common stock and each outstanding option to purchase shares of API common stock will be converted into an option to purchase shares of our common stock of, in each case at the same exchange ratio.
The Merger Agreement also provides that our board of directors will be expanded to seven seats and will be composed of three directors designated by our current board of directors, who will be Richard W. Roedel, as chairman, John B. Williamson, III and Michael W. Wise, and three directors to be designated by API’s board of directors, who will be Donald Pastor, Gary Spiegel and Ed J. Coringrato Jr. In addition, the Merger Agreement further provides that our chief executive officer, My E. Chung, will continue to serve as chief executive officer and as a member of our board of directors.
The Merger Agreement contains customary representations and warranties and pre-closing covenants. During the period from the date of the Merger Agreement to the effective time of the Merger, we and API have agreed to carry on business in the ordinary course and consistent with past practices and have agreed to certain other operating covenants. We and API have also agreed not to solicit or engage in discussions with third parties regarding other proposals to acquire us and API, respectively, subject to specified exceptions. In addition, the Merger Agreement contains covenants that require each of us and API to call and hold special stockholder meetings and, subject to certain exceptions, require API’s board of directors to recommend to API’s stockholders the adoption of the Merger Agreement and approval of the transactions contemplated thereby and our board of directors to recommend to our stockholders the approval of the issuance of the shares of our common stock as consideration for the Merger.
The completion of the Merger is subject to the satisfaction or waiver of a number of customary closing conditions in the Merger Agreement, including, among others, the effectiveness of a Form S-4 registration statement that we have filed with the Securities and Exchange Commission (the “SEC”), the adoption of the Merger Agreement and approval of the transactions contemplated thereby by API’s stockholders, approval by our stockholders of the issuance of shares of our common stock, the absence of certain governmental restraints and the absence of a material adverse effect on us or API.
The Merger Agreement may be terminated by either us or API in certain circumstances, including if the Merger has not been consummated on or before August 31, 2015, if the approval of our stockholders or API stockholders is not obtained and for breaches of certain representations and warranties. If the Merger Agreement is terminated in certain specified circumstances, API must pay us, or we must pay API, as applicable, a termination fee of $750,000. In addition, if the Merger Agreement is terminated following a meeting of our stockholders or API stockholders at which the adoption of the Merger Agreement and approval of the transactions contemplated thereby, or the approval of the issuance of shares the our common stock as consideration in the Merger is considered but not approved, then the we or API, as applicable, will be required to pay an amount up to $250,000 in reimbursement of the other party’s out-of-pocket expenses incurred in connection with the transaction.
Simultaneously with the execution and delivery of the Merger Agreement, the officers and directors of API, in their respective capacities as stockholders of API, have entered into voting agreements with us, pursuant to which such individuals have agreed, among other things, to vote their respective shares of API common stock for the adoption of the Merger Agreement and approval of the transactions contemplated thereby, against any alternative proposal and against any action or agreement that would reasonably be expected to impede, interfere with, delay, postpone, discourage or adversely affect the transactions contemplated by the Merger Agreement. Also simultaneously with the execution and delivery of the Merger Agreement, our officers and directors, in their respective capacities as our stockholders, have entered into voting agreements
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with API, pursuant to which such individuals have agreed, among other things, to vote their respective shares of our common stock for the approval of the issuance of shares of our common stock pursuant to the Merger Agreement, against any alternative proposal and against any action or agreement that would reasonably be expected to impede, interfere with, delay, postpone, discourage or adversely affect the transactions contemplated by the Merger Agreement.
We have filed the Form S-4 registration statement with the SEC, however that registration statement has not yet become effective. Following the effectiveness of the Form S-4, Luna and Advanced Photonix will mail the joint proxy statement/prospectus included in the Form S-4 to our respective stockholders for consideration at the companies’ stockholder meetings. Although the companies have not yet formally determined the dates of their stockholder meetings, we currently expect the stockholder meetings to be held and, subject to the satisfaction and/or waiver of the conditions to the Merger, the Merger to close in May 2015. Upon closing of the Merger, we expect to account for the Merger under the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standard Topic 805, Business Combinations.
Intellectual Property
We seek patent protection on inventions that we consider important to the development of our business. We rely on a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We control access to our proprietary technology and enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties.
Our success depends in part on our ability to develop patentable products and obtain, maintain and enforce patent and trade secret protection for our products, as well as to successfully defend these patents against third-party challenges both in the United States and in other countries. We will only be able to protect our technologies from unauthorized use by third parties to the extent that we own or have licensed valid and enforceable patents or trade secrets that cover them. Furthermore, the degree of future protection of our proprietary rights is uncertain because we may not be able to obtain patent protection on some or all of our technology and because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage.
Currently, we own or license approximately 136 U.S. and international patents and approximately 70 U.S. and international patent applications, and we intend to file, or request that our licensors file, additional patent applications for patents covering our products. Our issued patents generally have terms that are scheduled to expire between 2015 and 2030. However, patents may not be issued for any pending or future pending patent applications owned by or licensed to us. Claims allowed under any issued patent or future issued patent owned or licensed by us may not be valid or sufficiently broad to protect our technologies. Any issued patents owned by or licensed to us now or in the future may be challenged, invalidated or circumvented, and, in addition, the rights under such patents may not provide us with competitive advantages. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture or increase their market share with respect to related technologies.
A discussion of our material patents and patent applications is set forth below.
Siemens Patent
We have licensed a U.S. patent and related patents in Canada, Switzerland, Germany, Great Britain, Italy, Netherlands and France from Siemens AG concerning methods of preparing fullerene derivatives for use. We use these methods in our nanotechnology area to attach certain materials to carbon fullerenes. The U.S. patent expires in April 2015. The related Canadian and European patents expired in 2014.
NASA Patents
We have licensed, on a non-exclusive basis, four U.S. patents and related patents in Japan, Canada, Germany, France, Great Britain and Belgium from the National Aeronautics and Space Administration, an agency of the U.S. government (“NASA”), which patents concern the measurement of strain in optical fiber using Bragg gratings and Rayleigh scatter and the measurement of the properties of fiber-optic communications devices. These patents expire between February 2017 and September 2020.
VTIP Patents
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We have licensed, on an exclusive basis, two U.S. patents from Virginia Tech Intellectual Properties, Inc. (“VTIP”) to commercialize Trimetasphere® nanomaterials for all fields of human endeavor. These patents expire in December 2019 and December 2022.
Coherent Patents
We have licensed, on a non-exclusive basis, several U.S. patents and other intellectual property rights owned or controlled by Coherent, Inc., related to the manufacturing, using, importing, selling and offering for sale of Coherent’s “Iolon” brand of swept tunable lasers, which we market under our “Phoenix” brand of lasers. These U.S. patents expire between 2020 and 2025.
Shape Sensing Patents
As a part of our sale of assets associated with our fiber optic shape sensing technology in the medical field to Intuitive, we transferred our related patents to Intuitive. Also as a part of this transaction, we entered into a revocable license agreement with Intuitive pursuant to which we have the right to use all of our transferred technology outside the field of medicine and in respect of our existing non-shape sensing products in certain non-robotic medical fields. Two U.S. patents that we now license back from Intuitive cover the use of optical frequency domain reflectometry, or OFDR, and multiple, closely spaced Bragg gratings for shape sensing, and the use of the inherent scatter as a strain sensor for shape sensing. These two patents expire in July 2025. We also have a license back from Intuitive for a patent application that covers certain refinements to the measurements covered in the first two patents, which are necessary in order to achieve the necessary accuracies for medical and other applications. This patent application was filed in the United States, the European Patent Office, China, India, Russia, Brazil, Japan and Indonesia. These patents and patent applications can support other nonmedical applications of our fiber optic shape sensing technology.
Corporate History and Chapter 11 Reorganization
We were incorporated in the Commonwealth of Virginia in 1990 and reincorporated in the State of Delaware in April 2003. We completed our initial public offering in June 2006. Our executive offices are located at 1 Riverside Circle, Suite 400, Roanoke, Virginia 24016 and our main telephone number is (540) 769-8400.
On July 17, 2009, we filed a voluntary petition for relief in order to reorganize under Chapter 11 of the United States Bankruptcy Code, including a proposed plan of reorganization, which we refer to in this report as the Reorganization Plan, with the United States Bankruptcy Court for the Western District of Virginia. On January 12, 2010, the Bankruptcy Court approved the Reorganization Plan and we emerged from bankruptcy on that date.
Litigation and Agreements with Hansen Medical, Inc.
In June 2007, Hansen, a company for which we had conducted certain research and performed certain services, filed a lawsuit against us for using allegedly misappropriated trade secrets from Hansen in connection with our work with Intuitive or otherwise. On April 21, 2009, a jury found in favor of Hansen and awarded a verdict of $36.3 million against us. As a result of this jury verdict, we filed for Chapter 11 reorganization in July 2009.
On December 11, 2009, we and our wholly owned subsidiary Luna Technologies, Inc. entered into a settlement agreement with Hansen to settle all claims arising out of the litigation. On January 12, 2010, as part of our Reorganization Plan, we entered into a series of agreements with Hansen and Intuitive that were contemplated by the settlement agreement. Under our license agreement with Hansen (the “Hansen License”), we granted Hansen (i) a co-exclusive (with Intuitive), royalty-free, fully paid, perpetual and irrevocable license to our fiber optic shape sensing/localization technology within the medical robotics field. The license can only be sublicensed by Hansen in connection with Hansen products, except that Hansen can grant full sublicenses to third parties for single degree of freedom robotic medical devices; (ii) an exclusive (and fully sublicenseable) royalty-free, fully paid, perpetual and irrevocable license to our fiber optic shape sensing/localization technology for non-robotic medical devices within the orthopedics, vascular, and endoluminal fields; and (iii) a co-exclusive (with us) royalty-free, fully paid, perpetual and irrevocable license to our fiber optic shape sensing/localization technology for non-robotic medical devices in other medical fields (including colonoscopies but not including devices described in clause (ii) above). In 2011, Hansen entered into certain agreements with Philips Medical Systems (and/or its affiliates) under which Hansen sublicensed its non-robotic medical rights to our fiber optic shape sensing/localization technology.
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In connection with the settlement agreement, we also entered into a development and supply agreement with Hansen. The agreement provides that we will perform product development services with respect to fiber optic shape sensing at Hansen’s request and provide our shape sensing products to Hansen. Revenues earned for product development will be determined in a manner consistent with our normal contract development services and will be payable monthly to us. The agreement also sets forth certain terms under which we would supply fiber optic components to Hansen. In May 2011, we amended this development and supply agreement with Hansen in order to update the specifications and estimated budget amounts for certain development milestones and provide for additional development milestones and related budget estimates and specifications to be achieved. The amendment also provides for a payment structure whereby we share a specified percentage of the development expenses otherwise payable in connection with certain of the development milestones, up to a certain cumulative maximum, and changes the mechanism for calculating amounts that Hansen may hold back from being paid to us while such expenses are being shared by the parties. Finally, the amendment adjusted the commercial transfer pricing mechanism for our supply of fiber optic components to Hansen. At this time, Hansen is not requesting us to perform any development work under this development and supply agreement. Our sale of assets to Intuitive was made expressly subject to the development and supply agreement with Hansen and the Hansen License.
Material Agreements
Sale of Assets to Intuitive Surgical
On January 17, 2014, we entered into an Asset Purchase Agreement with Intuitive (the “Asset Purchase Agreement”). Under the Asset Purchase Agreement, effective as of 12:01 a.m. on January 21, 2014, we closed on the sale to Intuitive of substantially all of our assets related to our medical shape sensing business, including all of the patents and patent applications used or useful for our fiber optical shape sensing and localization technology, for $12 million, plus up to $8 million upon the accomplishment by Intuitive of certain technical specifications (the “Technical Specifications Payment”) and up to $10 million in potential future royalties (altogether, the “Transaction”). We had been engaged since 2007 in a development project for Intuitive developing a fiber optic-based shape sensing and position tracking system to be integrated into Intuitive’s products. Also as a part of the Transaction, Intuitive has hired certain of our employees, many of whom were historically engaged in this development project.
The Technical Specifications Payment is tied to the achievement of certain technical specifications that were previously established for the development project between us and Intuitive. If these technical specifications are not achieved but our fiber optical shape sensing and localization technology is nevertheless included in an Intuitive medical system that receives Food and Drug Administration approval as the system’s only localization solution, then Intuitive shall pay us $6 million upon such approval. The royalties will be paid at a rate of $10,000 per commercially-sold medical robotic system that includes our fiber optical shape sensing and localization technology. The foregoing deferred and potential payments are subject to set off against any liabilities we may have to Intuitive for any breach of our representations or obligations under the Asset Purchase Agreement.
The Asset Purchase Agreement contains representations and warranties, covenants and indemnification provisions common to transactions of this nature, except that our indemnification obligations are only limited in time until no further payments are due from Intuitive. Any disputes between the parties will be handled by mediation and arbitration in Chicago, Illinois. All of the transfers of technology contemplated in the Transaction have been made subject to our existing licenses and related obligations to Hansen and Philips.
Also, in connection with the Transaction, we and Intuitive entered into a License Agreement of the same date under which we received a license back to all of our transferred technology outside the field of medicine and in respect of our existing non-shape sensing products in certain non-robotic medical fields. The license back to us outside the medical field is exclusive to us except that Intuitive retained certain non-sublicensable rights for itself. This license back to us is revocable if we were, after notice and certain time periods, (i) to challenge the validity or enforceability of the transferred patents and patent applications, (ii) to commercialize our fiber optical shape sensing and localization technology in the field of medicine (except to perform on a development and supply project for Hansen), (iii) to violate our obligations related to our ability to sublicense in the field of medicine or (iv) to violate our confidentiality obligations in a manner that advantages a competitor in the field of medicine and not cure such violation. As a part of the Transaction, we retained assets and rights necessary to perform on our development and supply project for Hansen if that project is re-started.
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Also, as a part of the Transaction, for a period of 15 years after closing, we agreed to exit and not develop or commercialize our fiber optical shape sensing and localization technology in the field of medicine (except for Hansen as described above). For a period of 10 years after closing, Intuitive has agreed not to use any of the assets being acquired in the Transaction, including the key employees being hired, to compete with us outside the field of medicine for shape, strain and/or temperature sensing in the aerospace, automotive, and energy markets and for strain sensing in the civil structural monitoring and composite material markets.
Prior Agreement with Intuitive
Prior to our recent sale of our shape sensing assets related to medical applications to Intuitive, we were party to an intellectual property licensing, development and supply agreement with Intuitive, which we originally entered into in June 2007. Under this multi-year agreement, we were to develop and supply a fiber optic-based shape sensing and position tracking system for integration into Intuitive’s future products.
Under the agreement, Intuitive agreed to pay us an up-front license fee, development fees payable in quarterly installments for the first 18 months of the agreement, and certain other fees, subject to specified termination rights by Intuitive and other rights of repayment or reduction. There were also minimum purchase requirements by Intuitive, which were subject to our successful completion of the development criteria and certain other terms and conditions.
In January 2010, in connection with our settlement with Hansen, and related emergence from Chapter 11 bankruptcy, we amended our agreement with Intuitive in order to make it consistent with our January 2010 license agreement with Hansen and to make certain other changes to provide, among other things, additional development of enhancements to the Intuitive product platform. The amendment also provided that Intuitive could request us to perform additional development work for a period of 10 years ending January 2020 and that this additional development work, if requested, would be paid by Intuitive on a time and materials basis. Under the amendment, Intuitive received a limited credit against a future portion of this development work and against the transfer pricing for the shape-sensing products supplied by us to Intuitive. The amendment also eliminated certain future fees that would have otherwise been payable by Intuitive and also eliminated all of Intuitive’s future minimum purchase requirements. Intuitive continued to be obligated to purchase its reasonable commercial requirements of the shape-sensing products from us, subject to Intuitive’s right to purchase optical fiber or sensors from other suppliers. The amendment also provided that the exclusive license granted by us to Intuitive in the medical robotics field was modified to allow for the co-exclusive license granted to Intuitive and Hansen and any restrictions or prohibitions on us to develop and manufacture products for Hansen were eliminated.
The agreement was further amended to provide for the development work to be conducted in 2010 and provide a budget for this work. The agreement was amended again in respect of development work to be conducted in 2011, setting certain milestones for us to achieve during 2011, establishing the amounts to be paid by Intuitive to us for this development work and providing that, if we successfully completed the milestones by a certain date, any remaining credit in favor of Intuitive would be eliminated. The agreement was amended again in respect of development work to be conducted in 2012, similarly setting certain milestones to be achieved by us during 2012, establishing the amounts to be paid by Intuitive to us for this development work and confirming that no further credit remained. In June 2013, we again amended our agreement with Intuitive, to cover development work during the period of 2013 through 2015. This amendment established certain milestones for us to achieve during this period, as well as the amounts to be paid by Intuitive for development work during this period.
As amended, the term of our agreement with Intuitive extended to January 2020 and was terminable by either party for cause upon notice and opportunity to cure.
As part of our agreement with Intuitive, we granted Intuitive a co-exclusive (with Hansen), royalty-free, fully paid, perpetual and irrevocable license to our fiber optic shape sensing/localization technology within the medical robotics field. The license can only be sublicensed by Intuitive in connection with Intuitive products and Intuitive and Hansen have the right to enforce the licensed intellectual property within the medical robotics field. Because of the nature of this perpetual license, the license does not provide for a term or termination provisions. Intuitive has granted to us a perpetual, royalty-free license to any intellectual property solely or jointly invented by Intuitive on our development project for all fields outside of medical robotics, which is exclusive to the extent of any patents and patent applications included in such intellectual property.
Although after our sale of assets to Intuitive we no longer have a development and supply relationship with Intuitive and Intuitive no longer has any payment obligations to us, this agreement remains in place.
Virginia Tech
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Our nanomaterials activity is focused on Trimetasphere® materials. The Trimetasphere® nanomaterial is a carbon sphere with three metal atoms and a nitrogen atom enclosed. We have obtained an exclusive license from VTIP to commercialize Trimetasphere nanomaterials under two U.S. patents for all fields of human endeavor. The term of this license ends upon the last expiration date of the underlying patents, which is December 2022. The license provides for certain royalties to be paid as a percentage of our net sales, certain percentages of amounts received from any of our sublicensees and certain milestone payments based on product development phases. We paid VTIP a total of approximately $3,000 in royalties in respect of 2012 under the license. We reimburse VTIP for patent costs incurred under the license. VTIP may terminate the license for cause. We may terminate the license at any time for any reason on 60 days' notice.
We primarily utilize the VTIP license in our ongoing research into the potential use of Trimetaspheres to improve the safety of contrast agents commonly utilized in magnetic resonance imaging (“MRI”) procedures. We believe that contrast agents utilizing our Trimetasphere nanomaterials may be able to provide a higher image contrast than existing contrast agents but with a lower risk of toxicity. Medical contrast agents for human use, such as our Trimetasphere nanomaterials, must be approved by the FDA or similar foreign regulatory agencies before they can be marketed, which we do not expect to occur for at least several years, if at all. As described below under “Government Regulation,” this approval process can involve significant time and expense and may delay or prevent our products from reaching the market.
Coherent
In December 2006, we entered into an asset transfer and license agreement with Coherent. Under the agreement, we acquired the rights to manufacture Coherent’s “Iolon” brand of swept tunable lasers as well as certain manufacturing equipment and inventory previously used by Coherent to manufacture the lasers. We continue to enhance, produce, and market these lasers under our “Phoenix” brand. Under this agreement, Coherent granted non-exclusive licenses to us for certain U.S. patents and other intellectual property rights owned or controlled by Coherent for making, having made, using, importing, selling and offering for sale the lasers. The term of this agreement is 10 years, but the patent licenses become fully paid and perpetual if we fulfill our royalty obligations during this 10-year period and the license to the other intellectual property rights is perpetual. These U.S. patents expire between 2020 and 2025. As consideration, we agreed to pay Coherent a total of $1.3 million over a period of two years and royalty payments on net sales of products sold by us that incorporate the lasers or that are manufactured using the intellectual property covered by the licenses. We paid Coherent a minimum royalty of $54,000 for 2013 and approximately $68,000 in royalties based on net sales for 2014. We also agreed to sell Coherent a limited number of lasers each year. The agreement is terminable by either party for cause after notice and an opportunity to cure.
The Phoenix laser is a miniaturized, external-cavity laser offering high performance in a compact footprint and is applicable to a range of fiber optic test and measurement, instrumentation, and sensing applications. These products employ frequency-tuned lasers to measure various aspects of the transmission properties of telecommunications fiber optic components and systems. Lasers are also used in fiber optic sensing applications such as distributed strain and temperature mapping, and distributed measurement of shape. We currently use these lasers within our ODiSI platform of products, our fiber optic shape sensing products and certain of our backscatter reflectometer products, and we also sell variations of the Phoenix laser as standalone products. Under our agreements related to our sale of assets to Intuitive, we have certain obligations to supply Intuitive with these lasers and Intuitive has certain rights to require us to transfer and assign this Coherent license to Intuitive, in which case Intuitive would be similarly required to supply us with lasers.
NASA
We have licensed, on a non-exclusive basis, certain patents from NASA under two license agreements. These patents concern the measurement of strain in optical fiber using Bragg gratings and Rayleigh scatter, and also the measurement of the properties of fiber-optic communications devices. Under the license agreements, we pay NASA certain royalties based on a percentage of net sales of products covered by the patents. We incur a royalty obligation to NASA based upon a specified percentage of the revenue earned on each product sold utilizing these patents subject to combined minimum royalties of $220,000 per year under the license agreements. The term of the license agreements continues until the expiration of the last licensed patent, which is September 2020. These license agreements may be terminated by us on 90 days' notice. Either party may terminate the license agreements for cause upon certain conditions.
Competition
We compete for government, university and corporate research contracts relating to a broad range of technologies. Competition for contract research is intense and the industry has few barriers to entry. We compete against a number of in-
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house research and development departments of major corporations, as well as a number of small, limited-service contract research providers and companies backed by large venture capital firms. The contract research industry continues to experience consolidation, which has resulted in greater competition for clients. Increased competition might lead to price and other forms of competition that could harm our operating results. We compete for contract research on the basis of a number of factors, including reliability, past performance, expertise and experience in specific areas, scope of service offerings, technological capabilities and price.
We also compete, or will compete, with a variety of companies in several different product markets. The products that we have developed or are currently developing will compete with other technologically innovative products, as well as products incorporating conventional materials and technologies. We expect that we will compete with companies in a wide range of industries, including semiconductors, electronics, biotechnology, textiles, alternative energy, military, defense, healthcare, telecommunications, industrial measurement, security applications and consumer electronics. Although there can be no assurance that we will continue to do so, we believe that we compete favorably in these areas because our products leverage advanced technologies to offer superior performance. If we are unable to effectively compete in these areas in the future, we could lose business to our competitors, which could harm our operating results.
Government Regulation
Qualification for Small Business Innovation Research Grants
SBIR is a highly competitive program that encourages small businesses to explore their technological potential and provides them with incentives to commercialize their technologies by funding research that might otherwise be prohibitively expensive or risky for companies like us. As noted above, we presently derive a significant portion of our revenue from this program, but we must continue to qualify for the SBIR program in order to be eligible to receive future SBIR awards. The eligibility requirements are:
• | Ownership. The company must be at least 51 percent owned and controlled by U.S. citizens or permanent resident aliens, or owned by an entity that is itself at least 51 percent owned and controlled by U.S. citizens or permanent resident aliens; and |
• | Size. The company, including its affiliates, cannot have more than 500 employees. |
These requirements are set forth in the SBA’s regulations and are interpreted by the SBA’s Office of Hearings and Appeals. In determining whether we satisfy the 51% ownership requirement, agreements to merge, stock options, convertible debt and other similar instruments are given “present effect” by the SBA as though the underlying security were actually issued unless the exercisability or conversion of such securities is speculative, remote or beyond the control of the security holder. We therefore believe our outstanding options and warrants held by eligible individuals may be counted as outstanding equity for purposes of meeting the 51% equity ownership requirement. We believe that we are in compliance with the SBA ownership requirements.
In addition, to be eligible for SBIR contracts, the number of our employees, including those of any entities that are considered to be affiliated with us, cannot exceed 500. As of December 31, 2014, we, including all of our divisions, had 113 full- and part-time employees. In determining whether we have 500 or fewer employees, the SBA may count the number of employees of entities that are large stockholders who are “affiliated” or have the power to control us. In determining whether firms are affiliated, the SBA evaluates factors such as stock ownership and common management, but it ultimately may make its determination based on the totality of the circumstances. Eligibility protests can be raised to the SBA by a competitor or by the awarding contracting agency. If we grow larger, and if our ownership becomes more diversified, we may no longer qualify for the SBIR program, and we may be required to seek alternative sources and partnerships to fund some of our research and development costs. Additional information regarding these risks may be found below in “Risk Factors.”
FDA Regulation of Products
Some of the potential products that we are developing may be subject to regulation under the Food, Drug, and Cosmetic ("FDC") Act. In particular, any Trimetasphere® nanomaterial-based MRI contrast agent would be considered a drug, and our ultrasound diagnostic devices for measuring certain medical conditions will be considered medical devices, under the FDC Act. Both the statutes and regulations promulgated under the FDC Act govern, among other things, the testing, manufacturing, safety efficacy, labeling, storage, record keeping, advertising and other promotional practices involving the regulation of drug and devices. Compliance with the FDC Act may add time and expense to product development, and there can be no assurance that any of our products will be successfully developed and approved for marketing by the FDA.
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Environmental, Health and Safety Regulation
Our facilities and current and proposed activities involve the use of a broad range of materials that are considered hazardous under applicable laws and regulations. Accordingly, we are subject to a number of domestic and foreign laws and regulations and other requirements relating to employee health and safety, protection of the environment, product labeling and product take back. Regulated activities include the storage, use, transportation and disposal of, and exposure to, hazardous or potentially hazardous materials and wastes. Our current and proposed activities also include potential exposure to physical hazards associated with work environment and equipment. We could incur costs, fines, civil and criminal penalties, personal injury and third-party property damage claims, or we could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental, health and safety laws and regulations or requirements. Liability under environmental, health and safety laws can be joint and several and without regard to fault. There can be no assurance that violations of environmental, health and safety laws will not occur in the future as a result of the inability to obtain permits in a timely manner, human error, equipment failure or other causes. Environmental, health and safety laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business. Further, violations of present and future environmental, health and safety laws could restrict our ability to expand facilities and pursue certain technologies, as well as require us to acquire costly equipment or to incur potentially significant costs to comply with environmental, health and safety regulations and other requirements.
We have made, and will continue to make, expenditures to comply with current and future environmental, health and safety laws. We anticipate that we could incur additional capital and operating costs in the future to comply with existing environmental, health and safety laws and new requirements arising from new or amended statutes and regulations. In addition, because the applicable regulatory agencies have not yet promulgated final standards for some existing environmental, health and safety programs, we cannot at this time reasonably estimate the cost for compliance with these additional requirements. The amount of any such compliance costs could be material. We cannot predict the impact that future regulations will impose upon our business.
Employees
As of December 31, 2014, we had approximately 113 total employees of whom approximately 100 were full-time employees, and 53 of whom held advanced degrees, including approximately 21 Ph.D. degrees. None of our employees are covered by a collective bargaining agreement, and we consider our relationship with our employees to be good.
Backlog
We have historically had a backlog of contracts for which work has been scheduled, but for which a specified portion of work has not yet been completed. The approximate value of our backlog was $8.7 million at December 31, 2013 and $12.8 million at December 31, 2014, of which substantially all was from our Technology Development segment.
We define backlog as the dollar amount of obligations payable to us under negotiated contracts upon completion of a specified portion of work that has not yet been completed, exclusive of revenues previously recognized for work already performed under these contracts, if any. Total backlog includes funded backlog, which is the amount for which money has been directly authorized by the U.S. Congress or for which a purchase order has been received from a commercial customer, and unfunded backlog, which represents firm orders for which funding has not yet been appropriated. Unfunded backlog was $1.0 million and $2.7 as of December 31, 2013 and 2014 respectively. Indefinite delivery and quantity contracts and unexercised options are not reported in total backlog. Our backlog is subject to delays or program cancellations that may be beyond our control.
Research, Development and Engineering
We incur research, development and engineering expenses that are not related to our contract performance. These expenses were $2.6 million and $2.1 million for the years ended December 31, 2013 and 2014, respectively. In addition, during these years, we spent $8.9 million and $9.4 million, respectively, on customer-sponsored research activities, which amounts are reimbursed as part of our performance of customer contracts.
Operating Segments and Geographic Areas
For information with respect to our operating segments and geographic markets, see Note 14 to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Website Access to Reports
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Our website address is www.lunainc.com. We make available, free of charge under “SEC Filings” on the Investor Relations portion of our website, access to our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, as well as amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Information appearing on our website is not incorporated by reference in and is not a part of this annual report. A copy of this annual report, as well as our other periodic and current reports, may be obtained from the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding our filings at www.sec.gov.
ITEM 1A. ITEM 1A.
You should carefully consider the risks described below before deciding whether to invest in our common stock. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently believe are immaterial may also impair our business operations and financial results. If any of the following risks actually occurs, our business, financial condition or results of operations could be adversely affected. In such case, the trading price of our common stock could decline and you could lose all or part of your investment. Our filings with the Securities and Exchange Commission also contain forward-looking statements that involve risks or uncertainties. Our actual results could differ materially from those anticipated or contemplated by these forward-looking statements as a result of a number of factors, including the risks we face described below, as well as other variables that could affect our operating results. Past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
RISKS RELATING TO OUR BUSINESS GENERALLY
Our technology is subject to a license from Intuitive, which is revocable in certain circumstances. Without this license, we cannot continue to market, manufacture or sell our fiber-optic products.
As a part of the sale of our assets to Intuitive, we entered into a license agreement with Intuitive pursuant to which we received rights to use all of our transferred technology outside the field of medicine and in respect of our existing non-shape sensing products in certain non-robotic medical fields. This license back to us is revocable if after notice and certain time periods, we were to (i) challenge the validity or enforceability of the transferred patents and patent applications, (ii) commercialize our fiber optical shape sensing and localization technology in the field of medicine (except to perform on a development and supply project for Hansen), (iii) violate our obligations related to our ability to sublicense in the field of medicine or (iv) violate our confidentiality obligations in a manner that advantages a competitor in the field of medicine and not cure such violation. Maintaining this license is necessary for us to conduct our fiber-optic products business, both for our telecom products and our ODiSI sensing products. If this license were to be revoked by Intuitive, we would no longer be able to market, manufacture or sell these products which would severely limit our ability to continue operations.
If there are substantial sales of our common stock, or the perception that such sales may occur, our stock price could decline.
If any of our stockholders were to sell substantial amounts of our common stock, the market price of our common stock may decline, which might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Substantial sales of our common stock, or the perception that such sales may occur, may have a material adverse effect on the prevailing market price of our common stock.
Pursuant to an Investor Rights Agreement, we filed a Form S-3 registration statement in 2014 registering the potential resale of an aggregate of up to approximately 6.3 million shares of our common stock by our then two largest stockholders, Carilion Clinic, or Carilion and Dr. Kent Murphy. This registration statement has been declared effective by the Securities and Exchange Commission, and Dr. Murphy has sold substantially all of his approximately 2.8 million shares included in the registration statement. Carilion continues to hold its approximately 3.5 million shares covered by the registration statement (including approximately 1.3 million shares issuable to Carilion upon conversion of shares of Series A Convertible Preferred Stock that Carilion holds). Because the registration statement is effective, these shares may be sold freely in the public market. Any sales of these shares, or the perception that future sales of shares may occur by Carilion or any of our other significant stockholders, may have a material adverse effect on the market price of our stock. Any such continuing material adverse effect on the market price of our stock could impair our ability to comply with NASDAQ’s continuing listing standards in respect of our minimum stock price, as further described below.
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Our narrowed scope and focus may make it more difficult for us to achieve or maintain operating profitability.
Through the recent sales of SCC to Mac-B and of our medical shape sensing business to Intuitive, we have reduced our overall size and narrowed our focus to one key growth objective: to become the leading provider of fiber optic strain & temperature sensing solutions and standard test methods for composite, as well as non-composite, materials, structures and systems. There can be no guarantee that we will be successful in pursuing this objective. Although we anticipate realizing cost savings as a result of the sale of assets to Mac-B and Intuitive, we will continue to incur significant operating expenses associated with our public company infrastructure. Accordingly, we will need to significantly increase the revenues we generate from our remaining operations in order to achieve or maintain operating profitability, and there can be no guarantee that we will be able to do so.
We depend on third-party vendors for specialized components in our manufacturing operations, making us vulnerable to supply shortages and price fluctuations that could harm our business.
We primarily rely on third-party vendors for the manufacture of the specialized components used in our products. The highly specialized nature of our supply requirements poses risks that we may not be able to locate additional sources of the specialized components required in our business. For example, there are few manufacturers who produce the special lasers used in our optical test equipment. Our reliance on these vendors subjects us to a number of risks that could negatively affect our ability to manufacture our products and harm our business, including interruption of supply. Although we are now manufacturing tunable lasers in low-rate initial production, we expect our overall reliance on third-party vendors to continue. Any significant delay or interruption in the supply of components, or our inability to obtain substitute components or materials from alternate sources at acceptable prices and in a timely manner could impair our ability to meet the demand of our customers and could harm our business.
As a provider of contract research to the U.S. government, we are subject to federal rules, regulations, audits and investigations, the violation or failure of which could adversely affect our business.
We must comply with and are affected by laws and regulations relating to the award, administration and performance of U.S. government contracts. Government contract laws and regulations affect how we do business with our government customers and, in some instances, impose added costs on our business. A violation of a specific law or regulation could result in the imposition of fines and penalties, termination of our contracts or debarment from bidding on contracts. In some instances, these laws and regulations impose terms or rights that are more favorable to the government than those typically available to commercial parties in negotiated transactions. For example, the U.S. government may terminate any of our government contracts and, in general, subcontracts, at their convenience, as well as for default based on performance.
In addition, U.S. government agencies, including the Defense Contract Audit Agency and the Department of Labor, routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. The U.S. government also may review the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit uncovers the inclusion of certain claimed costs deemed to be expressly unallowable, as with the preliminary audit report we received in September 2014 from the Defense Contract Audit Agency, or improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. In addition, our reputation could suffer serious harm if allegations of impropriety were made against us.
In addition to the risk of government audits and investigations, U.S. government contracts and grants impose requirements on contractors and grantees relating to ethics and business practices, which carry civil and criminal penalties including monetary fines, assessments, loss of the ability to do business with the U.S. government and certain other criminal penalties.
We may also be prohibited from commercially selling certain products that we develop under our Technology Development segment or related products based on the same core technologies if the U.S. government determines that the commercial availability of those products could pose a risk to national security. For example, certain of our wireless technologies have been classified as secret by the U.S. government and as a result we cannot sell them commercially. Any of these determinations would limit our ability to generate product sales and license revenues.
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Our failure to attract, train and retain skilled employees or members of our senior management and to obtain necessary security clearances for such persons or maintain a facility security clearance would adversely affect our business and operating results.
The availability of highly trained and skilled technical and professional personnel is critical to our future growth and profitability. Competition for scientists, engineers, technicians and professional personnel is intense and our competitors aggressively recruit key employees. In the past, we have experienced difficulties in recruiting and hiring these personnel as a result of the tight labor market in certain fields. Any difficulty in hiring or retaining qualified employees, combined with our growth strategy and future needs for additional experienced personnel, particularly in highly specialized areas such as nanomaterial manufacturing and fiber optic sensing technologies, may make it more difficult to meet all of our needs for these employees in a timely manner. Although we intend to continue to devote significant resources to recruit, train and retain qualified employees, we may not be able to attract and retain these employees, especially in technical fields in which the supply of experienced qualified candidates is limited, or at the senior management level. Any failure to do so would have an adverse effect on our business. Any loss of key personnel could have a material adverse effect on our ability to meet key operational objectives, such as timely and effective project milestones and product introductions, which in turn could adversely affect our business, results of operations and financial condition.
We provide certain services to the U.S. government that require us to maintain a facility security clearance and for certain of our employees and our board chairman to hold security clearances. In general, the failure for necessary persons to obtain or retain sufficient security clearances, any loss by us of a facility security clearance or any public reprimand related to security matters could result in a U.S. government customer terminating an existing contract or choosing not to renew a contract or prevent us from bidding on or winning certain new government contracts.
In addition, our future success depends in a large part upon the continued service of key members of our senior management team. We do not maintain any key-person life insurance policies on our officers. The loss of any members of our management team or other key personnel could seriously harm our business.
We rely and will continue to rely on contracts and grants awarded under the SBIR program for a significant portion of our revenues. A finding by the SBA that we no longer qualify to receive SBIR awards could adversely affect our business.
We compete as a small business for some of our government contracts. Our revenues derived from the Small Business Innovation Research, ("SBIR"), program account for a significant portion of our consolidated total revenues, and contract research, including SBIR contracts, will remain a significant portion of our consolidated total revenues for the foreseeable future. For the year ended December 31, 2013, approximately 54% of our total revenues were generated under the SBIR program, compared to 47% in 2014.
We may not continue to qualify to participate in the SBIR program or to receive new SBIR awards from federal agencies. In order to qualify for SBIR contracts and grants, we must meet certain size and ownership eligibility criteria. These eligibility criteria are applied as of the time of the award of a contract or grant. A company can be declared ineligible for a contract award as a result of a size challenge filed with the SBA by a competitor or a federal agency.
In order to be eligible for SBIR contracts and grants, under current SBA rules we must be more than 50% owned and controlled by individuals who are U.S. citizens or permanent resident aliens, and/or other small business concerns (each of which is more than 50% owned and controlled by individuals who are U.S. citizens or permanent resident aliens) or certain qualified investment companies. In the event our institutional ownership significantly increases, either because of increased buying by institutions or selling by individuals, we could lose eligibility for new SBIR contracts and grants.
Also, in order to be eligible for SBIR contracts and grants, the number of our employees, including those of any entities that are considered to be affiliated with us, cannot exceed 500. As of December 31, 2014, we had approximately 100 full-time employees. In determining whether we are affiliated with any other entity, the SBA may analyze whether another entity controls or has the power to control us. Carilion is our largest institutional stockholder. Since early 2011, a formal size determination by the SBA that focused on whether or not Carilion is or was our affiliate has been outstanding. Although we do not believe that Carilion has or had the power to control our company, we cannot assure you that the SBA will interpret its regulations in our favor on this question. If the SBA were to make a determination that we are or were affiliated with Carilion, we would exceed the size limitations, as Carilion has over 500 employees. In that case, we would lose eligibility for new SBIR contracts and grants and other awards that are set aside for small businesses based on the criterion of number of employees, and the relevant government agency would have the discretion to suspend performance on existing SBIR grants. The loss of our eligibility to receive SBIR awards would have a material adverse impact on our revenues, cash flows and our ability to fund our growth.
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Moreover, as our business grows, it is foreseeable that we will eventually exceed the SBIR size limitations, in which case we may be required to seek alternative sources of revenues or capital.
A decline in government research contract awards or government funding for existing or future government research contracts, including SBIR contracts, could adversely affect our revenues, cash flows and ability to fund our growth.
Technology development revenues, which consist primarily of government-funded research, accounted for approximately 62% and 57% of our consolidated total revenues for the years ended December 31, 2013 and 2014, respectively. As a result, we are vulnerable to adverse changes in our revenues and cash flows if a significant number of our research contracts and subcontracts were to be simultaneously delayed or canceled for budgetary, performance or other reasons. For example, the U.S. government may cancel these contracts at any time without cause and without penalty or may change its requirements, programs or contract budget, any of which could reduce our revenues and cash flows from U.S. government research contracts. Our revenues and cash flows from U.S. government research contracts and subcontracts could also be reduced by declines or other changes in U.S. defense, homeland security and other federal agency budgets. In addition, we compete as a small business for some of these contracts, and in order to maintain our eligibility to compete as a small business, we, together with any affiliates, must continue to meet size and revenue limitations established by the U.S. government.
Our contract research customer base includes government agencies, corporations and academic institutions. Our customers are not obligated to extend their agreements with us and may elect not to do so. Also, our customers’ priorities regarding funding for certain projects may change and funding resources may no longer be available at previous levels.
In addition, the Budget Control Act commits the U.S. Government to reduce the federal deficit by $1.2 trillion over ten years through a combination of automatic, across-the-board spending cuts and caps on discretionary spending. This “sequestration” under the Budget Control Act, which is split equally between defense and non-defense programs, went into effect on March 1, 2013. The appropriate resolution reflecting a budget deal for fiscal years 2014 and 2015 reduces but does not eliminate these sequestration cuts. Any spending cuts required by “sequestration” could have a material adverse effect on our technology development revenues and, consequently, our results of operations. While the exact manner in which this “sequestration” may impact our business remains unclear, funding for programs in which we participate could be reduced, delayed or canceled. Our ability to obtain new contract awards also could be negatively affected.
In addition to contract cancellations and changes in agency budgets, our future financial results may be adversely affected by curtailment of or restrictions on the U.S. government’s use of contract research providers, including curtailment due to government budget reductions and related fiscal matters or any legislation or resolution limiting the number or amount of awards we may receive. These or other factors could cause U.S. defense and other federal agencies to conduct research internally rather than through commercial research organizations or direct awards to other organizations, to reduce their overall contract research requirements or to exercise their rights to terminate contracts. Alternatively, the U.S. government may discontinue the SBIR program or its funding altogether. Also, SBIR regulations permit increased competition for SBIR awards from companies that may not have previously been eligible, such as those backed by venture capital operating companies, hedge funds and private equity firms. Any of these developments could limit our ability to obtain new contract awards and adversely affect our revenues, cash flows and ability to fund our growth.
The results of our operations could be adversely affected by economic and political conditions and the effects of these conditions on our customers’ businesses and levels of business activity.
Global economic and political conditions affect our customers’ businesses and the markets they serve. A severe or prolonged economic downturn or a negative or uncertain political climate could adversely affect our customers’ financial conditions and the timing or levels of business activity of our customers and the industries we serve. This may reduce the demand for our products or depress pricing for our products and have a material adverse effect on our results of operations. Changes in global economic conditions could also shift demand to products or services for which we do not have competitive advantages, and this could negatively affect the amount of business we are able to obtain. In addition, if we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, and our business could be negatively affected as a result.
There was a rapid softening of the economy and tightening of the financial markets in 2008 and 2009. This slowing of the economy has reduced the financial capacity of some of our customers and, to the extent that such economic conditions continue in certain industries, it could continue to affect our potential customers, thereby slowing spending on the products and services
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we provide. The outlook for the economy in 2015 and beyond remains uncertain, and until there is a sustained economic recovery our revenues and results of operations could be negatively impacted.
We have a history of losses, and because our strategy for expansion may be costly to implement, we may experience continuing losses and may never achieve or maintain profitability or positive cash flow.
We realized a net loss from continuing operations of $5.5 million and $3.4 million for the years ended December 31, 2013 and 2014, respectively. We expect to continue to incur significant expenses as we pursue our strategic initiatives, including increased expenses for research and development, sales and marketing and manufacturing. We may also grow our business in part through acquisitions of additional companies and complementary technologies which could cause us to incur greater than anticipated transaction expenses, amortization or write-offs of intangible assets and other acquisition-related expenses. As a result, we expect to incur net losses for the foreseeable future, and these losses could be substantial. At a certain level, continued net losses could impair our ability to comply with NASDAQ continued listing standards, as described further below.
Our ability to generate additional revenues and to become profitable will depend on our ability to execute our key growth initiative regarding the development, marketing and sale of sensing products, develop and commercialize innovative technologies, expand our contract research capabilities and sell the products that result from those development initiatives. We are unable to predict when or if we will be able to achieve profitability. If our revenues do not increase, or if our expenses increase at a greater rate than our revenues, we will continue to experience losses. Even if we do achieve profitability, we may not be able to sustain or increase our profitability on a quarterly or annual basis.
We have obtained capital by borrowing money under a term loan and we might require additional capital to support and expand our business; our term loan has various loan covenants with which we must comply.
We intend to continue to make investments to support our business growth, including developing new products, enhancing our existing products, obtaining important regulatory approvals, enhancing our operating infrastructure, completing our development activities and building our commercial scale manufacturing facilities. To the extent that we are unable to become or remain profitable and to finance our activities from our continuing operations, we may require additional funds to support these initiatives and to grow our business.
If we are successful in raising additional funds through issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, including as the result of the issuance of warrants in connection with the financing, and any new equity securities we issue could have rights, preferences and privileges superior to those of our existing common stock. Furthermore, such financings may jeopardize our ability to apply for SBIR grants or qualify for SBIR contracts or grants, and our dependence on SBIR grants may restrict our ability to raise additional outside capital. If we raise additional funds through debt financings, these financings may involve significant cash payment obligations and covenants that restrict our ability to operate our business and make distributions to our stockholders.
We have a term loan with SVB, which requires us to observe certain financial and operational covenants, including maintenance of a specified cash balance, protection and registration of intellectual property rights, and certain customary negative covenants, as well as other customary events of default. If any event of default occurs SVB may declare due immediately all borrowings under our term loan and foreclose on the collateral. Furthermore, an event of default would result in an increase in the interest rate on any amounts outstanding.
If we are unable to obtain adequate financing or financing terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.
RISKS RELATED TO THE MERGER
The issuance of shares of our common stock to API stockholders in the Merger will substantially reduce the percentage interests of our stockholders.
If the Merger is completed, we expect that (i) approximately 11,880,560 shares of our common stock would be issued to existing API common stockholders (including holders of shares subject to a repurchase option or obligation, risk of forfeiture or other condition under any applicable restricted stock purchase agreement or other agreement with API) and (ii) upon exercise
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or settlement of assumed options and warrants, up to approximately 1,081,042 shares will be issued to holders of assumed options and warrants.
Our existing common stockholders on the one hand, and former API common stockholders on the other hand, are expected to own approximately 56% and 44%, respectively, of the outstanding shares of our common stock following the completion of the Merger based on the number of each company’s outstanding common shares as of January 30, 2015. Upon attributing ownership to the former API stockholders of the shares of common stock that may be issued upon exercise of the options or warrants to purchase our common stock issued as a result of the Merger, and attributing ownership of the shares of our common stock issuable upon exercise of outstanding Luna options and restricted stock units (but excluding, for this purpose, the shares of our common stock issuable upon conversion of our outstanding Series A convertible preferred stock and upon payment of accrued dividends thereon), our existing securityholders would own approximately 57% of our common stock on a fully diluted basis and the former API securityholders would own approximately 43% of our common stock on a fully diluted basis. The issuance of shares of our common stock to API stockholders in the Merger and the assumption by us of API options and warrants will cause a significant reduction in the relative percentage interest of our current securityholders in earnings, voting, liquidation value and book and market value.
Certain directors and executive officers of Luna and API have interests in the Merger that may be different from, or in addition to, the interests of our stockholders and API stockholders.
Executive officers of Luna and API negotiated the terms of the Merger Agreement under the direction of their respective boards of directors. Our board of directors approved the Merger Agreement and unanimously recommended that our stockholders vote in favor of the issuance of shares of our common stock in connection with the Merger, and the board of API unanimously approved the Merger Agreement and the transactions contemplated thereby and unanimously recommended that API stockholders vote in favor of the adoption of the Merger Agreement and approval of the transactions contemplated thereby. These directors and executive officers may have interests in the Merger that are different from, or in addition to, or may be deemed to conflict with, yours. These interests include the continued employment of certain of our executive officers, the continued positions of certain directors of Luna and API as directors of the combined company and the indemnification of former directors and officers by the combined company. Certain of API’s executive officers will not be continuing employment with the combined company and, as a result, will be entitled to severance payments under the employment agreements with API. Additionally, our executive officers will be entitled to receive certain bonuses as a result of the completion of the Merger under the terms of the 2014 senior management incentive plan. Our stockholders should be aware of these interests when they consider our board of directors’ recommendation that our stockholders vote in favor of the proposal to issue shares of our common stock in the Merger.
Provisions of the Merger Agreement may deter alternative business combinations and could negatively impact the stock prices of Luna if the Merger Agreement is terminated in certain circumstances.
In connection with the execution and delivery of the Merger Agreement we agreed to refrain from soliciting, initiating, or knowingly encouraging or facilitating certain acquisition proposals with any third party, subject to exceptions set forth in the Merger Agreement. The Merger Agreement also provides for the payment by us of a nonrefundable reimbursement fee of up to $250,000 or termination fee of $750,000 if the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement. These provisions limit our ability to pursue offers from third parties that could result in greater value to our stockholders. The obligation to pay the termination fee or reimbursement fee also may discourage a third party from pursuing an acquisition proposal. If the Merger is terminated and we determine to seek another business combination, we cannot assure our stockholders that we will be able to negotiate a transaction with another company on terms comparable to the terms of the Merger, or that we will avoid incurrence of any fees associated with the termination of the Merger Agreement.
In the event we terminate the Merger in circumstances that obligate us to pay the termination fee or reimbursement fee to API, our stock price may decline.
If the proposed Merger is not completed, we will have incurred substantial costs that may adversely affect our financial results and operations and the market price of our common stock.
If the Merger is not completed, the price of our common stock may decline to the extent that the current market price of our common stock reflects a market assumption that the Merger will be completed. In addition, we have incurred and will incur substantial costs in connection with the proposed Merger. These costs are primarily associated with the fees of attorneys, accountants and our financial advisors. In addition, we diverted significant management resources in an effort to complete the Merger and are subject to restrictions contained in the Merger Agreement on the conduct of our business during the pendency of the Merger. If the Merger is not completed, we will have received little or no benefit in respect of such costs incurred. Also,
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if the Merger is not completed under certain circumstances specified in the Merger Agreement, we may be required to pay a termination fee to API of $750,000 or a reimbursement fee to API of up to $250,000.
Further, if the Merger is not completed, we may experience negative reactions from the financial markets and our suppliers, customers and employees. Each of these factors may adversely affect the trading price of our common stock and our financial results and operations.
If we cannot successfully transition our revenue mix from contract research revenues to product sales and license revenues, we may not be able to fully execute our business model or grow our business.
Our business model and future growth depend on our ability to transition to a revenue mix that contains significantly larger product sales and revenues from the provision of services or from licensing. Product sales and these revenues potentially offer greater scalability than contract research revenues. Our current plan is to increase our sales of commercial products, our licensing revenues and our provision of non-research services to customers so as to represent a larger percentage of our total revenues. If we are unable to develop and grow our product sales and revenues from the provision of services or from licensing to augment our contract research revenues, however, our ability to execute our business model or grow our business could suffer. There can be no assurance that we will be able to achieve increased revenues in this manner.
We and API are, and may in the future may become, involved in securities class action litigation that could divert management's attention and harm our business and insurance coverage may not be sufficient to cover all costs and damages.
In the past, securities class action litigation often follows certain significant business transactions, such as the sale of a business division or a merger. After our announcement of the Merger, three separate putative class action complaints were filed in Michigan and Delaware, alleging claims of breach of fiduciary duty against the API board of directors and naming Luna as a defendant for aiding and abetting the alleged breach of fiduciary duty. The plaintiffs seek injunctive relief and unspecified damages. Responding to this litigation could divert management's attention and harm our business. Moreover, insurance coverage may not be sufficient to cover all costs and damages we incur in connection with the litigation. It is also possible that we could be subject to additional litigation in connection with the Merger.
The failure to integrate successfully the businesses of Luna and API in the expected timeframe would adversely affect the combined company’s future results and the market price of the combined company’s common stock following the completion of the Merger.
The success of the Merger will depend, in large part, on sales of the combined company’s products and on the ability of the combined company following the completion of the Merger to realize the anticipated benefits, including annual net operating synergies and cost reductions from combining the businesses of Luna and API. To realize these anticipated benefits, the combined company must successfully integrate Luna’s and API’s respective businesses. This integration will be complex and time-consuming.
The failure to successfully integrate and manage the challenges presented by the integration process may result in the combined company’s failure to achieve some or all of the anticipated benefits of the Merger. Potential difficulties that may be encountered in the integration process include the following:
•lost sales and customers as a result of customers of either of the two companies deciding not to do business with the combined company;
•complexities associated with managing the larger combined company with distant business locations;
•integrating personnel from the two companies while maintaining focus on providing consistent, high quality products;
•the loss of key employees;
•potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the Merger; and
•performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the Merger and integrating the companies’ operations.
If any of these events were to occur, the ability of the combined company to maintain relationships with customers, suppliers and employees or the combined company’s ability to achieve the anticipated benefits of the Merger could be adversely affected, or could reduce the combined company’s earnings or otherwise adversely affect its business and financial results after the Merger and, as a result, adversely affect the market price of the combined company’s common stock.
The market price for shares of the combined company’s common stock may be affected by factors different from those affecting the market price for shares of Luna common stock prior to the Merger.
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The risks associated with the combined company may affect the results of operations of the combined company differently than they could affect the results of operations of each of Luna as a separate companies. Additionally, the results of operations of the combined company may be affected by additional or different factors than those that currently affect the results of operations of Luna, including, but not limited to: complexities associated with managing the larger, more complex, combined business; integrating personnel from the two companies while maintaining focus on providing products and services; and potential performance shortfalls resulting from the diversion of management’s attention caused by integrating the companies’ operations.
Failure to develop, introduce and sell new products or failure to develop and implement new technologies, could adversely impact the financial results of the combined company.
Success of the combined company will depend on its ability to develop and introduce new products and software platforms that customers choose to buy. The new products the market requires tend to be increasingly complex, incorporating more functions and operating at faster speeds than old products. If the combined company fails to introduce new product designs or technologies in a timely manner or if customers do not successfully introduce new systems or products incorporating products of the combined company, the business, financial condition and results of operations of the combined company could be materially harmed.
The Merger will result in changes to the Luna board of directors that may affect the combined company’s operations.
If the parties complete the Merger, the composition of the Luna board of directors will change in accordance with the Merger Agreement. This new composition of the board of directors may affect the business strategy and operating decisions of the combined company upon completion of the Merger.
If API stockholders sell the shares of Luna common stock received in the Merger, they could cause a decline in the market price of the combined company’s common stock.
Our issuance of common stock in the Merger will be registered with the SEC. As a result, those shares will be immediately available for resale in the public market following the completion of the Merger. As of January 30, 2015, if the Merger occurred on such date, the number of shares of Luna common stock to be issued to existing API common stockholders, collectively, in connection with the Merger and immediately available for resale would have equaled approximately 44% of the number of outstanding shares of Luna common stock as of such date prior to giving effect to such issuance. API stockholders may sell the stock they receive commencing immediately after the Merger. If this occurs, or if there is a perception in the market that such sales may occur, the market price of the combined company’s common stock may decline.
Customer uncertainties related to the Merger could adversely affect the businesses, revenues and gross margins of Luna, API or the combined company.
In response to the announcement of the Merger or due to ongoing uncertainty about the Merger, customers of Luna or API may delay or defer purchasing decisions or elect to switch to other suppliers. In particular, prospective customers could be reluctant to purchase the products and services of Luna, API or the combined company due to uncertainty about the direction of the combined company’s offerings and willingness to support existing products. To the extent that the Merger creates uncertainty among those persons and organizations contemplating purchases such that customers delay, defer or change purchase decisions in connection with the planned Merger, the revenues of Luna, API or the combined company would be adversely affected. Customer assurances may be made by Luna and API to address their customers’ uncertainty about the direction of the combined company’s product and related support offerings, which may result in additional obligations of Luna, API or the combined company. As a result of any of these actions, quarterly revenues and net earnings of Luna, API or the combined company could be substantially below market expectations and a decline in the companies’ respective stock prices could result.
The combined company must continue to retain, recruit and motivate executive officers and other key employees, and failure to do so could negatively affect the combined company.
The combined company must be successful at retaining, recruiting, and motivating key employees following the completion of the Merger in order for the benefits of the transaction to be fully realized. Employees of both Luna and API may experience uncertainty about their future roles with the combined company until, or even after, strategies with regard to the combined company are announced and executed. The potential distractions related to the Merger may adversely affect the ability of the combined company to keep executives and other key employees focused on business strategies and goals, to address other important personnel matters and to retain them at all. A failure by the combined company to attract, retain, and motivate executives and other key employees during the period prior to or after the completion of the Merger could have a negative impact on their respective businesses.
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RISKS RELATING TO OUR OPERATIONS AND BUSINESS STRATEGY
If we cannot successfully transition our revenue mix from contract research revenues to product sales and license revenues, we may not be able to fully execute our business model or grow our business.
Our business model and future growth depend on our ability to transition to a revenue mix that contains significantly larger product sales and revenues from the provision of services or from licensing. Product sales and these revenues potentially offer greater scalability than contract research revenues. Our current plan is to increase our sales of commercial products, our licensing revenues and our provision of non-research services to customers so as to represent a larger percentage of our total revenues. If we are unable to develop and grow our product sales and revenues from the provision of services or from licensing to augment our contract research revenues, however, our ability to execute our business model or grow our business could suffer. There can be no assurance that we will be able to achieve increased revenues in this manner.
If we are unable to manage growth effectively, our revenues and net loss could be adversely affected.
We may need to expand our personnel resources to grow our business effectively. We believe that sustained growth at a higher rate will place a strain on our management as well as on our other human resources. To manage this growth, we must continue to attract and retain qualified management, professional, scientific and technical and operating personnel. If we are unable to recruit a sufficient number of qualified personnel, we may be unable to staff and manage projects adequately, which in turn may slow the rate of growth of our contract research revenues or our product development efforts.
We may not be successful in identifying market needs for new technologies or in developing new products.
Part of our business model depends on our ability to correctly identify market needs for new technologies. We intend to identify new market needs, but we may not always have success in doing so in part because our contract research largely centers on identification and development of unproven technologies, often for new or emerging markets. Furthermore, we must identify the most promising technologies from a sizable pool of projects. If our commercialization strategy process fails to identify projects with commercial potential or if management does not ensure that such projects advance to the commercialization stage, we may not successfully commercialize new products and grow our revenues.
Our growth strategy requires that we also develop successful commercial products to address market needs. We face several challenges in developing successful new products. Many of our existing products and those currently under development are technologically innovative and require significant and lengthy product development efforts. These efforts include planning, designing, developing and testing at the technological, product and manufacturing-process levels. These activities require us to make significant investments. Although there are many potential applications for our technologies, our resource constraints require us to focus on specific products and to forgo other opportunities. We expect that one or more of the potential products we choose to develop will not be technologically feasible or will not achieve commercial acceptance, and we cannot predict which, if any, of our products we will successfully develop or commercialize. The technologies we research and develop are new and steadily changing and advancing. The products that are derived from these technologies may not be applicable or compatible with the state of technology or demands in existing markets. Our existing products and technologies may become uncompetitive or obsolete if our competitors adapt more quickly than we do to new technologies and changes in customers’ requirements. Furthermore, we may not be able to identify if and when new markets will open for our products given that future applications of any given product may not be readily determinable, and we cannot reasonably estimate the size of any markets that may develop. If we are not able to successfully develop new products, we may be unable to increase our product revenues.
We face and will face substantial competition in several different markets that may adversely affect our results of operations.
We face and will face substantial competition from a variety of companies in several different markets. As we focus on developing marketing and selling fiber optic sensing products, we may also face substantial and entrenched competition in that market.
Many of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. In addition, current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers or other third parties. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share. We cannot assure you that we will be able to compete successfully against current or new competitors, in which case our revenues may fail to increase or may decline.
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We have limited experience manufacturing our products in commercial quantities in a cost-effective manner, which could adversely impact our business.
In the past, we produced most of our products on a custom order basis rather than pursuant to large contracts that require production on a large volume basis. Accordingly, other than the commercial manufacture of products by our Products and Licensing segment, we have no experience manufacturing products in large volumes. Because our experience in large scale manufacturing is limited, we may encounter unforeseen difficulties in our efforts to manufacture other products or materials in commercial quantities or have to rely on third-party contractors over which we may not have direct control to manufacture our products. We may also encounter difficulties and delays in manufacturing our products for any of the following reasons:
• | we may need to expand our manufacturing operations, and our production processes may have to change to accommodate this growth; |
• | to increase our manufacturing output significantly, we will have to attract and retain qualified employees, who are in short supply, for the assembly and testing operations; |
• | we might have to sub-contract to outside manufacturers which might limit our control of costs and processes; and |
• | our manufacturing operations may have to comply with government or customer-mandated specifications. |
If we are unable to keep up with demand for our products, our revenues could be impaired, market acceptance of our products could be adversely affected and our customers might instead purchase our competitors’ products. Moreover, failure to develop and maintain a U.S. market for goods developed with U.S. government-licensed technology may result in the cancellation of the relevant U.S. government licenses. Our inability to manufacture our products successfully would have a material adverse effect on our revenues.
Even if we are able to manufacture our products on a commercial scale, the cost of manufacturing our products may be higher than we expect. If the costs associated with manufacturing are not significantly less than the prices at which we can sell our products, we may not be able to operate at a profit.
Our nanotechnology-enabled products are new and may be, or may be perceived as being, harmful to human health or the environment.
While we believe that none of our current products contain chemicals known by us to be hazardous or subject to environmental regulation, it is possible that our current or future products, particularly carbon-based nanomaterials, may become subject to environmental or other regulation. We intend to develop and sell carbon-based nanomaterials as well as nanotechnology-enabled products, which are products that include nanomaterials as a component to enhance those products’ performance. Nanomaterials and nanotechnology-enabled products have a limited historical safety record. Because of their size or shape or because they may contain harmful elements, such as gadolinium and other rare-earth metals, our products could pose a safety risk to human health or the environment. These characteristics may also cause countries to adopt regulations in the future prohibiting or limiting the manufacture, distribution or use of nanomaterials or nanotechnology-enabled products. Such regulations may inhibit our ability to sell some products containing those materials and thereby harm our business or impair our ability to develop commercially viable products.
The subject of nanotechnology has received negative publicity and has aroused public debate. Government authorities could, for social or other purposes, prohibit or regulate the use of nanotechnology. Ethical and other concerns about nanotechnology could adversely affect acceptance of our potential products or lead to government regulation of nanotechnology-enabled products.
We face risks associated with our international business.
We currently conduct business internationally and we might considerably expand our international activities in the future. Our international business operations are subject to a variety of risks associated with conducting business internationally, including:
• | having to comply with U.S. export control regulations and policies that restrict our ability to communicate with non-U.S. employees and supply foreign affiliates and customers; |
• | changes in or interpretations of foreign regulations that may adversely affect our ability to sell our products, perform services or repatriate profits to the United States; |
• | the imposition of tariffs; |
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• | hyperinflation or economic or political instability in foreign countries; |
• | imposition of limitations on, or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries or joint ventures; |
• | conducting business in places where business practices and customs are unfamiliar and unknown; |
• | the imposition of restrictive trade policies; |
• | the imposition of inconsistent laws or regulations; |
• | the imposition or increase of investment and other restrictions or requirements by foreign governments; |
• | uncertainties relating to foreign laws and legal proceedings; |
• | having to comply with a variety of U.S. laws, including the Foreign Corrupt Practices Act; and |
• | having to comply with licensing requirements. |
We do not know the impact that these regulatory, geopolitical and other factors may have on our international business in the future.
We could be negatively affected by a security breach, either through cyber attack, cyber intrusion or other significant disruption of our IT networks and related systems.
We face the risk, as does any company, of a security breach, whether through cyber attack or cyber intrusion over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, or other significant disruption of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.
As a technology company, and particularly as a government contractor, we may face a heightened risk of a security breach or disruption from threats to gain unauthorized access to our proprietary, confidential or classified information on our IT networks and related systems. These types of information and IT networks and related systems are critical to the operation of our business and essential to our ability to perform day-to-day operations, and, in some cases, are critical to the operations of certain of our customers. In addition, as certain of our technological capabilities become widely known, it is possible that we may be subjected to cyber attack or cyber intrusion as third parties seek to gain improper access to information regarding these capabilities and cyber attacks or cyber intrusion could compromise our confidential information or our IT networks and systems generally, as it is not practical as a business matter to isolate all of our confidential information and trade secrets from email and internet access. There can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging.
A security breach or other significant disruption involving these types of information and IT networks and related systems could disrupt the proper functioning of these networks and systems and therefore our operations, compromise our confidential information and trade secrets, or damage our reputation among our customers and the public generally. Any of these developments could have a negative impact on our results of operations, financial condition and cash flows.
RISKS RELATING TO OUR REGULATORY ENVIRONMENT
Our operations are subject to domestic and foreign laws, regulations and restrictions, and noncompliance with these laws, regulations and restrictions could expose us to fines, penalties, suspension or debarment, which could have a material adverse effect on our profitability and overall financial position.
Our operations, particularly our international sales, subject us to numerous U.S. and foreign laws and regulations, including, without limitation, regulations relating to imports, exports (including the Export Administration Regulations and the International Traffic in Arms Regulations), technology transfer restrictions, anti-boycott provisions, economic sanctions and the Foreign Corrupt Practices Act. The number of our various emerging technologies, the development of many of which has been funded by the Department of Defense, presents us with many regulatory challenges. Failure by us or our sales representatives or consultants to comply with these laws and regulations could result in administrative, civil, or criminal liabilities and could result in suspension of our export privileges, which could have a material adverse effect on our business. Changes in regulation
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or political environment may affect our ability to conduct business in foreign markets including investment, procurement and repatriation of earnings.
Our healthcare and medical products are and may continue to be subject to a lengthy and uncertain domestic regulatory approval process. If we do not obtain and maintain the necessary domestic regulatory approvals or clearances, we will not be able to market and sell our products for clinical use in the United States. Complying with applicable regulations is an expensive and time-consuming process and any failure to fully comply with such regulations could subject us to enforcement actions.
Certain of our current and potential products could require regulatory clearances or approvals prior to commercialization. For example, any nanomaterial-based MRI contrast agent is likely to be considered a drug under the Federal Food, Drug and Cosmetic Act, or the FDC Act. Drugs and some medical devices are subject to rigorous preclinical testing and other approval requirements by the U.S. Food and Drug Administration, or the FDA, pursuant to the FDC Act, and regulations under the FDC Act, as well as by similar health authorities in foreign countries.
Various federal statutes and regulations also govern or influence the testing, manufacturing, safety, labeling, packaging, advertising, storage, registration, listing and recordkeeping related to marketing of pharmaceuticals. The process of obtaining these clearances or approvals and the subsequent compliance with appropriate federal statutes and regulations require the expenditure of substantial resources, which we may not be able to obtain on favorable terms, if at all. We cannot be certain that any required FDA or other regulatory approval will be granted or, if granted, will not be withdrawn. Our failure to obtain the necessary regulatory approvals, or our failure to obtain them in a timely manner, will prevent or delay our commercialization of new products and our business or our stock price could be adversely affected as a result.
We will also become subject to inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements. If the FDA determines that we have failed to comply, it can institute a wide variety of enforcement actions ranging from a regulatory letter to a public warning letter to more severe civil and criminal sanctions. Our failure to comply with applicable requirements could lead to an enforcement action that may have an adverse effect on our financial condition and results of operations.
If our manufacturing facilities do not meet Federal, state or foreign country manufacturing standards, we may be required to temporarily cease all or part of our manufacturing operations, which would result in product delivery delays and negatively impact revenues.
Our manufacturing facilities are subject to periodic inspection by regulatory authorities and our operations will continue to be regulated by the FDA for compliance with Good Manufacturing Practice requirements contained in the quality systems regulations. We are also required to comply with International Organization for Standardization, or ISO, quality system standards in order to produce products for sale in Europe. If we fail to continue to comply with Good Manufacturing Practice requirements or ISO standards, we may be required to cease all or part of our operations until we comply with these regulations. Obtaining and maintaining such compliance is difficult and costly. We cannot be certain that our facilities will be found to comply with Good Manufacturing Practice requirements or ISO standards in future inspections and audits by regulatory authorities. In addition, if we cannot maintain or establish manufacturing facilities or operations that comply with such standards or do not meet the expectations of our customers, we may not be able to realize certain economic opportunities in our current or future supply arrangements.
Medical products are subject to various international regulatory processes and approval requirements. If we do not obtain and maintain the necessary international regulatory approvals for any such potential products, we may not be able to market and sell our medical products in foreign countries.
To be able to market and sell medical products in other countries, we must obtain regulatory approvals and comply with the regulations of those countries. These regulations, including the requirements for approvals and the time required for regulatory review, vary from country to country. Obtaining and maintaining foreign regulatory approvals are expensive, and we cannot be certain that we will have the resources to be able to pursue such approvals or whether we would receive regulatory approvals in any foreign country in which we plan to market our products. For example, the European Union requires that manufacturers of medical products obtain the right to affix the CE mark to their products before selling them in member countries of the European Union, which we have not yet obtained and may never obtain. If we fail to obtain regulatory approval in any foreign country in which we plan to market our products, our ability to generate revenues will be harmed.
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We are subject to additional significant foreign and domestic government regulations, including environmental and health and safety regulations, and failure to comply with these regulations could harm our business.
Our facilities and current and proposed activities involve the use of a broad range of materials that are considered hazardous under applicable laws and regulations. Accordingly, we are subject to a number of foreign, federal, state and local laws and regulations relating to health and safety, protection of the environment and the storage, use, disposal of, and exposure to, hazardous materials and wastes. We could incur costs, fines and civil and criminal penalties, personal injury and third party property damage claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental, health and safety laws. Moreover, a failure to comply with environmental laws could result in fines and the revocation of environmental permits, which could prevent us from conducting our business. Liability under environmental laws can be joint and several and without regard to fault. There can be no assurance that violations of environmental and health and safety laws will not occur in the future as a result of the inability to obtain permits, human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could harm our business. Accordingly, violations of present and future environmental laws could restrict our ability to expand facilities, pursue certain technologies, and could require us to acquire costly equipment or incur potentially significant costs to comply with environmental regulations.
Compliance with foreign, federal, state and local environmental laws and regulations represents a small part of our present budget. If we fail to comply with any such laws or regulations, however, a government entity may levy a fine on us or require us to take costly measures to ensure compliance. Any such fine or expenditure may adversely affect our development. We cannot predict the extent to which future legislation and regulation could cause us to incur additional operating expenses, capital expenditures or restrictions and delays in the development of our products and properties.
RISKS RELATING TO OUR INTELLECTUAL PROPERTY
Our proprietary rights may not adequately protect our technologies.
Our commercial success will depend in part on our obtaining and maintaining patent, trade secret, copyright and trademark protection of our technologies in the United States and other jurisdictions as well as successfully enforcing this intellectual property and defending it against third-party challenges. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable intellectual property protections, such as patents or trade secrets, cover them. In particular, we place considerable emphasis on obtaining patent and trade secret protection for significant new technologies, products and processes. The degree of future protection of our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. The degree of future protection of our proprietary rights is also uncertain for products that are currently in the early stages of development because we cannot predict which of these products will ultimately reach the commercial market or whether the commercial versions of these products will incorporate proprietary technologies.
Our patent position is highly uncertain and involves complex legal and factual questions. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. For example:
• | we or our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;. |
• | we or our licensors might not have been the first to file patent applications for these inventions; |
• | others may independently develop similar or alternative technologies or duplicate any of our technologies; |
• | it is possible that none of our pending patent applications or the pending patent applications of our licensors will result in issued patents; |
• | patents may issue to third parties that cover how we might practice our technology; |
• | our issued patents and issued patents of our licensors may not provide a basis for commercially viable technologies, may not provide us with any competitive advantages, or may be challenged and invalidated by third parties; and |
• | we may not develop additional proprietary technologies that are patentable. |
Patents may not be issued for any pending or future pending patent applications owned by or licensed to us, and claims allowed under any issued patent or future issued patent owned or licensed by us may not be valid or sufficiently broad to
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protect our technologies. Moreover, protection of certain of our intellectual property may be unavailable or limited in the United States or in foreign countries, and we have not sought to obtain foreign patent protection for certain of our products or technologies due to cost, concerns about enforceability or other reasons. Any issued patents owned by or licensed to us now or in the future may be challenged, invalidated, or circumvented, and the rights under such patents may not provide us with competitive advantages. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, and in the case of certain products no foreign patents were filed or can be filed. This could make it easier for competitors to capture or increase their market share with respect to related technologies. We could incur substantial costs to bring suits in which we may assert our patent rights against others or defend ourselves in suits brought against us. An unfavorable outcome of any litigation could have a material adverse effect on our business and results of operations.
We also rely on trade secrets to protect our technology, especially where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. We regularly attempt to obtain confidentiality agreements and contractual provisions with our collaborators, employees and consultants to protect our trade secrets and proprietary know-how. These agreements may be breached or may not have adequate remedies for such breach. While we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors or scientific and other advisors, or those of our strategic partners, may unintentionally or willfully disclose our information to competitors. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, our enforcement efforts would be expensive and time consuming, and the outcome would be unpredictable. In addition, courts outside the United States are sometimes unwilling to protect trade secrets. Moreover, if our competitors independently develop equivalent knowledge, methods and know-how, it will be more difficult for us to enforce our rights and our business could be harmed.
If we are not able to defend the patent or trade secret protection position of our technologies, then we will not be able to exclude competitors from developing or marketing competing technologies and we may not generate enough revenues from product sales to justify the cost of developing our technologies and to achieve or maintain profitability.
We also rely on trademarks to establish a market identity for our company and our products. To maintain the value of our trademarks, we might have to file lawsuits against third parties to prevent them from using trademarks confusingly similar to or dilutive of our registered or unregistered trademarks. Also, we might not obtain registrations for our pending trademark applications, and we might have to defend our registered trademark and pending trademark applications from challenge by third parties. Enforcing or defending our registered and unregistered trademarks might result in significant litigation costs and damages, including the inability to continue using certain trademarks.
Third parties may claim that we infringe their intellectual property, and we could suffer significant litigation or licensing expense as a result.
Various U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in our technology areas. Such third parties may claim that we infringe their patents. Because patent applications can take several years to result in a patent issuance, there may be currently pending applications, unknown to us, which may later result in issued patents that our technologies may infringe. For example, we are aware of competitors with patents in technology areas applicable to our optical test equipment products. Such competitors may allege that we infringe these patents. There could also be existing patents of which we are not aware that our technologies may inadvertently infringe. We have from time to time been, and may in the future be, contacted by third parties, including patent assertion entities or intellectual property advisors, about licensing opportunities that also contain claims that we are infringing on third party patent rights. If third parties assert these claims against us, we could incur extremely substantial costs and diversion of management resources in defending these claims, and the defense of these claims could have a material adverse effect on our business, financial condition and results of operations. Even if we believe we have not infringed on a third party’s patent rights, we may have to settle a claim on unfavorable terms because we cannot afford to litigate the claim. In addition, if third parties assert claims against us and we are unsuccessful in defending against these claims, these third parties may be awarded substantial damages as well as injunctive or other equitable relief against us, which could effectively block our ability to make, use, sell, distribute or market our products and services in the United States or abroad.
Commercial application of nanotechnologies in particular, or technologies involving nanomaterials, is new and the scope and breadth of patent protection is uncertain. Consequently, the patent positions of companies involved in nanotechnologies have not been tested, and there are complex legal and factual questions for which important legal principles will be developed or may remain unresolved. In addition, it is not clear whether such patents will be subject to interpretations or legal doctrines that differ from conventional patent law principles. Changes in either the patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our nanotechnology-related intellectual property. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our nanotechnology-related patents or in third party
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patents. In the event that a claim relating to intellectual property is asserted against us, or third parties not affiliated with us hold pending or issued patents that relate to our products or technology, we may seek licenses to such intellectual property or challenge those patents. However, we may be unable to obtain these licenses on commercially reasonable terms, if at all, and our challenge of the patents may be unsuccessful. Our failure to obtain the necessary licenses or other rights could prevent the sale, manufacture or distribution of our products and, therefore, could have a material adverse effect on our business, financial condition and results of operations.
A substantial portion of our technology is subject to retained rights of our licensors, and we may not be able to prevent the loss of those rights or the grant of similar rights to third parties.
A substantial portion of our technology is licensed from academic institutions, corporations and government agencies. Under these licensing arrangements, a licensor may obtain rights over the technology, including the right to require us to grant a license to one or more third parties selected by the licensor or that we provide licensed technology or material to third parties for non-commercial research. The grant of a license for any of our core technologies to a third party could have a material and adverse effect on our business. In addition, some of our licensors retain certain rights under the licenses, including the right to grant additional licenses to a substantial portion of our core technology to third parties for non-commercial academic and research use. It is difficult to monitor and enforce such non-commercial academic and research uses, and we cannot predict whether the third-party licensees would comply with the use restrictions of such licenses. We have incurred and could incur substantial expenses to enforce our rights against them. We also may not fully control the ability to assert or defend those patents or other intellectual property which we have licensed from other entities, or which we have licensed to other entities.
In addition, some of our licenses with academic institutions give us the right to use certain technology previously developed by researchers at these institutions. In certain cases we also have the right to practice improvements on the licensed technology to the extent they are encompassed by the licensed patents and are within our field of use. Our licensors may currently own and may in the future obtain additional patents and patent applications that are necessary for the development, manufacture and commercial sale of our anticipated products. We may be unable to agree with one or more academic institutions from which we have obtained licenses whether certain intellectual property developed by researchers at these academic institutions is covered by our existing licenses. In the event that the new intellectual property is not covered by our existing licenses, we would be required to negotiate a new license agreement. We may not be able to reach agreement with current or future licensors on commercially reasonable terms, if at all, or the terms may not permit us to sell our products at a profit after payment of royalties, which could harm our business.
Some of our patents may cover inventions that were conceived or first reduced to practice under, or in connection with, U.S. government contracts or other federal funding agreements. With respect to inventions conceived or first reduced to practice under a federal funding agreement, the U.S. government may retain a non-exclusive, non-transferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the invention throughout the world. We may not succeed in our efforts to retain title in patents, maintain ownership of intellectual property or in limiting the U.S. government’s rights in our proprietary technologies and intellectual property when an issue exists as to whether such intellectual property was developed in the performance of a federal funding agreement or developed at private expense.
RISKS RELATING TO OUR COMMON STOCK
We may become involved in securities class action litigation that could divert management’s attention and harm our business and our insurance coverage may not be sufficient to cover all costs and damages.
The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock of technology companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. Securities class litigation also often follows certain significant business transactions, such as the sale of a business division or a change in control transaction. We may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect our business.
We may not be able to comply with all applicable listing requirements or standards of The NASDAQ Capital Market and NASDAQ could delist our common stock.
Our common stock is listed on The NASDAQ Capital Market. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards. There can be no assurances that we will be able to comply with applicable listing standards. In the event that our common stock is not eligible for quotation on another market or exchange, trading of our common stock could be conducted in the over-the-counter market or on an electronic bulletin board
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established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by security analysts and the news media, which could cause the price of our common stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a major exchange.
Our common stock price has been volatile and we expect that the price of our common stock will fluctuate substantially in the future, which could cause you to lose all or a substantial part of your investment.
The public trading price for our common stock is volatile and may fluctuate significantly. Since January 1, 2009, our common stock has traded between a high of $5.00 per share and a low of $0.26 per share. Among the factors, many of which we cannot control, that could cause material fluctuations in the market price for our common stock are:
• | sales of our common stock by our significant stockholders, or the perception that such sales may occur, including sales pursuant to the Form S-3 registration statement described above; |
• | changes in earnings estimates, investors’ perceptions, recommendations by securities analysts or our failure to achieve analysts’ earnings estimates; |
• | changes in our status as an entity eligible to receive SBIR contracts and grants; |
• | quarterly variations in our or our competitors’ results of operations; |
• | general market conditions and other factors unrelated to our operating performance or the operating performance of our competitors; |
• | announcements by us, or by our competitors, of acquisitions, new products, significant contracts, commercial relationships or capital commitments; |
• | pending or threatened litigation; |
• | any major change in our board of directors or management or any competing proxy solicitations for director nominees; |
• | changes in governmental regulations or in the status of our regulatory approvals; |
• | announcements related to patents issued to us or our competitors; |
• | a lack of, limited or negative industry or securities analyst coverage; |
• | discussions of our company or our stock price by the financial and scientific press and online investor communities such as chat rooms; and |
• | general developments in our industry. |
In addition, the stock prices of many technology companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These factors may materially and adversely affect the market price of our common stock.
If our internal control over financial reporting is found not to be effective or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls, investors could lose confidence in our financial reports, and our stock price may be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to include an internal control report with our Annual Report on Form 10-K. That report must include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year.
We evaluate our existing internal control over financial reporting based on the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. During the course of our ongoing evaluation of the internal controls, we may identify areas requiring improvement, and may have to design enhanced processes and controls to address issues identified through this review. Remedying any deficiencies, significant deficiencies or material weaknesses that we identify may require us to incur significant costs and expend significant time and management resources. We cannot assure you that any of the measures we implement to remedy any such deficiencies will effectively mitigate or remedy such deficiencies. Investors could lose confidence in our financial reports, and our stock price may be adversely affected, if our internal controls over financial reporting are found not to be effective by management or if we make disclosure of existing or potential significant deficiencies or material weaknesses in those controls.
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Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws and Delaware law could discourage or prevent a change in control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management.
Our amended and restated certificate of incorporation and bylaws and Delaware law contain provisions that might delay or prevent a change in control, discourage bids at a premium over the market price of our common stock and adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include:
• | a classified board of directors serving staggered terms; |
• | advance notice requirements to stockholders for matters to be brought at stockholder meetings; |
• | a supermajority stockholder vote requirement for amending certain provisions of our amended and restated certificate of incorporation and bylaws; and |
• | the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. |
We are also subject to provisions of the Delaware General Corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years unless the holder’s acquisition of our stock was approved in advance by our board of directors or certain other conditions are satisfied.
The existence of these provisions could adversely affect the voting power of holders of common stock and limit the price that investors might be willing to pay in the future for shares of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We lease approximately 12,000 square feet of space in Roanoke, Virginia from Carilion Clinic Properties, LLC, a successor to Carilion Medical Center and an affiliate of our largest institutional stockholder, Carilion Clinic. This property is used for our corporate headquarters, as well as for general administrative functions. In January of 2015 we executed an amendment to this lease that provides we may terminate the lease at any time on 30 days prior written notice and provides that, in any event, the term of the lease shall end April 30, 2015. We have provided notice to terminate the lease effective April 15, 2015. The term of the lease previously expired on December 31, 2018. In November 2014 we entered into a lease with an unaffiliated third party for approximately 4,400 square feet of space in Roanoke, Virginia, starting on April 1, 2015. This lease expires March 31, 2020. This property will be used for our new corporate headquarters, as well as for general administrative functions.
We lease approximately 42,000 square feet of space in Blacksburg, Virginia, near Virginia Tech, which is used by both our Technology Development segment and our Products and Licensing segment. This lease expires December 31, 2024.
We lease approximately 16,000 square feet of space in Charlottesville, Virginia, near the University of Virginia, for use by certain groups in our Technology Development segment. This lease expires December 31, 2015.
We own a 24,000 square foot facility in Danville, Virginia. This property was previously the subject of a lease with the city, and we exercised a purchase option during 2010 to acquire the building for approximately $70,000. Our Technology Development segment primarily uses this facility for nanomaterials research and development and manufacturing.
We believe that our existing facilities are adequate for our current needs and suitable additional or substitute space will be available as needed to accommodate expansion of our operations.
ITEM 3. LEGAL PROCEEDINGS
After our announcement of the Merger with API, three separate putative class action complaints were filed on behalf of API stockholders against members of the API board of directors, API, Luna, and API Merger Sub. Two actions were filed in the Circuit Court for the County of Washtenaw of the State of Michigan (captioned Clark v. Advanced Photonix, Inc., Case No.
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15-169-CB and Panzer v. Advanced Photonix, Inc., Case No. 15-214-CB) and one action was filed in the Court of Chancery for the State of Delaware (captioned Henderson v. Advanced Photonix, Inc., C.A. No. 10715) (collectively, the “Stockholder Litigation”) In general, and to date, the plaintiffs in the Stockholder Litigation allege that the API’s directors breached its fiduciary duties to API’s stockholders by, among other things, agreeing to sell API to Luna at an inadequate price, implementing an unfair process, agreeing to certain provisions of the Merger Agreement that are alleged to favor Luna and deter alternative bids, and/or by omitting material information from the Registration Statement on Form S-4 that we filed with the SEC in connection with the Merger. The complaints have also generally alleged that API and Luna aided and abetted the API director’s breaches of fiduciary duties. The existing complaints seek, among other things, an injunction against the consummation of the Merger and an award of costs and expenses, including a reasonable allowance for attorneys’ and experts’ fees. We intend to defend ourselves vigorously in these actions.
Additionally, from time to time, we may become involved in litigation or claims arising out of our operations in the normal course of business. Management currently believes the amount of ultimate liability, if any, with respect to these actions will not materially affect our financial position, results of operations, or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON STOCK
Our common stock trades on The NASDAQ Capital Market. The following table sets forth the high and low sales prices of our common stock for each period indicated as reported by NASDAQ.
2013 | 2014 | |||||||||||||||
Fiscal Period | High | Low | High | Low | ||||||||||||
First Quarter | $ | 1.40 | $ | 1.09 | $ | 3.36 | $ | 1.28 | ||||||||
Second Quarter | $ | 1.35 | $ | 1.09 | $ | 1.68 | $ | 1.30 | ||||||||
Third Quarter | $ | 2.40 | $ | 1.13 | $ | 2.70 | $ | 1.20 | ||||||||
Fourth Quarter | $ | 1.80 | $ | 1.15 | $ | 1.56 | $ | 1.22 | ||||||||
We have a single class of common stock outstanding. As of February 27, 2015, there were approximately 75 stockholders of record of our common stock. The number of holders of record of our common stock does not reflect the number of beneficial holders whose shares are held by depositories, brokers or other nominees.
STOCK PERFORMANCE GRAPH
The graph set forth below compares the cumulative total stockholder return on our common stock for the previous five years, during which our common stock was traded on the NASDAQ Capital Market, as compared to the cumulative total return of the NASDAQ Composite Index and the Russell 2000 Index over the same period. This graph assumes the investment of $100,000 in our common stock at the closing price on January 1, 2010, and an equivalent amount in the NASDAQ Composite Index and the Russell 2000 Index on that date, and assumes the reinvestment of dividends, if any. We have never paid dividends on our common stock and have no present plans to do so.
Since there is no published industry or line-of-business index for our business reflective of our performance, nor do we believe we can reasonably identify a peer group, we measure our performance against issuers with similar market capitalizations. We selected the Russell 2000 Index because it measures the performance of a broad range of companies with lower market capitalizations than those companies included in the S&P 500 Index.
The comparisons shown in the graph below are based upon historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock.
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The preceding Stock Performance Graph is not deemed filed with the Securities and Exchange Commission and shall not be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
DIVIDEND POLICY
Since our inception, we have never declared or paid any cash dividends on our common stock. We currently expect to retain any future earnings for use in the operation and expansion of our business, and therefore do not anticipate paying any cash dividends in the foreseeable future. In addition, our line of credit facility with Silicon Valley Bank restricts us from paying cash dividends on our capital stock without the bank’s prior written consent.
ITEM 6. SELECTED FINANCIAL DATA
The consolidated statement of operations data for each of the two years in the period ended December 31, 2014 and the consolidated balance sheet data as of December 31, 2013 and 2014 have been derived from our audited consolidated financial statements appearing elsewhere in this report. The consolidated statement of operations data for the years ended December 31, 2010, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2010, 2011 and 2012 have been derived from our audited consolidated financial statements that do not appear in this report. The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included at Part II, Item 7 in this Annual Report on Form 10-K. The selected data in this section is not intended to replace the consolidated financial statements, and the historical results are not necessarily indicative of the results to be expected in any future period.
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Years ended December 31, | |||||||||||||||||||
In thousands, except share and per share data | 2010 | 2011 | 2012 | 2013 | 2014 | ||||||||||||||
Consolidated Statement of Operations Data: | |||||||||||||||||||
Revenues: | |||||||||||||||||||
Technology development revenues | $ | 14,365 | $ | 15,586 | $ | 15,127 | $ | 11,422 | $ | 12,206 | |||||||||
Products and Licensing revenues | 12,133 | 13,196 | 8,339 | 6,912 | 9,054 | ||||||||||||||
Total revenues | 26,498 | 28,782 | 23,466 | 18,334 | 21,260 | ||||||||||||||
Cost of revenues: | |||||||||||||||||||
Technology development costs | 10,454 | 11,483 | 10,749 | 8,882 | 9,376 | ||||||||||||||
Products and Licensing costs | 5,787 | 6,590 | 3,825 | 3,403 | 4,047 | ||||||||||||||
Total cost of revenues | 16,241 | 18,073 | 14,574 | 12,285 | 13,423 | ||||||||||||||
Gross profit | 10,257 | 10,709 | 8,892 | 6,049 | 7,837 | ||||||||||||||
Operating expense | 14,425 | 13,557 | 13,022 | 14,084 | 12,342 | ||||||||||||||
Operating loss | (4,168 | ) | (2,848 | ) | (4,130 | ) | (8,035 | ) | (4,505 | ) | |||||||||
Other income, net | 77 | 228 | 108 | 347 | 111 | ||||||||||||||
Interest expense, net | (474 | ) | (388 | ) | (312 | ) | (208 | ) | (96 | ) | |||||||||
Loss from continuing operations before reorganization items and income tax | (4,565 | ) | (3,008 | ) | (4,334 | ) | (7,896 | ) | (4,490 | ) | |||||||||
Reorganization costs | 174 | — | — | — | — | ||||||||||||||
Loss from continuing operations before income tax | (4,739 | ) | (3,008 | ) | (4,334 | ) | (7,896 | ) | (4,490 | ) | |||||||||
Income tax benefit | (478 | ) | (479 | ) | (1,107 | ) | (2,387 | ) | (1,137 | ) | |||||||||
Loss from continuing operations, net | (4,261 | ) | (2,529 | ) | (3,227 | ) | (5,509 | ) | (3,353 | ) | |||||||||
Income from discontinued operations, net of income taxes | 1,641 | 1,137 | 1,843 | 4,705 | 9,347 | ||||||||||||||
Net (loss)/ income | (2,620 | ) | (1,392 | ) | (1,384 | ) | (804 | ) | 5,994 | ||||||||||
Preferred stock dividend | 361 | 127 | 120 | 102 | 112 | ||||||||||||||
Net (loss)/ income attributable to common stockholders | $ | (2,981 | ) | $ | (1,519 | ) | $ | (1,504 | ) | $ | (906 | ) | $ | 5,882 | |||||
Net loss per share from continuing operations: | |||||||||||||||||||
Basic and Diluted | $ | (0.33 | ) | $ | (0.19 | ) | $ | (0.23 | ) | $ | (0.38 | ) | $ | (0.23 | ) | ||||
Net income per share from discontinued operations: | |||||||||||||||||||
Basic and Diluted | $ | 0.13 | $ | 0.08 | $ | 0.13 | $ | 0.33 | $ | 0.63 | |||||||||
Net (loss)/ income per share attributable to common stockholders: | |||||||||||||||||||
Basic and Diluted | $ | (0.23 | ) | $ | (0.11 | ) | $ | (0.11 | ) | $ | (0.06 | ) | $ | 0.40 | |||||
Weighted-average number of shares used in per share calculations: | |||||||||||||||||||
Basic and Diluted | 13,009,326 | 13,647,555 | 13,930,267 | 14,336,135 | 14,880,697 | ||||||||||||||
December 31, | |||||||||||||||||||
2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||||
Consolidated Balance Sheet Data: | |||||||||||||||||||
Cash and cash equivalents | $ | 7,217 | $ | 8,939 | $ | 6,340 | $ | 7,779 | $ | 14,117 | |||||||||
Working capital | 8,055 | 10,928 | 10,509 | 10,106 | 15,346 | ||||||||||||||
Total assets | 22,876 | 22,919 | 20,458 | 19,704 | 27,584 | ||||||||||||||
Total current liabilities | 10,648 | 8,407 | 9,186 | 7,206 | 8,540 | ||||||||||||||
Total debt | 6,307 | 5,250 | 3,625 | 2,125 | 625 | ||||||||||||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” and elsewhere in this report.
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Business Overview
We develop, manufacture and market fiber optic sensing and test & measurement products focused on bringing new and innovative technology solutions to measure, monitor, protect and improve critical processes in the aerospace, automotive, energy, composite, telecommunications, and defense industries. Our business model is designed to accelerate the process of bringing new and innovative products to market. In addition, we use our in-house technical expertise across a range of technologies to perform applied research services for companies and government-funded projects in the areas of sensing & instrumentation, advanced materials, and health sciences. We continue to invest in product development and commercialization, which we anticipate will lead to increased product sales growth.
Our corporate growth strategy is focused on becoming the leading provider of fiber optic strain & temperature sensing solutions and standard test methods for composite, as well as non-composite materials, structures and systems.
We are organized into two main business segments, our Products and Licensing segment and our Technology Development segment. Our Products and Licensing segment develops, manufactures and markets our fiber optic sensing products, as well as test & measurement products, and also conducts applied research in the fiber optic sensing area for both corporate and government customers. We are continuing to develop and commercialize our fiber optic technology for strain & temperature sensing applications for the aerospace, automotive, and energy industries. Our Products and Licensing segment revenues represented approximately 38% and 43% of our total revenues for the years ended December 31, 2013 and 2014, respectively.
Our Technology Development segment performs applied research principally in the areas of sensing & instrumentation, advanced materials, and health sciences. Our Technology Development segment comprised approximately 62% and 57% of our total revenues for the years ended December 13, 2013 and 2014, respectively. Our Technology Development segment predominantly performs applied research in the areas of sensing and materials. Most of the government funding for our Technology Development segment is derived from the Small Business Innovation Research, or SBIR, program coordinated by the U.S. Small Business Administration, or SBA. Our Technology Development segment revenues have historically accounted for a large portion of our total revenues, and we expect that they will continue to represent a significant portion of our total revenues for the foreseeable future. Within the Technology Development segment, we have historically had a backlog of contracts for which work has been scheduled, but for which a specified portion of work has not yet been completed. We define backlog as the dollar amount of obligations payable to us under negotiated contracts upon completion of a specified portion of work that has not yet been completed, exclusive of revenues previously recognized for work already performed under these contracts, if any. Total backlog includes funded backlog, which is the amount for which money has been directly authorized by the U.S. Congress and for which a purchase order has been received by a commercial customer, and unfunded backlog, representing firm orders for which funding has not yet been appropriated. Indefinite delivery and quantity contracts and unexercised options are not reported in total backlog. The approximate value of our Technology Development segment backlog was $8.7 million at December 31, 2013 and $12.8 million at December 31, 2014.
Revenues from product sales are mostly derived from the sales of our sensing systems and products that make use of light-transmitting optical fibers, or fiber optics. We continue to invest in product development and commercialization, which we anticipate will lead to increased product sales growth. Although we have been successful in licensing certain technology in past years, we do not expect license revenues to represent a significant portion of future revenues. Over time, however, we do intend to gradually increase such revenues. In the near term, we expect revenues from product sales and product development to be primarily in areas associated with our fiber optic instrumentation, test and measurement and sensing platforms. In the long term, we expect that revenues from product sales will represent a larger portion of our total revenues and that as we develop and commercialize new products, these revenues will reflect a broader and more diversified mix of products.
We incurred net losses attributable to common stockholders of approximately $0.9 million for the year ended December 31, 2013 and generated net income attributable to common stockholders of $5.9 million for the year ended December 31, 2014. Excluding the effects of our Secure Computing and Communications ("SCC") group which we sold in 2013 and our medical shape sensing business, which we sold in 2014, we incurred net losses from continuing operations of approximately $5.5 million and $3.4 million for the years ended December 31, 2013 and 2014, respectively.
We may incur increasing expenses as we seek to expand our business, including expenses for research and development, sales and marketing and manufacturing capabilities. We may also grow our business in part through acquisitions of additional companies and complementary technologies, which could cause us to incur transaction expenses, amortization or write-offs of intangible assets and other acquisition-related expenses. As a result, we expect to incur net losses for the foreseeable future, and these losses could be substantial.
Reductions in government spending may impact the availability of new program awards in 2015. For example, the Budget Control Act commits the U.S. Government to reduce the federal deficit by $1.2 trillion over ten years through a combination of automatic, across-the-board spending cuts and caps on discretionary spending, or sequestration. Automatic across-the-board cuts required by sequestration could have a material adverse effect on our technology development revenues
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and, consequently, our results of operations. While the exact manner in which sequestration will impact our business is unclear, funding for programs in which we participate could be reduced, delayed or canceled. Our ability to obtain new contract awards also could be negatively affected.
Recent Sales of SCC and Medical Shape Sensing Business
In March 2013, we sold our SCC group to MacAuley-Brown, Inc., another defense contractor, for $6.1 million in cash. In January 2014, we sold our assets associated with the development of fiber optic shape sensing and localization for the medical field to affiliates of Intuitive Surgical, Inc., or Intuitive, for total cash consideration of up to $30 million, including $6 million received at closing, $6 million received in April 2014 and up to $18 million that we may receive in the future based on the achievement of certain technical milestones and royalties on system sales if any.
Our sales of SCC in 2013 and of our medical shape sensing business in 2014 are expected to result in lower revenues than historically realized until we can increase revenues significantly, primarily from product sales. As a result, we may incur greater net losses than we have in prior years.
Proposed Merger with Advanced Photonix, Inc.
On January 30, 2015, we, Advanced Photonix, Inc., a Delaware corporation (“API”), and API Merger Sub, Inc., a Delaware corporation and our wholly owned subsidiary (" API Merger Sub"), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), pursuant to which API Merger Sub will merge with and into API (the “Merger”), with API surviving as our wholly owned subsidiary.
Upon the effective time of the Merger, each share of the common stock of API will be converted into the right to receive shares of our common stock at an exchange ratio of 0.31782. In addition, unless otherwise provided by the terms of the warrant, each outstanding warrant to purchase API shares will be converted into the right to purchase shares of our common stock and each outstanding option to purchase shares of API common stock will be converted into an option to purchase shares of our common stock of, in each case at the same exchange ratio.
The completion of the Merger is subject to the satisfaction or waiver of a number of customary closing conditions in the Merger Agreement, including, among others, the effectiveness of a Form S-4 registration statement that we have filed with the Securities and Exchange Commission (the “SEC”), the adoption of the Merger Agreement and approval of the transactions contemplated thereby by API’s stockholders, approval by our stockholders of the issuance of shares of our common stock, the absence of certain governmental restraints and the absence of a material adverse effect on us or API.
We have filed the Form S-4 registration statement with the SEC, however that registration statement has not yet become effective. Following the effectiveness of the Form S-4, Luna and Advanced Photonix will mail the joint proxy statement/prospectus included in the Form S-4 to our respective stockholders for consideration at the companies’ stockholder meetings. Although the companies have not yet formally determined the dates of their stockholder meetings, we currently expect the stockholder meetings to be held and, subject to the satisfaction and/or waiver of the conditions to the Merger, the Merger to close in May 2015. Upon closing of the Merger, we expect to account for the Merger under the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standard Topic 805, Business Combinations.
Description of Our Revenues, Costs and Expenses
Revenues
We generate revenues from technology development, product sales and commercial product development and licensing activities. We derive technology development revenues from providing research and development services to third parties, including government entities, academic institutions and corporations, and from achieving milestones established by some of these contracts and in collaboration agreements. In general, we complete contracted research over periods ranging from six months to three years, and recognize these revenues over the life of the contract as costs are incurred or upon the achievement of certain milestones built into the contracts. Our technology development revenues represented approximately 62% and 57% of our total revenues for the years ended December 31, 2013 and 2014, respectively.
Our products and licensing revenues reflect amounts that we receive from sales of our products or development of products for third parties, as well as fees paid to us in connection with licenses or sub-licenses of certain patents and other intellectual property, and represented approximately 38% and 43% of our total revenues for the years ended December 31, 2013 and 2014, respectively.
Cost of Revenues
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Cost of revenues associated with technology development revenues consists of costs associated with performing the related research activities including direct labor, amounts paid to subcontractors and overhead allocated to technology development activities.
Cost of revenues associated with product sales and license revenues consists of license fees for use of certain technologies; product manufacturing costs including all direct material and direct labor costs; amounts paid to our contract manufacturers; manufacturing, shipping and handling; provisions for product warranties; and inventory obsolescence, as well as overhead allocated to each of these activities.
Operating Expense
Operating expense consists of selling, general and administrative expenses, as well as expenses related to research, development and engineering, depreciation of fixed assets and amortization of intangible assets. These expenses also include compensation for employees in executive and operational functions including certain non-cash charges related to expenses from option grants, facilities costs, professional fees, salaries, commissions, travel expense and related benefits of personnel engaged in sales, product management and marketing activities; costs of marketing programs and promotional materials; salaries, bonuses and related benefits of personnel engaged in our own research and development beyond the scope and activities of our Technology Development segment; product development activities not provided under contracts with third parties; and overhead costs related to these activities.
Interest Expense, net
In February 2010, we entered into a new line of credit facility with Silicon Valley Bank, or SVB, with a borrowing capacity of $5.0 million. In May 2011, we entered into a loan modification agreement with SVB under which we repaid the outstanding balance under the prior line of credit and obtained a term loan in the amount of $6.0 million, along with a new $1.0 million line of credit. In May 2012, we entered into another loan modification agreement with SVB under which we extended the maturity date of the line of credit to May 2014 and adjusted certain covenants. On March 21, 2013, we entered into another loan modification agreement with SVB under which we replaced the previous financial covenants with a single covenant that we maintain a minimum cash balance of $5.0 million. At December 31, 2014, we had $0.6 million outstanding on the term loan and no amounts outstanding on the line of credit. Effective on January 21, 2014, this minimum cash balance covenant was modified to reduce the required minimum balance to $3.5 million.
During the years 2013 and 2014, interest expense included interest accrued on our outstanding bank credit facilities, and interest incurred with respect to our capital lease obligations.
Critical Accounting Policies and Estimates
Technology Development Revenues
We perform research and development for U.S. Federal government agencies, educational institutions and commercial organizations. We recognize revenue under research contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collectability of the contract price is considered reasonably assured and can be reasonably estimated. Revenue is earned under cost reimbursable, time and materials and fixed price contracts. Direct contract costs are expensed as incurred.
Under cost reimbursable contracts, we are reimbursed for costs that are determined to be reasonable, allowable and allocable to the contract and paid a fixed fee representing the profit negotiated between us and the contracting agency. Revenue from cost reimbursable contracts is recognized as costs are incurred plus an estimate of applicable fees earned. We consider fixed fees under cost reimbursable contracts to be earned in proportion to the allowable costs incurred in performance of the contract.
Revenue from time and materials contracts is recognized based on direct labor hours expended at contract billing rates plus other billable direct costs.
Fixed price contracts may include either a product delivery or specific service performance throughout a period. For fixed price contracts that are based on the proportional performance method and involve a specified number of deliverables, we recognize revenue based on the proportion of the cost of the deliverables compared to the cost of all deliverables included in the contract as this method more accurately measures performance under these arrangements. For fixed price contracts that provide for the development and delivery of a specific prototype or product, revenue is recognized based upon the percentage of completion method.
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Our contracts with agencies of the U.S. government are subject to periodic funding by the respective contracting agency. Funding for a contract may be provided in full at inception of the contract or ratably throughout the contract as the services are provided. In evaluating the probability of funding for purposes of assessing collectability of the contract price, we consider our previous experience with our customers, communication with our customers regarding funding status and our knowledge of available funding for the contract or program. If funding is not assessed as probable, revenue recognition is deferred until realization is reasonably assured.
Contract revenue recognition inherently involves estimation, including the contemplated level of effort to accomplish the tasks under the contract, the cost of the effort and an ongoing assessment of progress toward completing the contract. From time to time, as part of normal management processes, facts may change, causing revisions to estimated total costs or revenues expected. The cumulative impact of any revisions to estimates and the full impact of anticipated losses on any type of contract are recognized in the period in which they become known.
The underlying bases for estimating our contract research revenues are measurable expenses, such as labor, subcontractor costs and materials, and data that are updated on a regular basis for purposes of preparing our cost estimates. Our research contracts generally have a period of performance of six to 18 months, and our estimates of contract costs have historically been consistent with actual results. Revisions in these estimates between accounting periods to reflect changing facts and circumstances have not had a material impact on our operating results, and we do not expect future changes in these estimates to be material.
Whether certain costs under government contracts are allowable is subject to audit by the government. Certain indirect costs are charged to contracts using provisional or estimated indirect rates, which are subject to later revision based on government audits of those costs. Management is of the opinion that costs subsequently disallowed, if any, would not likely have a significant impact on revenues recognized for those contracts.
Products and Licensing Revenues
We recognize revenue relating to our product sales when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collectability of the resulting receivable is reasonably assured. For tangible products that contain software that is essential to the tangible product’s functionality, we consider the product and software to be a single unit of accounting and recognize revenue accordingly. We evaluate product sales that are a part of multiple-element revenue arrangements to determine whether separate units of accounting exist, and we follow appropriate revenue recognition policies for each separate unit. For multi-element arrangements we allocate revenue to all significant deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value, or VSOE, (ii) third-party evidence of selling price or TPE, and (iii) best estimate of the selling price, or ESP. VSOE generally exists only when we sell the deliverable separately and is the price actually charged by us for that deliverable. Our product sales often include bundled products, options and services and therefore VSOE is not readily determinable. In addition, we believe that because of unique features of our products, TPE also is not available. ESPs reflect our best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis.
Our process for determining ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered in developing the ESPs include prices charged by us for similar offerings, our historical pricing practices, the nature of the deliverables, and the relative ESP of all of the deliverables as compared to the total selling price of the product. We may also consider, when appropriate, the impact of other products and services, on selling price assumptions when developing and reviewing our ESPs.
Income Taxes
We estimate our tax liability through calculating our current tax liability, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we record on our balance sheet. Management then assesses the likelihood that deferred tax assets will be recovered in future periods. In assessing the need for a valuation allowance against the net deferred tax asset, management considers factors such as future reversals of existing taxable temporary differences, taxable income in prior carry back years, whether carry back is permitted under the tax law, tax planning strategies and estimated future taxable income exclusive of reversing temporary differences and carry forwards. To the extent that we cannot conclude that it is more likely than not that the benefit of such assets will be realized, we establish a valuation allowance to reduce their net carrying value.
As we assess our projections of future taxable income or other factors that may impact our ability to generate taxable income in future periods, our estimate of the required valuation allowance may change, which could have a material impact on future earnings or losses.
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We recognize tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities. While it is often difficult to predict the final outcome of timing of the resolution of any particular tax matter, we establish a liability at the time we determine it is probable we will be required to pay additional taxes related to certain matters. These liabilities are recorded in accrued liabilities in our consolidated balance sheets. We adjust this provision, including any impact on the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit. A number of years may elapse before a particular matter for which we have established a liability is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. Settlement of any particular issue would usually require the use of cash. We recognize favorable resolutions of tax matters for which we have previously established liabilities as a reduction to our income tax expense when the amounts involved become known.
Due to differences between federal and state tax law, and accounting principles generally accepted in the United States of America, or GAAP, certain items are included in the tax return at different times than when those items are reflected in the consolidated financial statements. Therefore, the annual tax rate reflected in our consolidated financial statements is different than that reported in our tax return. Some of these differences are permanent, such as expenses that are not deductible in our tax return. Some differences, such as depreciation expense, reverse over time and create deferred tax assets and liabilities. The tax rates used to determine deferred tax assets or liabilities are the enacted tax rates in effect for the year in which the differences are expected to reverse. Based on the evaluation of all available information, we recognize future tax benefits, such as net operating loss carry forwards, to the extent that realizing these benefits is considered more likely than not.
Stock-Based Compensation
We recognize stock-based compensation expense based upon the fair value of the underlying equity award on the date of the grant. The calculation of the fair value of our awards requires certain inputs that are subjective and changes to the estimates used will cause the fair values of our stock awards and related stock-based compensation expense to vary. We have elected to use the Black-Scholes-Merton option pricing model to determine the fair value of stock options. The fair value of a stock option award is affected by our stock price on the date of the grant as well as other assumptions used as inputs in the valuation model including the estimated volatility of our stock price over the term of the awards, the estimate period of time that we expect employees to hold their stock options and the risk-free interest rate assumption. In addition, we are required to reduce stock-based compensation expense for the effects of estimated forfeitures of awards over the expense recognition period. Although we estimate the rate of future forfeitures based on historical experience, actual forfeitures may differ.
Long-lived and Intangible Assets
Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future un-discounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell.
Results of Operations
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The following table shows information derived from our consolidated statements of operations expressed as a percentage of total revenues for the periods presented.
Years ended December 31, | ||||||
2013 | 2014 | |||||
Revenues: | ||||||
Technology development revenues | 62.3 | % | 57.4 | % | ||
Product and licensing revenues | 37.7 | 42.6 | ||||
Total revenues | 100.0 | 100.0 | ||||
Cost of Revenues: | ||||||
Technology development costs | 48.4 | 44.1 | ||||
Product and licensing costs | 18.6 | 19.0 | ||||
Total cost of revenues | 67.0 | 63.1 | ||||
Gross profit | 33.0 | 36.9 | ||||
Operating expense | 76.8 | 58.1 | ||||
Operating loss | (43.8 | ) | (21.2 | ) | ||
Total other income, net | 0.8 | 0.1 | ||||
Loss from continuing operations before income taxes | (43.0 | ) | (21.1 | ) | ||
Loss from continuing operations, net of income taxes | (30.0 | ) | (15.8 | ) | ||
Income from discontinued operations, net of income taxes | 25.7 | 44.0 | ||||
Net (loss)/income | (4.3 | ) | 28.2 | |||
Year Ended December 31, 2013 Compared to Year Ended December 31, 2014
Revenues
Years ended December 31, | ||||||||||||||
2013 | 2014 | $ Difference | % Difference | |||||||||||
Technology development revenues | $ | 11,421,868 | $ | 12,205,889 | $ | 784,021 | 6.9 | % | ||||||
Products and licensing revenues | 6,911,707 | 9,054,101 | 2,142,394 | 31.0 | % | |||||||||
Total revenues | $ | 18,333,575 | $ | 21,259,990 | $ | 2,926,415 | 16.0 | % | ||||||
Our Technology Development segment revenue increased $0.8 million from $11.4 million in the year ended December 31, 2013 to $12.2 million in the year ended December 31, 2014. This increase was attributable primarily to growth in research performed under government contracts related to carbon nanomaterials and to our use of sensing technologies for applications such as corrosion monitoring.
Our Products and Licensing segment revenue increased $2.1 million from $6.9 million in the year ended December 31, 2013 to $9.1 million in the year ended December 31, 2014. This increase was due primarily to growth in sales of our optical vector analyzer products for testing of passive optical components, as the telecom market recovered somewhat in 2014, in addition to continued growth in sales of the ODiSI platform of products for fiber optic measurement of strain or temperature. We introduced the ODiSI platform for fiber optic sensing of strain and temperature in 2011 and have identified the growth of ODiSI as our key strategic initiative for product sales.
Cost of Revenues
Years ended December 31, | ||||||||||||||
2013 | 2014 | $ Difference | % Difference | |||||||||||
Technology development costs | $ | 8,882,071 | $ | 9,376,485 | $ | 494,414 | 5.6 | % | ||||||
Products and licensing costs | 3,402,882 | 4,046,885 | 644,003 | 18.9 | % | |||||||||
Total costs of revenues | $ | 12,284,953 | $ | 13,423,370 | $ | 1,138,417 | 9.3 | % | ||||||
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Our Technology Development segment costs increased $0.5 million from $8.9 million in the year ended December 31, 2013 to $9.4 million in the year ended December 31, 2014. This increase was due primarily to an increase in the utilization of subcontractors in the delivery of contract research on government programs.
Our Products and Licensing segment costs increased $0.6 million from $3.4 million in the year ended December 31, 2013 to $4.0 million in the year ended December 31, 2014. This increase was due primarily to the increase in sales as noted above. A significant part of the increase came from our optical vector analyzer product which typically has a higher margin and therefore tends to increase costs less than our other products.
Operating Expense
Years ended December 31, | ||||||||||||||
2013 | 2014 | $ Difference | % Difference | |||||||||||
Selling general and administrative expense | $ | 11,525,636 | $ | 10,253,847 | $ | (1,271,789 | ) | (11.0 | )% | |||||
Research, development, and engineering expense | 2,558,332 | 2,087,874 | (470,458 | ) | (18.4 | )% | ||||||||
Total operating expense | $ | 14,083,968 | $ | 12,341,721 | $ | (1,742,247 | ) | (12.4 | )% | |||||
Selling, general and administrative expenses decreased $1.3 million from $11.5 million in the year ended December 31, 2013 to $10.3 million in the year ended December 31, 2014. This decrease reflects the recognition in 2013 of an aggregate of $0.9 million of professional fees, such as investment banking and legal costs, and compensation costs incurred in connection with the sale of our medical shape sensing business in January 2014, reductions in headcount taken subsequent to the sale of the medical shape sensing business, lower outside professional fees incurred with respect to SEC and NASDAQ filings and compliance and lower share-based compensation expense.
Research, development, and engineering expenses decreased $0.5 million from $2.6 million in the year ended December 31, 2013, to $2.1 million in the year ended December 31, 2014. This decrease was due primarily to the transfer of ten engineers and technicians to Intuitive in January 2014 in connection with the sale of the medical shape sensing business.
Interest Expense, net and Other Income
Our net interest expense was approximately $0.2 million for the year ended December 31, 2013 compared to approximately $0.1 million for the year ended December 31, 2014. During 2013 and 2014, our primary outstanding borrowing was the term loan provided by SVB. The average monthly loan balance for the year ended December 31, 2013 was $2.9 million as compared to $1.3 million for the year ended December 31, 2014, resulting in a decrease in interest expense.
Other income was approximately $0.3 million for the year ended December 31, 2013 and $0.1 million for the year ended December 31, 2014. During the year ended December 31, 2013, we received approximately $48,000 from an insurance policy profit share and $265,000 in rent income from a sublease of office space. We also recognized additional income from the amortization of the discount we received on prepayment of the Hansen Note of approximately $38,000, which was fully amortized during the second quarter of 2013. Other income for 2014 primarily consisted of $106,000 from rent income from a sublease of office space, which concluded in the second quarter of 2014.
Income Tax Benefit
During 2013, we recorded a benefit from income taxes from continuing operations of $2.4 million that resulted in an effective tax rate from continuing operations of 30.24%, as compared to an effective tax rate of 25.33% from an income tax benefit of $1.1 million from continuing operations in 2014. The change in our effective tax rate from continuing operations from 2013, as compared to 2014, was primarily due to the decrease in loss from continuing operations, the unfavorable change in alternative minimum tax, and the decrease in the intra-period allocation from benefit from discontinued operations.
Loss from Continuing Operations
Given the increases in Technology Development revenue and Product and Licensing revenue, as well as the improvement in operating expenses described above, our loss from continuing operations decreased approximately $3.4 million from $8.0 million in the year ended December 31, 2013 to $4.5 million in the year ended December 31, 2014.
Income from Discontinued Operations
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For the year ended December 31, 2013, we recognized net income from discontinued operations of $4.7 million, compared to a net income from discontinued operations of $9.3 million for the year ended December 31, 2014. For 2013, this income consisted of $1.3 million of income, net of income taxes, from the operations of our medical shape sensing business and a $3.4 million gain realized on the sale of our SCC business, net of income taxes, which sale occurred during the first quarter of 2013, partially offset by an operating loss of $0.1 million from the SCC business for the two months prior to the sale on March 1, 2013. The decrease in operating income of the SCC business in 2013 was primarily a result of a significant decline in revenue within our SCC business as a result of a decrease in revenue from one government contract.
For the year ended December 31, 2014, our net income from discontinued operations was due primarily to the gain, net of income taxes, of the sale of our medical shape sensing business in the first quarter of 2014 of $9.4 million.
Preferred Stock Dividend
In January 2010, we issued 1,321,514 shares of our newly designated Series A Convertible Preferred Stock to Carilion. The Series A Convertible Preferred Stock carries an annual cumulative dividend of 6%, or approximately $0.2815 per share. During 2013 and 2014, we accrued approximately $102,000 and $112,000, respectively, for the dividends payable to Carilion. The dividends are not payable in cash, but rather in shares of our Common Stock, until liquidation event occurs. During each of 2013 and 2014, 79,292 shares of common stock became issuable to Carilion as dividends and have been recorded in the statement of stockholders’ equity.
Liquidity and Capital Resources
At December 31, 2014, our total cash and cash equivalents were $14.1 million. The sale of our medical shape sensing business to Intuitive on January 21, 2014, significantly increased our cash by providing us with net proceeds of $10.7 million, after deducting transaction expenses paid by us.
We have a term loan with SVB which at December 31, 2014 had a balance of $0.6 million. This term loan matures on May 1, 2015. We currently do not have plans to refinance this loan. However, following the closing of the proposed Merger with API, we may enter into a new debt agreement to replace the balance of the outstanding debt held by API that we will assume at the time of the Merger.
We may prepay amounts due under the term loan at any time with no penalties.
Amounts due under the term loan are secured by substantially all of our assets, including intellectual property, personal property and bank accounts.
On March 21, 2013, the Credit Facility was amended to replace the existing financial covenants with a single covenant that we maintain a minimum cash balance of $5.0 million. Effective on January 21, 2014, in connection with our sale of assets to Intuitive, this covenant was modified to reduce the minimum cash balance to $3.5 million. As of the date of the filing of this report, we are in compliance with all covenants under the Credit Facility.
The Credit Facility contain customary events of default, including nonpayment of principal, interest or other amounts, violation of covenants, material adverse change, an event of default under any subordinated debt documents, incorrectness of representations and warranties in any material respect, bankruptcy, judgments in excess of a threshold amount, and violations of other agreements in excess of a threshold amount. If any event of default occurs SVB may declare due immediately all borrowings under the Credit Facility and foreclose on the collateral. Furthermore, an event of default under the Credit Facility would result in an increase in the interest rate on any amounts outstanding.
During the fourth quarter of 2014 we executed a letter-of-credit ("LOC") in the amount of $1.0 million as a condition of our lease on our Blacksburg office.
We believe that our cash balance as of December 31, 2014 will provide adequate liquidity for us to meet our working capital needs over the next twelve months.
Discussion of Cash Flows
Years ended December 31, | ||||||||
2013 | 2014 | |||||||
Net cash used in operating activities | $ | (1,787,292 | ) | $ | (2,714,719 | ) | ||
Net cash (used in)/provided by investing activities | 4,670,448 | 10,419,943 | ||||||
Net cash used in by financing activities | (1,445,076 | ) | (1,366,796 | ) | ||||
Net increase in cash and cash equivalents | $ | 1,438,080 | $ | 6,338,428 | ||||
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During 2014, operations used $2.7 million of net cash, as compared to 2013, when operations used $1.8 million of net cash. In 2014, our net income of $6.0 million included a benefit of an after-tax gain on the sale of our medical shape sensing business of $9.4 million and a tax benefit of $1.1 million. Absent the effects of that gain and the tax benefit, our pre-tax loss from continuing operations was $4.5 million. The pre-tax loss from continuing operations included charges for depreciation and amortization of $0.6 million and share-based compensation of $1.0 million, each of which are non-cash items that do not impact cash flow for the period.
In 2013, our net loss of $0.8 million included income from discontinued operations, net of tax, of $4.7 million and a tax benefit of $2.4 million. Absent the effects of discontinued operations and the tax benefit, our pre-tax loss from continuing operations was $7.9 million. The pre-tax loss from continuing operations included charges for depreciation and amortization of $0.9 million, share-based compensation of $1.2 million and allowance for doubtful accounts of $0.1 million, all of which are non-cash items that do not impact cash flow for the period. Additionally, changes in working capital provided net cash inflow of $1.7 million, principally due to a decrease of $1.5 million in accounts receivable.
Cash used in, or provided by, investing activities relates to the purchase of property and equipment as well as capitalized costs associated with securing intellectual property rights and, in 2014, the sale of our medical shape sensing business and, in 2013, the sale of SCC. Our overall cash provided by investing activities was $10.4 million in 2014, consisting of a cash inflow of $10.9 million from the sale of our medical shape sensing business in January 2014 and cash outflows of $0.3 million for the purchase of equipment and $0.3 million in patent costs associated with certain intangible assets, primarily associated with our fiber optic platform.
Our overall cash provided by investing activities was $4.7 million in 2013, consisting of a cash inflow of $5.1 million from the sale of SCC in March 2013, partially offset by cash outflows of $0.2 million for the purchase of equipment and $3.3 million in patent costs associated with certain intangible assets, primarily associated with our fiber optic platform.
Cash used in financing activities for the year ended December 31, 2014 was $1.4 million, compared to cash used in financing activities of $1.4 million in 2013.
During 2014, we repaid $1.5 million to SVB for principal on our Term Loan. We also paid approximately $67,000 for leased equipment and received approximately $232,000 from the exercise of options and warrants.
During 2013, we repaid $1.5 million to SVB for principal on our Term Loan. We also paid approximately $57,000 for leased equipment and received approximately $112,000 from the exercise of options and warrants.
Summary of Contractual Obligations
The following table sets forth information concerning our known contractual obligations as of December 31, 2014 that are fixed and determinable.
Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | |||||||||||||||
Long-term debt obligations (1) | $ | 625,000 | $ | 625,000 | $ | — | $ | — | $ | — | |||||||||
Operating facility leases (2) | 4,522,547 | 995,312 | 1,666,058 | 1,381,014 | 480,163 | ||||||||||||||
Other leases (3) | 110,307 | 102,601 | 7,706 | — | — | ||||||||||||||
Purchase order obligation (4) | 451,536 | 451,536 | — | — | — | ||||||||||||||
Other liabilities (5) | 1,510,000 | 320,000 | 750,000 | 440,000 | — | ||||||||||||||
Total | $ | 7,219,390 | $ | 2,494,449 | $ | 2,423,764 | $ | 1,821,014 | $ | 480,163 | |||||||||
_________________________
(1) | Amounts due under our debt obligations to SVB are payable in monthly installments, plus accrued interest, through May 2015. |
(2) | We lease our facilities in Blacksburg, Charlottesville and Roanoke, Virginia under operating leases that as of December 31, 2014, are scheduled to expire between December 2015 and December 2020. In January 2015, we amended our lease for our current Roanoke office to terminate the lease effective April 30, 2015. Accordingly, our minimum payments under this lease and the amounts of operating facility lease obligations in the table above, will be reduced by $0.3 million for 2015, $0.6 million for 2016-2017 and $0.3 million for 2018-2019. In January 2015, we amended the lease for the Blacksburg facility to increase the allowance for leasehold improvements and to extend the term of the lease for an additional four years, which will increase our minimum payments under this lease, and the amounts of operating facility lease obligations in the table above, by $2.6 million for the period beyond 2019. Upon |
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expiration of our office leases, we may exercise certain renewal options as specified in the leases. Rental payments associated with these option periods are not included in the table above.
(3) | In February 2011 and August 2013, we executed leases in the amounts of $274,000 and $50,100, respectively, for equipment for our offices in Roanoke, Blacksburg and Charlottesville, Virginia. These equipment leases expire in February 2016 and August 2018, respectively. |
(4) | In the fourth quarter of 2013, our Luna Technologies subsidiary executed two non-cancelable purchase orders in the amounts of $0.9 million and $0.5 million for multiple shipments of tunable lasers to be delivered over an 18-month period beginning in December of 2013. The amount set forth in the table above represents our remaining obligation as of December 31, 2014. |
(5) | Other liabilities include remaining amounts payable for minimum royalty payments for certain licensed technologies payable over the remaining patent terms of the underlying technology. |
The table above does not reflect any contractual obligations of API that we will assume upon completion of the Merger, which obligations will materially affect our contractual obligations for the periods set forth above.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii).
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. We do not hold or issue financial instruments for trading purposes or have any derivative financial instruments. Our exposure to market risk is limited to interest rate fluctuations due to changes in the general level of United States interest rates.
Interest Rate Risk
We do not use derivative financial instruments as a hedge against interest rate fluctuations, and, as a result, interest income earned on our cash and cash equivalents and short-term investments is subject to changes in interest rates. However, we believe that the impact of these fluctuations does not have a material effect on our financial position due to the immediate available liquidity or short-term nature of these financial instruments.
We are exposed to interest rate fluctuations as a result of our SVB debt facility having a variable interest rate. However, the loan facility has a minimum fixed interest rate of 6%, which was in effect during both 2013 and 2014. We do not currently use derivative instruments to alter the interest rate characteristics of our debt. The principal amount of $0.6 million outstanding under the term loan as of December 31, 2014, is scheduled to be retired during the second quarter of 2015.
Foreign Currency Exchange Rate Risk
As of December 31, 2014, all payments made under our research contracts have been denominated in United States dollars. Our product sales to foreign customers are also denominated in U.S. dollars, and we do not receive payments in foreign currency. As such, we are not directly exposed to currency gains or losses resulting from fluctuations in foreign exchange rates.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Luna Innovations Incorporated
We have audited the accompanying consolidated balance sheets of Luna Innovations Incorporated (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2013 and 2014, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2014. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15 (a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Luna Innovations Incorporated and subsidiaries as of December 31, 2013 and 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ GRANT THORNTON LLP
McLean, Virginia
March 16, 2015
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CONSOLIDATED BALANCE SHEETS
December 31, 2013 | December 31, 2014 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 7,778,541 | $ | 14,116,969 | |||
Accounts receivable, net | 5,408,281 | 5,689,615 | |||||
Inventory, net | 3,346,177 | 3,364,233 | |||||
Prepaid expenses | 708,974 | 523,553 | |||||
Other current assets | 70,208 | 191,749 | |||||
Total current assets | 17,312,181 | 23,886,119 | |||||
Property and equipment, net | 2,060,709 | 3,497,057 | |||||
Intangible assets, net | 288,475 | 199,277 | |||||
Other assets | 42,710 | 1,995 | |||||
Total assets | $ | 19,704,075 | $ | 27,584,448 | |||
Liabilities and stockholders’ equity | |||||||
Current Liabilities: | |||||||
Current portion of long term debt obligation | 1,500,000 | 625,000 | |||||
Current portion of capital lease obligation | 66,617 | 70,725 | |||||
Accounts payable | 1,401,764 | 1,447,177 | |||||
Accrued liabilities | 3,546,585 | 5,536,322 | |||||
Deferred revenue | 691,424 | 861,081 | |||||
Total current liabilities | 7,206,390 | 8,540,305 | |||||
Long-term debt obligation | 625,000 | — | |||||
Long-term capital lease obligation | 110,307 | 39,582 | |||||
Total liabilities | 7,941,697 | 8,579,887 | |||||
Commitments and contingencies | |||||||
Stockholders’ equity: | |||||||
Preferred stock, par value $0.001, 1,321,514 shares authorized, issued and outstanding at December 31, 2013 and 2014 | 1,322 | 1,322 | |||||
Common stock, par value $0.001, 100,000,000 shares authorized, 14,527,335 and 15,110,924 shares issued, 14,527,335 and 15,088,199 shares outstanding at December 31, 2013 and 2014, respectively | 14,842 | 15,541 | |||||
Treasury stock at cost, zero shares at December 31, 2013 and 22,725 shares at December 31, 2014 | — | (32,221 | ) | ||||
Additional paid-in capital | 62,756,571 | 64,147,666 | |||||
Accumulated deficit | (51,010,357 | ) | (45,127,747 | ) | |||
Total stockholders’ equity | 11,762,378 | 19,004,561 | |||||
Total liabilities and stockholders’ equity | 19,704,075 | 27,584,448 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, | ||||||||
2013 | 2014 | |||||||
Revenues: | ||||||||
Technology development revenues | $ | 11,421,868 | $ | 12,205,889 | ||||
Products and licensing revenues | 6,911,707 | 9,054,101 | ||||||
Total revenues | 18,333,575 | 21,259,990 | ||||||
Cost of revenues: | ||||||||
Technology development costs | 8,882,071 | 9,376,485 | ||||||
Products and licensing costs | 3,402,882 | 4,046,885 | ||||||
Total cost of revenues | 12,284,953 | 13,423,370 | ||||||
Gross profit | 6,048,622 | 7,836,620 | ||||||
Operating expense: | ||||||||
Selling, general & administrative | 11,525,636 | 10,253,847 | ||||||
Research, development, and engineering | 2,558,332 | 2,087,874 | ||||||
Total operating expense | 14,083,968 | 12,341,721 | ||||||
Operating loss | (8,035,346 | ) | (4,505,101 | ) | ||||
Other income/(expense): | ||||||||
Other income, net | 347,062 | 111,452 | ||||||
Interest expense, net | (207,538 | ) | (96,229 | ) | ||||
Total other income | 139,524 | 15,223 | ||||||
Loss from continuing operations before income taxes | (7,895,822 | ) | (4,489,878 | ) | ||||
Income tax benefit | (2,387,422 | ) | (1,137,228 | ) | ||||
Loss from continuing operations | (5,508,400 | ) | (3,352,650 | ) | ||||
Operating income/(loss) from discontinued operations, net of $0.9 million and $0.0 million of related income taxes | 1,313,611 | (34,491 | ) | |||||
Gain on sale, net of $1.5 million and $1.3 million of related income taxes | 3,391,639 | 9,381,948 | ||||||
Income from discontinued operations, net of income taxes | 4,705,250 | 9,347,457 | ||||||
Net (loss)/income | (803,150 | ) | 5,994,807 | |||||
Preferred stock dividend | 102,327 | 112,197 | ||||||
Net (loss)/income attributable to common stockholders | $ | (905,477 | ) | $ | 5,882,610 | |||
Net loss per share from continuing operations: | ||||||||
Basic and diluted | $ | (0.38 | ) | $ | (0.23 | ) | ||
Net income per share from discontinued operations: | ||||||||
Basic and diluted | $ | 0.33 | $ | 0.63 | ||||
Net (loss)/ income per share attributable to common stockholders: | ||||||||
Basic and diluted | $ | (0.06 | ) | $ | 0.40 | |||
Weighted average shares: | ||||||||
Basic and diluted | 14,336,135 | 14,880,697 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Preferred Stock | Common Stock | Treasury Stock | Additional Paid in Capital | Accumulated Deficit | Total | ||||||||||||||||||||||||||
Shares | $ | Shares | $ | Shares | $ | $ | $ | $ | |||||||||||||||||||||||
Balance—January 1, 2013 | 1,321,514 | 1,322 | 14,009,280 | 14,245 | — | — | 61,361,505 | (50,104,880 | ) | 11,272,192 | |||||||||||||||||||||
Exercise of stock options and warrants | — | — | 169,277 | 168 | — | — | 111,789 | — | 111,957 | ||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 1,063,645 | — | 1,063,645 | ||||||||||||||||||||||
Non cash compensation | — | — | 337,500 | 338 | — | — | 102,396 | — | 102,734 | ||||||||||||||||||||||
Stock dividends (1) | — | — | — | 80 | — | — | 102,247 | (102,327 | ) | — | |||||||||||||||||||||
Issuance of Common Stock, Other (2) | — | — | 11,278 | 11 | — | — | 14,989 | — | 15,000 | ||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (803,150 | ) | (803,150 | ) | ||||||||||||||||||||
Balance—December 31, 2013 | 1,321,514 | 1,322 | 14,527,335 | 14,842 | — | — | 62,756,571 | (51,010,357 | ) | 11,762,378 | |||||||||||||||||||||
Exercise of stock options | — | — | 315,087 | 316 | — | — | 231,726 | — | 232,042 | ||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | — | 854,370 | — | 854,370 | ||||||||||||||||||||||
Non cash compensation | — | — | 245,777 | 303 | — | — | 192,882 | — | 193,185 | ||||||||||||||||||||||
Stock dividends (1) | — | — | — | 80 | — | — | 112,117 | (112,197 | ) | — | |||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | 22,725 | (32,221 | ) | — | — | (32,221 | ) | ||||||||||||||||||||
Net Income | — | — | — | — | — | — | — | 5,994,807 | 5,994,807 | ||||||||||||||||||||||
Balance—December 31, 2014 | 1,321,514 | $ | 1,322 | 15,088,199 | $ | 15,541 | 22,725 | $ | (32,221 | ) | $ | 64,147,666 | $ | (45,127,747 | ) | $ | 19,004,561 | ||||||||||||||
(1) | The stock dividends payable in connection with the Series A Convertible Preferred Stock are issuable upon the request of Carilion. |
(2) | Fees paid to our board of directors by issuance of our common stock. |
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, | ||||||||
2013 | 2014 | |||||||
Cash flows used in operating activities: | ||||||||
Net (loss)/income | $ | (803,150 | ) | $ | 5,994,807 | |||
Adjustments to reconcile net (loss)/income to net cash used in by operating activities: | ||||||||
Depreciation and amortization | 935,477 | 607,693 | ||||||
Stock-based compensation | 1,181,379 | 1,019,445 | ||||||
Gain on sale of discontinued operations, net of income taxes | (3,391,639 | ) | (9,381,948 | ) | ||||
Inventory obsolescence | — | 163,998 | ||||||
Bad debt | 134,811 | — | ||||||
Tax benefit from utilization of loss from current year operations | (1,507,791 | ) | (1,148,941 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 1,533,827 | (281,334 | ) | |||||
Inventory | (9,261 | ) | (220,419 | ) | ||||
Other assets | (79,180 | ) | 50,696 | |||||
Accounts payable and accrued liabilities | 396,540 | 311,627 | ||||||
Deferred revenue | (178,305 | ) | 169,657 | |||||
Net cash used in operating activities | (1,787,292 | ) | (2,714,719 | ) | ||||
Cash flows provided by investing activities: | ||||||||
Acquisition of property and equipment | (186,956 | ) | (255,242 | ) | ||||
Intangible property costs | (253,451 | ) | (252,083 | ) | ||||
Proceeds from sale of discontinued operations, net | 5,110,855 | 10,927,268 | ||||||
Net cash provided by investing activities | 4,670,448 | 10,419,943 | ||||||
Cash flows used in financing activities: | ||||||||
Payments on debt obligations | (1,500,000 | ) | (1,500,000 | ) | ||||
Payments on capital lease obligations | (57,033 | ) | (66,617 | ) | ||||
Repurchase of common stock | — | (32,221 | ) | |||||
Proceeds from the exercise of options and warrants | 111,957 | 232,042 | ||||||
Net cash used in financing activities | (1,445,076 | ) | (1,366,796 | ) | ||||
Net change in cash and cash equivalents | 1,438,080 | 6,338,428 | ||||||
Cash and cash equivalents—beginning of period | 6,340,461 | 7,778,541 | ||||||
Cash and cash equivalents—end of period | $ | 7,778,541 | $ | 14,116,969 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest | $ | 178,646 | $ | 87,354 | ||||
Cash paid for income taxes | $ | 14,010 | $ | 150,000 | ||||
Dividend on preferred stock, 79,292 shares of common stock issuable for each of the years ended December 31, 2013 and 2014, respectively | $ | 102,327 | $ | 112,177 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Luna Innovations Incorporated (“we” or the "Company”), headquartered in Roanoke, Virginia was incorporated in the Commonwealth of Virginia in 1990 and reincorporated in the State of Delaware in April 2003.
We develop, manufacture and market fiber optic sensing and test & measurement products focused on bringing new and innovative technology solutions to measure, monitor, protect and improve critical processes in the aerospace, automotive, energy, composite, telecommunications and defense industries. Our business model is designed to accelerate the process of bringing new and innovative products to market. We use our in-house technical expertise to perform applied research services on government-funded projects across a range of technologies and also for corporate customers in the fiber optic sensing area. We are organized into two business segments: our Technology Development segment and our Products and Licensing segment. Our Technology Development segment performs applied research principally on government-funded projects. Most of the government funding in our Technology Development segment is derived from the U.S. Government’s Small Business Innovation Research ("SBIR") program coordinated by the U.S. Small Business Administration ("SBA"). Our Products and Licensing segment focuses on fiber optic test and measurement, sensing, and instrumentation products and also conducts applied research in the fiber optic sensing area to corporate and government customers. The Products and Licensing segment focuses on fiber optic test and measurement, sensing and instrumentation products.
We have a history of net losses and negative cash flow from operations. We have historically managed our liquidity through cost reduction initiatives, debt financings, capital markets transactions and the sale of assets.
Although there can be no guarantees, we believe that our current cash and cash equivalents balance, provides adequate liquidity for us to meet our working capital needs through 2015.
Consolidation Policy
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and include the accounts of the Company and its wholly owned subsidiaries. We eliminate from our financial results all significant intercompany transactions.
Use of Estimates
The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our consolidated financial statements and accompanying notes.
Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may differ from such estimates and assumptions.
Technology Development Revenues
We perform research and development for U.S. government agencies, educational institutions and commercial organizations. We recognize revenues under research contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred and collection of the contract price is considered reasonably assured. Revenue is earned under cost reimbursable, time and materials and fixed price contracts. Direct contract costs are expensed as incurred.
Under cost reimbursable contracts, we are reimbursed for costs that are determined to be reasonable, allowable and allocable to the contract and are paid a fixed fee representing the profit negotiated between us and the contracting agency. Revenue from cost reimbursable contracts is recognized as costs are incurred plus a portion of the fee earned. Revenue from time and materials contracts is recognized based on direct labor hours expended at contract billing rates plus other billable direct costs.
Revenue from fixed price research contracts that involve the delivery of services and a prototype model is recognized under the percentage of completion method. Fixed price arrangements that involve the delivery of research reports are recognized under the proportional performance method based upon the ratio of costs incurred to achieve contract milestones to total estimated cost as this method more accurately measures performance under these arrangements. Losses on contracts, if any, are recognized in the period in which they become known and estimable.
Intellectual Property License Revenues
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Amounts received from third parties for licenses to our intellectual property are recognized when earned under the terms of the agreements. Revenues are recognized upon transfer of the license unless we have continuing obligations for which fair value cannot be established, in which case the revenues are recognized over the period of the obligation. If there are extended payment terms, license fee revenues are recognized as these payments become due and collection is reasonably assured. We consider all arrangements with payment terms extending beyond 12 months not to be fixed and determinable.
Certain of our license arrangements have also required us to enter into research and development agreements. Accordingly, we allocate our arrangement fees to the various elements based upon objective reliable evidence of fair value, if available. For those arrangements in which evidence of fair value is not available, we defer revenues from any up-front payments and recognize them over the service period in the arrangement. Certain of these arrangements also include the payment of performance bonuses based upon the achievement of specific milestones. Generally, there are no assurances at the onset of these arrangements that the milestones will be achieved. As such, fees related to such milestones are excluded from the initial allocation of the arrangement fee and are recognized upon achievement of the milestone provided that all other revenue recognition criteria are met.
Product Sales Revenues
Revenues from product sales are generated by the sale of commercial products and services under various sales programs to the end user and through distribution channels. We sell fiber optic sensing systems to end users for use in numerous fiber optic based measurement applications. Revenues are recorded net of applicable sales taxes collected from customers and payable to state or local governmental entities.
We recognize revenue relating to our products when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collectability of the resulting receivable is reasonably assured.
For multi-element arrangements that include tangible products that contain software that is essential to the tangible product’s functionality, we allocate revenue to all deliverables based on their relative selling prices. Other deliverables include extended warranty, training and various add-on products. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE"), and (iii) best estimate of the selling price ("ESP"). VSOE generally exists only when we sell the deliverable separately and is the price actually charged by us for that deliverable. Due to the uniqueness of our products comparable third party evidence is generally not available. ESPs reflect our best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis.
Our process for determining our ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. Key factors considered in developing the ESPs include prices charged by us for similar offerings, our historical pricing practices, the nature of the deliverables, and the relative ESP of all of the deliverables as compared to the total selling price of the product. We may also consider, when appropriate, the impact of other products and services on selling price assumptions when developing and reviewing our ESPs.
Revenues from product sales that require no ongoing obligations are recognized as revenues when shipped to the customer, title has passed and collection is reasonably assured. In transactions in which a right-of-return exists, revenues are deferred until acceptance has occurred and the period for the right-of-return has expired.
Allowance for Uncollectible Receivables
Accounts receivable are recorded at their face amount, less an allowance for doubtful accounts. We review the status of our uncollected receivables on a regular basis. In determining the need for an allowance for uncollectible receivables, we consider our customers’ financial stability, past payment history and other factors that bear on the ultimate collection of such amounts. The allowance was $134,811 at December 31, 2013 and December 31, 2014.
Cash Equivalents
We consider all highly liquid investments purchased with maturities of three months or less to be cash equivalents. To date, we have not incurred losses related to cash and cash equivalents. The Company’s cash transactions are processed through reputable commercial banks. To date, the Company has not incurred losses related to cash and cash equivalents. The Company regularly maintains cash balances with financial institutions which exceed Federal Deposit Insurance Corporation (“FDIC”) insurance limits. At December 31, 2013 and December 31, 2014, the Company had approximately $7.5 million and $13.9 million, respectively, in excess of FDIC insured limits.
Fair Value Measurements
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The Company’s financial assets and liabilities are measured at fair value, which is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. Valuation techniques are based on observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:
• | Level 1—Quoted prices for identical instruments in active markets. |
• | Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant value drivers are observable. |
• | Level 3—Valuations derived from valuation techniques in which significant value drivers are unobservable. |
The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term nature of these instruments. We consider the terms of the SVB debt Facility including its interest rate of prime plus 2%, to be at market based upon similar instruments that would be available to us.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. We record depreciation using the straight-line method over the following estimated useful lives:
Equipment | 3 – 7 years |
Furniture and fixtures | 7 years |
Software | 3 years |
Leasehold improvements | Lesser of lease term or life of improvements |
Intangible Assets
Intangible assets consist of patents related to certain intellectual property that we have developed or acquired. We amortize our patents over their estimated useful life of five years, and analyze them whenever events or circumstances indicate that the carrying amount may not be recoverable to determine whether their carrying value has been impaired.
Research, Development and Engineering
Research, development and engineering expenses not related to contract performance are expensed as incurred. We expensed $2.6 million and $2.1 million of non-contract related research, development and engineering expenses for the years ended December 31, 2013 and 2014, respectively.
Valuation of Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of by sale are reflected at the lower of their carrying amount or fair value less cost to sell.
Inventory
Inventory consists of finished goods, work in process and raw materials valued at the lower of cost (determined on the first-in, first-out basis) or market. We provide reserves for estimated obsolescence or unmarketable inventory equal to the difference between the carrying value of the inventory and the estimated market value based upon assumptions about future demand and market conditions.
Net (Loss)/Income per Share
Basic per share data is computed by dividing net (loss)/income attributable to common stockholders by the weighted average number of shares outstanding during the period. Diluted per share data is computed by dividing net (loss)/income attributable to common stockholders by the weighted average shares outstanding during the period increased to include, if dilutive, the number of additional common share equivalents that would have been outstanding if potential common shares had
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been issued using the treasury stock method. Diluted per share data would also include the potential common share equivalents relating to convertible securities by application of the if-converted method.
The effect of 2.3 million common stock equivalents (which include outstanding warrants, preferred stock and stock options) are not included for the years ended December 31, 2013 and 2014, as they are antidilutive to earnings per share due to the Company having a net loss from continuing operations.
Stock-Based Compensation
We have a stock-based compensation plan, which is described further in Note 9. We recognize compensation expense based upon the fair value of the underlying equity award as of the date of grant. The Company has elected to use the Black-Scholes option pricing model to value any awards granted. We recognize stock-based compensation for such awards on a straight-line method over the requisite service period of the awards taking into account the effects of the employees’ expected exercise and post-vesting employment termination behavior.
The Company recognizes expense for equity instruments issued to non-employees based upon the fair value of the equity instruments issued.
The fair value of each option granted is estimated as of the grant date using the Black-Scholes option pricing model with the following assumptions:
Years ended December 31, | ||||
2013 | 2014 | |||
Risk-free interest rate range | 1.27% – 2.34% | 2.02% – 2.27% | ||
Expected life of option-years | 7.5 | 7.5 | ||
Expected stock price volatility | 108% | 106% | ||
Executive turnover rates | —% | —% | ||
Non-executive turnover rates | 14.7% | 33.6% | ||
Expected dividend yield | —% | —% | ||
The risk-free interest rate is based on U.S. Treasury interest rates, the terms of which are consistent with the expected life of the stock options. Expected volatility is based upon the average historical volatility of our common stock over the period commensurate with the expected term of the related instrument. The expected life and estimated post-employment termination behavior is based upon historical experience of homogeneous groups, executives and non-executes, within our company. We do not currently pay dividends on our common stock nor do we expect to in the foreseeable future.
Advertising
We expense the cost of advertising as incurred. Historically such amounts have not been significant to our operations.
Income Taxes
We account for income taxes using the liability method. Deferred tax assets or liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when the differences reverse. A valuation allowance against net deferred tax assets is provided unless we conclude it is more likely than not that the deferred tax assets will be realized.
We recognize tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting
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the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.
2. Inventory
Inventory consists of finished goods, work-in-process and raw materials valued at the lower of cost (determined on the first-in, first-out basis) or market. We provide reserves for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions.
Components of inventory are as follows:
December 31, 2013 | December 31, 2014 | ||||||
Finished goods | $ | 719,574 | $ | 648,182 | |||
Work-in-process | 361,754 | 262,025 | |||||
Raw materials | 2,339,595 | 2,692,765 | |||||
3,420,923 | 3,602,972 | ||||||
Less: Inventory reserves | 74,746 | 238,739 | |||||
Total inventory, net | $ | 3,346,177 | $ | 3,364,233 | |||
3. Debt
Silicon Valley Bank Facility
We currently have a Loan and Security Agreement with Silicon Valley Bank (“SVB”) under which we have a term loan with an original borrowing amount of $6.0 million (the “Term Loan”). The Term Loan is to be repaid by us in 48 monthly installments, plus accrued interest payable monthly in arrears, and unless earlier terminated, matures on the earlier of either May 1, 2015 or an event of a default under the loan agreement. The term loan carries a floating annual interest rate equal to SVB’s prime rate then in effect plus 2%. We may repay amounts due under the Term Loan at any time with no penalties.
In addition to the terms and conditions of the Term Loan, we had a revolving line of credit (the “Line of Credit”) which had a maximum borrowing capacity of $1.0 million. The interest rate on the Line of Credit was SVB’s prime rate plus 1.25%, paid monthly in arrears, and we were required to pay an unused Line of Credit fee of one-quarter of one percent (0.25%), paid monthly. We could have terminated the Line of Credit for a termination fee of $10,000, which fee would not be paid in the event that the Line of Credit is replaced by another loan facility with SVB. The Line of Credit matured on May 18, 2014 and was not renewed.
Amounts due under the Credit Facility are secured by substantially all of our assets, including intellectual property, personal property and bank accounts.
On March 21, 2013, we entered into a Fourth Loan Modification Agreement with SVB that replaced the existing financial covenants with a single covenant that we maintain a minimum cash balance of $5.0 million with SVB. Effective on January 21, 2014, in connection with our sale of assets to Intuitive, this covenant was modified to reduce the required minimum cash balance to $3.5 million. The Credit Facility also requires us to observe a number of operational covenants, including protection and registration of intellectual property rights, and certain customary negative covenants. As of December 31, 2014, we were in compliance with all covenants under the Credit Facility.
In addition, the Credit Facility contains customary events of default, including nonpayment of principal, interest or other amounts, violation of covenants, material adverse change, an event of default under any subordinated debt documents, incorrectness of representations and warranties in any material respect, bankruptcy, judgments in excess of a threshold amount, and violations of other agreements in excess of a threshold amount. If any event of default occurs SVB may declare due immediately all borrowings under the Credit Facility and foreclose on the collateral. Furthermore, an event of default under the Credit Facility would result in an increase in the interest rate on any amounts outstanding. As of December 31, 2014, there were no events of default on the Credit Facility.
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The balance under the Term Loan at December 31, 2014 was $0.6 million all of which was classified as short-term. The effective rate of our Term Loan at December 31, 2014 was 6%.
The following table presents a summary of debt outstanding as of December 31, 2013 and 2014:
December 31, | |||||||
2013 | 2014 | ||||||
Silicon Valley Bank Term Loan | $ | 2,125,000 | $ | 625,000 | |||
Less: current portion | 1,500,000 | 625,000 | |||||
Total long-term debt | $ | 625,000 | $ | — | |||
Maturities on long-term debt are as follows:
Year | Amount | ||
2015 | 625,000 | ||
Total | $ | 625,000 | |
Costs associated with loans outstanding were as follows:
Years ended December 31, | ||||||||
2013 | 2014 | |||||||
Interest expense | $ | 189,151 | $ | 87,426 | ||||
Amortization of transaction costs | 18,387 | 8,803 | ||||||
Total interest expense | $ | 207,538 | $ | 96,229 | ||||
4. Accounts Receivable—Trade
Accounts receivable consist of the following:
December 31, | |||||||
2013 | 2014 | ||||||
Billed | $ | 3,552,184 | $ | 4,517,672 | |||
Unbilled | 1,755,439 | 1,249,814 | |||||
Other | 235,469 | 56,940 | |||||
$ | 5,543,092 | $ | 5,824,426 | ||||
Less: allowance for doubtful accounts | (134,811 | ) | (134,811 | ) | |||
$ | 5,408,281 | $ | 5,689,615 | ||||
Unbilled receivables result from contract retainages and revenues that have been earned in advance of billing and can be invoiced at contractually defined intervals, milestones, or at completion of the contract. Unbilled amounts are expected to be billed in future periods and are classified as current assets in accordance with industry practice.
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5. Property and Equipment
Property and equipment, net, consists of the following at:
December 31, | |||||||
2013 | 2014 | ||||||
Building | $ | 69,556 | $ | 69,556 | |||
Equipment | 7,239,017 | 7,312,730 | |||||
Furniture and fixtures | 562,485 | 562,485 | |||||
Software | 1,092,484 | 1,092,484 | |||||
Leasehold improvements | 3,168,377 | 4,830,055 | |||||
12,131,919 | 13,867,310 | ||||||
Less—accumulated depreciation | (10,071,210 | ) | (10,370,253 | ) | |||
$ | 2,060,709 | $ | 3,497,057 | ||||
Depreciation for the years ended December 31, 2013 and 2014 was approximately $0.5 million and $0.3 million, respectively.
6. Intangible Assets
The following is a summary of intangible assets, net:
December 31, | |||||||
2013 | 2014 | ||||||
Patent costs | $ | 2,496,560 | $ | 2,356,820 | |||
Accumulated amortization | (2,208,085 | ) | (2,157,543 | ) | |||
$ | 288,475 | $ | 199,277 | ||||
Amortization for the years ended December 31, 2013 and 2014 was approximately $0.4 million and $0.3 million, respectively. Estimated aggregate amortization, based on the net value of intangible assets at December 31, 2014, for each of the next five years is as follows:
Year Ending December 31, | |||
2015 | 91,285 | ||
2016 | 53,342 | ||
2017 | 29,218 | ||
2018 | 15,137 | ||
2019 | 2,210 | ||
$ | 191,192 | ||
7. Accrued Liabilities
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December 31, | ||||||
2013 | 2014 | |||||
Accrued compensation | 2,205,612 | 2,362,608 | ||||
Accrued sub-contracts | 297,510 | 244,218 | ||||
Accrued professional fees | 279,991 | 177,712 | ||||
Accrued income tax | 13,143 | 166,550 | ||||
Deferred rent | 102,569 | 1,752,717 | ||||
Royalties | 291,442 | 392,945 | ||||
Warranty reserve | 56,700 | 69,264 | ||||
Claims reserve | 92,167 | — | ||||
Accrued liabilities - other | 207,451 | 370,308 | ||||
Total Accrued Liabilities | 3,546,585 | 5,536,322 | ||||
8. Income Taxes
The benefit from income taxes from continuing operations consisted of the following for the periods indicated:
Years ended December 31, | ||||||||
2013 | 2014 | |||||||
Current: | ||||||||
Federal | $ | (2,387,422 | ) | $ | (1,146,447 | ) | ||
State | — | 9,219 | ||||||
Deferred Federal | — | — | ||||||
Deferred State | — | — | ||||||
Income tax benefit | $ | (2,387,422 | ) | $ | (1,137,228 | ) | ||
Deferred tax assets and liabilities consist of the following components:
December 31, 2013 | December 31, 2014 | ||||||||||||||
Current | Long-Term | Current | Long-Term | ||||||||||||
Bad debt and inventory reserve | $ | 88,077 | $ | — | $ | 150,330 | $ | — | |||||||
Deferred revenue | — | 59,673 | — | 126,096 | |||||||||||
Depreciation and amortization | — | 1,024,746 | — | 309,600 | |||||||||||
Net operating loss carryforwards | — | 10,897,715 | — | 8,030,396 | |||||||||||
Research and development credits | — | 386,161 | — | 386,161 | |||||||||||
Accrued liabilities | 836,049 | — | 1,584,633 | — | |||||||||||
Deferred compensation | — | 163,655 | — | 199,717 | |||||||||||
Stock-based compensation | — | 1,519,513 | — | 1,695,868 | |||||||||||
AMT credit | — | 42,636 | — | 207,648 | |||||||||||
Total | 924,126 | 14,094,099 | 1,734,963 | 10,955,486 | |||||||||||
Valuation allowance | (924,126 | ) | (14,094,099 | ) | (1,734,963 | ) | (10,955,486 | ) | |||||||
Net deferred tax asset | $ | — | $ | — | $ | — | $ | — | |||||||
The benefit from income taxes from continuing operations differs from the amount computed by applying the federal statutory income tax rate to the Company’s loss from continuing operations before income taxes as follows for the periods indicated:
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Years ended December 31, | ||||||
2013 | 2014 | |||||
Income tax expense at federal statutory rate | 34.00 | % | 34.00 | % | ||
State taxes, net of federal tax effects | 3.96 | % | 3.75 | % | ||
Change in valuation allowance | (3.78 | )% | (8.02 | )% | ||
Incentive stock options | (4.12 | )% | (3.33 | )% | ||
Provision to return adjustments | 2.43 | % | (0.34 | )% | ||
Meals and entertainment | (0.13 | )% | (0.27 | )% | ||
Other Permanent differences | (2.12 | )% | (0.46 | )% | ||
Income tax benefit | 30.24 | % | 25.33 | % | ||
The realization of our deferred income tax assets is dependent upon sufficient taxable income in future periods. In assessing whether deferred tax assets may be realized, we consider whether it is more likely than not that some portion, or all, of the deferred tax asset will be realized. We consider scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies that we can implement in making our assessment. We have net operating loss carryforwards at December 31, 2014 of approximately $21.2 million expiring at varying dates through 2025. We have research and development tax credit carryforwards at December 31, 2014 of approximately $0.4 million, which expire at varying dates through 2024.
We have undertaken a formal section 382 study and determined that we do not have a limitation on our net operating loss available to offset future income.
The U.S. federal statute of limitations remains open for the year 2006 and onward. We currently have no federal income tax returns under examination. U.S. state jurisdictions have statutes of limitation generally ranging from three to seven years. We currently have no state income or franchise tax returns under examination. We currently do not file tax returns in any foreign tax jurisdiction.
We currently have no positions for which we expect that the amount of unrecognized tax benefit will increase or decrease significantly within twelve months of the reporting date or for which we believe there is significant risk of disallowance upon audit. We have no tax interest or penalties reported in either our statement of operations or statement of financial position for any year reported herein. Management believes it is not more likely than not that the deferred tax assets at December 31, 2013 or December 31, 2014 will not be realized, and as a result a valuation allowance was established against all such deferred tax assets.
Windfall equity-based compensation deductions are tracked, but will not be recorded to the balance sheet until management determines it is more likely than not that such amounts will be utilized. As of December 31, 2014, the Company had approximately $331,007 of windfall stock compensation deductions. If and when realized, the tax benefit associated with these deductions will be credited to additional paid-in capital. These excess benefit deductions are included in the total federal net operating losses disclosed above.
9. Stockholders’ Equity
Series A Convertible Preferred Stock
In January 2010, we entered into a transaction with Carilion, in which Carilion agreed to exchange all of its Senior Convertible Promissory Notes with an original principal amount of $5.0 million plus all accrued but unpaid interest, totaling $1.2 million, for 1,321,514 shares of our newly designated Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock is non-voting, carries a dividend of 6% payable in shares of common stock and maintains a liquidation preference up to $6.2 million. As of December 31, 2014, 393,277 shares of common stock were issuable to Carilion as dividends and have been recorded in the statement of stockholders’ equity. These dividends are issuable on demand. Each share of Series A Convertible Preferred Stock may be converted into one share of our common stock at the option of the holder. We recorded the fair value of the Series A Convertible Preferred Stock, determined based upon the conversion value immediately prior to the exchange, the fair value of the new warrant issued to Carilion, determined using the Black-Scholes valuation model, and the incremental fair value of the prior warrant due to the re-pricing and extension of maturity to stockholders’ equity.
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Stock Option Plans
In April 2003, we adopted the Luna Innovations Incorporated 2003 Stock Plan, or the 2003 Plan. Under the 2003 Plan, our Board of Directors was authorized to grant both incentive and non-statutory stock options to our employees, directors and consultants to purchase shares of Common Stock. Options generally had a life of 10 years and exercise price equal to or greater than the fair market value of the Common Stock as determined by the Board of Directors. On February 4, 2006, our Board of Directors increased the number of shares reserved under the 2003 Plan to 9,715,000. There were options outstanding under the 2003 Plan to purchase an aggregate of 541,394 shares as of December 31, 2014. Following the adoption of the 2006 Equity Incentive Plan in January 2006, no shares or options are available for future grant under the 2003 Plan, except to satisfy grants outstanding as of June 5, 2006.
In January 2006, we adopted our 2006 Equity Incentive Plan or the 2006 Plan. Under the 2006 Plan, our Board of Directors is authorized to grant both incentive and non-statutory stock options to purchase common stock and restricted stock awards to our employees, directors, and consultants. Stock option awards generally have a life of 10 years and exercise prices equal to the closing price of our common stock on the date of the option grant. On January 1 of each year, the number of shares available for issuance increases by the lesser of (a) 10% of the outstanding shares of our common stock on the last day of the preceding fiscal year; (b) 1,695,690 shares; or (c) such other amount as our Board of Directors may determine. A total of 10,468,175 and 13,999,918 shares were available for future grant under the 2006 Plan as of December 31, 2013 and 2014, respectively.
Vesting for employees typically occurs over a five-year period.
The following table sets forth the activity of the options to purchase common stock under the 2003 Plan and the 2006 Plan. The prices represent the closing price of our Common Stock on the NASDAQ Capital Market on the respective dates.
Options Outstanding | Options Exercisable | ||||||||||||||||||||||
Number of Shares | Price per Share Range | Weighted Average Exercise Price | Aggregate Intrinsic Value (1) | Number of Shares | Weighted Average Exercise Price | Aggregate Intrinsic Value (1) | |||||||||||||||||
Balance at January 1, 2013 | 5,422,130 | $0.35–6.74 | $ | 2.19 | $ | 639,904 | 3,775,388 | $ | 2.37 | $ | 604,292 | ||||||||||||
Forfeited | (693,644 | ) | 0.35–6.74 | 2.08 | |||||||||||||||||||
Exercised | (137,097 | ) | 0.35–1.18 | 0.56 | |||||||||||||||||||
Granted | 687,840 | 1.20–1.31 | 1.29 | ||||||||||||||||||||
Balance at December 31, 2013 | 5,279,229 | $0.35 - 6.55 | $ | 2.11 | $ | 784,154 | 4,012,378 | $ | 2.28 | $ | 697,826 | ||||||||||||
Forfeited | (1,660,354 | ) | $0.35 - 6.55 | 2.22 | |||||||||||||||||||
Exercised | (321,696 | ) | $0.35 - 1.27 | 0.73 | |||||||||||||||||||
Granted | 992,452 | $1.37 - 1.53 | 1.43 | ||||||||||||||||||||
Balance at December 31, 2014 | 4,289,631 | $0.35 - 6.55 | $ | 1.93 | $ | 512,901 | 3,111,199 | $ | 2.11 | $ | 453,032 | ||||||||||||
(1) | The intrinsic value of an option represents the amount by which the market value of the stock exceeds the exercise price of the option of in-the-money options only. |
Options Outstanding | Options Exercisable | ||||||||||||||||
Range of Exercise Prices | Options Outstanding | Weighted Average Remaining Life in Years | Weighted Average Exercise Price | Options Exercisable | Weighted Average Exercise Price of Options Exercisable | ||||||||||||
Year ended December 31, 2013 | $0.35 - 6.55 | 5,279,229 | 5.88 | $ | 2.11 | 4,012,378 | $ | 2.28 | |||||||||
Year ended December 31, 2014 | $0.35 - 6.55 | 4,289,631 | 6.03 | $ | 1.93 | 3,111,199 | $ | 2.11 | |||||||||
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Total intrinsic value of options exercised | Total fair value of options vested | ||||||
Year ended December 31, 2013 | $ | 111,595 | $ | 1,248,067 | |||
Year ended December 31, 2014 | $ | 260,803 | $ | 821,392 | |||
For the years ended December 31, 2013 and 2014, the weighted average grant date fair value of options granted was $0.87 and $1.23, respectively. We estimate the fair value of options at the grant date using the Black-Scholes-Merton model.
Restricted Stock Issuances
In 2013 and 2014, we issued 337,500 and 303,000, respectively, shares of restricted stock to certain employees. These shares vest in three equal annual installments on the first three anniversary dates of their grant. Accordingly, zero and 101,000 shares vested in 2013 and 2014, respectively.
The following table summarizes our restricted stock awards:
Number of Vested Shares | Number of Unvested Shares | Weighted Average Grant Date Fair Value | Aggregate Value of Vested Shares | Aggregate Value of Unvested Shares | |||||||||
Balance at January 1, 2013 | 23,765 | 15,123 | $ | 1.80 | $ | 42,777 | $ | 27,222 | |||||
Granted | — | 337,500 | $ | 1.26 | — | 425,250 | |||||||
Vested | 12,963 | (12,963 | ) | $ | 1.80 | 23,333 | (23,333 | ) | |||||
Exercised | — | — | $ | — | — | — | |||||||
Balance at December 31, 2013 | 36,728 | 339,660 | $ | 1.32 | 66,110 | 429,139 | |||||||
Granted | — | 303,000 | $ | 1.40 | — | 424,200 | |||||||
Vested | 114,660 | (114,660 | ) | $ | 1.27 | 145,639 | (145,639 | ) | |||||
Exercised | (22,725 | ) | — | $ | 1.26 | (28,634 | ) | — | |||||
Balance at December 31, 2014 | 128,663 | 528,000 | $ | 1.36 | $ | 183,115 | $ | 707,700 | |||||
We recognized $1.2 million and $0.9 million in stock-based compensation expense, which is recorded in selling, general and administrative expenses on the consolidated statement of operations for the years ended December 31, 2013 and 2014, respectively, and we will recognize $1.5 million over the remaining requisite service period. For all options granted through December 31, 2014, the weighted average remaining service period is 1.5 years.
10. Commitments and Contingencies
Obligation under Operating Leases
We lease facilities in Blacksburg, Charlottesville and Roanoke, Virginia under operating leases that as of December 31, 2014, were scheduled to expire between March 2015 and December 2020. Certain of the leases are subject to fixed escalations and provide for possible termination prior to their expiration dates. We recognize rent expense on such leases on a straight-line basis over the lease term. Rent expense under these leases recorded in selling, general and administrative expense on our statement of operations totaled approximately $1.0 million and $0.9 million, respectively, for the years ended December 31, 2013 and 2014. During 2014, we subleased a portion of the office space formerly occupied by Secure Computing and Communications group (“SCC”) to Mac-B. The amount of the sublease income recognized in 2014 was approximately $108,000. The sublease expired on April 30, 2014.
We are obligated under operating leases covering certain equipment that expire at various dates during the next two years.
Minimum future payments, as of December 31, 2014, under the aforementioned operating leases for each of the next five years are:
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2015 | 995,312 | ||
2016 | 829,005 | ||
2017 | 837,053 | ||
2018 | 845,294 | ||
2019 | 535,720 | ||
Thereafter | 480,163 | ||
$ | 4,522,547 | ||
Purchase Commitment
In the fourth quarter of 2013 we executed two non-cancelable purchase orders totaling $1.4 million for multiple shipments of tunable lasers to be delivered over an 18-month period beginning in the fourth quarter of 2013. At December 31, 2014, approximately $0.5 million of this commitment remained.
Royalty Agreement
We have licensed certain third-party technologies from vendors for which we owe minimum royalties aggregating $1.5 million payable over the remaining patent terms of the underlying technology.
11. Employee Profit Sharing Plan
We maintain a salary reduction/profit-sharing plan under provisions of Section 401(k) of the Internal Revenue Code. The plan is offered to employees who have completed three months of service with us. We contribute 25% of the salary deferral elected by each employee up to a maximum deferral of 10% of annual salary.
We contributed approximately $175,000 and $150,000 to the plan for the years ended December 31, 2013 and 2014, respectively.
12. Litigation and Other Contingencies
From time to time, we may become involved in litigation in relation to claims arising out of our operations in the normal course of business. While management currently believes it is not reasonably possible the amount of ultimate liability, if any, with respect to these actions will have a material adverse effect on our financial position, results of operations or liquidity, the ultimate outcome of any litigation is uncertain.
After our announcement of the merger with API (see Note 17), three separate putative class action complaints were filed in Michigan and Delaware, alleging claims of breach of fiduciary duty against the API board of directors and naming Luna as a defendant for aiding and abetting the alleged breach of fiduciary duty. The plaintiffs seek injunctive relief and unspecified damages. We intend to defend ourselves vigorously in these actions. The possible range of monetary loss that might occur in the future in this matter, if any, is unknown at this time.
In September 2014, we received a preliminary audit report from the Defense Contract Audit Agency ("DCAA"), with respect to our 2007 incurred cost submission and questioning $0.8 million of claimed costs that the DCAA believes are expressly unallowable under the Federal Acquisition Regulations and, therefore, subject to potential penalty. We have not been informed of any actual claim for penalty by the Defense Contract management Agency and intend to contest such claim if received.
We have made, and will continue to make, efforts to comply with current and future environmental laws. We anticipate that we could incur additional capital and operating costs in the future to comply with existing environmental laws and new requirements arising from new or amended statutes and regulations. In addition, because the applicable regulatory agencies have not yet promulgated final standards for some existing environmental programs, we cannot at this time reasonably estimate the cost for compliance with these additional requirements. The amount of any such compliance costs could be material. We cannot predict the impact that future regulations will impose upon our business.
13. Relationship with Major Customers
During the years ended December 31, 2013 and 2014, approximately 65% and 57%, respectively, of our consolidated revenues were attributable to contracts with the U.S. government.
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At December 31, 2013 and 2014, receivables with respect to contracts with the U.S. government represented 25% and 29% of total billed trade receivables, respectively.
14. Financial Information About Segments
Our operations are divided into two operating segments: Technology Development and Products and Licensing. Our engineers and scientists collaborate with our network of government, academic and industry experts to identify technologies and ideas with promising market potential. We then compete to win fee-for-service contracts from government agencies and industrial customers who seek innovative solutions to practical problems that require new technology. The Technology Development segment derives its revenue primarily from services. The Technology Development segment provides applied research to customers in our areas of focus.
The Products and Licensing segment develops and sells products or licenses technologies based on commercially viable concepts developed by the Technology Development segment. The Products and Licensing segment derives its revenue from product sales, funded product development and technology licenses.
Our President and Chief Executive Officer and his direct reports collectively represent our chief operating decision makers, and they evaluate segment performance based primarily on revenue and operating income or loss.
Information about the results of operations for each segment is set forth in the table below. There were no significant inter-segment sales during the years ended December 31, 2013 and 2014.
During the years ended December 31, 2013 and 2014, 27% and 18%, respectively, of our total sales took place outside the United States.
Years ended December 31, | ||||||||
2013 | 2014 | |||||||
Technology Development revenue | $ | 11,421,868 | $ | 12,205,889 | ||||
Products and Licensing revenue | 6,911,707 | 9,054,101 | ||||||
Total revenue | 18,333,575 | 21,259,990 | ||||||
Technology Development operating loss | (3,169,605 | ) | (1,964,216 | ) | ||||
Products and Licensing operating income (loss) | (4,865,741 | ) | (2,540,885 | ) | ||||
Total operating loss | (8,035,346 | ) | $ | (4,505,101 | ) | |||
Depreciation, Technology Development | $ | 499,439 | $ | 317,925 | ||||
Depreciation, Products and Licensing | 266,327 | 235,831 | ||||||
Amortization, Technology Development | 212,790 | 219,156 | ||||||
Amortization, Products and Licensing | 113,471 | 162,565 | ||||||
Additional segment information is as follows:
December 31, | |||||||
2013 | 2014 | ||||||
Total segment assets: | |||||||
Technology Development | $ | 12,275,693 | $ | 15,836,918 | |||
Products and Licensing | 7,428,382 | 11,747,530 | |||||
Total | $ | 19,704,075 | $ | 27,584,448 | |||
Property plant and equipment and intangible assets, Technology Development | $ | 1,463,548 | $ | 2,122,157 | |||
Property plant and equipment and intangible assets, Products and Licensing | $ | 885,636 | $ | 1,574,177 | |||
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15. Quarterly Results (unaudited)
The following table sets forth our unaudited historical revenues, operating loss and net (loss) income by quarter during 2013 and 2014.
Quarter Ended | |||||||||||||||||||||||||||||||
(Dollars in thousands, except per share amounts) | March 31, 2013 | June 30, 2013 | September 30, 2013 | December 31, 2013 | March 31, 2014 | June 30, 2014 | September 30, 2014 | December 31, 2014 | |||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||
Technology | $ | 2,627 | $ | 2,807 | $ | 3,130 | $ | 2,858 | $ | 2,675 | $ | 3,219 | $ | 3,067 | $ | 3,245 | |||||||||||||||
Products and licensing | 1,478 | 2,024 | 1,569 | 1,841 | 1,796 | 2,009 | 2,304 | 2,945 | |||||||||||||||||||||||
Total revenues | 4,105 | 4,831 | 4,699 | 4,699 | 4,471 | 5,228 | 5,371 | 6,190 | |||||||||||||||||||||||
Gross margin | 1,135 | 1,777 | 1,677 | 1,460 | 1,552 | 1,988 | 2,083 | 2,214 | |||||||||||||||||||||||
Operating loss | (2,241 | ) | (1,739 | ) | (1,302 | ) | (2,753 | ) | (1,952 | ) | (963 | ) | (720 | ) | (870 | ) | |||||||||||||||
Loss from continuing operations | (1,319 | ) | (1,035 | ) | (775 | ) | (2,379 | ) | (1,133 | ) | (585 | ) | (467 | ) | (1,932 | ) | |||||||||||||||
Income/(loss) from discontinued operations net of income taxes | 4,105 | 83 | 161 | 356 | 9,673 | (331 | ) | (278 | ) | (329 | ) | ||||||||||||||||||||
Net loss | 2,786 | (952 | ) | (614 | ) | (2,023 | ) | 8,540 | (916 | ) | (745 | ) | (884 | ) | |||||||||||||||||
Net (loss)/income attributable to common stockholders | $ | 2,762 | $ | (978 | ) | $ | (640 | ) | $ | (2,049 | ) | $ | 8,511 | $ | (943 | ) | $ | (771 | ) | $ | (914 | ) | |||||||||
Net loss per share from continuing operations: | |||||||||||||||||||||||||||||||
Basic and diluted | $ | (0.09 | ) | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.16 | ) | $ | (0.08 | ) | $ | (0.04 | ) | $ | (0.03 | ) | $ | (0.13 | ) | |||||||
Net income/(loss) per share from discontinued operations: | |||||||||||||||||||||||||||||||
Basic and diluted | $ | 0.29 | $ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.66 | $ | (0.02 | ) | $ | (0.02 | ) | $ | (0.02 | ) | ||||||||||||
Net (loss)/income attributable to common stockholders: | |||||||||||||||||||||||||||||||
Basic and diluted | $ | 0.20 | $ | (0.07 | ) | $ | (0.04 | ) | $ | (0.14 | ) | $ | 0.58 | $ | (0.06 | ) | $ | (0.05 | ) | $ | (0.06 | ) | |||||||||
Weighted average shares: | |||||||||||||||||||||||||||||||
Basic and diluted | 14,011,814 | 14,362,494 | 14,441,707 | 14,488,060 | 14,653,262 | 14,817,084 | 15,016,429 | 15,056,007 | |||||||||||||||||||||||
16. Discontinued Operations
On March 1, 2013, we completed the sale of our SCC which was part of our Technology Development segment, to an unaffiliated third party for a gross sales price of $6.1 million in cash. Prior to the sale, SCC provided innovative solutions designed to secure critical technologies within the U.S. government. SCC conducted applied research and provided services to the government in this area, with its revenues primarily derived from U.S. government contracts and purchase orders. Of the purchase price, we received approximately $5.4 million at closing and $110,000 on December 31, 2013. During December 2013, an additional $475,000 in purchase price was released to us from escrow and another $125,000 is in escrow and may be released 18 months after the closing of the transaction, subject to any indemnification claims of the acquirer. In connection with the sale, we incurred approximately $0.9 million in transaction costs that included various charges related to investment banker and legal fees. In addition, the acquirer has entered into a sublease with us for the facilities historically occupied by SCC through April 30, 2014 for a total of $0.4 million. In the transaction, we sold the equipment, contracts and intellectual property associated with SCC. Approximately 20 employees of SCC transferred to the acquirer. Included in the transaction were current assets of approximately $0.2 million and long term assets with a net book value of approximately $0.1 million, at February 28, 2013. We recorded an aggregate after-tax gain on the sale of SCC of $9.3 million or $0.63 per diluted share in our results of operations for the year ended December 31, 2013.
Following the sale of SCC, we have continued to act on behalf of the purchaser and bill the government for certain contracts that have not yet been transferred by the government to the purchaser. We record these amounts as revenues, with an offsetting amount as cost of revenues, within (loss)/income from discontinued operations. During the year ended December 31, 2013, this amount was $1.7 million. We expect to continue recording such revenues and costs until all of these contracts are transferred to the purchaser by the government.
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On January 21, 2014, we sold our assets associated with the development of fiber optic shape sensing and localization for the medical field to affiliates of Intuitive Surgical, Inc.("Intuitive"), for total cash consideration of up to $30 million, including $6 million received at closing, and $6 million to be received within 90 days of closing, and up to $18 million that may be received in the future based on the achievement of certain technical milestones and royalties on system sales, if any. In the transaction, we sold equipment and intellectual property associated with our shape sensing technology. Ten employees were transferred to Intuitive. Included in the transaction were current assets of totaling approximately $0.2 million and long term assets with a net book value of approximately $0.2 million, at December 31, 2013. Our fiber optic shape sensing and localization for the medical field accounted for approximately 12% of our revenues, and 9% of our cost of revenues for the year ended December 31, 2013.
We have reported the results of operations of SCC and our medical shape sensing business as discontinued operations in our consolidated financial statements. We allocated a portion of the consolidated tax expense to discontinued operations based on the ratio of the discontinued groups’ income or loss before allocations.
The key components of income/(loss) from discontinued operations were as follows:
Years ended December 31, | ||||||||
2013 | 2014 | |||||||
Net revenues | $ | 5,909,375 | $ | — | ||||
Cost of revenues | 3,486,200 | 46,204 | ||||||
Operating expenses | 229,745 | — | ||||||
Income/(loss) before income taxes | 2,193,430 | (46,204 | ) | |||||
Allocated tax expense/(benefit) | 879,819 | (11,713 | ) | |||||
Operating income/(loss) from discontinued operations | 1,313,611 | (34,491 | ) | |||||
Gain on sale, net of $1.5 million and $1.3 million of related income taxes | 3,391,639 | 9,381,948 | ||||||
Income from discontinued operations, net of income taxes | $ | 4,705,250 | $ | 9,347,457 | ||||
17. Subsequent Events
On January 30, 2015, we entered into an agreement to merge with Advanced Photonix, Inc. (“API”), subject to approval by the stockholders of both companies and customary closing conditions. The merger agreement may be terminated by either us or API in certain circumstances, including if the merger has not been consummated on or before August 31, 2015, if the approval of the stockholders of either Luna or API is not obtained, and for breaches of certain representations and warranties. If the merger agreement is terminated in certain specified circumstances, API must pay us, or we must pay API, as applicable, a termination fee of $750,000. In addition, if the merger agreement is terminated following a meeting of the stockholders of Luna or API at which the adoption of the merger agreement and approval of the transactions contemplated thereby, or the approval of the issuance of shares of Luna Innovations common stock as consideration in the merger is considered but not approved, then we or API, as applicable, will be required to pay an amount up to $250,000 in reimbursement of the other party’s out-of-pocket expenses incurred in connection with the transaction. Upon the completion of the merger, stockholders of API will receive 0.31782 share of Luna Innovations common stock for each outstanding share of API common stock, resulting in the current stockholders of Luna owning approximately 56% of the outstanding common stock of the combined entity.
API is a leading test and measurement company that packages optoelectronic semiconductors into high-speed optical receivers ("HSOR products"), custom optoelectronic subsystems ("Optosolutions products") and Terahertz ("THz products") instrumentation, serving the test and measurement, telecommunications, military/aerospace and medical markets.
On January 20, 2015 we amended the leases for our Blacksburg and Roanoke facilities. The amendment to our Blacksburg lease increased by approximately $1.1 million the value of leasehold improvements to be provided by the landlord and extended the term of the lease for an additional four years. The amendment to the Roanoke lease with Carilion Clinic properties, LLC provides for early termination of the lease with 30 days' notice, without penalty, and that in any event the lease would terminate no later than on April 30, 2015. On March 12, 2015, we provided notice to Carilion Clinic Properties, LLC of our election to terminate the Roanoke lease effective April 15, 2015.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.
Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of December 31, 2014, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed, under the supervision of our principal executive and principal financial officers, and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America, or GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
There are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Under the supervision and with the participation of our management, including our President and Chief Executive Officer, and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial
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reporting as of December 31, 2014. This evaluation was based on the criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on our evaluation under the framework established in the 2013 Internal Control—Integrated Framework, our President and Chief Executive officer, and our Chief Financial Officer concluded that our internal control over financial reporting was effective as of December 31, 2014 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
ITEM 9B. OTHER INFORMATION.
Termination of Lease for Roanoke, Virginia
On March 12, 2015, we provided notice to Carilion Clinic Properties, LLC, a successor to Carilion Medical Center and an affiliate of our largest institutional stockholder, Carilion Clinic, of our election to terminate the lease for our corporate headquarters in Roanoke, Virginia, effective April 15, 2015.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 of Form 10-K will be included in the joint proxy statement/prospectus related to our 2015 Annual Meeting of Stockholders, which we refer to as the 2015 Proxy Statement, anticipated to be filed with the SEC within 120 days after December 31, 2014, and is incorporated into this report by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Form 10-K is incorporated into this report by reference to the information to be provided in our 2015 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Other than the information below relating to securities authorized for issuance under our equity compensation plans, the information required by Item 12 of Form 10-K is incorporated into this report by reference to the information to be provided in our 2014 Proxy Statement.
EQUITY COMPENSATION PLANS
The following table summarizes our equity compensation plans as of December 31, 2014:
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted- average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | ||||||
Equity compensation plans approved by security holders | 4,289,631 | $ | 1.93 | 13,681,118 | |||||
Equity compensation plans not approved by security holders | 2,335,903 | 0.39 | — | ||||||
Total | 6,625,534 | $ | 1.53 | 13,681,118 | |||||
Our 2006 Equity Incentive Plan provides for annual increases in the number of shares available for issuance on the first day of each fiscal year equal to the least of: (i) 10% of the outstanding shares of our common stock on the last day of the immediately preceding fiscal year; (ii) 1,695,690 shares; or (iii) such other amount as our board of directors may determine.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 of Form 10-K is incorporated into this report by reference to the information to be provided in our 2015 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated into this report by reference to the information to be provided in our 2015 Proxy Statement.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
(a) | The following documents are filed as part of this Annual Report on Form 10-K: |
(1) | Financial Statements. See Index to Consolidated Financial Statements at Item 8 of this Report on Form 10-K. |
(2) | Schedules. |
Schedule II
Luna Innovations Incorporated
Valuation and Qualifying Accounts
Column A | Column B | Column C | Column D | Column E | Column F | ||||||||||||||
Balance at beginning of Period | Charged to costs and expenses | Deductions | Valuation against asset | Balance at end of period | |||||||||||||||
Year Ended December 31, 2013 | |||||||||||||||||||
Reserves deducted from assets to which they apply: | |||||||||||||||||||
Inventory obsolescence | $ | 86,186 | $ | — | $ | (11,435 | ) | $ | — | $ | 74,751 | ||||||||
Allowances for doubtful Accounts | $ | — | $ | 134,811 | $ | — | $ | — | $ | 134,811 | |||||||||
$ | 86,186 | $ | 134,811 | $ | (11,435 | ) | $ | — | $ | 209,562 | |||||||||
Year Ended December 31, 2014 | |||||||||||||||||||
Reserves deducted from assets to which they apply: | |||||||||||||||||||
Inventory obsolescence | $ | 74,751 | $ | 166,773 | $ | (2,775 | ) | $ | — | $ | 238,749 | ||||||||
Allowances for doubtful Accounts | $ | 134,811 | $ | — | $ | — | $ | — | $ | 134,811 | |||||||||
$ | 209,562 | $ | 166,773 | $ | (2,775 | ) | $ | — | $ | 373,560 | |||||||||
All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements and notes thereto in Item 8 of Part II of this Annual Report on Form 10-K.
(3) | Exhibits. The exhibits filed as part of this report are listed under “Exhibits” at subsection (b) of this Item 15. |
(b) | Exhibits |
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EXHIBIT INDEX
Exhibit No. | Exhibit Document |
2.1(1) | Findings of Fact, Conclusions of Law, and Order under 11 U.S.C. §§ 1129(a) and (b) and Fed. R. Bankr. P. 3020 Confirming First Amended Joint Plan of Reorganization of Luna Innovations Incorporated and Luna Innovations, Inc., debtors and debtors-in-possession, dated January 12, 2010 (Exhibit 2.1) |
2.2(1) | First Amended Joint Plan of Reorganization of Luna Innovations Incorporated and Luna Technologies, Inc., dated December 18, 2009 (Exhibit 2.2) |
2.3(1) | First Amended Disclosure Statement in support of First Amended Joint Plan of Reorganization of Luna Innovations Incorporated, et al., under Chapter 11 of the Bankruptcy Code, dated December 18, 2009 (Exhibit 2.3) |
2.4(2)* | Asset Purchase Agreement, dated March 1, 2013, by and between Luna Innovations Incorporated and MacAulay-Brown, Inc. (Exhibit 2.4) |
2.5(3)* | Asset Purchase Agreement by and between Luna innovations Incorporated and Luna Technologies, Inc. and Intuitive Surgical Operations, Inc., and Intuitive Surgical International, Ltd., dated as of January 17, 2014 (Exhibit) 2.1) |
2.6(4) | Agreement and Plan of Merger and Reorganization dated as of January 30, 2015, by and among Luna Innovations Incorporated, API Merger Sub, Inc. and Advanced Photonix, Inc. |
3.1(5) | Amended and Restated Certificate of Incorporation of the Registrant (Exhibit 3.2) |
3.2(6) | Certificate of Designations of the Series A Convertible Preferred Stock (Exhibit 3.1) |
3.3(7) | Amended and Restated Bylaws of the Registrant (Exhibit 3.4) |
3.4(8) | Amendment to Amended and Restated Bylaws (Exhibit 3.1) |
4.1(9) | Specimen Common Stock certificate of the Registrant (Exhibit 4.1) |
4.2(7) | 2003 Stock Plan (Exhibit 10.7) |
4.3(9) | 2006 Equity Incentive Plan (Exhibit 10.9) |
4.4(7) | Form of Stock Option Agreement (Exhibit 4.7) |
10.1(11) | Form of Indemnification Agreement for directors and executive officers (Exhibit 10.1) |
10.2(12) | Commercial Lease, dated March 15, 2007, between Canvasback Real Estate & Investments LLC and Luna Innovations Incorporated (705 Dale Avenue, Charlottesville, Virginia) (Exhibit 10.1) |
10.3(9)** | License Agreement No. DN-982, dated June 10, 2002, by and between the National Aeronautics and Space Administration (NASA) and Luna Innovations Incorporated; Modification No. 1 to License Agreement No. DN-982, dated January 23, 2006, by and between NASA and Luna Innovations Incorporated (Exhibit 10.22) |
10.4(9)** | License Agreement No. DN-951, dated December 20, 2000, by and between NASA and Luna Technologies, Inc. (Exhibit 10.23) |
10.5(9)** | Amended and Restated License Agreement, dated March 19, 2004, by and between Virginia Tech Intellectual Properties, Inc. and Luna Innovations Incorporated (Exhibit 10.26) |
10.6(13) | Asset Transfer and License Agreement by and between Luna Innovations Incorporated and Coherent, Inc. (Exhibit 10.21) |
10.7(14)** | Development and Supply Agreement, dated December 12, 2006, by and between Luna Innovations Incorporated and Intuitive Surgical, Inc. dated June 11, 2007 (Exhibit 10.1) |
10.8(15) | Amendment to Commercial Lease, by and between Luna Innovations Incorporated and Canvasback Real Estate & Investments LLC dated March 18, 2008 (Exhibit 10.5) |
10.9(16) | Confidential Settlement Agreement, dated as of December 11, 2009, by and between Luna Innovations, Inc. and Luna Technologies, Inc. and Hansen Medical, Inc. (Exhibit 10.26) |
10.10(6) | Securities Purchase and Exchange Agreement, dated January 12, 2010, by and between Luna Innovations Incorporated and Carilion Clinic (Exhibit 10.1) |
10.11(6) | Warrant No. 1 to Purchase Common Stock, dated January 13, 2010, issued to Carilion Clinic (Exhibit 10.2) |
10.12(6) | Warrant No. 2 to Purchase Common Stock, dated January 13, 2010, issued to Carilion Clinic (Exhibit 10.3) |
10.13(6) | Amended and Restated Investor Rights Agreement, dated January 13, 2010, by and among Luna Innovations Incorporated, Carilion Clinic, and certain stockholders of Luna Innovations Incorporated (Exhibit 10.4) |
10.14(17) | Non-Employee Directors’ Deferred Compensation Plan (Exhibit 10.37) |
10.15(18)** | License Agreement, effective January 12, 2010, by and among Luna Innovations Incorporated, Luna Technologies, Inc. and Hansen Medical, Inc. (Exhibit 10.6) |
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10.16(18)** | Development and Supply Agreement, effective January 12, 2010, by and among Luna Innovations Incorporated, Luna Technologies, Inc. and Hansen Medical, Inc., as amended on February 17, 2010 and April 2, 2010 (Exhibit 10.7) |
10.17(18)** | License Agreement, effective January 12, 2010, by and among Luna Innovations Incorporated, Luna Technologies, Inc. and Intuitive Surgical, Inc. (Exhibit 10.8) |
10.18(18)** | Amendments to Development and Supply Agreement, effective January 12, 2010 and April 27, 2010, by and between Luna Innovations Incorporated and Intuitive Surgical, Inc. (Exhibit 10.9) |
10.19(18) | Confidential Mutual Release, effective as of January 12, 2010, by and among Luna Innovations Incorporated, Luna Technologies, Inc. and Hansen Medical, Inc. (Exhibit 10.13) |
10.20(18) | Industrial Lease Agreement, dated as of March 21, 2006, by and between Luna Innovations Incorporated and the Economic Development Authority of Montgomery County, Virginia, as amended by a First Amendment effective as of May 11, 2006, a Second Amendment effective as of July 15, 2009 and a Third Amendment effective as of March 23, 2010 (Exhibit 10.14) |
10.21(18) | Lease for Riverside Center, dated December 30, 2005, by and between Carilion Medical Center and Luna Innovations Incorporated, as amended by an Amended Lease dated July 20, 2006, a Second Amendment dated on or about October 5, 2007 and a Third Amendment effective as of April 1, 2010 (Exhibit 10.15) |
10.22(18) | Loan and Security Agreement, dated February 18, 2010, by and between Luna Innovations Incorporated, Luna Technologies, Inc. and Silicon Valley Bank (Exhibit 10.5) |
10.23(19) | Third Amendment to Commercial Lease dated June 21, 2010, by and between Canvasback Real Estate & Investments, LLC and Luna Innovations, Incorporated (Exhibit 10.5) |
10.24(20)** | Amendment No.3 to the Development Supply Agreement, dated as of September 2, 2010, by and between Luna Innovations Incorporated and Intuitive Surgical, Inc. (Exhibit 10.5) |
10.25(21) | First Loan Modification Agreement, dated as of March 7, 2011, by and between Luna Innovations Incorporated and Silicon Valley Bank (Exhibit 10.1) |
10.26(22)** | Amendment No. 4 to the Development and Supply Agreement, dated as of March 23, 2011, by and between Luna Innovations Incorporated and Intuitive Surgical, Inc. (Exhibit 10.2) |
10.27(22) | Fourth Amendment to Industrial Lease Agreement, dated as of March 1, 2011, by and between The Economic Development Authority of Montgomery County and Luna Innovations Incorporated (Exhibit 10.3) |
10.28(23) | Second Loan Modification Agreement, dated as of May 18, 2011, by and between Luna Innovations Incorporated, Luna Technologies, Inc. and Silicon Valley Bank (Exhibit 10.1) |
10.29(24) | Fifth Amendment to Industrial Lease Agreement, dated as of November 1, 2011, by and between The Economic Development Authority of Montgomery County and Luna Innovations Incorporated |
10.30(24) | Employment Agreement dated March 28, 2012, by and between My E. Chung and Luna Innovations Incorporated |
10.31(24) | Employment Agreement dated March 28, 2012, by and between Dale E. Messick and Luna Innovations Incorporated |
10.32(24) | Employment Agreement dated March 28, 2012, by and between Scott A. Graeff and Luna Innovations Incorporated |
10.33(24) | Employment Agreement dated March 28, 2012, by and between Talfourd H. Kemper, Jr., and Luna Innovations Incorporated |
10.34(25)** | Amendment No. 5 to Development and Supply Agreement, dated as of March 22, 2012, by and between Luna Innovations Incorporated and Intuitive Surgical, Inc. (Exhibit 10.1) |
10.35(26) | Fourth Amendment to Commercial Lease, dated as of April 15, 2012, by and between Canvasback Real Estate & Investments, LLC and Luna Innovations Incorporated (Exhibit 10.3) |
10.36(27) | Development Agreement, dated as of April 25, 2012, by and between Luna Innovations Incorporated and Philips Medical Systems Nederland BV (Exhibit 10.1) |
10.37(28) | Third Loan Modification Agreement, dated as of May 17, 2012, by and between Luna Innovations Incorporated, Luna Technologies, Inc. and Silicon Valley Bank (Exhibit 10.1) |
10.38(29) | Fourth Loan Modification Agreement, dated March 21, 2013, by and between Luna Innovations Incorporated, Luna Technologies, Inc. and Silicon Valley Bank. (Exhibit 10.1) |
10.39(29) | Fourth Amendment to Luna Innovations Lease of Riverside Center, dated March 21, 2013, by and between Carilion Clinic Properties, LLC and Luna Innovations Incorporated (Exhibit 10.2) |
10.40(30)** | Amendment No. 6 to the Intuitive-Luna Development and Supply Agreement, dated December 15, 2012, by and between Luna Innovations Incorporated and Intuitive Surgical Operations, Inc., a successor in interest to Intuitive Surgical, Inc. (Exhibit 10.2) |
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10.41(30)** | Amendment No. 7 to the Intuitive-Luna Development and Supply Agreement, entered into on June 28, 2013, by and between Luna Innovations Incorporated and Intuitive Surgical Operations, Inc., a successor in interest to Intuitive Surgical, Inc. (Exhibit 10.3) |
10.42(31) | Fifth Amendment to Luna Innovations Lease of Riverside Center, dated December 13, 2013, by and between Carilion Clinic Properties, LLC and Luna Innovations Incorporated (Exhibit 10.44) |
10.43(3)** | 2014 Senior Management Incentive Plan (Exhibit 10.1) |
10.44(3)** | Cross-License Agreement by and among Luna Innovations Incorporated and Luna Technologies, Inc., and Intuitive Surgical Operations, Inc., and Intuitive Surgical international, Ltd., dated as of January 17, 2014 (Exhibit 10.2) |
10.45(3)** | Consent, Release and Fifth Loan Modification Agreement between Luna Innovations incorporated and Silicon Valley Bank dated as of January 21, 2014 (Exhibit 10.3) |
10.46 | Sixth Amendment to Industrial lease Agreement by and between the Economic Development Authority of Montgomery County, Virginia and Luna Innovations Incorporated dated October 1, 2014 |
10.47 | Industrial Lease Agreement by and between The Economic Development Authority of Montgomery County, Virginia and Luna Innovations Incorporated dated October 1, 2014 |
10.48 | Lease Agreement by and between SBA Tenant, LLC and Luna Innovations Incorporated dated November 2014 |
21.1 | List of Subsidiaries |
23.1 | Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm |
24.1 | Power of Attorney (see signature page) |
31.1 | Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1*** | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2*** | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101 | The following materials from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014, are formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2013 and 2014, (ii) Consolidated Statements of Operations for the years ended December 31, 2013 and 2014, (iii) Consolidated Statements of Changes in Stockholder’s Equity (Deficit) for the years ended December 31, 2013 and 2014 (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2014, and (v) Notes to audited Consolidated Financial Statements. |
_________________________
(1) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on January 15, 2010 (reporting under Items 1.03, 5.02 and 9.01). The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
(2) | Incorporated by reference to the Registrant’s Annual Report on Form 10-K, Commission File No. 000-52008, filed on March 29, 2013. The number in parentheses indicates the corresponding exhibit number in such Form 10-K. |
(3) | Incorporated by reference to the exhibit to the Registrant's Quarterly Report on Form 10-Q, Commission File No. 000.52008, filed on May 13, 2014. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
(4) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on February 2, 2015. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
(5) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on June 8, 2006. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
(6) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on January 15, 2010 (reporting under Items 1.01, 3.02, 3.03, 5.03 and 9.01). The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
(7) | Incorporated by reference to the exhibit to the Registrant’s Registration Statement on Form S-1, Commission File No. 333-131764, filed on February 10, 2006. The number given in parentheses indicates the corresponding exhibit number in such Form S-1. |
(8) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 10, 2010 (File No. 000-52008). The number in parentheses indicates the corresponding exhibit number in such Form 8-K. |
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(9) | Incorporated by reference to the exhibit to Amendment No. 5 of the Registrant’s Registration Statement on Form S-1, Commission File No. 333-131764, filed on April 19, 2006. The number given in parentheses indicates the corresponding exhibit number in such Form S-1. |
(10) | Incorporated by reference to the exhibit to Amendment No. 3 of the Registrant’s Registration Statement on Form S-1, Commission File No. 333-131764, filed on April 28, 2006. The number given in parentheses indicates the corresponding exhibit number in such Form S-1. |
(11) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on July 17, 2009 (reporting under Items 1.01, 5.02 and 9.01). The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
(12) | Incorporated by reference to the exhibit to Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on May 15, 2007. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
(13) | Incorporated by reference to the exhibit to Amendment No. 1 to Registrant’s Annual Report on Form 10-K, Commission File No. 000-52008, filed on April 6, 2007. The number given in parentheses indicates the corresponding exhibit number in such Form 10-K/A. |
(14) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on June 14, 2007. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
(15) | Incorporated by reference to the exhibit to Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on May 9, 2008. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
(16) | Incorporated by reference to the exhibit to Registrant’s Annual Report on Form 10-K, Commission File No. 000-52008, filed on March 26, 2010. The number given in parentheses indicates the corresponding exhibit number in such Form 10-K. |
(17) | Incorporated by reference to the exhibit to Registrant’s Annual Report on Form 10-K, Commission File No. 000-52008, filed on March 16, 2009. The number given in parentheses indicates the corresponding exhibit number in such Form 10-K. |
(18) | Incorporated by reference to the exhibit to Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on May 17, 2010. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
(19) | Incorporated by reference to the exhibit to Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on August 16, 2010. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
(20) | Incorporated by reference to the exhibit to Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on November 15, 2010. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
(21) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on March 9, 2011. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
(22) | Incorporated by reference to the exhibit to Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on May 16, 2011. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
(23) | Incorporated by reference to the exhibit to Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on August 12, 2011. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
(24) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 10-K, Commission File No. 000-52008, filed on March 29, 2012. The number given in parentheses indicates the corresponding exhibit number in such Form 10-K. |
(25) | Incorporated by reference to the exhibit to the Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on May 10, 2012. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
(26) | Incorporated by reference to the exhibit to the Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on August 9, 2012. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
(27) | Incorporated by reference to the exhibit to the Registrant’s Amendment No. 1 to Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on August 10, 2012. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
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(28) | Incorporated by reference to the exhibit to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on July 11, 2012. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
(29) | Incorporated by reference to the Registrant’s Current Report on Form 8-K, Commission File No. 000-52008, filed on March 27, 2013. The number given in parentheses indicates the corresponding exhibit number in such Form 8-K. |
(30) | Incorporated by reference to the exhibit to the Registrant’s Quarterly Report on Form 10-Q, Commission File No. 000-52008, filed on August 8, 2013. The number given in parentheses indicates the corresponding exhibit number in such Form 10-Q. |
(31) | Incorporated by reference to the exhibit to the Registrant's Current Report on Form 10-K, Commission File No. 000-52008, filed on April 10, 2014. The number given in parentheses indicates the corresponding exhibit number in such Form 10-K. |
* | Confidential treatment has been granted with respect to portions of this exhibit, indicated by asterisks, which has been filed separately with the Securities and Exchange Commission. Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and exhibits to this agreement are omitted, but will be furnished to the Securities and Exchange Commission upon request. |
** | Confidential treatment has been granted with respect to portions of this exhibit, indicated by asterisks, which has been filed separately with the Securities and Exchange Commission. |
*** | These certifications are being furnished solely to accompany this annual report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LUNA INNOVATIONS INCORPORATED | |||
By: | /S/ DALE E. MESSICK | ||
Dale E. Messick Chief Financial Officer | |||
March 16, 2015
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Talfourd H. Kemper, Jr. and Dale E. Messick, and each of them acting individually, as his true and lawful attorneys-in-fact and agents, with full power of each to act alone, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/S/ MY E. CHUNG | President, Chief Executive Officer and Director (Principal Executive Officer) | March 16, 2015 | ||
My E. Chung | ||||
/S/ DALE E. MESSICK | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | March 16, 2015 | ||
Dale E. Messick | ||||
/S/ MICHAEL W. WISE | Director | March 16, 2015 | ||
Michael W. Wise | ||||
/S/ WARNER DALHOUSE | Director | March 16, 2015 | ||
Warner Dalhouse | ||||
/S/ JOHN B. WILLIAMSON III | Director | March 16, 2015 | ||
John B. Williamson III | ||||
/S/ NEIL WILKIN JR. | Director | March 16, 2015 | ||
Neil Wilkin, Jr. | ||||
/S/ RICHARD W. ROEDEL | Chairman of the Board of Directors | March 16, 2015 | ||
Richard W. Roedel | ||||
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Exhibit 10.47
SIXTH AMENDMENT TO INDUSTRIAL LEASE
THIS SIXTH AMENDMENT TO INDUSTRIAL LEASE AGREEMENT, (“the Amendment”) is made and effective as of October 1, 2014, by and between the Economic Development Authority of Montgomery County, Virginia, (“Landlord”), formerly known as the Industrial Development Authority of Montgomery County a public body corporate, having a principal place of business at 755 Roanoke Street, Suite 2H, Christiansburg, Virginia 24073 and Luna Innovations Incorporated (“Tenant”), a Virginia corporation having a principal place of business at 1 Riverside Circle, Suite 400, Roanoke, Virginia 24016.
1.Introduction. Landlord and Tenant previously entered into that certain Industrial Lease Agreement dated as of the 21st day of March, 2006, as amended by the First Amendment dated effective as of May 11, 2006, as amended by the Second Amendment (the “Second Amendment”) dated effective July 15, 2009, as amended by Third Amendment (the “Third Amendment”) dated effective March 23, 2010, as amended by Fourth Amendment (the “Fourth Amendment”) dated effective March 1, 2011, and as amended by Fifth Amendment (the “Fifth Amendment”) dated effective as of November 1, 2011, (as amended, “the Lease”). Any capitalized terms used but not defined herein shall have the meanings given to them in the Lease. Landlord and Tenant have also signed a non-binding Letter of Intent dated September 10, 2014, in respect of the Premises and the lease of new, replacement space in the Building. Accordingly, effective as of the date hereof, Landlord and Tenant have entered into an Industrial Lease Agreement for such replacement space (the “New Lease”). Section 1.1 of the Lease incorporates Exhibit A in the Lease clarifying the square footage in the Premises. The Parties wish to amend Section 1.1 by incorporating a revised Exhibit A detailing Spaces A, B and C which contains the current square footage being leased by the Tenant under the Lease. The Tenant agrees to vacate and surrender Spaces A and B to the Landlord prior to the termination of the Lease. Landlord agrees to amend Section 1.2 by extending the term of the Lease allowing Tenant to remain in Space C from November 30, 2014, through January 3, 2015. Section 3.1.1 of the Lease provides for a base rent of $39,125 per month for the Premises. This base rent shall be reduced proportionately for the month of October based on the Tenant vacating Spaces A by or on October 14, 2014, and no rent shall be charged Tenant to lease Space B from November 1, 2014 through November 16, 2014, and Space C from November 1, 2014 through January 3, 2015.
NOW THEREFORE, in consideration of the rents, covenants, and agreements set forth herein, and in the Lease and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties hereby agree to the following terms:
2.Premises. The Tenant agrees that Space A, as shown on Exhibit A which is attached and incorporated into this Amendment (“Exhibit A”) shall no longer be part of the Leased Premises as of October 15, 2014. The Tenant agrees to vacate and surrender Space A to the Landlord by October 15, 2014. The Tenant agrees that Space B as shown on Exhibit A shall no longer be part of the Leased Premises as of November 16, 2014. The Tenant agrees to vacate and surrender Space B to the Landlord by November 16, 2014. Exhibit A attached to the Lease is replaced with Exhibit A attached hereto.
3.Term. The Term of the Lease under Section 1.2 shall be extended from November 30, 2014 until January 3, 2015 for the Tenant’s use of Space C as shown on Exhibit A. Notwithstanding anything else to the contrary, in the event the Premises under the New Lease are not ready for the Tenant to move into and occupy for their intended purpose due to a delay in Renovations and has not received a Certificate of Occupancy for such Premises (as such terms are defined in the New Lease), then Tenant may remain in Space C rent-free until such renovations are complete enough for the move.
4.Payment of Rent. The payment of rent under Section 3.1.1 of the Lease shall be reduced proportionately in October based on the reduction in square footage of the Premises after the Tenant vacates and surrenders Space A by or on October 14, 2014, which reduces the monthly base rent for October from $39,125 to $36,492 a reduction of $2633. The Tenant shall have use of Space B rent free from November 1, 2014 through November 16, 2014. The Tenant shall have use of Space C rent free from November 1, 2014 through January 3, 2015.
5.Miscellaneous. The terms and conditions set forth in the Introduction are incorporated herein by reference. This Amendment may be executed in any number of identical counterparts and, as so executed, shall constitute one agreement, binding on all the parties hereto, notwithstanding that all the parties are not signatories to the original or the same counterpart.
6.Except as specifically amended herein, the Lease shall remain in full force and effect.
In Witness Whereof, Landlord and Tenant have executed this Sixth Amendment as of the date set forth hereinabove.
[Remainder of Page Intentionally Left Blank – Signature Page Follows]
THE ECONOMIC DEVELOPMENT AUTHORITY OF MONTGOMERY COUNTY, VIRGINIA
By: ________/s/ Eric Johnsen______________
Eric Johnsen, Chair
LUNA INNOVATIONS INCORPORATED
By: _______/s/ Scott A. Graeff________________
Scott A. Graeff, Chief Strategy Officer and Treasurer
COMMONWEALTH OF VIRGINIA,
COUNTY OF MONTGOMERY, to-wit:
I, the undersigned, a Notary Public in and for the jurisdiction aforesaid, do hereby certify that Eric Johnsen, Chair of the Economic Development Authority of Montgomery County, Virginia, has signed the foregoing Lease Amendment before me in my jurisdiction aforesaid.
Given under my hand this day of , 2014.
My commission expires:
Registration Number:
Notary Public
COMMONWEALTH OF VIRGINIA,
COUNTY/CITY OF ____________________, to-wit;
I, the undersigned, a Notary Public in and for the jurisdiction aforesaid, do hereby certify that Scott A. Graeff, Chief Strategy Officer of Luna Innovations Incorporated has signed the foregoing Lease Amendment before me in my jurisdiction aforesaid.
Given under my hand this day of , 2014.
My commission expires:
Registration Number:
Notary Public
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EXHIBIT 10.48
INDUSTRIAL LEASE AGREEMENT
BETWEEN
LUNA INNOVATIONS INCORPORATED
AS TENANT
AND
THE ECONOMIC DEVELOPMENT AUTHORITY
OF MONTGOMERY COUNTY, VIRGINIA
AS LANDLORD
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INDUSTRIAL LEASE AGREEMENT
THIS LEASE (the "Lease" or Agreement) is made and effective as of this 1st day of October 1, 2014, by and between The Economic Development Authority of Montgomery County, Virginia ("Landlord"), a public body corporate, having a principal place of business at 755 Roanoke Street, Suite 2 H, Christiansburg, Virginia 24073, and Luna Innovations Incorporated, (“Tenant”), a Virginia corporation having a principal place of business at 3155 State Street, Blacksburg, Virginia, 24060.
WHEREAS, Landlord is the owner of certain real property located in the Town of Blacksburg, Virginia upon which Landlord has built a 109,000 sq. ft. Technology Manufacturing Building (the “Building”) on fifteen (15) acres of land in the Blacksburg Industrial Park, 3155 State Street, Blacksburg, VA 24060;
WHEREAS, Tenant desires to lease and occupy 41,900 square feet of the Building as shown on the attached diagram identified as Exhibit A entitled “Luna Innovations Lease Floor Plan Technology Manufacturing Building (Leased Area is Shaded)” (the “Premises”) if the Landlord is willing to lease the said Premises to the Tenant; and
WHEREAS, Landlord is willing to lease the said Premises to the Tenant subject to and in accordance with the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the rents, covenants and agreements herein set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:
1. | PREMISES AND TERM. |
1.1 Premises. In consideration of the obligations of Landlord and Tenant set forth herein, Landlord leases to Tenant, and Tenant hereby takes from Landlord the Premises identified on Exhibit A situated on real property owned by the Landlord within the Town of Blacksburg, County of Montgomery, Commonwealth of Virginia more particularly described on Exhibit B attached hereto and incorporated herein by reference (the “Property”) together with all rights, privileges, easements, appurtenances, and amenities belonging to or in any way pertaining to the Premises, to have and to hold, subject to the terms, covenants and conditions of this Lease. Without limiting the foregoing, Tenant shall have the right, as appurtenant to the Premises, to use the driveways, parking, chemical storage area and loading docks and other common areas on the Property. As used in this Lease, Tenant’s “Proportionate Share” shall mean a fraction the numerator of which shall be the square footage of the Premises (41,900 sq. ft..) and the denominator of which shall be the square footage of the Building (109,000 sq. ft.).
1.2 Term. The Term of this Lease (the “Term”) shall commence (the “Commencement Date”) on October 15, 2014, and shall expire as of 11:59 PM on December 31, 2020, unless terminated sooner, renewed or extended as provided herein. Notwithstanding the fact that the Commencement Date is subsequent to the effective date of this Lease, the parties agree that each have vested rights hereunder and that this Lease constitutes a binding and valid obligation of each as of the date this Lease is fully executed.
1.3 Acceptance of the Premises. After taking possession of all of the Premises as of January 1, 2015, Tenant acknowledges that: (i) it has inspected the Premises; (ii) it accepts the Premises “as is”, except
2
for the agreed upon Upfits in Section 1.4 which are indicated on Exhibit C, attached hereto, (iii) the Premises are suitable for the purpose for which the Premises are leased; and (iv) except as otherwise set forth in this Lease (including all exhibits and attachments), no representations or warranties have been made by Landlord with respect to the Premises.
1.4 Up fit Allowance. The Landlord shall provide the Tenant with an up fit improvement allowance of Five Hundred Thousand Dollars ($500,000) to be used to cover design and construction costs to convert the clean room into lab space and to renovate the front office area and cafeteria, (altogether, “Renovations”) as shown on Exhibit C (the “Up fit Allowance”). Landlord and Tenant agree that should the desired improvements exceed the Up fit Allowance agreed upon by the Landlord, the Tenant shall be responsible for providing to the Landlord the additional funds required to pay for the additional improvements. Should the desired improvements by the Tenant exceed the Up fit Allowance, the Landlord shall have no obligation to enter into any contract for the agreed upon Up fit work until such time that the Tenant provides the additional funds in excess of the Up fit Allowance or agrees in writing to an adjustment to the price per square foot for rent using a 8% interest rate on the overage across the lease period. Should the Tenant not provide the Landlord with the additional funds in excess of the Up fit Allowance or agree to an amendment of the Lease increasing the price per square foot for rent to cover the overage, within five (5) calendar days of receiving written notice from the Landlord that an overage exists, the Landlord may deem the Tenant in default and the Landlord may, in addition to any other remedy available, use the deposit money and/or letter of credit to pay all the architectural and engineering fees incurred up to the date of default. The list of improvements under the Up fit Allowance as mutually agreed by the Parties to be performed by the Landlord prior to Commencement Date are indicated on Exhibit C and are incorporated herein as a part of this Lease. Landlord shall review with and obtain consent from Tenant for the construction bids or quotes for the Renovation and obtain prior written consent for any bids or quotes that would exceed the Up Fit Allowance.
RENEWAL; EXTENSION; SURRENDER
2.1 Renewal.
2.1.1 Tenant and Landlord may mutually agree to renew this Lease for an additional term on terms and conditions to be negotiated by the Parties (the “First Renewal Term”); provided that this Lease is in full force and effect immediately prior to the date of the commencement of the renewal term and that the Tenant is not in default, beyond applicable cure periods, under any of the provisions of this Lease at the time the Tenant and Landlord mutually agree to renew this Lease for an additional term or at the time the Renewal Term is scheduled to commence. The First Renewal Term, if mutually agreed to, shall commence upon the expiration of the initial term and continue for a period agreed to by the Parties. The First Renewal shall be upon the terms, covenants, conditions and limitations as negotiated by the Parties.
2.2 Extension By Mutual Consent. If Tenant lawfully occupies the Premises after the end of the Term, after having requested and obtained Landlord's written consent to do so, this Lease and all its terms, provisions, conditions, covenants, waivers, remedies and any and all of Landlord's rights herein specifically given and agreed to, shall be in force for one month thereafter and thereafter from month-to-month until either party gives the other thirty (30) days written notice of its desire to terminate this Lease.
2.3 Surrender. At the expiration of this Lease (including any renewal or extension) or the sooner termination thereof, Tenant shall surrender the Premises to Landlord, together with all additions, alterations and improvements thereto, in broom clean condition and in good order and repair except for ordinary wear and tear and Landlord’s maintenance obligations. Nothing herein, however, shall prohibit
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Tenant from removing any of its computers, voice and data network components, phone system components, phone switch, TV’s and other video equipment, satellite antennae, office equipment, furniture, office supplies, storage racks, compressors, vacuum, wastewater and manufacturing equipment and other personal property (collectively “Tenant Equipment”) in accordance with the terms of this Lease. Tenant shall repair any damage to the Premises caused by the removal of such Tenant Equipment. Any Tenant Equipment not removed by Tenant as required herein shall be deemed abandoned thirty (30) days after the expiration or earlier termination of the Lease, and may be stored, removed and disposed of by Landlord in its discretion, and Tenant waives all claims against Landlord for any damages resulting from Landlord’s retention or disposal of same. Tenant shall be entitled to no payment or offset for the value of any abandoned property (even if sold by Landlord) and Tenant shall pay on demand all reasonable costs incurred by Landlord in connection with such removal or disposal. No retention, disposal or sale of such abandoned property shall limit remedies otherwise available to Landlord hereunder for a breach of this Agreement by Tenant. All obligations of Tenant hereunder not fully performed as of the termination or expiration of the Lease shall survive such termination or expiration, until they are performed.
2.4 Holding Over. If Tenant occupies the Premises beyond the Term of this Lease or any properly exercised Renewal Term, without Landlord's written consent (a “Hold Over”), Tenant shall be deemed to occupy the Premises as a tenant at sufferance, and all of the terms and provisions of this Lease shall be applicable during that period, except that Tenant shall pay Landlord a rental equal to one hundred twenty‑five percent (125%) of the monthly rent applicable hereunder at the expiration of the Term or applicable Renewal Term, prorated for the number of days of such holding over. If Tenant refuses to vacate, Landlord may institute a forcible detainer or similar action against Tenant or any other party in possession of the Premises or pursue any other remedy available at law or in equity.
3. PAYMENT OF RENT
`
3.1 Payment; Proration.
3.1.1 Payment. Beginning on October 15, 2014 and lasting through December 31, 2014, the lease rate for the Premises shall be $0.00. Beginning January 1, 2015 and lasting through December 31, 2020, the Tenant shall pay Landlord per month Base Rent for the Premises in advance, without demand or set-off, in the amount of Thirty Eight Thousand Four Hundred Eight Dollars ($38,408) for 41,900 sq. ft. at $11.00 per sq. ft. (“Base Rent”) on or before the first day of each successive calendar month during the Term in lawful money of the United States of America, without prior notice or demand, at such place or places as may be designated in writing from time to time by Landlord. The Tenant’s proportionate share of the real estate taxes on the Premises is included in the Tenant’s Base Rent.
3.1.2 Proration. In the event that the date on which a payment obligation: (i) begins on a date other than the first day of a calendar month; or (ii) ends on a date other than the last day of a calendar month then the amount of the payment shall be prorated, based upon the number of days during said month that the obligation was effective.
3.1.3 Letter of Credit. The Tenant shall maintain at all times throughout the entire term of the Lease including any renewals, unless otherwise agreed by the Landlord, a letter of credit issued by a bank in the New River/Roanoke Valleys or by Silicon Valley Bank in a form acceptable to the Landlord in the amount of Five Hundred Thousand Dollars ($500,000), against which the Landlord may draw upon the occurrence of a default by Tenant under this Lease and may be used as security against damages and the Tenant not making lease payments. The Letter of Credit shall be governed by the “Uniform Customs
4
and Practices for Commercial Documentary Credits” promulgated by the XIII Congress of the International Chamber of Commerce (International Chamber of Commerce Brochure No. 500, 1993 revision) and the provisions of the Uniform Commercial Code-Letters of Credit, Title 8.5A of the Code of Virginia, 1950, as amended. The Landlord agrees to reimburse the Tenant for the annual cost of obtaining the Letter of Credit up to a 2% fee annually.
4. UTILITIES The Base Rent paid by the Tenant shall include the Tenant’s water, sewer, electric and natural gas monthly utility usage (“Utilities”). In the event that any Utilities are interrupted or stopped by the action or inaction of Landlord, its employees, agents or contractors, Landlord shall, upon notice from Tenant, immediately notify the affected utility company and use its best efforts to cause repairs to be commenced. The Tenant shall be responsible for all other utilities including internet service, telephone, cable, satellite, trash and refuse collection.
5. USE
5.1 Tenant agrees that it will use and occupy the Premises as an office, manufacturing, research and development facility and for such other lawful purposes as may be incident thereto and for no other purpose without Landlord's prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed. Tenant shall comply with all governmental laws, rules, ordinances and regulations applicable to its particular use of the Premises, and promptly comply with all governmental orders and directives for the correction and abatement of nuisances in or upon the Premises caused by Tenant, all at Tenant’s sole expense. Tenant recognizes and agrees that Landlord is making no warranties, expressed or implied, as to the suitability of the Premises for any particular use.
5.2 Landlord represents and warrants that it has not and will not, during the term of this lease, enter into an agreement which limits Tenant’s ability to use the Premises for the uses set forth in Section 5.1.
6. ALTERATIONS
6.1 Tenant shall not make any alterations, additions or improvements to the Premises, except for pursuant to Section 1.4 above and non-structural alterations that cost less than $50,000 per project without the prior written consent of Landlord, which shall not be unreasonably withheld, conditioned or delayed. Tenant, at its own cost and expense may erect such shelves, bins, machinery and trade fixtures as it desires provided that (a) such items do not alter the basic character of the Premises or the Building; (b) such items do not overload or damage the same; (c) such items may be removed without injury to the Premises; and (d) the construction, erection or installation thereof complies with all applicable governmental laws, ordinances, regulations and all provisions of this Lease. All alterations, additions, improvements and partitions erected by Tenant shall be and remain the property of Tenant during the term of this Lease and shall be the property of Landlord upon the expiration or earlier termination of this Lease provided that nothing herein shall prohibit Tenant from removing the Tenant Equipment or other items, in accordance with Section 2.3, above. All shelves, bins, machinery and trade fixtures installed by Tenant shall be removed in accordance with Section 2.3 on or before the expiration or earlier termination of this Lease, at which time Tenant shall repair any damage caused thereby, ordinary wear and tear excepted. All alterations, installations, removals and restoration shall be performed in a good, workmanlike and lien free manner.
6.2 Mechanics Liens. Tenant shall promptly pay all contractors and material men, and will use reasonable commercial efforts to prevent any lien from attaching to the Premises or any part thereof. If any lien is filed purporting to be for labor or material furnished or to be furnished at the request of Tenant, Tenant
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shall do all acts necessary to discharge such lien within twenty (20) days of filing, or if Tenant desires to contest any lien, then Tenant shall deposit with Landlord the amount of said lien as security for its payment. In the event Tenant fails to deposit the security with Landlord and fails to pay any lien claim after entry of final judgment in favor of the claimant, Landlord shall have the right to expend all sums reasonably necessary to discharge the lien claim, and Tenant shall pay all sums expended by Landlord in discharging said lien, including reasonable attorney’s fees within thirty (30) days of receipt of the invoice. Tenant has no express or implied authority to create or place any lien or encumbrance of any kind upon, or in any manner to bind the interest of Landlord in the Premises or to charge the rentals payable hereunder for any claim in favor of any person dealing with Tenant, including, without limitation, those who may furnish materials or perform labor for any construction or repairs.
7. SIGNAGE Tenant shall not place or permit on any exterior door or window or any exterior wall of the Premises any sign, awning, canopy, advertising matter or lettering without the written consent of the Landlord, which shall not be unreasonably withheld. It shall not be unreasonable for Landlord to withhold its consent to the placement of any sign that does not comply with any federal, state or local law or ordinance.
8. MAINTENANCE
8.1 Tenant's Maintenance Responsibilities. Tenant shall at all times keep the Premises (including all entrances and vestibules) and all partitions, fixtures, equipment and appurtenances thereof and all parts of the Premises not required in Section 8.3 to be maintained by Landlord in good order, condition and repair, and in compliance with all applicable laws, rules, ordinances and regulations, damage by casualty excepted. If replacement of equipment, fixtures and appurtenances thereto are necessary, Tenant shall replace the same with equipment, fixtures and appurtenances of the same quality, and shall repair all damages done in or by such replacement.
8.2 Tenant’s Failure to maintain or make repairs. If Tenant fails to maintain the Premises or commence any repair to the Building or the Premises or to the common area that is Tenant’s responsibility under Section 8.1 within ten (10) days after notification by the Landlord of the need for such maintenance or repair and fails to complete such maintenance or repair within a reasonable period of time, the Landlord may, in addition to any other remedies it may have, complete such maintenance or make such repair at the expense of Tenant and Tenant shall pay to Landlord all costs and expenses reasonably incurred as a result of such maintenance or repairs within ten (10) days of receipt of invoice thereof. In the event of a bona fide emergency which may result in damage or injury to persons or Landlord’s property, Landlord may, unless Tenant commences and diligently pursues such maintenance or repairs within five (5) days after receipt of written notice (or such shorter period as would reasonably be expected under the given circumstances) make such repairs or commence such maintenance on behalf of Tenant and Tenant shall pay Landlord all costs and expenses reasonably incurred in making such repairs within thirty (30) days of receipt of invoice thereof. If the parties so agree, the Landlord may perform any maintenance or repair that is the Tenant’s responsibility hereunder, and Tenant shall pay the cost for the maintenance or repair upon receiving a proper invoice from the Landlord.
8.3 Landlord's Maintenance Responsibilities. Landlord shall provide and keep or cause to be kept the HVAC systems, electrical, and plumbing systems all as existing in the Building as of the date of this Lease or added as part of the up fit pursuant to Section 1.4, all other improvements made to the Premises by Landlord pursuant to Section 1.4 and all structural portions of the Building, including without limitation, the
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foundation, roof, loading docks and all load bearing and exterior walls, in good order, condition and repair, except for damage thereto due to the negligence of Tenant, Tenant's employees or invitees. The term “exterior walls” as used herein shall include windows, glass or plate glass, doors or overhead doors, special store fronts, dock bumpers and dock plates or levelers. Landlord shall keep or cause to be kept the outside grounds, including mowing, landscaping and snow removal, grass, tree and the parking area(s), and sidewalks in good order, condition and repair. Tenant shall immediately give Landlord written notice of defect or need for repairs, after which Landlord shall commence such repairs as soon as reasonably practicable. If the parties so agree, Tenant may perform any maintenance or repair that is Landlord’s responsibility hereunder, and Landlord shall pay the cost for the maintenance or repair upon receiving a proper invoice from the Tenant.
8.4 Landlord’s Failure to Make Repairs. If Landlord fails to commence any repair to the Building or the Premises or to a common area that is Landlord’s responsibility under Section 8.3 within ten (10) days after notification of the need for such repair, and fails to complete such repairs within a reasonable period of time, Tenant may, in addition to any other remedies it may have, make such repairs at the expense of Landlord and Landlord shall pay to Tenant all costs and expenses reasonably incurred as a result of such repairs within ten (10) days of receipt of invoice thereof. In the event of a bona fide emergency which may result in damage or injury to persons or Tenant’s property, damage which has a material impact on Tenant’s ability to conduct business as contemplated under this Agreement, or damage which otherwise exposes Tenant (in Tenant’s reasonable judgment) to liability, Tenant may, unless Landlord commences and diligently pursues such repairs within five (5) days after receipt of written notice (or such shorter period as would reasonably be expected under the given circumstances), make such repairs on behalf of Landlord and Landlord shall pay to Tenant all costs and expenses reasonably incurred in making such repairs within thirty (30) days of receipt of invoice thereof.
9. ASSIGNMENT AND SUBLETTING
9.1 Assignment or Subletting by Tenant. Tenant shall not assign, transfer, mortgage, pledge, hypothecate or encumber this Lease, or any interest therein, and shall not sublet the Premises, or any part thereof, without obtaining the prior written consent of Landlord, which shall not be unreasonably withheld. In connection with any such assignment or sublease, Tenant or the assignee or subtenant of Tenant shall not owe Landlord any legal and administrative costs incurred by Landlord in approving such assignment or subletting. The acceptance of rent from any other person shall not be deemed to be a waiver of any of the provisions of this Lease, or deemed consent to the assignment or subletting of the Premises. Consent to any assignment or subletting shall not be deemed consent to any future assignment or subletting. Notwithstanding the foregoing, Tenant shall have the absolute right (without obtaining Landlord's prior written consent which shall not be required) to assign this Lease in whole or in part or to sublet all or any portion of the Premises to: any affiliate controlling, controlled by or under common control with Tenant; an entity with which Tenant merges or consolidates; or to a purchaser of all or substantially all of the assets of Tenant related to the business conducted at the Premises, if the assignee assumes, in writing delivered to Landlord, all of Tenant's obligations under the Lease.
9.2 Assignment by Landlord. Landlord may assign this Lease, in whole or in part, without the prior written consent of Tenant, provided that such assignment does not in any way affect or impair the rights granted to Tenant herein, or adversely affect Tenant’s possession of the Premises.
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9.3 Assignment pursuant to Provision of the Bankruptcy Code. If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code (11 U.S.C. sec. 101 et seq) any and all monies or other considerations payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to the Landlord and shall be and remain the exclusive property of the Landlord and shall not constitute the property of the Tenant or the estate of the Tenant, within the meaning of the Bankruptcy Code.
10. RIGHT OF ENTRY Landlord, its employees and agents, shall have the right to enter the Premises with a designated representative of Tenant upon reasonable notice during regular business hours for the purpose of examining or inspecting the same, showing the same to prospective purchasers, mortgagees or Tenants of the Premises, and to perform its maintenance obligations under Section 8.3, above. In the case of a bona fide emergency, Landlord shall use its best efforts to provide Tenant with the greatest possible notice under the circumstances prior to entering the Premises and in the event that representatives of Tenant are not present to accompany Landlord or to open and permit entry into the Premises during the course of a bona fide emergency, then Landlord may enter the Premises forcibly and without being accompanied by a representative of Tenant without such entry constituting an eviction of Tenant or termination of this Lease. Except in the case of a bona fide emergency, Landlord, its employees and agents shall abide by all reasonable security and safety procedures established for the Premises by Tenant.
11. INSURANCE
11.1 Landlord’s Obligations. Throughout the Term of this Lease, including any renewals or extensions thereof, Landlord shall maintain the following insurance coverage: (i) standard all risk coverage in an amount equal to the replacement cost of the Building; (ii) Commercial General Liability of not less than $1,000,000 per occurrence and $2,000,000 aggregate, naming Tenant as an additional insured; (iii) boiler insurance with coverage and in an amount reasonably satisfactory to Tenant: and (iv) at Landlord’s discretion, such other insurance policies as may be deemed normal and customary for substantially similar buildings, including but not limited to coverage for loss of rent. All insurance coverage shall be primary and non-contributory and issued by insurers licensed to do business in the state in which the Premises are located. The insurance required of Landlord hereunder may be maintained by a blanket or master policy, which includes properties other than the Premises. All such policies and coverage shall be primary and non-contributory, issued by insurers, licensed to do business in the state in which the Premises are located and which are rated A- or better by Best’s Key rating Guide, endorsed to include Tenant as additional insured (Commercial General Liability only), and endorsed to provide at least 30 –days prior notification of cancellation or material change in coverage to said Tenant.
11.2 Tenant’s Obligations.
11.2.1 Tenant shall keep in effect at Tenant's expense during the term of this Lease: (i) all risk property insurance covering the full replacement cost of Tenant’s Equipment and all other property and improvements installed or placed in the Premises by Tenant at Tenant's expense; (ii) worker's compensation insurance with no less than the minimum limits required by law; (iii) employer's liability insurance with such limits as required by law; and (iv) commercial general liability insurance with a minimum limit of $1,000,000 per occurrence and $2,000,000 aggregate. All such policies and coverage shall be primary and non-contributory, issued by insurers, licensed to do business in the state in which the Premises are located and which are rated A- or better by Best’s Key Rating Guide, endorsed to include Landlord as additional insured (Commercial General Liability only), and endorsed to provide at least 30-days prior notification of cancellation or material change in coverage to said Landlord. Tenant may comply with its insurance obligations hereunder in whole
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or in part through a company-wide program of self-insurance and may maintain company-wide levels of deductibles provided the Tenant provides Landlord with an appropriate self-insurance certificate.
11.2.2 Fire and Casualty Insurance. Tenant shall not do or suffer to be done any act, matter or thing whereby the fire and casualty insurance carried by Landlord on the building of which the Premises are a part shall be suspended or rated as more hazardous than January 1, 2015. As a remedy for the breach of this covenant (in addition to all other remedies given to Landlord for breach of any covenants or conditions of this Lease), Tenant agrees to pay, within thirty (30) days of receipt of written demand, any and all increase of premium for fire and casualty insurance carried by Landlord caused directly by the actions or occupancy of Tenant or may alter its use of the building such that its use is no more hazardous than at the commencement of this Lease.
12. DAMAGE OR DESTRUCTION OF LEASED PREMISES
12.1 In case the Premises are damaged to the extent of 50% or more of its replacement value by fire or any other cause, then either party may, by a notice in writing sent no later than thirty (30) days after such damage, terminate this Lease as of the date of such damage, and any fixed rent for the unexpired period paid in advance beyond the date of such damage, shall be refunded by Landlord to Tenant.
12.2 If the Premises are damaged to an extent less than 50% of its value or neither party exercises its right to terminate the Lease under Section 12.1 above, the Landlord shall diligently commence restoration and restore the Premises to a condition equal to its condition before the damage. Landlord’s obligation to rebuild is contingent upon its receipt of insurance proceeds sufficient to make such repairs. In the event any mortgagee or lender requires such sums to be applied to any debt, Landlord shall not be deemed to have received the proceeds, in which event Tenant may terminate this Lease unless Landlord agrees to fund the repairs. If Landlord completes such repairs, then Tenant shall promptly repair or replace its Trade Fixtures, furnishings, furniture, carpeting, wall covering, floor covering, drapes and equipment to the same condition as they were in immediately prior to the casualty. A proportion of the rent herein reserved, according to the extent that such damage and its repair shall interfere with the full enjoyment and use of the Premises, shall be suspended and abated from the date of such damage until Landlord’s repairs have been completed. In the event that the Premises have not been restored to a condition equal to their condition before the damage within ninety (90) days after Landlord’s receipt of the proceeds, then Tenant may, by a notice in writing sent prior to completion of restoration, terminate this Lease as of the date of such termination, and any fixed rent for the unexpired period paid in advance beyond the date of such damage, shall be refunded by Landlord to Tenant.
13. REMEDIES OF LANDLORD UPON TENANT’S DEFAULT
13.1 Tenant’s Default Defined. The following shall be considered an “Event of Default” and a breach of this Lease: (a) any failure of Tenant to pay any Base Rent or the money in the excess of the Up-fit Allowance or other amounts due hereunder for more than five (5) business days after receipt of written notice of non-payment; (b) any failure by Tenant to perform or observe any of the other terms, provisions, conditions and covenants of this Lease for more than thirty (30) days after receipt of written notice of such failure provided, however, that if the event for which the notice is given is of a nature that may not be reasonably cured within said thirty (30) day period, Tenant shall not be in default for so long as Tenant commences to cure the default within the thirty (30) day period and diligently pursues it to conclusion; (c) Tenant files a voluntary or involuntary petition in bankruptcy which is not dismissed within thirty (30) days of the filing or makes a general assignment for the benefit of its creditors; (d) a receiver of any property of
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Tenant in or upon the Premises is appointed in any action, suit, or proceeding by or against Tenant and such appointment shall not be vacated or annulled within sixty (60) days; or (e) this Lease, Tenant's interest herein or in the Premises, any improvements thereon, or any property of Tenant is judicially executed upon or attached and not released within sixty (60) days of such action.
13.2. Landlord's Remedies. Upon the occurrence of any Event of Default specified in Section 13.1, Landlord, in addition to all other rights or remedies Landlord may have for such default at law or in equity, shall have the right to pursue any one or more of the following remedies.
13.2.1 Terminate this Lease and, without prejudice to any other remedy which it may have for possession or arrearages in rent or fees, enter upon and take possession of the Premises by summary dispossession proceedings or any other method authorized by law and recover from Tenant through the Letter of Credit provided pursuant to Paragraph 3.1.3 or by other legal means: (i) the entire remaining unpaid balance of Base Rent, and other fees by deeming the remaining Term of the lease accelerated whereby the entire sum shall become immediately due and payable; (ii) the costs of repairing or otherwise putting the Premises into the condition required by this Lease.
13.2.2 Without terminating this Lease, enter upon and take possession of the Premises, by summary dispossession proceedings or any other remedy authorized by law and re-let the Premises, or any part thereof, for such term or terms (which may extend beyond the term of this Lease), for the highest rent reasonably obtainable (even if such rent is below market value) and to recover from Tenant the difference between the rent reserved by this Lease and the amount obtained through such re-letting plus the following costs, if reasonably incurred by Landlord in such re-letting: (a) brokerage fees and/or leasing commissions; (b) the costs of removing and storing Tenant's or any other occupant's property; and (c) the costs of repairing or otherwise putting the Premises into the condition required by this Lease together with the costs of alterations reasonably necessary to re-let the Premises. No such re-letting shall relieve Tenant from its obligations hereunder. In no event shall Tenant be entitled to any excess rent obtained by re-letting the Premises over and above the rent reserved herein.
13.3 If the Tenant shall continue in default in the performance of any of the covenants or agreements herein contained, after any applicable cure period, Landlord may perform the same for the account of Tenant. Any amount incurred by Landlord in the performance of any such matter for the account of Tenant shall be payable by Tenant to Landlord within thirty (30) days after written demand.
13.4 No re-entry or taking possession of the Premises by Landlord shall be construed as an election to terminate this Lease unless Landlord sends a written notice of termination to Tenant. Notwithstanding any such re-letting or re-entry or taking possession, without termination, Landlord may at any time thereafter terminate this Lease for any prior uncured breach or default, unless the Landlord waives the said breach or default in writing. Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies herein provided or any other remedies provided by at law or in equity, nor shall pursuit of any remedy herein provided constitute a forfeiture or waiver of any Base Rent, or Fees due to Landlord hereunder or of any damages accruing to Landlord.
14. REMEDIES OF TENANT UPON LANDLORD’S DEFAULT
14.1 Landlord shall be in default of this Lease (“Landlord Default”) if it shall fail to perform any duty or obligation imposed upon it by this Lease and such failure shall continue for a period of thirty (30) days after written notice, provided, however, that if the event for which the notice is given is of a nature that
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may not reasonably be performed within said thirty (30) day period, Landlord shall not be in default for so long as Landlord commences its performance within said thirty day period and diligently pursues it to conclusion. Upon the occurrence of a Landlord Default, Tenant, in addition to all other rights or remedies Tenant may have for such default at law or in equity, shall have the right to exercise any self-help measures as may be reasonably necessary to cure such default. Landlord shall reimburse any costs and expenses incurred by Tenant in order to cure a Landlord Default within thirty (30) days after written demand. In addition, if Landlord fails to cure any material default within thirty (30) days after receiving written notice of the default, Tenant shall have the right, upon written notice to Landlord, to terminate this Lease without penalty or further obligation to Landlord, its employees, officers, agents or lenders.
14.2 All obligations of Landlord under this Lease will be deemed binding upon Landlord only during the period of its ownership of the Premises and not thereafter. The term “Landlord” in this Lease shall mean only the owner, for the time being of the Premises, and in the event of the transfer by such owner of its interest in the Building and the Property, such owner shall thereupon be released and discharged from all obligations of Landlord thereafter accruing (but not from defaults accruing during such Landlord’s ownership), but such obligations shall be binding during the Lease Term upon each new owner for the duration of such owner’s ownership. Any liability of a current Landlord under this Lease shall be limited solely to its interest in the Premises, including without limitation any equity therein, income derived there from or personal property on or about the Building and the Property, and in no event shall any personal liability be asserted against such current Landlord in connection with this Lease nor shall any recourse be had to any other property or assets of such current Landlord.
15. EMINENT DOMAIN In the event that more than thirty percent (30%) of the Premises are taken by paramount governmental authority or in any way condemned or appropriated by the exercise of the right of eminent domain or a deed or conveyance in lieu of eminent domain, (each a "Taking"), either party hereto shall have the right, at its option, within sixty (60) days after said Taking, to terminate this Lease upon thirty (30) days written notice to the other party. In the event that either party elects to terminate the Lease, the rent herein set forth shall be abated and Landlord and Tenant's liability therefore will cease as of the date of such termination, this Lease shall terminate as of said date, and any prepaid rent shall be returned to Tenant. If this Lease is not terminated as herein provided then it shall continue in full force and effect, and Landlord shall within a reasonable time after possession is physically taken by the condemning authority restore the remaining portion of the Premises to render it reasonably suitable for the uses permitted by this Lease and the Base Rent shall be proportionately and equitably reduced. Notwithstanding the foregoing, Landlord shall not be obligated to expend an amount greater than the proceeds received from the condemning authority less all expenses reasonably incurred in connection therewith (including attorney's fees) for the restoration. In the event any mortgagee or lender requires that all or any portion of the proceeds received from the condemning authority be applied to any debt, Landlord will not be deemed to have received such proceeds. All compensation awarded in connection with or as a result of a Taking shall be the property of the Landlord, except that Tenant may apply for and keep as its property a separate award for: (i) the value of Tenant's leasehold interest; (ii) the value of Tenant Equipment or Tenant’s trade fixtures or personal property; (iii) Tenant's moving expenses; (iv) Tenant's business relocation expenses; and (v) damages to Tenant's business incurred as a result of such Taking.
16. SUBORDINATION OF LEASE
16.1 This Lease is and shall remain subordinate and subject to any mortgage or mortgages or deed of trust which are now, or at any time hereafter shall be placed, upon the interest of Landlord in the Premises or any part thereof or to any assignment of the interest of Landlord in this Lease; provided that the holder
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thereof shall execute and deliver to Tenant a non-disturbance agreement in form reasonably acceptable to Tenant. Tenant agrees to execute and deliver to Landlord, without cost, any instrument that may be deemed necessary by Landlord to further effect the subordination of this Lease to any such mortgage, mortgages or assignments in form reasonably acceptable to Tenant. The failure of landlord to obtain a non-disturbance agreement from any lender as provided in this Section 16.1 within thirty (30) days following execution of this Lease shall be deemed an event of default by Landlord. In addition, Landlord shall not execute a mortgage or deed of trust after the date hereof encumbering all or any portion of the Property unless Landlord has first provided Tenant with a non-disturbance agreement in a form satisfactory to Tenant from the party benefitted by such mortgage or deed of trust.
16.2 In the event of a foreclosure of any such mortgage, Landlord and Tenant hereby agree that this Lease shall not terminate by reason thereof, and Tenant further agrees to recognize as Landlord hereunder the mortgagee or purchaser at a foreclosure sale for the balance of the Term, the Renewal Term or an extension of either, subject to all the terms and provisions hereof; provided, however, that any such mortgagee or purchaser at a foreclosure sale, which shall become the Landlord hereunder, shall not be:
(a) liable for acts or omissions of Landlord occurring prior to its ownership of the Premises (but such mortgagee or purchaser shall perform any unperformed obligations under this Lease existing at the time it becomes Landlord);
(b) subject to any offsets or defenses which Tenant might have against Landlord that accrue prior to its ownership of the Premises, except as provided in this Lease;
(c) bound by any rent or additional rent which Tenant may have paid to Landlord more than thirty days in advance (other than the security deposit); or
(d) bound by any amendment or modifications of said Lease made after Tenant receives written notice of such foreclosure.
17. ESTOPPEL CERTIFICATE Either party shall, at any time and from time to time within twenty (20) days following receipt of written request from the other party, execute, acknowledge and deliver to the requesting party a written statement certifying that this Lease is in full force and effect and unmodified (or, if modified, stating the nature of such modification), certifying the date to which the rent reserved hereunder has been paid, and certifying that there are not, to the responding party’s knowledge, any uncured defaults on the part of the party requesting the certificate, or specifying such defaults if any are claimed. Such a statement may be relied upon by any prospective purchaser, mortgagee or subtenant of all or any portion of the Premises. The responding party’s failure to deliver such statement within said twenty-day period shall be conclusive upon such party that this Lease is in full force and effect and unmodified, and that there are no uncured defaults in the requesting party’s performance hereunder.
18. RULES AND REGULATIONS Tenant and Tenant’s agents, employees and invitees shall faithfully observe and comply with all reasonable, uniform rules and regulations promulgated by Landlord from time to time for the safety, care or cleanliness of the Premises and for the preservation of good order therein, provided that such rules and regulations do not materially increase Tenant's duties or obligations under this Lease. In the event of any conflict or inconsistency between the terms and conditions of this Lease and any rules and regulations promulgated by Landlord, the conflict or inconsistency shall be resolved by giving precedence to the terms and conditions of this Lease.
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19. QUIET ENJOYMENT Landlord represents and warrants that it has the authority to enter into this Lease. Landlord further represents, warrants and covenants that so long as Tenant pays all amounts due hereunder and performs all other material covenants and conditions of this Lease to be performed by the Tenant hereunder, Landlord and its successors and assigns shall not interfere, nor permit interference, with Tenant’s quiet use and enjoyment of the Premises and that, subject to the terms and conditions of this Lease, Tenant shall peaceably and quietly have, hold and enjoy the Premises for the Term hereof.
20. ENVIRONMENTAL MATTERS
20.1 Definitions.
20.1.1 For purposes of this Lease, the term "Environmental Laws" shall mean any and all federal, state, or local laws, statutes, rules, regulations, ordinances, or judicial or administrative decrees or orders relating to: (i) health, safety or environmental protection; (ii) the emissions, discharges, releases or threatened releases of pollutants, contaminants or toxic or hazardous materials into the environment (including, without limitation, ambient air, surface water, ground water or subsurface strata); or (iii) the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of, or exposure to pollutants, contaminants or toxic or hazardous materials, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, 42 USC 9601 et seq. ("CERCLA"), as amended and judicially and administratively interpreted through the date hereof, and all regulations promulgated thereunder as of such date.
20.1.2 For purposes of this Lease, the term "Hazardous Substance" shall mean: (i) any products, materials, solvents, elements, compounds, chemical mixtures, contaminants, pollutants, or other substances identified as toxic or hazardous under CERCLA or any other Environmental Law; and (ii) the following substances: PCBs, gasoline, kerosene or other petroleum products, toxic pesticides and herbicides, volatile solvents, materials containing asbestos or formaldehyde and radioactive materials.
20.2 Tenant's Obligations.
20.2.1 Tenant shall not cause or knowingly permit any Hazardous Substance to be placed, stored, treated, released, spilled, transported or disposed of on, under, at or from the Premises in violation of any Environmental Laws. Nor will Tenant knowingly permit the Premises to be used or operated in a manner that may cause the Building or any part thereof, to be contaminated by any Hazardous Substance in violation of any Environmental Laws.
20.2.2 Tenant shall contain at or remove from the Premises or perform any other remedial action regarding any Hazardous Substance placed, held, located, released, spilled, transported or disposed of on, under, at or from the Premises by Tenant, its employees, agents or contractors, at Tenant's sole cost and expense, if, and when such containment, removal or other remedial action is required under any Environmental Law, and shall perform such containment, removal or other remediation in compliance with all Environmental Laws.
20.2.3 Tenant shall provide Landlord with written notice (and a copy as may be applicable) within ten (10) business days after Tenant obtains actual knowledge of any of the following: (a) any governmental or regulatory actions instituted or threatened under any Environmental Law affecting the Tenant or the Premises, (b) all claims made or threatened by any third party against Tenant or the Premises relating to damage, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials,
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(c) the discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Premises that could cause the Premises or Property to be classified in a manner which may support a claim under any Environmental Law, and (d) the discovery of any Hazardous Substance on, under, at or from the Premises not authorized or permitted under Environmental Laws.
20.2.4 In addition to Tenant’s general indemnification obligations set forth in Section 21 below, Tenant shall defend all actions against Landlord and pay, protect, indemnify and save harmless Landlord from and against any and all liabilities, losses, damages, costs, expenses (including, without limitation, reasonable attorney fees and expenses), causes of action, suits, claims, demands or judgments of any nature arising from Tenant’s failure to comply with this Section 20. The indemnity contained in this Section 20.2.4 shall survive the expiration or earlier termination of this Lease indefinitely with respect to the obligations and liabilities of Tenant hereunder, actual or contingent, which have arisen on or prior to such expiration or earlier termination.
20.3 Landlord's Obligations.
20.3.1 In addition to Landlord's general indemnification obligations set forth in Section 21 below, Landlord shall, to the extent permitted by law and subject to the Landlord’s rights and defenses under the doctrine of sovereign immunity, which the Landlord’s sovereign immunity shall not be deemed waived, defend all actions against Tenant and pay, protect, indemnify and save harmless Tenant from and against any and all liabilities, losses, damages, costs, expenses (including, without limitation, reasonable attorney fees and expenses), causes of action, suits, claims, demands or judgments of any nature arising out of or relating to: (i) emissions, discharges, releases or threatened releases of pollutants, contaminants or Hazardous Substances into the environment (including, without limitation, ambient air, surface water, ground water or subsurface strata) or exposure to such Hazardous Substances on, at, under, or from the Premises, or any real estate contiguous thereto, that occurred or originated prior to the Commencement Date or that were caused by Landlord, its employees, agents or contractors; (ii) the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of pollutants, contaminants or Hazardous Substances on, under, at or from the Premises, or any real estate contiguous thereto, that occurred or originated prior to the Commencement Date or by Landlord, its employees, agents or contractors; and (iii) any actual or alleged violation of any Environmental Law on, under, at or arising from the Premises, or any real estate contiguous thereto, that occurred or originated prior to the Commencement Date or by Landlord, its employees, agents or contractors. The indemnity contained in this Section 20.3.1 shall survive the expiration or earlier termination of this Lease indefinitely with respect to the obligations and liabilities of Landlord hereunder, actual or contingent, which have arisen on or prior to such expiration or earlier termination.
20.3.2 Landlord represents to Tenant that as of the Commencement Date Landlord has no knowledge that: (i) the Premises, the Building and the ground under them and the Property are contaminated by any Hazardous Substances; (ii) all or any portion of the Premises has, at any time, been used for the treatment, storage, or disposal of any Hazardous Substances; (iii) Hazardous Substances are (or have been) used, generated or disposed of on or about the Premises, except in compliance with all applicable Environmental Laws; and (iv) any part of the Premises or surrounding common areas are on any governmental list of contaminated properties, or of any investigation, administrative order or notice, consent order, or agreement for litigation pertaining to the Building or the surrounding common areas.
21. WAIVER; INDEMNIFICATION
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21.1 Waiver. EXCEPT AS OTHERWISE SET FORTH IN THIS LEASE, NEITHER PARTY OR ITS AGENTS OR EMPLOYEES, SHALL BE LIABLE TO THE OTHER PARTY OR ANY PERSON CLAIMING THROUGH THAT PARTY FOR ANY EXEMPLARY, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION LOST PROFITS) FOR ANY CAUSE WHATSOEVER, EXCEPT CLAIMS CAUSED BY OR RESULTING FROM THE GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT OF THAT PARTY, ITS AGENTS, CONTRACTORS OR EMPLOYEES.
21.2 Tenant's Indemnity. Except to the extent caused by the breach of this Lease by Landlord or the acts or omissions of Landlord, its officers, agents, employees, contractors, or any other person or entity for whom Landlord is legally responsible, Tenant shall defend, indemnify and hold Landlord and its officers, directors, shareholders, employees, agents and representatives harmless from and against any and all claims, demands, litigation, settlements, judgments, damages, liabilities, costs and expenses (including without limitation reasonable attorneys’ fees) arising directly or indirectly out of: (i) any wrongful act or omission of Tenant, its officers, agents, employees, contractors, or any other person or entity for whom Tenant is legally responsible; or (ii) a breach of any representation, warranty or covenant of Tenant contained or incorporated in this Lease. Tenant’s obligations under this Section 21.2 shall survive the expiration or earlier termination of this Lease indefinitely.
21.3 Landlord's Indemnity. Except to the extent caused by the breach of this Lease by Tenant or the acts or omissions of Tenant, its officers, agents, employees, contractors, or any other person or entity for whom Tenant is legally responsible, and to the extent permitted by law and subject to the Landlord’s rights and defenses under the doctrine of sovereign immunity, which the Landlord’s sovereign immunity shall not be deemed waived, Landlord shall defend, indemnify and hold Tenant, its officers, directors, shareholders, employees, agents and representatives harmless from and against any and all claims, demands, litigation, settlements, judgments, damages, liabilities, costs and expenses (including without limitation reasonable attorneys’ fees) arising directly or indirectly out of: (i) any wrongful act or omission of Landlord, its officers, agents, employees, contractors or any other person or entity for whom Landlord is legally responsible; or (ii) a breach of any representation, warranty or covenant of Landlord contained or incorporated in this Lease. Landlord’s obligations under this Section 21.3 shall survive the expiration or earlier termination of this Lease indefinitely.
21.4 Indemnification Procedure. The party seeking indemnification (the “Indemnified Party”) shall promptly notify in writing the party from whom indemnification is being sought (the “Indemnifying Party”) of the claim or suit for which indemnification is sought. The Indemnified Party shall not make any admission as to liability or agree to any settlement of or compromise any claim without the prior written consent of the Indemnifying Party. The Indemnifying Party shall be entitled to have the exclusive conduct of and/or settle all negotiations and litigation arising from any claim and the Indemnified Party shall, at the Indemnifying Party
request and expense, give the Indemnifying Party all reasonable assistance in connection with those negotiations and litigation.
22. MISCELLANEOUS
22.1 Force Majeure. Notwithstanding anything to the contrary in this Lease, neither party shall be liable to the other party for nonperformance or delay in performance of any of its obligations under this Lease (except Tenant’s obligation to pay rent) due to causes beyond its reasonable control, including without limitation strikes, lockouts, labor troubles, acts of God, accidents, technical failure, governmental
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restrictions, insurrections, riots, enemy act, war, civil commotion, fire, explosion, flood, windstorm, earthquake, natural disaster, or other casualty ("Force Majeure"). Upon the occurrence of a Force Majeure condition, the affected party shall immediately notify the other party with as much detail as possible and shall promptly inform the other party of any further developments. Immediately after the Force Majeure event is removed or abates, the affected party shall perform such obligations with all due speed. Neither party shall be deemed in default under this Agreement if a delay or other breach is caused by a Force Majeure event. A proportion of the rent, according to the extent that such Force Majeure event shall interfere with the full enjoyment and use of the Premises, shall be suspended and abated from the date of commencement of such Force Majeure event until the date that such Force Majeure event subsides.
22.2 Affiliates. For purposes of this Lease, the term "Affiliate" shall mean, with respect to a party hereto, any other person or entity directly or indirectly controlling, controlled by or under common control with that party.
22.3 Successors and Assigns. The respective rights and obligations provided in this Lease shall bind and shall inure to the benefit of the parties hereto, their legal representative, heirs, successors and permitted assigns. No rights however, shall inure to the benefit of any assignee of Tenant, unless such assignment shall have been made in accordance with Section 9 above.
22.4 Brokers. Each party represents and warrants to the other that no person or entity has a claim or will claim any commission, finder’s fee or other amounts by, through, under or as a result of any relationship with such party because of this transaction. Landlord and Tenant each agree to defend, indemnify and hold the other party harmless from and against any and all claims, losses or damages, including without limitation reasonable attorney’s fees arising out of or relating to any breach of such party’s representations and warranties contained in this Section 22.4.
22.5 Governing Law and Construction. This Lease shall be construed, governed and enforced in accordance with the laws of the Commonwealth of Virginia. Landlord and Tenant acknowledge and agree that they and their counsel have reviewed, or have been given a reasonable opportunity to review, this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments hereto.
22.6 Person; Gender; Number. As used in this Lease, the word "person" shall mean and include, where appropriate, an individual, corporation, partnership or other entity; the plural shall be substituted for the singular, and the singular for the plural, where appropriate; and words of any gender shall mean to include any other gender.
22.7 Severability. If any provisions of this Lease shall be held to be invalid, void or unenforceable, the remaining provisions hereof shall in no way be affected or impaired and such remaining provisions shall remain in full force and effect.
22.8 Waiver. The failure of any party to insist upon strict performance of any provision of this Agreement shall not be construed as a waiver of any subsequent default or breach of the same or similar nature. All rights and remedies reserved to either party shall be cumulative and shall not be in limitation of any other right or remedy which such party may have at law or in equity.
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22.9 Notice. Any notice to be given hereunder shall be in writing and shall be sent by hand delivery with verified receipt, or by first class certified mail, postage prepaid, or by overnight courier service, charges prepaid, to the party notified, addressed to such party at the following address or such other address as such party may have substituted by written notice to the other parties. The receipt of such notice shall constitute the giving thereof:
If to Landlord: Economic Development Authority of Montgomery County, VA.
755 Roanoke Street, Suite 2H
Christiansburg, VA 24073
Attn: Economic Development Authority Secretary/Treasurer
With a copy to: County Attorney
County of Montgomery, VA
755 Roanoke Street, Suite 2F
Christiansburg, Virginia 24073
If to Tenant: Luna Innovations Incorporated
3155 State Street
Blacksburg, Virginia 24060
With a copy to: Whitlow and Youell, PLC
Attn: C. Cooper Youell, IV
28A Kirk Avenue
Roanoke, VA 24011
22.10 Entire Agreement. This Agreement sets forth the entire, final and complete understanding between the parties hereto relevant to the subject matter of this Agreement, and it supersedes and replaces all previous understandings or agreements, written, oral, or implied, relevant to the subject matter of this Agreement made or existing before the date of this Agreement. Except as expressly provided by this Agreement, no waiver or modification of any of the terms or conditions of this Agreement shall be effective unless in writing and signed by both parties. Any provision of this Agreement which logically would be expected to survive termination or expiration, shall survive for a reasonable time period under the circumstances, whether or not specifically provided in this Agreement.
22.11 Compliance with Law. The parties shall comply with, and agree that this Agreement is subject to, all applicable federal, state, and local laws, rules and regulations, and all amendments thereto, now enacted or hereafter promulgated in force during the Term, a Renewal Term or any extension of either.
22.12 Counterparts. This Lease may be executed in any number of identical counterparts and, as so executed, shall constitute one agreement, binding on all the parties hereto, notwithstanding that all the parties are not signatories to the original or the same counterpart.
22.13 Remedies Cumulative. It is agreed that, except as expressly set forth in this Lease, the rights and remedies herein provided in case of default or breach by either Landlord or Tenant are cumulative and shall not affect in any manner any other remedies that the non breaching party may have by reason of
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such default or breach. The exercise of any right or remedy herein provided shall be without prejudice to the right to exercise any other right or remedy provided herein, at law, or in equity.
22.14 Attorneys’ Fees. If an action is brought by either party for breach of any lease covenant and/or to enforce or interpret any provision of this Lease, the prevailing party shall be entitled to recover its costs, expenses and reasonable attorney’s fees, both at trial and on appeal, in addition to all other sums allowed by law.
22.15 Recordation of Memorandum of Lease. Landlord and Tenant mutually agree to execute a notarized memorandum (the "Memorandum") setting forth the material terms and disclosing the existence of this Lease within ten (10) days of a written request by either party with the cost of such recording being borne by the requesting party.
22.16 Time is of the Essence. Time is of the essence; and all due dates, time schedules, and conditions precedent to exercising a right shall be strictly adhered to without delay except where otherwise expressly provided.
22.17 Access to Dock Doors and Parking. The Tenant shall have access to the existing dock doors and drive through door on the Premises. Tenant shall be entitled to priority use of Eighty-Nine (89) parking spaces on the Property based upon the Tenant’s proportionate share of the Premises.
22.18 Air and Wastewater Discharge. Except as follows, Tenant shall not be permitted to discharge wastewater or air through the Building’s existing wastewater or air handling systems. Nothing herein shall prohibit Tenant from discharging ordinary sanitary sewage through the Building’s sanitary sewage system. Tenant can use the air handling system that is designed for air discharge.
[Remainder of Page Intentionally Left Blank – Signature Page Follows]
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WITNESS the following signatures and seals:
THE ECONOMIC DEVELOPMENT LUNA INNOVATIONS Incorporated
AUTHORITY OF MONTGOMERY
COUNTY, VIRGINIA
By: ___/s/ Eric Johnsen__________ By: ____/s/ Scott A. Graeff_____________
Eric Johnsen, Chair Scott A. Graeff, Chief Strategy Officer
COMMONWEALTH OF VIRGINIA, at large,
COUNTY OF MONTGOMERY, to-wit;
I, the undersigned, a notary public in and for the jurisdiction aforesaid, do hereby certify that Eric Johnsen, whose name as Chairman of the Economic Development Authority of Montgomery County is signed to the foregoing Lease, has acknowledged the same before me in my jurisdiction aforesaid.
Given under my hand this ____day of ______, 2014.
My Commission expires:
____________________________
Notary Public
COMMONWEALTH OF VIRGINIA, at large,
COUNTY OF MONTGOMERY, to-wit;
I, the undersigned, a notary public in and for the jurisdiction aforesaid, do hereby certify that Scott A. Graeff, whose name as Chief Strategy Officer of Luna Innovations Incorporated is signed to the foregoing Lease, has acknowledged the same before me in my Jurisdiction aforesaid.
Given under my hand this ___day of _______, 2014.
My commission expires:
_____________________________
Notary Public
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Exhibit B
Description of the Property
All that certain tract or parcel of Land, with improvements thereon and appurtenances thereon to located and situated in the Mount Tabor Magisterial District of Montgomery County, Virginia, in the Blacksburg Industrial Park and being all of Lot Number Eight (8) containing 15.025 acres, Phase IV, Industrial Park Expansion, as shown on a plat of survey entitled “Industrial Park Expansion Phase IV”, prepared by Anderson and Associates, Inc., dated 19 Dec 95 and revised 19 Feb 96, which plat is of record in the Clerk’s Office of the Circuit Court of Montgomery County, Virginia, in Plat Book 16, at page 507.
Exhibit C
Upfit Improvements
EXHIBIT 10.49
LEASE
THIS LEASE AGREEMENT (the “Lease”), entered into this __ day of November 2014, by and between SBA TENANT LLC, herein called "Landlord", and LUNA INNOVATIONS INCORPORATED herein called "Tenant".
W I T N E S S E T H:
That for and in consideration of the rents and covenants hereinafter set forth, Landlord hereby agrees to Lease, and Tenant hereby rents from Landlord, the following described premises together with all improvements thereon called the "Leased Premises" to-wit: the first floor office space located at 301 1st Street, SW, Suite 200, Roanoke, Virginia 24011 and deemed to be 4,432 square feet of office space as shown in Exhibit A.
TO HAVE AND TO HOLD said Leased Premises and the privileges and appurtenances thereunto belonging unto the Tenant, its successors and assigns, for the terms hereinafter provided, and upon the following terms and conditions, to which the parties mutually covenant and agree:
(1) TERM:
(A)Subject to the terms and condition in this Section, the term of this Lease shall commence on April 1, 2015 (the “Commencement Date”) and end on March 31, 2020. Notwithstanding the foregoing, Landlord agrees as follows:
(i) | Landlord shall notify Tenant in writing on or about February 15, 2015 (but no later than February 20, 2015) of the anticipated date the improvements being made to the Leased Premises by Landlord as described in Section 9 are to be completed and the certificate of occupancy for the Leased Premises is to be obtained (the “Completion Date”). If the Completion Date is anticipated to be later than April 1, 2015, the parties agree to extend the Commencement Date to give Landlord additional time to complete the improvements and obtain the certificate of occupancy provided that Tenant shall be entitled to a credit of $5,540.00 for each thirty (30) day period, or portion thereof, the Commencement Date is extended. |
(ii) | If Landlord notifies Tenant as provided in Subsection (i) above that the Completion Date will be on or before April 1, 2015, and the improvements being made to the Leased Premises by the Landlord as described in Section 9 are not completed by such date and/or the certificate of occupancy is not issued, Tenant shall be entitled to two (2) free months of rent for each thirty (30) day period, or portion thereof, beginning April 1, 2015 and ending the date the improvements being made by the Landlord as described in Section 9 are completed, a certificate of occupancy for the Lease Premises is issued and possession of the Leased Premises is made available to Tenant. |
(iii) | If the Commencement Date is extended as provided in Subsection (i) above and Landlord is unable to complete the improvements being made to the Leased Premises as described in Section 9 and/or the certificate of occupancy for the Leased Premises is not issued by such date, Tenant shall be entitled to, in addition to the credit set forth in Subsection (i), two (2) free months of rent for each thirty (30) day period, or portion thereof, beginning on the date the Commenced Date was extended and ending on the date the improvements being made by the Landlord as described in Section 9 are completed, a certificate of occupancy for the Lease Premises is issued and possession of the Leased Premises is made available to Tenant. |
(iv) | Landlord and Tenant agree, if necessary, that they shall execute an amendment to the Lease setting forth the actual Commencement Date if the same is not April 1, 2015. Landlord and Tenant further agree that in the event the Commencement Date is changed all other dates in the Lease shall be adjusted accordingly. |
(v) | If Landlord is delayed in delivering the leased premises to Tenant due to reasons beyond its control, such as unusual weather events, unscheduled closures of government agencies, or Acts of God, it shall not be required to pay damages to Tenant as described in this Section. |
(B) Notwithstanding the foregoing and except for earlier termination as provided herein, either party desiring to terminate this Lease at the end of the term shall give the other party written notice of its intention to terminate this Lease at least 120 days in advance and this Lease shall continue in full force and effect at the highest rental rate and subject to all covenants, provisions and conditions herein contained until one party provides the other with 120 days prior notice of its election to terminate.
(C) Except where the context clearly requires otherwise, the word "term" whenever used in this Lease with reference to the duration hereof, shall be construed to include any renewal terms as well as the original term.
(2) BASE RENT:
(A) During the term of this Lease Tenant covenants to pay a base annual rent in monthly installments in advance on the first day of each month on the following schedule:
Year Annual Rental Monthly Rental
1 $66,480.00 $5,540.00
2 $68,474.40 $5,706.20
3 $70,528.63 $5,877.39
4 $72,644.49 $6,053.71
5 $74,823.83 $6,235.32
6+ 3% increase over preceding year.
(B) Provided there has been no event of Tenant default during the term of this Lease or any renewals and extensions thereof and provided Tenant has fulfilled all of its obligations under this Lease, then Tenant shall have the option to renew this Lease for two (2) terms of five (5) years. Tenant shall exercise its option by giving written notice to Landlord no less than 180 days prior to the end of the then current term. Rental in the renewal term(s) will increase annually by 3%.
(C) Tenant will require access to the Leased Premises during the course of construction for the purpose of installing and storing Tenant’s fixtures, personal property and equipment prior to the Commencement Date and Tenant shall not be obligated to pay rent or other charges during the period that Tenant is occupying the space for this purpose.
(D) If the original term does not commence on the first day of the month, Tenant shall pay for the period from the commencement date to the first day of the following calendar month a sum equal to one-thirtieth (1/30) of the monthly rental due hereunder for each day of such period. All rents thereafter shall be payable when due to:
SBA Tenant, LLC
c/o The Richmond Loft Company
301 1st Street SW, Suite 100
Roanoke, Virginia 24011
or such place as Landlord may designate in writing to Tenant.
(3) SECURITY DEPOSIT:
The Tenant has deposited with the Landlord $5,000.00 as security for Tenant's full and faithful performance of all the terms of this Lease. Landlord shall return such sum when this Lease expires if Tenant has fully and faithfully carried out all of its terms. If there is a bona fide sale of the property of which the Leased Premises are a part and purchaser assumes this Lease, Landlord shall transfer to the purchaser the security deposit to be held under the terms of this Lease, and the Landlord shall be released from all liability for the return of such security to the Tenant.
(4) ADDITIONAL RENT:
Additional rent (hereinafter referred to as "Additional Rent") is the amount of any payment referred to as such in any provision of this Lease or in any Addendum hereto, which accrues while this Lease is in effect.
(5) USE OF LEASED PREMISES:
Tenant shall use the Leased Premises for an office and in strict accordance with all applicable laws and regulation of governmental authorities. Tenant shall use the Leased Premises for no other purpose without the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant will not use or permit or suffer the use of the Leased Premises for any unlawful or offensive business or purpose. Tenant will not, without prior written consent of Landlord, use or permit the outside walls, fences or roof of the Leased Premises to be used for advertising purposes.
(6) CONDITION OF LEASED PREMISES
Tenant has examined and knows the present condition of the Leased Premises and the equipment thereon, if any. No representation, either verbally or written, has been made to Tenant, or Tenant's agents, by Landlord, or Landlord's agents, concerning the condition of the Leased Premises and the equipment thereto, if any, or that any particular use can be made thereof except as specifically set forth in writing in this Lease or any Addendum thereto. Landlord shall be under any duty to instruct Tenant or others as to the use of any equipment on the Leased Premises.
(7) INTENTIONALLY DELETED
(8) TENANT IMPROVEMENTS AND ACCEPTANCE OF PROPERTY
Landlord shall make the following tenant improvements to the Leased Premises, at no cost to Tenant, prior to the Commencement Date:
• | Metal or Wood Stud Framed Walls with Painted Gypboard finish. |
• | Insulation between all office walls and bathrooms. |
• | Gypboard ceilings in Lobby, Conference Room, Corridors |
• | Acoustic Ceilings in Offices, Bathrooms and Rear Open Office & File Room |
• | 400 Amp Electrical Service, Outlets, Fluorescent lighting and Conduits for data. |
• | Plumbing for bathrooms, kitchen and fixtures. |
• | Counter tops and cabinetry for kitchen |
• | HVAC and Duct, Split System Electric Heat Pumps and Air Conditioning. |
• | Code compliant Sprinkler Service tied into building fire alarm system. |
• | Polished Terrazzo Floor Finish, Carpet in Rear Open Office & File Room |
• | Carpet for all areas other than center hall, kitchen and bathrooms |
• | Solid Core Wood Doors with Metal Frames and ADA Lever Hardware |
• | Building Permits and Design Drawings. |
All improvements or alterations made to the Leased Premises by Tenant shall immediately become the property of Landlord and shall not be removed at the expiration or earlier termination of this Lease, unless so requested by Landlord, in which event Tenant agrees to so do and to repair promptly any damage caused by such removal.
At the Commencement Date, the Tenant shall be deemed to accept the building, improvements, and any equipment on or in the Leased Premises, in their existing condition, following a completed punch list approved by the Tenant and Landlord. Work shall be covered under warranty for one (1) year by Landlord.
(9) ASSIGNMENT, SUBLETTING AND MORTGAGING
Tenant shall not assign this Lease nor sublet the Leased Premises, in whole or in part, without Landlord’s prior written consent, which shall not be unreasonably withheld. If consent to sublease is obtained, no such sublease shall in any way release or relieve Tenant from any of its covenants or undertakings contained in this Lease, and in all cases under this section, Tenant shall remain liable on this Lease during the existing term as of the date of the assignment or sublet.
(10) UTILITIES
Landlord shall bear responsibility for the costs of water, sewer and trash to the Leased Premises. Tenant shall bear responsibility for the costs of electricity, telephone and other utility services to the Leased Premises not covered by Landlord. Tenant shall promptly pay all telephone and other utility bills, as the same become due, it being understood and agreed that the Tenant shall promptly make all required deposits for meters and utilities services. Charges for the foregoing shall commence on commencement date of the original term of this Lease. Landlord shall not be liable for any interruption or failure in the supply of any utility to the Leased Premises for any reason whatsoever.
(11) INSURANCE AND INDEMNIFICATION:
(11.1) INCREASE IN RISK. The Tenant
(A) shall not do or permit to be done any act or thing as a result of which either (i) any policy of insurance of any kind covering any or all of the Leased Premises or any liability of the Landlord in connection therewith may become void or suspended, or (ii) the insurance risk under any such policy would (in the opinion of the insurer thereunder) be made greater; and
(B) shall pay as Additional Rent the amount of any increase in any premium for such insurance resulting from any breach of such covenant, or shall pay Landlord for any loss sustained by Landlord as a result of any uninsured loss caused by Tenant's breach of covenants.
(11.2) INSURANCE TO BE MAINTAINED BY TENANT
(A) The Tenant shall maintain at its expense, throughout the term, and all extension thereof, insurance against loss on liability in connection with bodily injury and destruction, property damage, personal injury and destruction, occurring within the Leased Premises or arising out of the use thereof by the Tenant or its agents, employees, officers or invitees, visitors or guest under one or more policies of general public liability insurance having such limits as are reasonably required by Landlord from time to time (but in any event of not less than $2,000,000.00 general aggregate, $2,000,000.00 products-comp/ops aggregate, $1,000,000.00 personal and advertising injury, $1,000,000.00 each occurrence, $100,000.00 fire damage (any one fire) and $5,000.00 medical expense (any one person)). Such policies shall name the Landlord and Tenant (and at Landlord's request, any mortgagee) as insured parties, shall provide that they shall not be cancelable without at least sixty (60) days prior written notice to the Landlord and Landlord's Agent (and at the Landlord's request any mortgagee) and shall be issued by a company with a rating of at least class VIII and an excellent rating from A.M. Best Insurance Reporting.
(B) The Tenant shall maintain at Tenant's expense a plate glass insurance policy, for coverage of all glass contained in the Leased Premises.
(C) If Tenant shall not comply with this covenant to maintain insurance as provided herein, Landlord may, at its option, cause insurance as aforesaid to be issued and in such event, Tenant shall pay when due the premiums for such insurance as Additional Rent hereunder.
(11.3) INSURANCE TO BE MAINTAINED BY LANDLORD
The Landlord shall maintain throughout the term of the Lease and extensions thereof, replacement cost with the agreed amount endorsed (no co-insurance) risk of direct physical loss coverage insurance with respect to the Leased Premises.
(11.4) WAIVER OF SUBROGATION
In the event of loss or other perils named in replacement cost with the agreed amount endorsed (no co-insurance) risk of direct physical loss coverage insurance, neither Landlord nor Tenant shall have or exercise any right of subrogation against each other, either through themselves or through any subrogation right under any policy of replacement cost coverage covering material or consequential loss and each of the parties agrees to instruct their insurance company to have their polices endorsed to waive the right of subrogation by the insurance company against either of them.
(11.5) LIABILITY OF PARTIES
Except if any to the extent that such party is released from liability to the other party hereto pursuant to the provisions of subsection 11.4;
(A) The Landlord shall be responsible for, and shall indemnify and hold harmless the Tenant against and from any and all liability arising out of, any injury or death of any person or damage to any property, occurring anywhere upon the Leased Premises, if, and only if to the extent that such injury, death or damage is proximately caused by gross negligence or intentionally tortious act or omission of the Landlord. Landlord is not obligated to and specifically does not indemnify and hold harmless the Tenant against or from any liability for any such injury, death or damage occurring anywhere upon the Leased Premises, by reason of the Tenant’s occupancy or use of the Leased Premises because of fire, windstorm, act of God or other cause unless proximately caused by such gross negligence or intentionally tortious act or omission, as aforesaid.
(B) Subject to the operation and effect of the foregoing provisions of this subsection, the Tenant shall be responsible for, and shall indemnify and hold harmless the Landlord against and from, any and all liability arising out of any injury to or death of any person or damage to the property, occurring within the Leased Premises or as the result of Tenant's use and occupancy of the Leased Premises.
(12) TAXES AND ASSESSMENTS
(A) Tenant shall promptly pay when due all taxes and assessments levied by public authority on its trade fixtures, equipment and other property of Tenant located on or about the Leased Premises and all other taxes occasioned by its business or use of the Leased Premises.
(B) Tenant shall pay, as additional rental under this Lease Agreement, any state, county or municipal sales or use tax, or any other tax, which may hereafter be assessed with respect to the use or operation of the Leased Premises, provided Tenant shall not be required to pay any tax owed in connection with the rentals paid hereunder.
(13) INTENTIONALLY DELETED
(14) REPAIRS AND ALTERATIONS
(14.1) Tenant shall keep and maintain the Leased Premises in neat and clean condition and shall replace all plate glass broken during the tenancy, regardless of the manner in which same may have been broken, and unstop all water fixtures that may become choked. Tenant shall not make any alterations of, additions to or changes in the Leased Premises or equipment without the prior written consent of Landlord, which consent shall not be unreasonably withheld, and all alterations, changes and improvements, by whomsoever made, shall be the property of Landlord.
(14.2) Tenant agrees that all additions and improvements and attached equipment and fixtures installed in or on the Leased Premises by the Tenant, including but not being limited to, electric wiring, electric fixtures, show window reflectors, screens, screen doors, awnings, awning frames, permanent floor coverings, landscaping, furnaces and air conditioning machinery and equipment, shall immediately become the property of the Landlord and shall not be removed by Tenant at the termination of this Lease, unless requested to do so by the Landlord, in which event Tenant agrees to do so and to repair promptly any damage caused by such removal.
(14.3) Except as otherwise provided in subsection 14.1 above, Landlord shall maintain and make all necessary repairs and replacements to the Leased Premises and the building of which the Leased Premises are a part, including, but not limited to, the foundations, load bearing walls, HVAC, electrical and plumbing systems, the tenant improvements made to the Leased Premises by Landlord and the roof. .
(14.4) Tenant shall, on the last day of the term, or upon the sooner termination of this Lease, peaceably and quietly surrender the Leased Premises and equipment not owned by Tenant to Landlord, broom-clean, including all improvements, alterations, rebuildings, replacements, changes or additions placed by Tenant thereon, in as good condition and repair as the same were in at the commencement of the original term, normal wear and tear excepted; provided, however, Tenant shall not be required to return the Leased Premises and equipment in as good condition as aforesaid if the same are damaged or destroyed by fire or otherwise, unless caused by Tenant's fault or negligence which is not adequately covered by insurance.
(14.5) Tenant shall not paint or change the decorative or architectural treatment of the storefront, the interior or the exterior of the Leased Premises without Landlord's written consent which shall not be unreasonably withheld. Tenant shall promptly remove upon order from the Landlord any decoration or architectural change which has been applied to or installed upon the Leased Premises without Landlord's written consent or take such other action with reference thereto as Landlord may direct.
(14.6) Tenant shall not place or permit to be placed or maintained any sign, awning, advertising matter, decoration, lettering, or other item of any kind on the interior or the exterior of the Leased Premises or on the glass of any window or door of the Leased Premises without first obtaining Landlord's written approval thereof, which consent shall not be unreasonably withheld. Tenant shall promptly remove upon receipt of any order from Landlord, any sign, awning, advertising matter or other thing of any kind which has been applied to or installed upon the interior or exterior of Leased Premises without Landlord's written consent or take such other action with reference thereto as Landlord may direct.
(15) DESTRUCTION OF LEASED PREMISES
(A) If the Leased Premises are damaged or destroyed by fire or other casualty, then (1) if totally destroyed or so that the Leased Premises are rendered unleaseable, this Lease shall terminate as of the date of such destruction and Tenant shall be liable for the rent only to the date of such destruction and awards for the Leased Premises shall belong to and be payable to Landlord; or (2) if only partially destroyed and at least ninety percent (90%) of the space is useable by Tenant, Landlord shall, within a reasonable time, repair the Leased Premises with a prorata reduction in rent from the date of such partial destruction until the repairs are completed. Damage or destruction by fire or other casualty covered by insurance, which cannot be repaired or restored within 30 days of the date of such destruction, shall be deemed totally destroyed and the Lease shall be deemed to have terminated on the date of such destruction and Tenant shall be liable for the rent only to the date of such destruction and awards for the Leased Premises shall belong to and be payable to Landlord. Landlord's obligation to repair or restore the Leased Premises are stated herein as conditioned upon (a) all insurance proceeds and award for the Leased Premises being paid to Landlord, which are sufficient to cover the cost of said repairs and restorations, and (b) there remaining at least twenty four (24) months in the then existing term of this Lease. If Landlord does not repair the Leased Premises because either conditions (a) or (b) are not met, Landlord shall notify Tenant and this Lease shall terminate as of the date of such partial destruction and Tenant shall be liable for rent only to the date of such partial destruction. Notwithstanding the foregoing, if such damage is the result of the act or omission of the Tenant or Tenant’s employee, agent or invitee, and such damage is not covered by insurance, then Landlord at its option may repair or restore the Leased Premises, the cost of which shall be paid for by Tenant in installments or in whole upon notice thereof being given to Tenant by Landlord
(B) Tenant shall give immediate written notice to Landlord of any damage or destruction of the Leased Premises whether it is total or partial.
(16) INSPECTION BY LANDLORD
Tenant shall permit Landlord, its agents, or employees to inspect the Leased Premises and all parts thereof during normal business hours and to enforce and carry out any provision of this Lease and for the future purpose of showing the Leased Premises to prospective tenants and purchasers and representatives of lending institutions. During the last four (4) months of the original term and all renewals or extensions thereof, Landlord shall have the right to place "For Rent" and/or "For Sale" signs in conspicuous places on the Leased Premises and to otherwise advertise the Leased Premises "For Rent" and/or "For Sale", in addition to having the rights of entry and inspection set forth herein. Tenant shall do no act or omission which interferes with Landlord's rights to reentry and inspection.
(17) EMINENT DOMAIN
(17.1) RIGHT TO AWARD
(A) If any or all of the Leased Premises are taken by the exercise of any power of eminent domain or are conveyed to or at the direction of any governmental entity under a threat of any such taking (each of which is hereinafter referred to as a "Condemnation"), the Landlord shall be entitled to collect from the condemning authority thereunder the entire amount of any award made in any such proceeding or as consideration for such Deed, without deduction therefrom for any leasehold or other estate held by the Tenant by virtue of this Lease.
(B) The Tenant hereby (i) assigns to the Landlord all of the Tenant's right, title and interest, if any, in and to any such award, (ii) waives any right which it may otherwise have in connection with such Condemnation, against the Landlord or such condemning authority, to any payment for (a) the value of the then unexpired portion of the term, (b) leasehold damages, and (c) any damage to or diminution of the value of the Tenant's leasehold interest hereunder or any portion of the Premises not covered by such Condemnation; and (iii) agrees to execute any and all further documents which may be required in order to facilitate the Landlord's collection of any and all such awards. Tenant may recover from Landlord its reasonable out-of-pocket costs related to relocating its operations.
(C) Subject to the operation and effect of the foregoing provisions of this section, the Tenant may seek, in a separate proceeding, a separate award on account of any damages of costs incurred by the Tenant as a result of such Condemnation, so long as such separate award in no way diminishes any award or payment which the Landlord would otherwise receive as a result of such Condemnation.
(17.2) EFFECT OF CONDEMNATION
(A) If (i) all of the Leased Premises are covered by a Condemnation, or (ii) if any part of the Leased Premises is covered by a Condemnation and the remainder thereof is insufficient for the reasonable operation therein of the Tenant's business, in Tenant’s reasonable discretion, or (iii) any of the Leased Premises is covered by a Condemnation and, in the Landlord's reasonable opinion, it would be impractical to restore the remainder thereof, then, in any such event, the Lease shall terminate on the date upon which the tenant vacates the Leased Premises provided that such date may be no sooner than six (6) months from the date of scheduled possession of so much of the Leased Premises as is covered by such Condemnation is taken by the condemning authority thereunder, and all rent (including, by way of example rather then of limitation, any Additional Rent payable pursuant to any Addendum regarding Additional Rent), taxes, and other charges payable hereunder shall be prorated and paid to such date.
(B) If there is a Condemnation and the Term does not terminate pursuant to the foregoing provisions of this subsection, the operation and effect of this Lease shall be unaffected by such Condemnation, except that the base rent and the Additional Rent shall be reduced in proportion to the square footage of floor area, if any, of the Leased Premises covered by such Condemnation.
(17.3) If there is Condemnation, the Landlord shall have no liability to the Tenant on account of any (i) interruption of the Tenant's business upon the Leased Premises, (ii) diminution in the Tenant's ability to use the Leased Premises, or (iii) other injury or damage sustained by the Tenant as a result of such Condemnation.
(17.4) Except for any separate proceeding brought by the Tenant under the provisions of subsection17.1 (C), the Landlord shall be entitled to conduct any such Condemnation proceeding and any settlement thereof free of interference from the Tenant, and the Tenant hereby waives any right it might otherwise have to participate therein.
(18) DEFAULTS BY THE TENANT
(18.1) DEFINITION. As used in the provisions of this Lease, each of the following events shall constitute, and is hereunder referred to as, an "Event of Default":
(A) If the Tenant (i) fails to pay the base rent or any other sum which the Tenant is obligated to pay by any provision of this Lease, when and as it is due and payable hereunder and without demand therefor, or (ii) in any respect violates any of the terms, conditions or covenants set forth in the provisions of this Lease; or
(B) If the Tenant (i) applies for or consents to the appointment of a receiver, trustee or liquidator of the Tenant or of all or a substantial part of its assets, (ii) files a voluntary petition in bankruptcy or admits in writing its inability to pay its debts as they come due, (iii) makes an assignment for the benefit of its creditors, (iv) files a petition or an answer seeking a reorganization or an arrangement with creditors, or seeks to take advantage of any insolvency law, (v) performs any other act of bankruptcy, reorganization or insolvency proceeding; or
(C) If (i) an order, judgment or decree is entered by any court of competent jurisdiction adjudicating the Tenant a bankrupt or an insolvent, approving a petition seeking such a reorganization, or appointing a receiver, trustee or liquidator of the Tenant or of all or substantially all of its assets, or (ii) there otherwise commences with respect to the Tenant or any of its assets any proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment, receivership or similar law, and if such order, judgment, decree or proceeding continues in effect for more than sixty (60) consecutive days after the expiration of any stay thereof; or
(D) If the Tenant vacates the Leased Premises for thirty (30) consecutive days and fails to provide the necessary utility service to the Leased Premises to cause the temperature within the Leased Premises to remain at a reasonable level.
(18.2) NOTICE TO TENANT: GRACE PERIOD
Anything contained in the provisions of this section to the contrary notwithstanding, upon the occurrence of an Event of Default the Landlord shall not exercise any right or remedy which it holds under any provision of this Lease or under applicable law unless and until:
(A) The Landlord has given written notice thereof to the Tenant and
(B) If such Event of Default consists of failure to pay money, the Landlord has given seven (7) days written notice thereof to the Tenant and the Tenant has failed to make such payment in said seven (7) day period of time or, if such Event of Default consists of something other then failure to pay money, the Landlord has given thirty (30) days notice of the default and the Tenant has failed to proceed to diligently and in good faith to cure such Event of Default.
(C) No such notice shall be required, and the Tenant shall be entitled to no such grace period, (i) if the Event of Default has occurred more than twice during any twelve (12) month period, or (ii) if any Event of Default enumerated in the provisions of sections 18.1 (B) or 18.1 (C) has occurred.
(18.3) LANDLORD'S RIGHTS UPON EVENT OF DEFAULT
Upon the occurrence of any Event of Default, the Landlord may:
(A) Re-enter and repossess the Leased Premises and any and all improvements thereon and additions thereto without necessity of judicial proceedings:
(B) Relet any or all of the Leased Premises for the Tenant's account for any or all of the remainder of the Term as hereinabove defined, or for a period exceeding such remainder, in which event the Tenant shall pay to the Landlord any deficiency in the base rent and Additional Rent resulting, with respect to such remainder, from such releting, as well as the cost to the Landlord of any attorney's fees which fees the Tenant is hereby deemed to agree are reasonable or of any repairs or other action (including those taken in exercising the Landlord's rights under any provisions of this Lease) taken by the Landlord on account of such Event of Default;
(C) Pursue any combination of such remedies and/or any other remedy available to the Landlord on account of such Event of Default under applicable law.
(18.4) LANDLORD'S RIGHT TO CURE
Upon the occurrence of an Event of Default, the Landlord shall be entitled (but shall not be obligated), in addition to any other rights which it may have hereunder or under applicable law as a result thereof, and after giving the Tenant written notice of the Landlord's intention to do so except in the case of emergency, to cure such Event of Default, and the Tenant shall reimburse the Landlord for all expenses incurred by the Landlord in doing so, plus interest thereon at the highest rate then permitted on account thereof by applicable law, which expenses and interest shall be Additional Rent and shall be payable by the Tenant immediately upon demand therefore by the Landlord. In addition to the foregoing, in the event Tenant, its employees, agents or invitees, takes any action which constitutes an eminent danger or destruction or diminution of value of the Landlord’s property, real or personal, or to that of any other tenant or adjoining property owner, Landlord may immediately take all steps necessary to prohibit or enjoin such action and Tenant shall be responsible for the reasonable costs and expenses incurred by Landlord, including attorney’s fees, in correcting or stopping such danger or destruction.
(19) SEVERABILITY:
If any provision of this Lease or any application thereof shall be invalid or unenforceable, the remainder of this Lease and any other application of such provision shall not be affected thereby.
(20) RELATIONSHIP OF PARTIES:
Landlord and Tenant shall not be considered or deemed to be joint venturers or partners and neither shall have the power to bind or obligate the other except as set forth herein.
(21) RULES AND REGULATIONS
The Landlord hereby reserves the right to prescribe, at its sole discretion, reasonable rules and regulations (hereinafter referred to as the "Rules and Regulations"), having uniform applicability to all tenants of 301 1st Street SW and governing the use and enjoyment of 301 1st Street SW and the remainder of the Property; provided, that the Rules and Regulations shall not materially interfere with the Tenant's use and enjoyment of the Leased Premises, in accordance with the provisions of this Lease, and further provided that in the event the Rules and Regulations conflict with the terms and condition of this Lease the terms and condition of the Lease shall control. The Tenant shall adhere to the Rules and Regulations and shall cause its agents, employees, invitees, visitors and guests to do so. SEE EXHIBIT B FOR RULES AND REGULATIONS OF THE PROPERTY.
(22) NO REPRESENTATIONS BY LANDLORD:
Neither Landlord nor its agents have made any representations or promises with respect to the Building, the Land, or the Leased Premises except as expressly set forth herein. No rights, easements, or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this Lease. The taking possession of the Leased Premises by Tenant shall be conclusive evidence as against it, that Tenant accepts the Leased Premises were in good and satisfactory condition when possession was so taken.
(23) SUBORDINATION
Tenant accepts this Lease subject and subordinate to the present state of the Leased Premises and to any recorded mortgage, deed of trust or any other lien presently existing upon the Leased Premises and to any renewal, extension or modification thereof provided that the holder thereof shall execute and deliver to Tenant a non-disturbance agreement in form reasonably acceptable to Tenant. The failure of Landlord to obtain a non-disturbance agreement from any current lender prior to the Commencement Date shall be deemed an event of default by Landlord. Tenant agrees upon demand to execute such instruments subordinating this Lease to any future mortgage, deed of trust or other security instruments as Landlord may request, provided such further subordination is subject to, and conditioned upon, Tenant’s receipt from such future lender(s) of a non-disturbance agreement in form reasonably acceptable to Tenant.
(24) SUCCESSORS AND ASSIGNS
All parties to this Lease agree that all of the provisions hereof shall bind and inure to the benefit of the parties hereto, their heirs, legal representatives, successors and assigns.
(25) TENANT'S OBLIGATION TO COMPLY WITH APPLICABLE LAWS -
TENANT TO OBTAIN NECESSARY LICENSE
Tenant, at its expense, shall promptly comply with all federal, state, and municipal laws, orders, and regulations, and with all lawful directives of public officers, which impose any duty upon it with respect to the Leased Premises. The Tenant, at its expense, shall obtain all required licenses or permits for the conduct of its business within the terms of this Lease, or for the making of alterations, improvements, or additions, and the Landlord, when necessary, will join with the Tenant in applying for all such permits or licenses.
(26) APPLICABLE LAW, CONSTRUCTION
(A) This Lease shall be construed in accordance with the laws of the Commonwealth of Virginia.
(B) Whenever used the singular number shall include the plural, the singular, and the use of any gender shall include all other genders.
(27) ENVIRONMENTAL REQUIREMENTS
Tenant shall not cause, commit or allow to exist or to continue any violation of any environmental requirement imposed by any local, federal or state agency with respect to the Leased Premises or any use or activity on the Leased Premises. Tenant will not place, install, dispose of or release or cause, permit or allow to be placed, installed, disposed of or released any Hazardous Material on the Leased Premises. If any Hazardous Material is discovered on the Leased Premises at any time, which Hazardous Material has been placed thereon by Tenant, its employees or agents, Tenant shall promptly, at Tenant's sole risk and expense, remove, treat and dispose of the Hazardous Material in compliance with all applicable environmental regulations and laws.
(28) FITNESS FACILITY:
Landlord will maintain in good working condition the fitness room and equipment similar to that in existence at the inception of the Lease. Employees of Tenant shall be granted unrestricted access, free of charge, to the fitness facility.
(29) ESTOPPEL CERTIFICATE:
Either party shall, at any time and from time to time within twenty (20) days following receipt of written request from the other party, execute, acknowledge and deliver to the requesting party a written statement certifying that this Lease is in full force and effect and unmodified (or, if modified, stating the nature of such modification), certifying the date to which the rent reserved hereunder has been paid, and certifying that there are not, to the responding party’s knowledge, any uncured defaults on the part of the party requesting the certificate, or specifying such defaults if any are claimed. Such a statement may be relied upon by any prospective purchaser, mortgagee or subtenant of all or any portion of the Premises. The responding party’s failure to deliver such statement within said twenty-day period shall be conclusive upon such party that this Lease is in full force and effect and unmodified, and that there are no uncured defaults in the requesting party’s performance hereunder.
(30) DEFAULT BY LANDLORD:
In the event Landlord fails to maintain the building of which the Leased Premises are a part and infrastructure in good working order or fails to make any reasonable repair requested by the Tenant or otherwise required under this Lease within 30 days, or within 24 hours in the case of a repair causing a health risk to the Tenant’s employees, the Tenant may have such repair performed at its expense and deduct such costs from future rentals due under the Lease.
(31) NOTICES
Whenever in this Lease it shall be required or permitted that notice or demand be given or served by either party to this Lease to or on the other, such notices or demand shall be given or served and shall not be deemed to have been given or served unless in writing and forwarded by registered or certified mail addressed as follows:
TO LANDLORD:
SBA TENANT LLC
c/o The Richmond Loft Company
Attention: Bill Chapman
415 Oliver Hill Way, Suite 100
Richmond, VA 23219
TO TENANT:
LUNA INNOVATIONS INCORPORATED
Attn: Scott A Graeff301 1st Street SW, Suite 200
Roanoke, VA 24011
WITH A COPY TO:
Whitlow & Youell, PLC
Attn: Cooper Youell
28A Kirk Avenue
Roanoke, VA 24011
(32) FINAL UNDERSTANDING:
This Lease represents the final understanding between Landlord and Tenant and the obligations of each party hereunder cannot be changed or modified unless by written Addendum signed by the parties whose obligations are to be modified and endorsed hereon or attached hereto.
(33) QUIET ENJOYMENT:
Landlord represents and warrants that it has the authority to enter into this Lease. Landlord further represents, warrants and covenants that so long as Tenant pays all amounts due hereunder and performs all other material covenants and conditions of this Lease to be performed by the Tenant hereunder, Landlord and its successors and assigns shall not interfere, nor permit interference, with Tenant’s quiet use and enjoyment of the Leased Premises and that, subject to the terms and conditions of this Lease, Tenant shall peaceably and quietly have, hold and enjoy the Leased Premises for the Term hereof.
(34)SPECIAL PROVISIONS: This Lease shall allow the Tenant use of ten (10) designated parking spaces in the surface parking lot at 0 Kirk Street SW which spaces shall be available exclusively for use by Tenant 24 hours a day, seven days a week. Terms and conditions for use of the parking lot:
(A)Items Left in Vehicles. Landlord shall not be responsible for damage or loss to possessions or items left in Tenant’s vehicles.
(B)Damage to Vehicles. Landlord shall not be responsible for damage to Tenant’s vehicles, whether or not such damage is caused by other vehicle(s) or person(s) in the parking lot and surrounding area.
(C)Parking Lot Attendants. Landlord shall not provide parking lot attendants. In the event that Landlord provides such attendants, any use of such attendant by Tenant to park or drive Tenant’s vehicles shall be at Tenant’s request, direction and sole risk of any resulting loss and Tenant shall indemnify Landlord for any loss resulting from such use.
(D)Vehicle Identification. Tenant agrees to provide the model, make and color of cars and license plate numbers to Landlord. Landlord grants to Tenant the right to tow unauthorized vehicles in the parking spots leased to Tenant. Landlord shall not tow any vehicle in the parking spots leased to Tenant without contacting Tenant first.
(F) Requirements: Vehicle must be licensed, insured and maintained in accordance with all state and local laws and ordinances. A vehicle is unauthorized or illegally parked if it:
a)is on jacks, blocks or has wheel(s) missing; or
b)has no current license or no current inspection sticker; or
c)takes up more than one parking space not leased to Tenant; or
d)is parked in a marked handicap space without the legally required handicap insignia;
e)is parked in a space marked for manager, staff, or guest at the office; or
f)blocks another vehicle from exiting; or
g)is parked in a fire lane or designated "no parking" area; or
h)is parked in a space specifically marked for the use of others; or
i)is parked on the sidewalk; or
j)blocks garbage trucks from access to a dumpster.
WITNESS the following signatures and seals:
LUNA INNOVATIONS INCORPORATED
By: /s/ Dale Messick (SEAL)
Its: Chief Financial Officer
SBA TENANT, LLC
By: /s/ William Chapman (SEAL)
Its: Manager
{19074/03/00086550.DOCX;3 }
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated March 16, 2015, with respect to the consolidated financial statements and schedule included in the Annual Report of Luna Innovations Incorporated on Form 10-K for the year ended December 31, 2014. We hereby consent to the incorporation by reference of said report in the Registration Statements of Luna Innovations Incorporated on Form S-3 (File No #333-191809) and on Form S-8 (File No. 333-138745).
/s/ GRANT THORNTON LLP
McLean, VA
March 16, 2015
for the years ended December 31, 2013 and 2014, respectively.Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, My E. Chung, certify that:
1. | I have reviewed this annual report on Form 10-K of Luna Innovations Incorporated; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 16, 2015
/S/ MY E. CHUNG | |
My E. Chung | |
President and Chief Executive Officer (principal executive officer) | |
ndExhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dale E. Messick, certify that:
1. | I have reviewed this annual report on Form 10-K of Luna Innovations Incorporated; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 16, 2015
/S/ DALE E. MESSICK | |
Dale E. Messick | |
Chief Financial Officer (principal financial officer) | |
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Luna Innovations Incorporated (the “Company”) on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, My E. Chung, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This certification accompanies this Report to which it relates, shall not be deemed “filed” with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.
/S/ MY E. CHUNG | |
My E. Chung | |
President and Chief Executive Officer (principal executive officer) | |
March 16, 2015
Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with to the annual report of Luna Innovations Incorporated (the “Company”) on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dale E. Messick, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This certification accompanies this Report to which it relates, shall not be deemed “filed” with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.
/S/ DALE E. MESSICK | |
Dale E. Messick | |
Chief Financial Officer (principal financial officer) | |
March 16, 2015