Such recommendations should be provided at least 120 days prior to the anniversary date of the mailing of our proxy statement for the previous annual meeting of stockholders. The committee does not intend to alter the manner in which it evaluates candidates, including the criteria set forth below, based on whether or not the candidate was recommended by a stockholder.
The Nominating and Governance Committee retains the right to modify these qualifications from time to time.
Our Nominating and Governance Committee does not have a formal policy regarding board diversity. Diversity is one of a number of factors, however, that the committee takes into account in identifying nominees, and the Nominating and Governance Committee believes that it is essential that the board members represent diverse viewpoints.
The Board values diversity, in its broadest sense and, in the director identification and nomination process, the Board seeks a breadth of experience from a variety of industries and from professional disciplines, such as finance, professional services and technology, along with a diversity of gender, ethnicity and geographic location. In any searches for director candidates, the Nominating and Governance Committee seeks to include female and minority candidates in the initial list of candidates from which the committee selects prospective director candidates and requires that any search firm that it may engage to assist with a director search do the same.
The Nominating and Governance Committee will continue to evaluate the size and composition of our Board on an ongoing basis.
At our 2019 annual meeting of stockholders, our stockholders indicated their preference that we solicit a non-binding advisory vote on the compensation of our named executive officers, commonly referred to as a “say-on-pay” vote, every year. The Board has adopted a policy that is consistent with that preference. In accordance with that policy, this year we are again asking for our stockholders to approve, on an advisory basis, the compensation of the Company’s named executive officers as disclosed in this proxy statement in accordance with SEC rules.
This vote is not intended to address any specific item of compensation, but rather the overall compensation of the Company’s named executive officers described in the Executive Compensation section of this proxy statement. As discussed in those disclosures, the Company believes that its compensation policies and decisions are consistent with current market practices. Compensation of the Company’s named executive officers is designed to enable the Company to attract and retain talented and experienced executives to lead the Company successfully in a competitive environment.
Accordingly, the board of directors is asking the stockholders to indicate their support for the compensation of the Company’s named executive officers as described in this proxy statement by casting a non-binding advisory vote “FOR” the following resolution:
“RESOLVED, that the compensation paid to the Company’s named executive officers, as disclosed pursuant to compensation disclosure rules of the Securities and Exchange Commission, including the Executive Compensation section, compensation tables and any related information disclosed in this proxy statement, is hereby APPROVED.”
Because the vote is advisory, it is not binding on the board of directors or the Company. Nevertheless, the views expressed by the stockholders, whether through this vote or otherwise, are important to management and the board of directors and, accordingly, the board of directors and the Compensation Committee intend to consider the results of this vote in making determinations in the future regarding executive compensation arrangements.
Advisory approval of this proposal requires the vote of the holders of a majority of the shares present online at the meeting or represented by proxy and entitled to vote at the annual meeting.
As described more fully in its charter, the purpose of the Audit Committee is to assist the board of directors with its oversight responsibilities regarding the integrity of our financial statements, our compliance with legal and regulatory requirements, assessing our independent registered public accounting firm’s qualifications and independence and, if applicable, the performance of the persons performing internal audit duties for the Company.
Company management is responsible for preparation, presentation and integrity of our financial statements as well as our financial reporting processes, accounting policies, internal audit function, internal accounting controls and disclosure controls and procedures. Our independent registered public accounting firm is responsible for performing an independent audit of our consolidated financial statements in accordance with generally accepted auditing standards and to issue a report thereon. The Audit Committee’s responsibility is to monitor and oversee these processes. The following is the Audit Committee’s report submitted to the board of directors for 2021.
The Audit Committee has:
|
• |
reviewed and discussed our audited financial statements for the fiscal year ended December 31, 2021 with management and Grant Thornton LLP, our independent registered public accounting firm during 2021; |
|
• |
discussed with Grant Thornton LLP the matters required to be discussed by Auditing Standard No. 1301, Communications with Audit Committees, as adopted by the Public Company Accounting Oversight Board; and |
|
• |
received from Grant Thornton LLP the disclosures and a letter regarding their independence as required by the applicable requirements of the Public Company Accounting Oversight Board requesting Grant Thornton LLP’s communication with the Audit Committee concerning independence and discussed the auditors’ independence with them. |
In addition, the Audit Committee has met separately with Company management and with Grant Thornton LLP.
Based on the review and discussions referred to above, the Audit Committee recommended to the board of directors that the audited 2021 financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2021 for filing with the Securities and Exchange Commission.
|
AUDIT COMMITTEE |
|
Warren B. Phelps, III, Chair |
N. Leigh Anderson |
Mary Beth Vitale |
Pamela Coe |
The foregoing audit committee report is not “soliciting material,” shall not be deemed incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof, and shall not otherwise be deemed filed under these acts, except to the extent we specifically incorporate by reference into such filings.
LUNA INNOVATIONS, INC. |
|
|
23 |
2022 PROXY STATEMENT |
The Company is a “smaller reporting company” under Item 10 of Regulation S-K promulgated under the Securities and Exchange Act of 1934, and the following compensation disclosure is intended to comply with the requirements applicable to smaller reporting companies. Although the rules allow the Company to provide less detail about its executive compensation program, the Compensation Committee is committed to providing the information necessary to help stockholders understand its executive compensation-related decisions. Accordingly, this section includes supplemental narrative that describes the 2021 executive compensation program for our named executive officers (“NEOs”) listed in the table below. We are also committed to keeping an open dialogue with our stockholders to help ensure that we have a regular pulse on investor perspectives and, as we continue to grow, we intend to further enhance our outreach efforts during 2022 and into the future.
|
|
Name |
Position |
Scott A. Graeff |
President and Chief Executive Officer |
Eugene Nestro |
Chief Financial Officer |
Brian Soller |
Chief Operating Officer |
Executive Summary
Business Overview
2021 was a pivotal year for us. Through the challenges of the global pandemic, we stayed focused on our strategy and on enhancing our global leadership position in fiber optic technology. We reported record backlog and delivered double-digit revenue and gross profit growth for the fourth-quarter and full-year. Across our sensing and communications testing businesses, we realized some of the largest customer orders to date and penetrated new geographies and markets, while implementing systems to support growth. Key financial highlights included:
|
• |
Revenues for the year ended December 31, 2021, increased 48% compared to the prior-year period, primarily due to our acquisitions in 2020. |
|
• |
Gross margin of 59% for the year ended December 31, 2021, was down slightly (61% for the year ended December 31, 2020) due to product mix as a result of acquisitions. |
|
• |
Operating loss of $2.6 million for the year ended December 31, 2021, compared to operating income of $0.8 million for the year ended December 31, 2020. The decrease in operating income was primarily due to incremental amortization of intangible assets and inventory step-up related to Luna's completed acquisitions. |
|
• |
Net income was $1.4 million, or $0.04 per fully diluted share, for the year ended December 31, 2021, compared to a net income of $3.3 million, or $0.10 per fully diluted share, for the year ended December 31, 2020. |
|
• |
Adjusted EPS* was $0.17 for the year ended December 31, 2021, compared to $0.18 for the year ended December 31, 2020. |
|
• |
Adjusted EBITDA was $7.6 million for the year ended December 31, 2021, compared to $7.9 million for the year ended December 31, 2020. |
*Adjusted EPS and Adjusted EBITDA are non-GAAP financial measures. Adjusted EPS and Adjusted EBITDA exclude certain charges and credits that are required by GAAP. Adjusted EBITDA and Adjusted EPS provide useful information to both management and investors by excluding the effect of certain non-cash expenses and items that we believe may not be indicative of our operating performance, because either they are unusual and we do not expect them to recur in the ordinary course of its business, or they are unrelated to the ongoing operation of the business in the ordinary course. Adjusted EBITDA and Adjusted EPS should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. Adjusted EBITDA and Adjusted EPS have been reconciled to the nearest GAAP measure in the tables in Appendix of this proxy statement.
LUNA INNOVATIONS, INC. |
|
|
24 |
2022 PROXY STATEMENT |
2021 Compensation Highlights
Our executive compensation program has three primary elements: base salary, annual incentives, and long-term equity incentives. Each of these compensation elements serves a specific purpose in our compensation strategy. Base salary is an essential component to any market-competitive compensation program. Annual incentives reward the achievement of short-term goals, while long-term incentives drive our NEOs to focus on long-term sustainable stockholder value creation. Based on our performance and consistent with the design of our program, the Compensation Committee made the following executive compensation decisions for fiscal 2021:
|
• |
Base Salaries. The Compensation Committee approved market-based salary increases for the NEOs for 2021. |
|
• |
Annual Incentives. We established a 2021 senior management incentive plan, which rewarded our NEOs for our corporate financial performance, specifically whether the Company achieved specific financial performance metrics. The amount of the bonus was based on achieving goals set for revenue, adjusted operating income and individual qualitative objectives. We paid bonuses based on our performance as measured against each of the target financial metrics and the accomplishment of the qualitative objectives. For details, please refer to the “Cash Incentive Bonuses” section below. |
|
• |
Equity Incentives. Consistent with past practice, for 2021, the Compensation Committee approved long-term equity incentive grants to the NEOs, which were comprised of a balanced mix of service-based RSUs, which will vest over time, and performance-based RSUs that will vest based on our achievement of long-term performance goals. In addition, based on performance, the NEOs earned 100% of their target performance-based RSUs for the 2019- 2021 performance cycle. For details, please refer to the “Equity Incentives” section below. |
Best Compensation Practices, Policies and Guidelines
We believe the following practices and policies within our program promote sound compensation governance and are in the best interests of our stockholders and executives:
|
|
|
|
What We Do |
What We Don’t Do |
✓ |
Emphasize variable pay over fixed pay, with a significant portion tied to our financial results |
✘ |
No tax gross ups |
✓ |
Maintain stock ownership guidelines |
✘ |
No repricing or exchange of underwater options without stockholder approval |
✓ |
Maintain compensation recovery (claw-back) policy which applies to both cash and equity incentives |
✘ |
No option or stock appreciation rights
granted below fair market value |
✓ |
Use an independent compensation consultant |
✘ |
No supplemental executive retirement plans |
✓ |
Annually assess risk in compensation plans |
✘ |
No significant perquisites |
What Guides our Program
Our Compensation Philosophy & Objectives
Our overall compensation philosophy is to provide executive compensation packages that enable us to attract, retain and motivate highly qualified executive officers to achieve our short-term and long-term business goals.
Our performance-oriented compensation program consists of base salary, annual cash bonuses, long-term equity incentives, benefits and, for certain senior executive officers, severance and termination protection. We believe that appropriately balancing the total compensation package and ensuring the viability of each component of the package is necessary in order to provide compensation that is competitive and to attract and retain talent. As a small company, we also try to optimize the mix of components to make such compensation programs cost effective for us.
LUNA INNOVATIONS, INC. |
|
|
25 |
2022 PROXY STATEMENT |
The Compensation Committee intends for our compensation program to provide basic elements that ensure that management is fairly remunerated and has reasonable security so that the management team can perform at its best and take prudent risks. The committee believes that it does not use highly leveraged short-term incentives that drive high risk investments at the expense of our long-term value.
Our Compensation Committee typically evaluates the performance of each executive officer annually, based on the achievement of both corporate goals and individual qualitative performance objectives and makes its compensation decisions accordingly. Total compensation for our executive officers may vary significantly from year to year based on Company and individual performance. Further, the value of equity-based awards to our executives will vary based on fluctuation in our stock price from time to time.
Role of the Compensation Committee
Our executive compensation program is approved and monitored by the Compensation Committee of our board of directors. Under the terms of its charter, the Compensation Committee is responsible for reviewing and approving compensation granted to our executive officers, including our Chief Executive Officer ("CEO"), and those executive officers who report directly to the CEO and any other officers as determined under Section 16 of the Securities Exchange Act of 1934, as amended. Currently, we have three executive officers, our CEO, our Chief Financial Officer and our Chief Operating Officer. In particular, the Compensation Committee reviews and approves for the CEO and any other executive officers the following components of compensation:
|
• |
cash and equity bonuses, including the specific goals and amount; |
|
• |
other equity compensation, if any; |
|
• |
employment agreements, severance arrangements, and change in control provisions, as applicable; |
|
• |
signing bonus or payment of relocation costs, above normal Company policy, if applicable; and |
|
• |
any other material benefits, other than those provided to all employees. |
The Compensation Committee also serves as the administrator for our equity incentive plans. All stock-based awards, including new grants to existing employees and executive officers, as well as grants to new employees, are approved by the Compensation Committee. The Compensation Committee is also responsible for annually evaluating the performance of our executive officers.
Role of Management
In discharging its responsibilities, the Compensation Committee works with members of our management, including our CEO. Our management assists the Compensation Committee by providing information on corporate and individual performance, market compensation data, and management’s perspective on compensation matters. The Compensation Committee solicits and reviews our CEO’s proposals with respect to program structures, as well as our CEO’s recommendations for adjustments to annual cash compensation, long-term incentive compensation opportunities, and other compensation-related matters for our NEOs (except with respect to his compensation) based on our CEO’s evaluation of their performance for the prior year.
At the beginning of each year, our CEO reviews the performance of our other NEOs based on such individual’s level of success in accomplishing the business objectives established for him for the prior year and his overall performance during that year, and then shares these evaluations with, and makes recommendations to, the Compensation Committee for each element of compensation as described above. The annual business objectives for each NEO are developed through mutual discussion and agreement between our CEO and the NEOs.
The Compensation Committee reviews and discusses our CEO’s proposals and recommendations and considers them as one factor in determining and approving the compensation of our Named Executive Officers. Our CEO also attends meetings of our Board of Directors and the Compensation Committee at which executive compensation matters are addressed, except with respect to discussions involving our CEO’s own compensation.
LUNA INNOVATIONS, INC. |
|
|
26 |
2022 PROXY STATEMENT |
Role of the Independent Compensation Consultant
The Compensation Committee has the authority to engage and retain an independent compensation consultant to provide independent counsel and advice. At least annually, the Compensation Committee formally conducts an evaluation as to the effectiveness of the independent compensation consultant and periodically runs a request for proposal process to ensure the independent compensation consultant is meeting its needs. The Compensation Committee engaged an independent third-party compensation consultant, Compensation Strategies, Inc., in 2020 to conduct a competitive peer group analysis of our executive compensation program to provide us with insights and market data on executive and director compensation matters, both generally and within our industry. In 2020, Compensation Strategies, Inc., compared the salary, target cash incentives, and equity compensation of our executive officers against an identified peer group of publicly traded companies. As a result of its analysis, Compensation Strategies, Inc. made recommendations to the Compensation Committee that were intended to bring the compensation elements paid to our executive officers towards the median of the identified peer companies. For purposes of setting pay for 2021, our Compensation Committee used the previous analysis and recommendations as basis on our executive compensation program. These peer group companies, which are specified in the table below, were selected by the Compensation Committee because they are in the scientific and technical instruments industry and are comparable to our size based on their revenue and market value.
|
|
|
|
|
Peer Group |
|
Company |
Industry |
Location |
Applied Optolectronics, Inc. |
Semiconductors |
Sugar Land, TX |
Clearfield, Inc. |
Communications Equipment |
Minneapolis, MN |
CUI Global |
Electrical Equipment |
Tualatin, OR |
EXFO Inc |
Communication Equipment |
Quebec City, QC |
Emcore Corporation |
Semiconductors |
Alhambra, CA |
IEC Electronics Corp. |
Electronic Components |
Newark, NY |
inTEST |
Semiconductors |
Mt. Laurel, NJ |
IntriCon Corporation |
Medical Instruments & Supplies |
Arden Hills, MN |
Iteris, Inc. |
Communication Equipment |
Santa Ana, CA |
Mesa Laboratories, Inc. |
Scientific and Technical Instruments |
Lakewood, CO |
Napco Security Technologies |
Security and Protection Services |
Amityville, NY |
NeoPhotonics Corporation |
Semiconductors |
San Jose, CA |
NLight, Inc. |
Semiconductors |
Vancouver, WA |
We generally attempt to align our overall executive compensation with other publicly traded peer companies who share similar characteristics. Because of our diversified product and service offerings, we believe our peer group includes a broad range of technology and growth companies with whom we compete for executive talent.
In October 2021, the Compensation Committee engaged Pearl Meyer to serve as the independent consultant with respect to 2022 executive compensation program. Pearl Meyer was engaged after an extensive review process conducted by the Compensation Committee based on clearly stated selection criteria including applicable expertise within our industry segment, reputation, and application of compensation philosophy with the Compensation Committee and the Company’s management team.
The Compensation Committee assessed the independence of both Compensation Strategies, Inc. and Pearl Meyer in 2021, as required under Nasdaq listing rules. The Compensation Committee has also considered and assessed all relevant factors, including but not limited to those set forth in Rule 10C-1(b)(4)(i) through (vi) under the Exchange Act, that could give rise to a potential conflict of interest with respect to the compensation consultant described above. Based on this review, we are not aware of any conflict of interest raised by the work performed by Compensation Strategies, Inc. or Pearl Meyer that would prevent the consultant from serving as an independent consultant to the Compensation Committee.
LUNA INNOVATIONS, INC. |
|
|
27 |
2022 PROXY STATEMENT |
Summary Compensation Table
The following table sets forth the summary information concerning compensation earned during the last two completed fiscal years by our president and CEO, our Chief Financial Officer, and our Chief Operating Officer, who were our only executive officers during 2021. The following table includes all compensation earned by the NEOs for the respective periods, regardless of whether such amounts were actually paid during the period.
Name and Principal Position |
|
Year |
|
Salary ($) |
|
Bonus
($) |
|
Stock
Awards
($) |
|
Non-Equity
Incentive Plan
Compensation
($) |
|
All Other
Compensation
($) |
|
Total
($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott A. Graeff |
|
2021 |
|
|
|
410,000 |
|
|
|
|
|
- |
|
|
|
|
|
499,994 |
|
(1) |
|
|
|
184,500 |
|
(2) |
|
|
|
21,189 |
|
(3) |
|
|
1,115,683 |
|
|
|
|
2020 |
|
|
|
385,000 |
|
|
|
|
|
11,957 |
|
(4) |
|
|
|
461,160 |
|
(5) |
|
|
|
311,443 |
|
(6) |
|
|
|
9,268 |
|
(3) |
|
|
1,178,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eugene Nestro |
|
2021 |
|
|
|
290,000 |
|
|
|
|
|
- |
|
|
|
|
|
215,006 |
|
(1) |
|
|
|
87,000 |
|
(2) |
|
|
|
16,455 |
|
(3) |
|
|
608,461 |
|
|
|
|
2020 |
|
|
|
275,000 |
|
|
|
|
|
5,694 |
|
(4) |
|
|
|
181,440 |
|
(5) |
|
|
|
148,306 |
|
(6) |
|
|
|
6,477 |
|
(3) |
|
|
616,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian Soller |
|
2021 |
|
|
|
265,000 |
|
|
|
|
|
- |
|
|
|
|
|
202,510 |
|
(1) |
|
|
|
66,250 |
|
(2) |
|
|
|
7,297 |
|
(3) |
|
|
541,057 |
|
|
(1) |
In accordance with SEC rules, these amounts reflect the grant date fair values of the RSUs granted to each of the named executive officers in 2021, calculated in accordance with ASC Topic 718 for stock-based compensation transactions. Each RSU represented the contingent right to receive one share of our common stock. For Messrs. Graeff, Nestro and Soller, the amount reported in the table above includes the grant date fair values of time-based RSUs, as well as 34,091, 14,659 and 13,807 performance-based RSUs and 12,600 performance-based RSUs, respectively, which were based on the probable outcome of the vesting conditions of these RSUs as of the grant date. These performance based RSUs vest upon the achievement of certain performance targets, subject to the recipient’s continuous service through the vesting events. Assuming that the maximum performance vesting condition of these RSUs was met as of the grant date, the aggregate grant date fair value of all RSUs granted to Messrs. Graeff, Nestro and Soller would have been $624,998, $268,752 and $253,132, respectively. For a discussion of valuation assumptions, see Note 11 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. |
(2) |
Represents bonus amounts paid to the named executive officer under our 2021 senior management incentive plan upon the deemed achievement of specified financial and qualitative performance objectives. |
(3) |
Includes Company 401(k) plan matching contributions and policy premiums paid for life insurance for the benefit of the named executive officer and a car allowance for Messrs. Graeff and Nestro in 2021. |
(4) |
Represents the discretionary amounts earned pursuant to the 2020 senior management incentive plan by virtue of the Compensation Committee’s discretionary adjustments to the Company’s financial performance, as described in greater detail below. |
(5) |
In accordance with SEC rules, these amounts reflect the grant date fair values of the RSUs granted to each of the named executive officers in 2020, calculated in accordance with ASC Topic 718 for stock-based compensation transactions. Each RSU represented the contingent right to receive one share of our common stock. For Messrs. Graeff and Nestro, the amount reported in the table above includes the grant date fair values of time-based RSUs, as well as 32,025 performance-based RSUs and 12,600 performance-based RSUs, respectively, which were based on the probable outcome of the vesting conditions of these RSUs as of the grant date. These performance based RSUs vest upon the achievement of certain performance targets, subject to the recipient’s continuous service through the vesting events. Assuming that the maximum performance vesting condition of these RSUs was met as of the grant date, the aggregate grant date fair value of all RSUs granted to Messrs. Graeff and Nestro would have been $541,863 and $213,192, respectively. For a discussion of valuation assumptions, see Note 11 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. |
(6) |
Represents bonus amounts paid to the named executive officer under our 2020 senior management incentive plan upon the deemed achievement of specified financial and qualitative performance objectives. |
LUNA INNOVATIONS, INC. |
|
|
28 |
2022 PROXY STATEMENT |
2021 Executive Compensation Decisions in Detail
Base Salary
Base salary is generally determined by considering competitive salary data and individual job performance. In determining base salary, we primarily rely on factors such as job performance, skill set, prior experience, past levels of compensation, seniority, pay levels of similarly situated positions internally, alternative opportunities that may be available to executives, retention, and market conditions generally. Base salaries for executive officers are reviewed at least annually. Base salary increases may also be granted in connection with promotions or significant changes in responsibility. In each case, we take into account the results achieved by the executive, his future potential, the scope of the officer’s responsibilities and the depth of his experience. We do not apply specific formulas to determine annual pay increases, if any, and our Compensation Committee attempts to make decisions regarding changes in base salary in the context of other short-term and long-term compensation components.
The Compensation Committee approved annual base salaries for the NEOs as follows:
Name |
|
2020 Base
Salary |
|
2021 Base
Salary |
|
% Increase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott A. Graeff |
|
|
$ |
385,000 |
|
|
|
|
$ |
410,000 |
|
|
|
|
|
6 |
% |
|
Eugene Nestro |
|
|
$ |
275,000 |
|
|
|
|
$ |
290,000 |
|
|
|
|
|
5 |
% |
|
Brian Soller |
|
|
$ |
— |
|
(1) |
|
|
$ |
265,000 |
|
|
|
|
N/A |
|
|
(1) |
Dr. Soller was not a named executive officer in 2020. |
Cash Incentive Bonuses
The performance-based cash incentive bonus is designed to provide an opportunity for our senior executives, including our NEOs, to earn an annual incentive, paid in cash, based on the achievement of certain financial targets and strategic priorities. An executive’s incentive target is a percentage of his base salary. Following the end of the year, the Compensation Committee assessed the Company’s performance against certain financial metrics during 2021, as well as the achievement of individual performance objectives, with total award payouts measured on a scale of zero to 150% of target. The table below lists the annual incentive targets for each NEO for 2021.
Name |
|
2021 Base
Salary |
|
|
|
Bonus Target
(% of Base Salary) |
|
|
|
'Bonus at Target
'($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott A. Graeff |
|
|
$ |
410,000 |
|
|
|
|
|
75 |
% |
|
|
|
$ |
307,500 |
|
|
Eugene Nestro |
|
|
$ |
290,000 |
|
|
|
|
|
50 |
% |
|
|
|
$ |
145,000 |
|
|
Brian Soller |
|
|
$ |
265,000 |
|
|
|
|
|
50 |
% |
|
|
|
$ |
132,000 |
|
|
2021 Financial Performance Metrics, Weightings and Results. In 2021, we used consolidated revenue and consolidated adjusted operating income as the financial performance metrics in the senior management incentive plan because we believe it is important to focus on top line growth, as well as profitability. Revenue ensures we are delivering an appropriate level of top-line growth, while operating income keeps us focused on efficient delivery and execution, allowing us to drive long-term stockholder value creation.
In 2021, we continued to navigate through the challenges presented by the ongoing COVID-19 pandemic. Early in the year, at the time the Compensation Committee was establishing performance metrics and goals under incentive plans, we were cautiously optimistic about the pace of economic recovery given signs that COVID-19 restrictions were easing, and customer demand was strong. With this outlook, the Compensation Committee set goals for the incentive plans in early 2021 expecting an improved demand environment and minimal supply chain disruptions. However, unanticipated COVID-19 variants caused additional restrictions and increased supply chain disruptions throughout 2021, resulting in unavoidable and unplanned constraints to meet our customer demands.
LUNA INNOVATIONS, INC. |
|
|
29 |
2022 PROXY STATEMENT |
Consolidated revenue did not meet the original threshold performance levels. However, after evaluating the actual goal achievement for the year relative to the original goal, the Compensation Committee considered that based on circumstances beyond management’s control, the attainment of the original targets was unrealistic, and that, despite external headwinds, the Company demonstrated strong performance during 2021. However, because of significant supply chain disruptions caused by several factors, orders could not be converted to revenue in 2021, which negatively impacted top-line growth. Absent supply chain disruptions in late 2021, the Compensation Committee believed that consolidated revenue performance would have exceeded threshold level.
Based on these considerations, the Compensation Committee adjusted annual incentive payout results exclude the impact of the supply chain disruptions, and approved payouts based on the senior management incentive plan’s financial metrics at threshold as follows:
|
|
|
|
|
|
|
|
2021 Performance Metrics and Levels
(dollars in millions) |
|
'Payout Level |
|
'% of Target |
|
|
|
|
Consolidated Revenue (1) (2) |
|
Consolidated Adjusted Operating Income (2) |
|
|
|
|
|
|
|
|
|
(40% of Weighting) |
|
(40% of Weighting) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
200% |
|
|
|
|
$ |
113.0 |
|
$ |
10.3 |
|
Target |
|
100% |
|
|
|
|
$ |
99.0 |
|
$ |
7.6 |
|
Threshold |
|
50% |
|
|
|
|
$ |
90.0 |
|
$ |
6.1 |
|
Actual Results(3) |
|
|
|
|
$ |
87.5 |
|
$ |
6.2 |
|
|
|
|
|
|
|
|
|
88.4% of Target |
|
81.5% of Target |
|
Adjusted Results |
|
|
|
|
$ |
90.0 |
|
$ |
6.2 |
|
(1) |
Solely for purposes of calculating the payout percentage for purposes of our 2021 senior management incentive plan, the Compensation Committee adjusted GAAP consolidated revenue by $2.5 million to reflect our senior management team’s successful execution of our strategic priorities despite the challenges of the COVID-19 pandemic and supply chain disruptions. After taking into account the incremental cost to the organization of such adjustment, the Compensation Committee determined it was a modest and reasonable adjustment that resulted in a payout at threshold level for both metrics and only increased the performance level under the annual incentive plan by 2.5%. |
(2) |
Solely for purposes of calculating the payout percentage for purposes of our 2021 senior management incentive plan and consistent with past practice, the Compensation Committee adjusted performance metrics to include acquisitions of General Photonics and OptaSense, as well as the movement of Luna Labs to discontinued operations. The revised goals included increases to the revenue goals (to prevent unfair windfall to participants) and decreases to the operating income goals (to prevent any unfair penalization). |
(3) |
The actual percent of target achieved is calculated based on straight-line interpolation between incremental goal levels established between threshold and target and target and maximum. |
2021 Annual Incentive Plan Payouts. A portion (20%) of each NEO’s senior management incentive plan award is also based on the Compensation Committee’s assessment of performance relative to qualitative individual performance objectives, which for 2021 included, among other strategic objectives, the successful integration of OptaSense and other acquisitions into the operations of the Company. Based on the Compensation Committee’s assessments of individual performance, as well as the financial performance results described above, below are the actual awards earned by the NEOs in 2021 (and paid in 2022):
Name |
|
Bonus Target
(% of Base Salary) |
Bonus at Target
($) |
Bonus Earned
(% of Target) |
Bonus Earned
($) |
Scott A. Graeff |
|
|
|
75 |
% |
|
|
$ |
307,500 |
|
|
|
|
45 |
% |
|
|
$ |
184,500 |
|
|
Eugene Nestro |
|
|
|
50 |
% |
|
|
$ |
145,000 |
|
|
|
|
30 |
% |
|
|
$ |
87,000 |
|
|
Brian Soller |
|
|
|
50 |
% |
|
|
$ |
132,000 |
|
|
|
|
25 |
% |
|
|
$ |
66,250 |
|
|
Equity Incentives
Consistent with our compensation philosophy, our Compensation Committee believes that equity awards can be a significant motivator in attracting, retaining and rewarding the success of management employees by providing compensation with long-term vesting requirements and linking the ultimate value of those awards to stockholder returns. This component may include both grants of restricted stock units, or RSUs, and stock options. Similar to base salary increases, equity instruments may also be granted in connection with promotions or significant changes in responsibility. Although grants of stock-based awards can impact our operating results, we believe that
LUNA INNOVATIONS, INC. |
|
|
30 |
2022 PROXY STATEMENT |
long-term equity-based compensation is an important element of our overall compensation program because it helps focus our executives on our long-term financial and operational performance and also aligns the interests of our executives with those of our stockholders. The potential financial value offered through such stock awards is also an important retention tool.
2021 Grants. The Compensation Committee intends to provide for annual grants of equity compensation comprising a combination of service-based RSUs, which will vest over time, and performance-based RSUs that will vest based on our achievement of long-term performance goals. With respect to the 2021 grants of equity compensation (the “2021 Grants”), the service-based RSUs are scheduled to vest in three equal annual instalments and the performance-based RSUs are scheduled to vest, if at all, based on our levels of revenue and operating income for the 2023 fiscal year, in each case subject to the executive officer’s continuous service through the end of the performance period. The performance-based awards establish threshold, target and maximum vesting amounts based on pre-defined levels of each of 2023 revenue and operating income, subject to the overall achievement of a minimum level of operating income for the year ending December 31, 2023.
Set forth below is a table summarizing the 2021 Grants for each NEO:
|
|
Time-Based
Restricted Stock |
|
Performance-Based Restricted Stock Units |
|
|
Units |
|
Threshold |
|
Target |
Maximum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott A. Graeff |
|
|
22,727 |
|
|
|
11,363 |
|
|
|
22,727 |
|
|
34,091 |
|
Eugene Nestro |
|
|
9,773 |
|
|
|
4,886 |
|
|
|
9,773 |
|
|
14,659 |
|
Brian Soller |
|
|
9,205 |
|
|
|
4,602 |
|
|
|
9,205 |
|
|
13,807 |
|
The Compensation Committee intends to continue to grant a combination of time-based and performance-based equity incentive awards to the NEOs on an annual basis. It is the Compensation Committee’s current expectation that, in future years, performance-based grants will generally represent, at target, 50% of the NEOs’ total annual equity incentive awards.
2019 Grants – Payout Results. Based on 2021 results, the Compensation Committee determined that 100% of the target performance-based RSUs originally granted in 2019 were earned for the performance cycle, which was based off the achievement of 86% of the revenue at target and 118% of the adjusted operating income at target. These performance-based RSUs were settled in shares of the Company’s common stock in the first quarter of 2022. For 2019, the Compensation Committee selected revenue and operating income as the relevant performance metrics. The chart below shows the performance goals set for revenue and operating income, as well as actual results.
Payout Level |
|
% of Target |
|
|
2019 Grant Performance Metrics and Goals
(dollars in millions)(1) |
|
Payout Level |
|
% of Target |
|
|
Revenue |
|
Adjusted Operating Income |
|
Payout Level |
|
% of Target |
|
|
(50% of Weighting) |
|
(50% of Weighting) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
150% |
|
|
$ |
102.9 |
|
$ |
7.2 |
|
Target |
|
100% |
|
|
$ |
90.6 |
|
$ |
5.7 |
|
Threshold |
|
50% |
|
|
$ |
79.7 |
|
$ |
4.6 |
|
Actual Results |
|
|
$ |
87.5 |
|
$ |
6.2 |
|
Actual Results |
|
|
86% of Target |
|
118% of Target |
|
(1) |
Reflects goals under the incentive plans that were revised to include acquisitions of General Photonics and OptaSense, as well as the movement of Luna Labs to discontinued operations. The revised goals included increases to the revenue goals (to prevent unfair windfall to participants) and decreases to the operating income goals (to prevent any unfair penalization). |
As a result, the NEOs (other than Mr. Nestro who joined the Company in December 2019 and therefore, did not receive a performance-based RSU award in 2019) earned 100% of their target performance-based RSUs for the 2019-2021 performance cycle, as follows:
Name |
|
Target PSUs Granted |
|
Actual PSUs Earned |
|
|
|
|
|
|
|
|
|
Scott A. Graeff |
|
|
23,000 |
|
|
|
23,000 |
|
Brian Soller |
|
|
8,000 |
|
|
|
8,000 |
|
LUNA INNOVATIONS, INC. |
|
|
31 |
2022 PROXY STATEMENT |
Other Compensation Practices, Policies and Guidelines
Timing of Equity Grants
We do not time the granting of our equity awards relative to any favorable or unfavorable news that we release. Restricted stock or stock options for new employees, including executive officers, are generally awarded at the first regular meeting of the Compensation Committee following the employee’s hire date, or, in certain limited cases, at the first regular meeting of the Compensation Committee following the prospective employee’s written acceptance of an employment offer. The Compensation Committee’s regular meeting schedule is established several months in advance of each meeting. Thus, proximity of any equity grant to an earnings announcement or other market events is coincidental.
Stock Ownership Guidelines
In 2018, our board of directors established stock ownership guidelines applicable to our officers and directors, which are intended to ensure that our officers and directors acquire and maintain an equity stake in the company that aligns their interests with those of our stockholders.
Our officer stock ownership guidelines provide that the CEO and each other officer at the level of vice president or above who report directly to the CEO must acquire and maintain stock ownership at a multiple of their respective base salaries. Effective in 2022, the ownership requirement varies by officer level, with the CEO’s target at five times salary, and the Chief Financial Officer’s and Chief Operating Officer’s target at three times base salary.
Our director stock ownership guidelines also provide that each director should acquire stock ownership in the company equal to three times his or her annual board retainer.
Compliance is assessed at September 30 of each year, and as of the most recent evaluation date, all current officers and directors were in compliance with the stock ownership guidelines, with the exception of Ms. Coe, who joined the Board in May 2021. Officers and directors have five years to comply with the stock ownership guidelines.
Compensation Recovery Policy
In February 2019, the Compensation Committee adopted a policy for recoupment of incentive compensation. Under the terms of this policy, if the Company is required to prepare an accounting restatement for any fiscal quarter or year due to the material noncompliance of the Company with any financial reporting requirement, the Company may seek to recover from certain employees, including the named executive officers, during the three fiscal years preceding the date on which the Company was required to prepare such accounting restatement, incentive bonus and equity awards in excess of amounts that would have been awarded based upon the restated financial statements. The Company may seek recoupment from prior incentive compensation payments through the reduction of future incentive compensation payments, the reduction or cancellation of outstanding incentive compensation payments, and direct repayment by the executive.
Other Benefits
In general, our practice is to provide commensurate benefits to employees at all levels of our organization. Consistent with this practice, the following are the primary benefits provided to our full-time employees, including our named executive officers:
|
• |
health, vision and dental insurance including, at the employee’s option, Flexible Spending Accounts and/or a Health Savings Account; |
|
• |
term life insurance and optional supplemental life insurance; |
|
• |
optional supplemental health coverage; |
|
• |
short- and long-term disability benefits; |
|
• |
401(k) plan, under which we match 30% of an employee’s contributions up to 10% of the employee’s total cash compensation, which match vests over a period of three years; |
LUNA INNOVATIONS, INC. |
|
|
32 |
2022 PROXY STATEMENT |
|
• |
employee stock purchase plan, under which participating employees may use after-tax payroll deductions to buy our common stock at a discounted price at regular intervals; and |
|
• |
paid time off and holidays. |
We believe that these benefits are consistent with those offered by other companies and specifically with those companies with which we compete for employees.
Impact of Tax Accounting
We regularly consider the various tax and accounting implications of our compensation plans. When determining the value of long-term incentives and equity grants to executives and employees, the compensation costs associated with the grants are reviewed, as required by FASB ASC Topic 718.
LUNA INNOVATIONS, INC. |
|
|
33 |
2022 PROXY STATEMENT |
Outstanding Equity Awards at December 31, 2021
The following table shows all outstanding unexercised stock options and unvested stock awards held by our named executive officers as of December 31, 2021.
|
|
Option Awards |
|
|
Stock Awards |
|
|
Number of Securities Underlying
Unexercised Options (#) |
|
|
Option
Exercise |
|
Option
Expiration |
|
Number
of Shares
that have
not vested |
|
Market
Value of
Shares
that have
not vested |
Equity incentive plan awards: number of unearned shares or units of stock that have not vested |
|
|
Equity incentive plan awards: market or payout value of unearned shares or units of stock that have not vested |
Name |
|
Exercisable |
|
Unexercisable |
|
Price ($) |
|
Date |
|
(#) |
|
($) (13) |
(#) |
|
|
($) (13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott A. Graeff |
|
|
34,351 |
|
|
|
— |
|
|
|
1.68 |
|
|
|
2/28/2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,667 |
(1) |
|
|
258,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,433 |
(2) |
|
|
223,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,727 |
(3) |
|
|
191,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,500 |
(4) |
|
97,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,675 |
(5) |
|
90,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,363 |
(6) |
|
95,904 |
Eugene Nestro |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,666 |
(7) |
|
|
140,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,400 |
(2) |
|
|
87,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,773 |
(3) |
|
|
82,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,200 |
(8) |
|
35,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,886 |
(9) |
|
41,238 |
Brian Soller |
|
|
100,000 |
|
|
|
— |
|
|
|
1.49 |
|
|
|
4/7/2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,667 |
(1) |
|
|
90,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,800 |
(2) |
|
|
65,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,205 |
(3) |
|
|
77,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000 |
(10) |
|
33,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,150 |
(11) |
|
26,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,602 |
(12) |
|
38,841 |
(1) |
Represents unvested shares underlying a RSU award issued on January 14, 2019. These shares underlying this RSU award vest annually over a three-year period. |
(2) Represents unvested shares underlying a RSU award issued on January 8, 2020. The shares underlying this RSU award vest annually over a three-year period.
(3) Represents unvested shares underlying a RSU award issued on January 27, 2021. The shares underlying this RSU award vest annually over a three-year period.
(4) Represents unvested shares underlying a performance-based RSU based on the threshold level of achievement under the terms of the grant. Pursuant to the terms of the award, the award will vest, if at all, based on the Company’s levels of 2021 revenue and operating income, in each case subject to the executive officer’s continuous service through vesting. 11,500 shares underlying the RSU award will vest if the threshold level of achievement is reached, 23,000 shares underlying the RSU award will vest if the target level of achievement is reached and 34,500 shares underlying the RSU award will vest if the maximum level of achievement is reached.
(5) Represents unvested shares underlying a performance-based RSU based on the threshold level of achievement under the terms of the grant. Pursuant to the terms of the award, the award will vest, if at all, based on the Company’s levels of 2022 revenue and operating income, in each case subject to the executive officer’s continuous service through vesting. 10,675 shares underlying the RSU award will vest if the threshold level of achievement is reached, 21,350 shares underlying the RSU award will vest if the target level of achievement is reached and 32,025 shares underlying the RSU award will vest if the maximum level of achievement is reached.
(6) Represents unvested shares underlying a performance-based RSU based on the threshold level of achievement under the terms of the grant. Pursuant to the terms of the award, the award will vest, if at all, based on the Company’s levels of 2023 revenue and operating income, in each case subject to the executive officer’s continuous service through vesting. 11,363 shares underlying the RSU award will
LUNA INNOVATIONS, INC. |
|
|
34 |
2022 PROXY STATEMENT |
vest if the threshold level of achievement is reached, 22,727 shares underlying the RSU award will vest if the target level of achievement is reached and 34,091 shares underlying the RSU award will vest if the maximum level of achievement is reached
(7) |
Represents unvested shares underlying a RSU award issued on December 2, 2019, which vest annually over a three-year period. |
(8) Represents unvested shares underlying a performance-based RSU based on the threshold level of achievement under the terms of the grant. Pursuant to the terms of the award, the award will vest, if at all, based on the Company’s levels of 2022 revenue and operating income, in each case subject to the executive officer’s continuous service through vesting. 4,200 shares underlying the RSU award will vest if the threshold level of achievement is reached, 8,400 shares underlying the RSU award will vest if the target level of achievement is reached and 12,600 shares underlying the RSU award will vest if the maximum level of achievement is reached.
(9) Represents unvested shares underlying a performance-based RSU based on the threshold level of achievement under the terms of the grant. Pursuant to the terms of the award, the award will vest, if at all, based on the Company’s levels of 2023 revenue and operating income, in each case subject to the executive officer’s continuous service through vesting. 4,886 shares underlying the RSU award will vest if the threshold level of achievement is reached, 9,773 shares underlying the RSU award will vest if the target level of achievement is reached and 14,659 shares underlying the RSU award will vest if the maximum level of achievement is reached.
(10) Represents unvested shares underlying a performance-based RSU based on the threshold level of achievement under the terms of the grant. Pursuant to the terms of the award, the award will vest, if at all, based on the Company’s levels of 2021 revenue and operating income, in each case subject to the executive officer’s continuous service through vesting. 4,000 shares underlying the RSU award will vest if the threshold level of achievement is reached, 8,000 shares underlying the RSU award will vest if the target level of achievement is reached and 12,000 shares underlying the RSU award will vest if the maximum level of achievement is reached.
(11) Represents unvested shares underlying a performance-based RSU based on the threshold level of achievement under the terms of the grant. Pursuant to the terms of the award, the award will vest, if at all, based on the Company’s levels of 2022 revenue and operating income, in each case subject to the executive officer’s continuous service through vesting. 3,150 shares underlying the RSU award will vest if the threshold level of achievement is reached, 6,300 shares underlying the RSU award will vest if the target level of achievement is reached and 9,450 shares underlying the RSU award will vest if the maximum level of achievement is reached.
(12) Represents unvested shares underlying a performance-based RSU based on the threshold level of achievement under the terms of the grant. Pursuant to the terms of the award, the award will vest, if at all, based on the Company’s levels of 2023 revenue and operating income, in each case subject to the executive officer’s continuous service through vesting. 4,602 shares underlying the RSU award will vest if the threshold level of achievement is reached, 9,205 shares underlying the RSU award will vest if the target level of achievement is reached and 13,807 shares underlying the RSU award will vest if the maximum level of achievement is reached
(13) |
Based on the closing price of our common stock of $8.44 per share as of December 31, 2021, the last trading day of 2021. |
Current Employment Agreements Effective April 2022
On April 1, 2022, we entered into amended and restated employment agreements with each of our NEOs (the “Amended Employment Agreements”). The Amended Employment Agreements supersede each NEO’s prior employment agreement and are based on terms recommended by our compensation consultant.
Pursuant to the Amended Employment Agreements, Messrs. Graeff and Nestro and Dr. Soller are employed on an “at-will” basis. The initial term of the Amended Employment Agreements is through March 31, 2025, subject to automatic renewal for one-year periods unless either party notifies the other in writing of non-renewal at least six months in advance.
Mr. Graeff is entitled to an annual base salary of $450,000, Mr. Nestro is entitled to an annual base salary of $325,000, and Dr. Soller is entitled to an annual base salary of $290,000, each of which is subject to review and adjustment from time to time by the Board in its sole discretion. Messrs. Graeff and Nestro and Dr. Soller are eligible to earn an annual performance cash bonus at the following target and maximum percentages of their current base salaries, subject to achievement of individual and corporate performance goals to be determined by the Board:
|
|
|
Name |
Target Bonus
(% of Base Salary) |
Maximum Bonus
(% of Base Salary) |
Scott A. Graeff |
100% |
200% |
Eugene Nestro |
50% |
100% |
Brian Soller |
50% |
100% |
Pursuant to the Amended Employment Agreements, in the event that Messrs. Graeff’s or Nestro’s or Dr. Soller’s employment is terminated by us “without cause” or by one of them for “good reason” not in connection with a “change in control” (each as defined in the Amended Employment Agreements), subject to them entering into and not revoking a separation agreement that includes, among other terms, a general release of claims, they will be entitled to receive the following severance benefits:
LUNA INNOVATIONS, INC. |
|
|
35 |
2022 PROXY STATEMENT |
|
• |
payments equal to the then applicable base salary for a period of 12 months paid in instalments on our regular payroll dates; |
|
• |
if the NEO timely elects and remains eligible for continued coverage under COBRA, continued health insurance premiums until the earliest of (i) 12 months following termination, (ii) the date he becomes eligible for substantially equivalent insurance in connection with new employment or self-employment, or (iii) the date he ceases to be eligible for COBRA continuation coverage; |
|
• |
a discretionary lump sum bonus payment equal to 100% of the target bonus that executive officer would have been eligible to receive for the year in which the termination occurs which will be paid when we otherwise pays annual bonuses, so long as that date is no later than March 15th the year following the year in which the termination occurs; and |
|
• |
acceleration of vesting for all outstanding options, restricted stock or other equity incentive awards that have time-based vesting schedules for a period of 12 months. |
Pursuant to the Amended Employment Agreements, in lieu of the severance benefits described above, in the event that Messrs. Graeff’s or Nestro’s or Dr. Soller’s employment is terminated by us “without cause” or by one of them for “good reason” within three months prior to or 12 months following a “change in control” transaction, they will be entitled to receive the following severance benefits:
|
• |
in the case of Mr. Graeff, a payment equal to the then applicable base salary for a period of 24 months paid in a lump sum, and in the case of Mr. Nestro and Dr. Soller, a payment equal to the then applicable base salary for a period of 15 months paid in a lump sum; |
|
• |
if the NEO timely elects and remains eligible for continued coverage under COBRA, continued health insurance premiums until the earliest of (i) 18 months following termination, (ii) the date he becomes eligible for substantially equivalent insurance in connection with new employment or self-employment, or (iii) the date he ceases to be eligible for COBRA continuation coverage; |
|
• |
a discretionary lump sum bonus payment equal to 200%, 125% and 125% of the target bonus that Mr. Graeff, Mr. Nestro and Dr. Soller would have been eligible to receive for the year in which the termination occurs, respectively, which will be paid when we otherwise pays annual bonuses, so long as that date is no later than March 15th the year following the year in which the termination occurs; and |
|
• |
effective as of the later of the effective date of the change in control or the termination date, (i) for all outstanding options, restricted stock or other equity incentive awards that have time-based vesting schedules, acceleration of vesting in full, and (ii) for all outstanding options, restricted stock or other equity incentive awards that have performance-based vesting schedules, acceleration of vesting as if any performance metrics applicable or achievable in the future have been achieved at target levels. |
Furthermore, in the event and effective upon a change in control, (i) for all outstanding options, restricted stock or other equity incentive awards that have time-based vesting schedules, acceleration of vesting in full and (ii) for all outstanding options, restricted stock or other equity incentive awards that have performance-based vesting schedules, such awards will be shall be converted to time-based vesting in accordance with our standard time period of vesting.
Prior Employment Agreements in Effect Prior to April 2022
Employment Agreement with Scott A. Graeff
On December 5, 2017, we entered into an amended and restated employment agreement with Scott A. Graeff, which was in effect until we entered into the Amended Employment Agreements. Under the terms of the amended and restated employment agreement, Mr. Graeff’s initial salary was $325,000, which was subject to adjustment by the Compensation Committee from time to time. Mr. Graeff’s annual base salary for 2021 was $410,000. Under the amended and restated employment agreement, Mr. Graeff was eligible to participate in an annual cash incentive plan for a discretionary cash bonus plan with a payout at target performance of 75% of his actual salary during such year and a maximum value of 150% of his actual salary during such year, subject to the achievement of individual and corporate performance criteria to be determined by our board of directors or our Compensation Committee and set forth in the incentive plan.
The employment agreement provided that, in the event that his employment is terminated by us “without cause” or by him for “good reason” (each as defined in the employment agreement), subject to his entering into and not revoking a release in a form acceptable to the Company, he would be entitled to receive:
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• |
a severance payment equal to 12 months of his then current annual salary payable in instalments on the Company's regular payroll dates plus a lump sum payment equal to his annual cash incentive compensation assuming that the performance objectives were achieved at the target level; |
|
• |
if he timely elects and remains eligible for continued coverage under COBRA, an amount equal to the health insurance premiums that we were paying on his behalf and on behalf of his covered dependents prior to the date of termination for a period of nine months, or 12 months if the termination occurs within 12 months following a change in control transaction; |
|
• |
a lump sum payment of any annual cash incentive earned but unpaid with respect to the year preceding the year of termination; and |
|
• |
a cash payment for any unvested company matching contributions in his account under the Company’s 401(k) plan and for any accrued but unpaid vacation. |
In addition to the severance and retention payments described above, in the event a change in control occurs due to a sale of the Company’s assets or a merger of the Company or an acquisition of the Company via tender offer, the employment agreement also provided that Mr. Graeff would receive the payments described above provided that all such payments will be accelerated and not deferred. In addition, all outstanding equity awards received prior to the change in control would immediately vest.
Employment Agreement with Eugene Nestro
Effective December 2, 2019, we entered into an employment agreement with Mr. Nestro, which was in effect until we entered into the Amended Employment Agreements.
Under the terms of the agreement, Mr. Nestro’s initial salary was $275,000, which was subject to adjustment by the Compensation Committee from time to time. Mr. Nestro’s annual base salary for 2021 was $290,000. Under the amended and restated employment agreement, Mr. Nestro was eligible to participate in our senior management incentive plan for an annual discretionary cash bonus with a target value of at least 40% of his then current base salary, subject to the achievement of individual and corporate performance criteria to be determined by our board of directors or our Compensation Committee and set forth in the incentive plan.
In the event that Mr. Nestro’s employment was terminated by us "without cause" or by Mr. Nestro for "good reason" (each as defined in his employment agreement), subject to Mr. Nestro’s entering into and not revoking a separation agreement that includes, among other terms, a general release of claims in our favor, in a form acceptable to us, Mr. Nestro would be entitled to receive:
|
• |
severance payments equal to his then applicable base salary for a period of 9 months paid in instalments on our regular payroll dates; |
|
• |
a discretionary lump sum bonus payment equal to the target bonus that he would have been eligible to receive for the year in which the termination occurs, which will be paid when we otherwise pay annual bonuses, so long as that date is no later than March 15th the following year in which the termination occurs; provided, however, if the termination occurs within three months prior to or 12 months following a "change in control" transaction (as defined in the employment agreement), then Mr. Nestro will be entitled to receive a discretionary lump sum bonus payment equal to the maximum target bonus that he would have been eligible to receive for the year in which the termination occurs; |
|
• |
if he timely elects and remains eligible for continued coverage under COBRA, the health insurance premiums that we were paying on behalf of Mr. Nestro and his covered dependents prior to the date of termination, until the earliest of (i) 12 months following termination, (ii) the date Mr. Nestro becomes eligible for substantially equivalent insurance in connection with new employment or self-employment, or (iii) the date Mr. Nestro ceases to be eligible for COBRA continuation coverage; and |
|
• |
a cash payment for any unvested company matching contributions in Mr. Nestro’s account under our 401(k) plan. |
In addition, if Mr. Nestro’s employment was terminated by us "without cause" or by Mr. Nestro for "good reason" within three months prior to or 12 months following a "change of control" transaction, all unvested stock options
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and other stock awards for our common stock held by Mr. Nestro as of immediately prior to the termination date would accelerate in full.
Employment Agreement with Brian Soller
Effective August 1, 2018, we entered into an employment agreement with Dr. Soller, which was in effect until we entered into the Amended Employment Agreements.
Under the terms of the employment agreement, Dr. Soller initial salary was $208,000, which was subject to adjustment by the Compensation Committee from time to time. Dr. Soller’s annual base salary for 2021 was $265,000. Under the employment agreement, Dr. Soller was eligible to participate in our senior management incentive plan for an annual discretionary cash bonus with a target value of at least 40% of his then current base salary, subject to the achievement of individual and corporate performance criteria to be determined by our board of directors or our Compensation Committee and set forth in the incentive plan.
In the event that Dr. Soller’s employment was terminated by us "without cause" or by Dr. Soller for "good reason" (each as defined in his employment agreement), subject to Dr. Soller’s entering into and not revoking a separation agreement that includes, among other terms, a general release of claims in our favor, in a form acceptable to us, Dr. Soller would be entitled to receive:
|
• |
severance payments equal to his then applicable base salary for a period of 9 months paid in instalments on our regular payroll dates; |
|
• |
a discretionary lump sum bonus payment equal to the target bonus that he would have been eligible to receive for the year in which the termination occurs, which will be paid when we otherwise pay annual bonuses, so long as that date is no later than March 15th the following year in which the termination occurs; provided, however, if the termination occurs within three months prior to or 12 months following a "change in control" transaction (as defined in the employment agreement), then Dr. Soller will be entitled to receive a discretionary lump sum bonus payment equal to the maximum target bonus that he would have been eligible to receive for the year in which the termination occurs; |
|
• |
if he timely elects and remains eligible for continued coverage under COBRA, the health insurance premiums that we were paying on behalf of Dr. Soller and his covered dependents prior to the date of termination, until the earliest of (i) 12 months following termination, (ii) the date Dr. Soller becomes eligible for substantially equivalent insurance in connection with new employment or self-employment, or (iii) the date Dr. Soller ceases to be eligible for COBRA continuation coverage; and |
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• |
a cash payment for any unvested company matching contributions in Dr. Soller’s account under our 401(k) plan. |
In addition, if Dr. Soller’s employment was terminated by us "without cause" or by Dr. Soller for "good reason" within three months prior to or 12 months following a "change of control" transaction, all unvested stock options and other stock awards for our common stock held by Dr. Soller as of immediately prior to the termination date would accelerate in full.
Change in Control Benefits and Severance
The Compensation Committee believes that change in control and severance benefits play an important role in attracting and retaining valuable executives. The payment of such benefits also ensures a smooth transition in management following a change in control by giving the named executive officer the incentive to remain with the Company through the transition period, and, in the event the officer’s employment is terminated as part of the transition, by compensating the officer with a degree of financial and personal security during a period in which he is likely to be unemployed. As a result, as described above, we have historically maintained employment agreements with our named executive officers that provide for severance payments, specified accelerated vesting of equity awards and continuation of group benefits if our named executive officers’ employment is terminated by us without “cause” or by the named executive officers for “good reason,” including in circumstances involving a change in control of the Company.
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In connection with a change in control, the severance and other benefits provided for in the named executive officers’ employment agreements or otherwise payable to such named executive officers may be treated as excess parachute payments under Section 280G of the Code. In such event, under the terms of these employment agreements, the executive officer’s severance benefits shall be payable either (A) in full, or (B) as to such lesser amount which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by the executive officer, on an after-tax basis, of the greatest amount of severance benefits under the employment agreement, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes our securities authorized for issuance under our equity compensation plans as of December 31, 2021:
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 |
|
1,956,258 |
(1) |
|
$4.15 |
(2) |
2,340,854 |
(3) |
Total |
|
1,956,258 |
(1) |
|
$4.15 |
(2) |
2,340,854 |
(3) |
(1) Consists of 1,533,024 shares underlying stock options and 423,234 shares underlying restricted stock units.
|
(2) |
Includes 423,234 shares issuable upon the settlement of restricted stock units without consideration. The weighted average exercise price of the outstanding options and rights other than these restricted stock units is $3.00 per share. |
(3) |
Securities remaining available for future issuance under equity compensation plans include 1,381,946 securities available for issuance under the 2016 Equity Incentive Plan and 958,908 available for issuance under the 2020 Employee Stock Purchase Plan as of December 31, 2021. |
Our 2016 Equity Incentive Plan allows for forfeited awards to be added back to our pool of available awards, including awards forfeited from the 2006 Equity Incentive Plan after the expiration date of our 2006 Equity Incentive Plan.
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Security Ownership of Certain
Beneficial Owners and Management |
The following table sets forth certain information with respect to beneficial ownership of our common stock, as of March 31, 2022, by:
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• |
each person known by us to be a beneficial owner of 5% or more of the outstanding shares of our common stock; |
|
• |
each of the executive officers named in the Summary Compensation Table, to whom we refer as our named executive officers; and |
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• |
all of our currently serving executive officers and directors as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us and Schedules 13D and 13G, if any, filed with the SEC, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of the common stock that they beneficially own, subject to applicable community property laws. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options, RSUs, warrants, stock units under our non-employee directors’ deferred compensation plan or other exercisable or convertible securities held by that person that are currently exercisable or convertible or exercisable or convertible within 60 days of March 31, 2022 are deemed outstanding, but are not deemed outstanding for purposes of computing the percentage ownership of any other person. Unless otherwise indicated, these shares do not include any stock, options or RSUs or stock units awarded after March 31, 2022. A total of 32,361,117 shares of our common stock were outstanding as of March 31, 2022.
Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o Luna Innovations Incorporated, 301 1st Street SW, Roanoke, Virginia 24011.
Name and Address of Beneficial Owner |
|
Number of
Shares
Beneficially
Owned |
|
|
Percent
of Class |
|
|
|
|
|
|
|
|
|
|
Royce & Associates (1) |
|
|
1,997,576 |
|
|
|
6.3 |
% |
745 Fifth Avenue, New York, NY 10151 |
|
|
|
|
|
|
|
|
BlackRock Inc. (2) |
|
|
1,906,639 |
|
|
|
6.0 |
% |
55 East 52nd Street, New York, NY 10555 |
|
|
|
|
|
|
|
|
ACK Asset Management (3) |
|
|
1,832,647 |
|
|
|
5.7 |
% |
2 Greenwich Office Park, Suite 300, Greenwich, CT 06831 |
|
|
|
|
|
|
|
|
The Vanguard Group (4) |
|
|
1,759,127 |
|
|
|
5.5 |
% |
100 Vanguard Blvd., Malvern, PA 19355 |
|
|
|
|
|
|
|
|
Scott A. Graeff |
|
|
515,195 |
|
|
|
1.6 |
% |
Eugene Nestro |
|
|
32,792 |
|
|
* |
|
Brian Soller (5) |
|
|
234,245 |
|
|
* |
|
Richard W. Roedel (6) |
|
|
1,063,260 |
|
|
|
3.2 |
% |
Gary Spiegel (7) |
|
|
84,896 |
|
|
* |
|
Warren B. Phelps, III (8) |
|
|
87,197 |
|
|
* |
|
N. Leigh Anderson (9) |
|
|
40,231 |
|
|
* |
|
Mary Beth Vitale (10) |
|
|
28,317 |
|
|
* |
|
Pamela Coe (11) |
|
|
7,557 |
|
|
* |
|
All current directors and executive officers as a group (9 persons) (12) |
|
|
2,093,690 |
|
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
* |
Represents less than 1% of the outstanding shares of common stock. |
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2022 PROXY STATEMENT |
(1) |
This information has been obtained from a Schedule 13G/A filed on January 21, 2022, by Royce & Associates LP. |
(2) |
This information has been obtained from a Schedule 13G/A filed on February 3, 2022, by BlackRock, Inc. |
(3) |
This information has been obtained from a Schedule 13G filed on February 14, 2022 by ACK Asset Management (“ACK”). ACK owns no shares directly. ACK maintains investment and/or voting power with respect to certain funds and managed accounts advised by it. Mr. Meisenberg and Mr. Reilly are the managing members of ACK and control ACK. Each of ACK, Mr. Meisenberg and Mr. Reilly may be deemed to beneficially own such shares. |
(4) |
This information has been obtained from a Schedule 13G filed on February 10, 2022, by The Vanguard Group. |
(5) |
Includes 100,000 shares subject to options that are immediately exercisable or exercisable within 60 days of March 31, 2022. |
(6) |
Includes 304,164 shares subject to options that are immediately exercisable or exercisable within 60 days of March 31, 2022, and 301,054 shares of common stock issuable pursuant to stock units held under our non-employee directors’ deferred compensation plan that are payable under circumstances within the control of the holder. |
(7) |
Includes 13,943 shares of common stock issuable pursuant to stock units held under our non-employee directors’ deferred compensation plan that are payable under circumstances within the control of the holder. |
(8) |
Includes 70,964 shares of common stock issuable pursuant to stock units held under our non-employee directors’ deferred compensation plan that are payable under circumstances within the control of the holder. |
(9) |
Includes 23,998 shares of common stock issuable pursuant to stock units held under our non-employee directors’ deferred compensation plan that are payable under circumstances within the control of the holder. |
(10) |
Includes 28,317 shares of common stock issuable pursuant to stock units held under our non-employee directors’ deferred compensation plan that are payable under circumstances within the control of the holder. |
(11) |
Includes 7,557 shares of common stock issuable pursuant to stock units held under our non-employee directors’ deferred compensation plan that are payable under circumstances within the control of the holder. |
(12) |
Includes an aggregate of: (i) 445,833 shares of common stock issuable pursuant to stock units issued under our non-employee directors’ deferred compensation plan that are payable under circumstances within the control of the holders; and (ii) an aggregate of 404,164 shares of common stock issuable under stock options that are immediately exercisable or exercisable within 60 days of March 31, 2022. |
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