Thursday, April 23, 2009
Luna stock down but not out after verdict
The company was hit with a $36.3 million judgment, but investors aren't bailing just yet.
The latest from The Ticker blog
Trading was heavy in the aftermath of Tuesday's $36.3 million verdict against Luna Innovations Inc. as shareholders tried to assess the value of the Roanoke technology company.
As Luna executives remained in California to work through the details of the judgment, it was unclear exactly what the next step is for the company and its approximately 210 employees working in Roanoke, Blacksburg, Danville and Charlottesville.
Luna, which typically sees trading volume of about 12,000 shares, saw 1.08 million shares change hands on Wednesday in a day when the stock reached its 52-week low, dropping to 66 cents soon after the market opened. The stock price rebounded from the early low to close at $1.10 but still was down nearly 40 percent from Tuesday's close of $1.83.
Tuesday afternoon a Santa Clara County Superior Court jury ordered Luna to pay Hansen Medical Inc. $36.3 million in damages, finding in favor of Hansen on claims of breach of contract, breach of the covenant of good faith and misappropriation of trade secrets. The jury did not find in favor of Hansen on its fraud claims against Luna, but did say Luna's misappropriation was willful.
"It seems the market is not expecting the full verdict to stand," said Raman Kumar, a professor of investment management at Virginia Tech's Pamplin College of Business. "It's a significant drop [in the stock price] but it is not close to zero, which means the market thinks there is a chance of survival here. A lot of people are getting out, but a lot of people are making a purchase."
But for the company to survive something must change, because Luna's balance sheet cannot absorb the $36.3 million judgment, Kumar said.
In short, Luna, with total assets of $33.4 million for the year ended Dec. 31, 2008, cannot afford to pay the judgment. That, coupled with total liabilities of $19.7 million, leaves a net worth of $14.3 million for the last year.
The first step is likely for Luna to ask for the judgment to be reduced, said Kumar, adding that he does not have any specific knowledge of Luna's situation but is familiar with what many publicly traded companies would do in similar circumstances. If the judgment was reduced to between $10 million and $15 million, Kumar said he thought Luna might be able to absorb the cost.
Signaling that Luna is not willing to accept the verdict, Luna spokeswoman Karin Clark emphasized in an e-mail the judgment is not finalized as they are filing post-trial motions.
Still, she said, Luna executives did not have any further comment to make.
"The verdict came down late yesterday so we do not have any new information at this time," Clark wrote. "We will share information with you when we know it."
The company's annual shareholder meeting will be held May 12 in Washington, D.C.
Bankruptcy or the infusion of money by a new investor could be other options if Luna is unsuccessful in getting the judgement reduced, Kumar said.
Michael Miller, chairman of the Montgomery County Industrial Development Authority, said he believes Luna has many options before any doors are closed. Miller echoed Kumar's thoughts on an investor possibly seeing value in buying a significant stake in Luna.
"We would really hate to lose the employment and the economic possibilities that Luna represents," he said.
Miller is also a former vice president at Luna, but said he is no longer privy to internal discussions. He also is a senior licensing manager at Virginia Tech Intellectual Properties and said there is a lesson to entrepreneurs as the region continues to seek to develop new technology businesses.
"It is not a game; it is really serious stuff," he said of startup companies. "I'm hoping people around the area don't look at the situation as too dangerous and say we don't want to do it, but that they realize we just need to be extraordinarily careful about what we do."
