Luna Innovations, Inc.

Material Facts

• During the relevant period, Luna performed much of its government work under cost-reimbursable contracts.
• Luna became a publicly traded company in June 2006 and was required to comply with FAS 123r.
• Luna issued employee stock options during FY 2007 with strike prices generally set equal to the current market price.
• Luna used the European option no-dividend version of the Black-Scholes model to value the options.
• The model used the grant-date stock price, a Treasury yield, comparable-company stock-price volatility, the strike price, and a 7.5-year option period.
• Because Luna lacked sufficient trading history, it used the average volatility of eight comparable technology companies.
• Luna included the stock-option expense in its FY 2007 final indirect cost rate proposal.
• DCAA audited Luna’s FY 2007 incurred cost proposal and questioned the employee stock-option costs under FAR 31.205-6(i).
• The contracting officer disallowed the stock-option costs, assessed a penalty under FAR 52.242-3, and removed the expense in setting Luna’s final indirect cost rates.
• A DCAA CAS specialist stated that the costs could be allowable in circumstances involving options awarded below market value and that questioning such costs under FAR 31.205-6(i) would be erroneous.

Parties

Appellant

Luna Innovations, Inc.

Respondent Agency

Defense Contract Management Agency

Contracting Agency

Defense Contract Management Agency

Contract Number

N68335-05-C-0005