Exhibit 10.1

FIRST LOAN MODIFICATION AGREEMENT

This First Loan Modification Agreement (this “Loan Modification Agreement”) is
entered into as of March 7, 2011, by and between (i) SILICON VALLEY BANK, a
California corporation with a loan production office located at 275 Grove
Street, Suite 2-200, Newton, Massachusetts 02466 (“Bank”), and (ii) LUNA
INNOVATIONS INCORPORATED, a Delaware corporation and LUNA TECHNOLOGIES, INC., a
Delaware corporation, each with offices located at 1 Riverside Circle, Suite
400, Roanoke, Virginia 24016 (individually and collectively, jointly and
severally, the “Borrower”).

1. DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other
indebtedness and obligations which may be owing by Borrower to Bank, Borrower is
indebted to Bank pursuant to a loan arrangement dated as of February 18, 2010,
evidenced by, among other documents, a certain Loan and Security Agreement dated
as of February 18, 2010, between Borrower and Bank (as amended, the “Loan
Agreement”). Capitalized terms used but not otherwise defined herein shall have
the same meaning as in the Loan Agreement.

2. DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by the
Collateral as described in the Loan Agreement and in certain Intellectual
Property Security Agreements executed by each Borrower in favor of Bank
(collectively, the “IP Agreements”, and together with any other collateral
security granted to Bank, the “Security Documents”).

Hereinafter, the Security Documents, together with all other documents
evidencing or securing the Obligations shall be referred to as the “Existing
Loan Documents”.

3. DESCRIPTION OF CHANGE IN TERMS.

 

  A. Modifications to Loan Agreement.

 

  1 The Loan Agreement shall be amended by deleting the following text appearing
in Section 6.9(b) thereof:

“(b) Adjusted EBITDA. Maintain, measured as of the end of each fiscal quarter
during the following periods on a trailing three month basis, Adjusted EBITDA of
at least the following:

 

Trailing Three Month Period Ended    Minimum Adjusted EBITDA  

December 31, 2009

   ($ 1,000,000 ) 

March 31, 2010

   ($ 250,000 ) 

June 30, 2010

   $ 1.00   

September 30, 2010

   $ 250,000   

December 31, 2010, and each fiscal quarter ending thereafter

   $ 500,000 ” 

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and inserting in lieu thereof the following:

“(b) Adjusted EBITDA. Maintain, measured as of the end of each fiscal quarter
during the following periods on a trailing three month basis, Adjusted EBITDA of
at least the following:

 

Trailing Three Month Period Ended    Minimum Adjusted EBITDA  

December 31, 2009

   ($ 1,000,000 ) 

March 31, 2010

   ($ 250,000 ) 

June 30, 2010

   $ 1.00   

September 30, 2010

   $ 250,000   

December 31, 2010

   $ 500,000   

March 31, 2011

   ($ 300,000 )” 

 

  2 The Loan Agreement shall be amended by deleting the following text from
Section 10 thereof:

 

“If to Bank:     

Silicon Valley Bank

One Newton Executive Park,

Suite 200

2221 Washington Street

Newton, Massachusetts 02462

Attn: Mr. Ryan Ravenscroft

Fax: (617) 527-0177

Email: rravenscroft@svb.com”

and inserting in lieu thereof the following: “If to Bank:     

Silicon Valley Bank

275 Grove Street, Suite 2-200

Newton, Massachusetts 02466

Attn: Mr. Christopher Leary

Fax: (617) 527-0177

Email: cleary@svb.com”

 

  3 The Loan Agreement shall be amended by inserting the following definition in
its appropriate alphabetical order, in Section 13.1 thereof:

““Eligible Governmental Accounts” are, so long as Borrower’s unrestricted cash
at Bank minus all outstanding Obligations of Borrower owed to Bank is equal to
or greater than $2,500,000 (the “Eligible Governmental Accounts Threshold”),
Accounts that are otherwise Eligible Accounts which are owing from an Account
Debtor which is a United States government entity or any department, agency or
instrumentality thereof, for which Bank determines, in its sole discretion, that
Borrower and the Account Debtors of such Eligible Governmental Accounts are
using best efforts to obtain an assignment under the Federal Assignment of
Claims Act of 1940 in favor of Bank. For the avoidance of doubt, at any time the
Borrower fails to maintain the Eligible Governmental Accounts Threshold, no
Accounts will be considered “Eligible Governmental Accounts” until such time as
Bank determines, in its sole discretion, that Borrower has

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achieved the Eligible Governmental Accounts Threshold. Any Overadvance created
by Borrower failing to maintain the Eligible Governmental Accounts Threshold
shall immediately be repaid in accordance with Section 2.2.”

 

  4 The Loan Agreement shall be amended by deleting the following clause
(j) from the definition of “Eligible Accounts” in Section 13.1 thereof:

“(j) Accounts owing from the United States or any department, agency, or
instrumentality thereof except for Accounts of the United States if Borrower has
assigned its payment rights to Bank and the assignment has been acknowledged
under the Federal Assignment of Claims Act of 1940, as amended;”

and inserting in lieu thereof the following:

“(j) Accounts owing from the United States or any department, agency, or
instrumentality thereof except for Accounts of the United States if Borrower has
assigned its payment rights to Bank and the assignment has been acknowledged
under the Federal Assignment of Claims Act of 1940, as amended, except for
Eligible Governmental Accounts;”

 

  5 The Loan Agreement shall be amended by deleting the following definitions
appearing in Section 13.1 thereof:

““Borrowing Base” is (a) eighty percent (80%) of Eligible Accounts, as
determined by Bank from Borrower’s most recent Borrowing Base Certificate;
provided, however, that Bank may decrease the foregoing percentage in its good
faith business judgment based on events, conditions, contingencies, or risks
which, as determined by Bank, may adversely affect the Collateral.”

“Eligible Foreign Accounts” are Accounts for which the Account Debtor does not
have its principal place of business in the United States but are otherwise
Eligible Accounts that Bank pre-approves in writing, on a case-by-case basis.

“Revolving Line Maturity Date” is February 17, 2011.”

and inserting in lieu thereof the following:

““Borrowing Base” is (a) eighty percent (80%) of Eligible Accounts plus (b) the
lesser of (i) eighty percent (80%) of Eligible Governmental Accounts or (ii) Two
Million Five Hundred Thousand Dollars ($2,500,000), in each case as determined
by Bank from Borrower’s most recent Borrowing Base Certificate; provided,
however, that Bank may decrease the foregoing percentage in its good faith
business judgment based on events, conditions, contingencies, or risks which, as
determined by Bank, may adversely affect the Collateral.”

“Eligible Foreign Accounts” are Accounts for which the Account Debtor does not
have its principal place of business in the United States but are otherwise
Eligible Accounts that (i) are until such time as Bank determines otherwise, in
its sole discretion, Accounts which are billed and collected in the United
States, the Account Debtor for which is Alfa Photonics, Aragon Photonics,
Bombardier and/or Polytec GmbH; or (ii) Bank pre-approves in writing, on a
case-by-case basis.

“Revolving Line Maturity Date” is May 18, 2011.”

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  6 The Compliance Certificate appearing as Exhibit B to the Loan Agreement is
hereby replaced with the Compliance Certificate attached as Exhibit A hereto.

4. FEES. Borrower shall pay to Bank a modification fee equal to Nine Thousand
Three Hundred Seventy Five Dollars ($9,375.00), which fee shall be due on the
date hereof and shall be deemed fully earned as of the date hereof. Borrower
shall also reimburse Bank for all legal fees and expenses incurred in connection
with this amendment to the Existing Loan Documents.

5. RATIFICATION OF IP AGREEMENTS. Borrower hereby ratifies, confirms and
reaffirms, all and singular, the terms and conditions of the IP Agreements, and
acknowledges, confirms and agrees that said IP Agreements, as modified by
certain disclosures made by Borrower to Bank through and including the date
hereof, contain an accurate and complete listing of all Intellectual Property
Collateral as defined in each respective IP Agreement, and each remains in full
force and effect. Notwithstanding the terms and conditions of any of the IP
Agreements, Borrower shall not register any Copyrights or Mask Works in the
United States Copyright Office unless it: (i) has given at least fifteen
(15) days’ prior written notice to Bank of its intent to register such
Copyrights or Mask Works and has provided Bank with a copy of the application it
intends to file with the United States Copyright Office (excluding exhibits
thereto); (ii) executes a security agreement or such other documents as Bank may
reasonably request in order to maintain the perfection and priority of Bank’s
security interest in the Copyrights proposed to be registered with the United
States Copyright Office; and (iii) records such security documents with the
United States Copyright Office contemporaneously with filing the Copyright
application(s) with the United States Copyright Office. Borrower shall promptly
provide to Bank a copy of the Copyright application(s) filed with the United
States Copyright Office, together with evidence of the recording of the security
documents necessary for Bank to maintain the perfection and priority of its
security interest in such Copyrights or Mask Works. Borrower shall provide
written notice to Bank of any application filed by Borrower in the United States
Patent Trademark Office for a patent or to register a trademark or service mark
within thirty (30) days of any such filing.

6. RATIFICATION OF PERFECTION CERTIFICATE. Borrower hereby ratifies, confirms
and reaffirms, all and singular, the terms and disclosures contained in certain
Perfection Certificates, each dated as of February 18, 2010, each as modified by
written disclosures made by Borrower to Bank through and including the date
hereof, and acknowledges, confirms and agrees the disclosures and information
above Borrower provided to Bank in each such Perfection Certificate, as modified
through the date hereof, remains true and correct in all material respects as of
the date hereof.

7. AUTHORIZATION TO FILE. Borrower hereby authorizes Bank to file UCC financing
statements without notice to Borrower, with all appropriate jurisdictions, as
Bank deems appropriate, in order to further perfect or protect Bank’s interest
in the Collateral, including a notice that any disposition of the Collateral, by
either the Borrower or any other Person, shall be deemed to violate the rights
of the Bank under the Code.

8. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.

9. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and
reaffirms all terms and conditions of the Loan Agreement (as modified by this
Loan Modification Agreement), and all security or other collateral granted to
the Bank, and confirms that the indebtedness secured thereby includes, without
limitation, the Obligations.

10. NO DEFENSES OF BORROWER. Borrower hereby acknowledges and agrees that
Borrower has no offsets, defenses, claims, or counterclaims against Bank with
respect to the Obligations, or otherwise, and that if Borrower now has, or ever
did have, any offsets, defenses, claims, or counterclaims against Bank, whether
known or unknown, at law or in equity, all of them are hereby expressly WAIVED
and Borrower hereby RELEASES Bank from any liability thereunder.

11. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the
existing Obligations, Bank is relying upon Borrower’s representations,
warranties, and agreements, as set forth in the Existing Loan Documents. Except
as expressly modified pursuant to this Loan Modification Agreement, the terms of
the Existing Loan Documents remain unchanged and in full force and effect.
Bank’s agreement to modifications to the existing

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Obligations pursuant to this Loan Modification Agreement in no way shall
obligate Bank to make any future modifications to the Obligations. Nothing in
this Loan Modification Agreement shall constitute a satisfaction of the
Obligations. It is the intention of Bank and Borrower to retain as liable
parties all makers of Existing Loan Documents, unless the party is expressly
released by Bank in writing. No maker will be released by virtue of this Loan
Modification Agreement.

12. JURISDICTION/VENUE. Section 11 of the Loan Agreement is hereby incorporated
by reference in its entirety.

13. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective
only when it shall have been executed by Borrower and Bank.

[The remainder of this page is intentionally left blank]

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IN WITNESS WHEREOF, the parties hereto have caused this Loan Modification
Agreement to be executed as a sealed instrument under the laws of the
Commonwealth of Massachusetts as of the date first above written.

 

BORROWER: LUNA INNOVATIONS INCORPORATED By:  

/s/ Dale E. Messick

Name:   Dale E. Messick Title:   Interim President and COO LUNA TECHNOLOGIES,
INC. By:  

/s/ Scott A. Graeff

Name:   Scott A. Graeff Title:   President BANK: SILICON VALLEY BANK By:  

/s/ Christopher Leary

Name:   Christopher Leary Title:   Vice President

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Exhibit A to First Loan Modification Agreement

EXHIBIT B

COMPLIANCE CERTIFICATE

 

TO:    SILICON VALLEY BANK      Date:   

 

FROM:    LUNA INNOVATIONS INCORPORATED            LUNA TECHNOLOGIES, INC.     
  

The undersigned authorized officer of Luna Innovations Incorporated, a Delaware
corporation, and Luna Technologies, Inc., a Delaware corporation (individually
and collectively, jointly and severally, the “Borrower”) certifies that under
the terms and conditions of the Loan and Security Agreement between Borrower and
Bank (the “Agreement”), (1) Borrower is in complete compliance for the period
ending                              with all required covenants except as noted
below, (2) there are no Events of Default, (3) all representations and
warranties in the Agreement are true and correct in all material respects on
this date except as noted below; provided, however, that such materiality
qualifier shall not be applicable to any representations and warranties that
already are qualified or modified by materiality in the text thereof; and
provided, further that those representations and warranties expressly referring
to a specific date shall be true, accurate and complete in all material respects
as of such date, (4) Borrower, and each of its Subsidiaries, has timely filed
all required tax returns and reports, and Borrower has timely paid all foreign,
federal, state and local taxes, assessments, deposits and contributions owed by
Borrower except as otherwise permitted pursuant to the terms of Section 5.9 of
the Agreement, and (5) no Liens have been levied or claims made against Borrower
or any of its Subsidiaries, if any, relating to unpaid employee payroll or
benefits of which Borrower has not previously provided written notification to
Bank. Attached are the required documents supporting the certification. The
undersigned certifies that these are prepared in accordance with GAAP
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The undersigned acknowledges that no
borrowings may be requested at any time or date of determination that Borrower
is not in compliance with any of the terms of the Agreement, and that compliance
is determined not just at the date this certificate is delivered. Capitalized
terms used but not otherwise defined herein shall have the meanings given them
in the Agreement.

Please indicate compliance status by circling Yes/No under “Complies” column.

 

Reporting Covenant

 

Required

 

Complies

Monthly financial statements with Compliance Certificate   Monthly within 30
days   Yes    No Annual financial statement (CPA Audited) + CC   FYE within 120
days   Yes    No 10-Q, 10-K and 8-K   Within 5 days after filing with SEC  
Yes    No A/R & A/P Agings, Deferred Revenue/billings in excess of cost report  
Monthly within 15 days   Yes    No Transaction Reports   Bi-weekly (monthly with
30 days during a Streamline Period) and with each request for an advance  
Yes    No Projections   As amended and within 30 days following approval by
Borrower’s board   Yes    No

The following Intellectual Property was registered after the Effective Date (if
no registrations, state “None”)

 

 

 

Financial Covenant

  

Required

    

Actual

    

Complies

 

Maintain as indicated:

        

Minimum Adjusted Quick Ratio

     1.25:1.00                      :1.0         Yes    No   

Minimum Adjusted EBITDA

     *       $                      Yes    No   

 

* See Section 6.9(b) of the Loan and Security Agreement

 

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The following financial covenant analyses and information set forth in Schedule
1 attached hereto are true and accurate as of the date of this Certificate.

The following are the exceptions with respect to the certification above: (If no
exceptions exist, state “No exceptions to note.”)

 

 

 

 

 

 

 

LUNA INNOVATIONS INCORPORATED     BANK USE ONLY LUNA TECHNOLOGIES, INC.        
  Received by:  

 

        AUTHORIZED SIGNER By:  

 

    Date:  

 

Name:  

 

      Title:  

 

    Verified:  

 

        AUTHORIZED SIGNER       Date:  

 

      Compliance Status:            Yes    No

 

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Schedule 1 to Compliance Certificate

Financial Covenants of Borrower

Dated:                             

 

I. Adjusted Quick Ratio (Section 6.9(a))

Required: 1.25:1.00

Actual:

 

A.

 

Aggregate value of Borrower’s unrestricted cash at Bank and Borrower’s Cash
Equivalents at Bank

   $                

B.

 

Aggregate value of the net billed accounts receivable of Borrower and its
Subsidiaries

   $                

C.

 

Quick Assets (the sum of line A plus line B)

   $                

D.

 

Current Liabilities of Borrower and its Subsidiaries

   $                

E.

 

Current portion of Deferred Revenue

   $                

F.

 

Adjusted Current Liabilities (line D minus line E)

   $                

G.

 

Adjusted Quick Ratio (line D divided by line F)

     _______   

Is line G equal to or greater than 1.25:1:00?

 

  

 

 

   No, not in compliance     

 

   Yes, in compliance  

 

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II. Adjusted EBITDA (Section 6.9(b))

Required: Maintain, measured as of the end of each fiscal quarter during the
following periods on a trailing three month basis, Adjusted EBITDA of at least
the following:

 

Trailing Three Month Period Ended    Minimum Adjusted EBITDA  

December 31, 2009

   ($ 1,000,000 ) 

March 31, 2010

   ($ 250,000 ) 

June 30, 2010

   $ 1.00   

September 30, 2010

   $ 250,000   

December 31, 2010

   $ 500,000   

March 31, 2011

   ($ 300,000 ) 

Actual: All amounts calculated on a trailing three month basis:

 

A.

   Net Income    $                

B.

   To the extent included in the determination of Net Income       1.        The
provision for income taxes    $                    2.        Depreciation
expense    $                    3.        Amortization expense    $             
      4.        Net Interest Expense    $                    5.        Non-cash
stock compensation expense    $                    6.        The one-time
reversal of the Litigation Accrual (as applicable)    $                   
7.        The sum of lines 1 through 5 minus line 6    $                

C.

   Adjusted EBITDA (line A plus line B.7)      _______   

Is line C equal to or greater than $ [                            ]?

 

 

 

   No, not in compliance     

 

   Yes, in compliance  

 

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