Luna Innovations Inc. announced that Carilion Clinic, its largest non-employee shareholder, has exchanged all outstanding convertible promissory notes of Luna, with a balance of principal and accrued interest equal to $6.2 million, for newly issued shares of Series A Convertible Preferred Stock of Luna.

In 2005, Carilion Clinic invested $10 million in equity and $5 million in convertible promissory notes of Luna. The indebtedness accrued interest at 6 percent annually and had an aggregate balance of $1.2 million in accrued interest. Carilion elected to exchange the entire balance of this indebtedness for shares of Luna preferred stock that will be convertible into shares of common stock at the original conversion price of the promissory notes of $4.69 per share.

In addition, Carilion will receive warrants for 356,000 shares of common stock that are exercisable beginning in 2013 at an exercise price of $2.50 per share.

"Carilion has been an exceptional strategic partner of Luna's and is reaffirming its commitment by exchanging all of its debt for equity," said Kent Murphy, CEO "We are significantly deleveraging our indebtedness and simultaneously increasing our stockholders equity, which materially strengthens Luna's balance sheet."