Luna Innovations Reports Second Quarter 2012 Financial Results

Net loss improves 6% from prior year quarter; Total revenues decrease 15% over prior year quarter; Operating expenses decrease 14% from prior year quarter

ROANOKE, Va.–(BUSINESS WIRE)–Aug. 9, 2012–Luna Innovations Incorporated(NASDAQ: LUNA) today announced its financial results for the second quarter and six months endedJune 30, 2012.

As compared to the same quarter last year, total revenue decreased by 15%, from$9.6 millionin the second quarter of 2011 to$8.2 millionin the second quarter of 2012, driven primarily by the continued softness in the telecom test and measurement market that has negatively affected the company’s products and licensing revenues since the third quarter of 2011. Gross profit decreased from$3.7 millionfor the second quarter of 2011 to$3.1 millionfor the second quarter of 2012 with overall margins unchanged at 38%. Offsetting these declines, operating expenses improved 14% to$3.3 millionin the second quarter of 2012 compared to$3.9 millionin the second quarter of 2011. The company reported a net loss attributable to common stockholders of$269,000, or$0.02per common share for the second quarter of 2012, an improvement of 7% compared to a net loss of$289,000in the same quarter last year. Adjusted EBITDA, a non-GAAP measure, which is earnings before interest, taxes, and non-cash expenses of stock based compensation, depreciation, amortization and warrant expense, decreased to$0.5 millionfor the second quarter of 2012, as compared to$0.7 millionfor the second quarter of 2011. Cash decreased to$6.6 millionatJune 30, 2012compared to$8.1 millionatJune 30, 2011.

“Our products and licensing revenues for the most recent quarter were consistent with our quarterly revenues since the third quarter of last year, when the telecom test and measurement sector as a whole declined significantly. Our products and licensing revenues over the past four quarters have consistently ranged$2.7 million to $3.1 million. Our growth strategy for the future includes expansion of our products into markets for fiber optic sensing led by our new ODiSI platform. I am pleased that we did complete the roll-out of our new ODiSI-B product with the first shipments of the product realized in the second quarter,” saidMy Chung, chief executive officer of Luna. “Becoming the leading provider of sensing systems for testing composite materials is one of our key strategies; therefore, we are encouraged by these initial customer purchases and committed to continuing to evolve our solution to respond to the needs of our customers. In addition, we have continued to make solid progress in driving our other strategic growth initiatives, focusing on our fiber-optic shape sensing for medical applications and our cybersecurity solutions.”

Second Quarter Financial and Business Summary

— Total revenues decreased by 15%, from$9.6 millionin the second quarter of 2011 to$8.2 millionin the second quarter of 2012.

— Technology development revenues decreased by 5%, to$5.3 million, for the second quarter of 2012, from$5.6 millionfor the second quarter of 2011. Technology development revenues decreased by 6% compared to the first quarter of 2012.

— Products and licensing revenue decreased by 29%, from$4.0 millionin the second quarter of 2011 to$2.8 millionin the second quarter of 2012. Products and licensing revenue increased 5% over the first quarter of 2012.

— Gross profit for the second quarter of 2012 decreased to$3.1 million, or 38% of total revenues, from$3.7 million, or 38% of total revenues, for the corresponding period of 2011.

— Selling, general and administrative expenses decreased by 17% to$2.7 million, or 33% of total revenues for the second quarter of 2012, from$3.3 million, or 34% of total revenues, for the second quarter of 2011.

— Total operating expenses decreased to$3.3 million, or 41% of total revenues, for the second quarter of 2012 from$3.9 million, or 40% of total revenues for the second quarter of 2011.

— Adjusted EBITDA decreased to$0.5 millionin the second quarter 2012 from$0.7 millionin the second quarter of 2011.

— Net loss attributable to common stockholders for the second quarter of 2012 decreased to$269,000from$289,000for the second quarter of 2011.

— Cash and cash equivalents totaled$6.6 millionatJune 30, 2012, as compared to$7.9 millionatMarch 31, 2012. Cash and cash equivalents decreased primarily due to payment of liabilities accrued as ofDecember 31, 2011.

Six Months Ended June 30, 2012 Financial Summary

— Total revenue decreased by 11% to$16.6 millionfor the six months endedJune 30, 2012compared to$18.6 millionfor the six months endedJune 30, 2011.

— Technology development revenues decreased by 2%, from$11.2 millionfor the six months endedJune 30, 2011to$11.0 millionfor the six months endedJune 30, 2012. Technology development revenues for the six months endedJune 30, 2012decreased by 2% from the immediately preceding six month period.

— Products and licensing revenue decreased by 25%, from$7.4 millionfor the six months endedJune 30, 2011to$5.6 millionfor the six months endedJune 30, 2012. Products and licensing revenue for the six months endedJune 30, 2012decreased 4% from the immediately preceding six month period.

— Gross profit for the six months endedJune 30, 2012decreased by 9%, to$6.4 million, compared to a gross profit of$7.0 millionfor the six months endedJune 30, 2011. Gross margin percentages remained steady at 38% of revenues for the first six months of 2012 and 2011.

— Selling, general and administrative expenses decreased by 20% from$6.9 million, or 37% of total revenues, for the six months endedJune 30, 2011to$5.5 million, or 33% of total revenues, for the six months endedJune 30, 2012.

— Total operating expenses decreased by 16% to$6.8 million, or 41% of total revenues, for the six months endedJune 30, 2012compared to$8.1 million, or 44% of total revenues, for the six months endedJune 30, 2011.

— Adjusted EBITDA increased by 10% to$1.1 millionfor the six months endedJune 30, 2012from$1.0 millionfor the six months endedJune 30, 2011.

— Net loss attributable to common stockholders improved to$0.6 millionfor the six months endedJune 30, 2012, compared to a net loss attributable to common stockholders of$1.4 millionfor the six months endedJune 30, 2011.

Non-GAAP Measures

In evaluating the operating performance of its business, Luna’s management excludes certain charges and credits that are required by generally accepted accounting principles (“GAAP”). These non-GAAP results provide useful information to both management and investors by excluding items that the company believes may not be indicative of its operating performance, because either they are unusual and the company does 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. These non-GAAP measures should be considered in addition to results and guidance prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results. The non-GAAP measures included in this press release have been reconciled to the nearest GAAP measure in the table following the financial statements attached to this press release.

Conference Call Information

As previously announced, Luna Innovationswill conduct an investor conference call at 5:00 p.m. (EDT)today to discuss its financial results and business developments for the second quarter of 2012 and expectations for the remainder of 2012. The call can be accessed by dialing 800.659.1942 domestically or 617.614.2710 internationally prior to the start of the call. The participant access code is 79070603. Investors are advised to dial in at least five minutes prior to the call to register. The conference call will also be webcast live over the Internet. The webcast can be accessed by logging on to the “Investor Relations” section of the Luna Innovations website, www.lunainnovations.com, prior to the event. The webcast will be archived under the “Webcasts and Presentations” section of theLuna Innovations website for at least 30 days following the conference call.

About Luna Innovations:

Luna Innovations Incorporated(www.lunainnovations.com) is focused on sensing and instrumentation. Luna develops and manufactures new-generation products for the healthcare, telecommunications, energy and defense markets. The company’s products are used to measure, monitor, protect and improve critical processes in the markets we serve. Through its disciplined commercialization business model, Luna has become a recognized leader in transitioning science to solutions. Luna is headquartered inRoanoke, Virginia.

Forward-Looking Statements:

The statements in this release that are not historical facts constitute “forward-looking statements” made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. These statements include our expectations regarding the demand for the company’s fiber optic equipment and technologies and the company’s technical capabilities. Management cautions the reader that these forward-looking statements are only predictions and are subject to a number of both known and unknown risks and uncertainties, and actual results, performance, and/or achievements of the company may differ materially from the future results, performance, and/or achievements expressed or implied by these forward-looking statements as a result of a number of factors. These factors include, without limitation, failure of demand for the company’s products and services to meet expectations, technological challenges and those risks and uncertainties set forth in the company’s periodic reports and other filings with the Securities and Exchange Commission. Such filings are available at the SEC’s website at www.sec.gov and at the company’s website at www.lunainnovations.com. The statements made in this release are based on information available to the company as of the date of this release andLuna Innovations undertakes no obligation to update any of the forward-looking statements after the date of this release.

Luna Innovations Incorporated

Condensed Consolidated Statements of Operations

Three Months Ended Six Months Ended
June 30,

June 30,

2012 2011 2012 2011
(unaudited) (unaudited)
Revenues:
Technology development revenues $ 5,334,320 $ 5,623,074 $ 10,993,816 $ 11,244,689
Product and licensing revenues 2,845,864 4,000,515 5,559,677 7,377,525
Total revenues 8,180,184 9,623,589 16,553,493 18,622,214
Cost of revenues:
Technology development costs 3,768,081 4,194,442 7,670,979 8,280,608
Product and license costs 1,267,201 1,767,778 2,514,696 3,340,469
Total cost of revenues 5,035,282 5,962,220 10,185,675 11,621,077
Gross Profit 3,144,902 3,661,369 6,367,818 7,001,137
Operating expense:
Selling, general and administrative 2,706,983 3,251,073 5,517,494 6,929,593
Research, development, and engineering 629,347 620,470 1,314,311 1,180,159
Total operating expense 3,336,330 3,871,543 6,831,805 8,109,752
Operating loss (191,428 ) (210,174 ) (463,987 ) (1,108,615 )
Other expense, net:
Other income/(expense), net 23,265 37,823 46,533 35,835
Interest expense (74,357 ) (84,303 ) (154,015 ) (198,725 )
Total other expense (51,092 ) (46,480 ) (107,482 ) (162,890 )
Loss before income taxes (242,520 ) (256,654 ) (517,469 ) (1,271,505 )
Income tax expense 5,799 10,020
Net loss (242,520 ) (256,654 ) (577,268 ) (1,281,525 )
Preferred stock dividend 26,784 32,708 60,880 74,336
Net loss attributable to common stockholders $ (269,304 ) $ (289,362 ) $ (638,148 ) $ (1,355,861 )
Net loss per share of common stock: $ (0.02 ) $ (0.02 ) $ (0.05 ) $

(0.10

)

Luna Innovations Incorporated

Condensed Consolidated Balance Sheets

June 30, December 31,
2012 2011
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 6,639,519 $ 8,939,127
Accounts receivable, net 7,170,950 5,958,086
Inventory, net 3,395,620 3,330,773
Prepaid expenses 921,149 1,071,438
Other current assets 35,717 35,717
Total current assets 18,162,955 19,335,141
Property and equipment, net 2,556,583 2,816,674
Intangible assets, net 455,460 539,563
Other assets 190,460 228,043
Total assets $ 21,365,458 $ 22,919,421
Liabilities and stockholders’ equity
Liabilities :
Current Liabilities
Current portion of long term debt obligation 1,500,000 1,625,000
Current portion of capital lease obligation 52,496 50,949
Accounts payable 1,854,041 1,656,602
Accrued liabilities 2,579,446 3,612,193
Deferred credits 1,134,112 1,462,603
Total current liabilities 7,120,095 8,407,347
Long-term debt obligation 3,000,000 3,625,000
Long-term lease obligation 156,367 183,008
Total liabilities 10,276,462 12,215,355
Commitments and contingencies
Stockholders’ equity:
Preferred stock 1,322 1,322
Common stock 14,091 13,969
Additional paid-in capital 60,312,472 59,289,516
Accumulated deficit (49,238,889 ) (48,600,741 )
Total stockholders’ equity 11,088,996 10,704,066
Total liabilities and stockholders’ equity $ 21,365,458 $ 22,919,421

Luna Innovations Incorporated

Condensed Consolidated Statements of Cash Flows

Six months ended
June 30,
2012 2011
(unaudited)
Cash (used in)/provided by operating activities
Net loss $ (577,268 ) $ (1,281,525 )
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 528,113 710,269
Share-based compensation 928,368 1,275,147
Warrant expense 12,032 38,893
Change in assets and liabilities:
Accounts receivable

(1,212,864

)

994,149
Inventory (69,186 ) (665,883 )
Other current assets 150,289

(22,503

)

Other assets 37,583 37,583
Accounts payable and accrued expenses

(847,341

)

111,900
Deferred credits

(328,491

)

103,138
Net cash (used in)/provided by operating activities

(1,378,765

)

1,301,168
Cash flows used in investing activities
Acquisition of property and equipment (123,732 ) (173,945 )
Intangible property costs (55,847 ) (199,741 )
Net cash used in investing activities (179,579 ) (373,686 )
Cash flows used in financing activities
Payments on capital lease obligations (25,094 ) (18,030 )
Proceeds from debt obligations 6,000,000
Payment of debt obligations (750,000 ) (6,242,394 )
Proceeds from the exercise of options and warrants 33,830 182,368
Net cash used in financing activities (741,264 )

(78,056

)

Net change in cash

(2,299,608

)

849,426
Cash and cash equivalents, beginning of period 8,939,127 7,216,580
Cash and cash equivalents, end of period $ 6,639,519 $ 8,066,006

Luna Innovations Incorporated

Reconciliation of Net Loss to EBITDA and Adjusted EBITDA

Three Months Ended

Six Months Ended

June 30, June 30,
2012 2011 2012 2011
(unaudited) (unaudited)
Net loss $ (242,520 ) $ (256,654 ) $ (577,268 ) $ (1,281,525 )
Interest expense 74,357 84,303 154,015 198,725
Income tax expense 5,799 10,020
Depreciation and amortization 244,012 382,856 528,113 710,269
EBITDA 75,849 210,505 110,659 (362,511 )
Stock-based compensation and warrant expense 473,930 472,328 940,400 1,314,040
Adjusted EBITDA $ 549,779 $ 682,833 $ 1,051,059 $ 951,529

Luna Innovations Incorporated
Investor Contact:
Dale Messick, CFO, 1-540-769-8400
IR@lunainnovations.com