Luna Innovations Reports Second Quarter 2009 Financial Results;

Revenues Decline by $1.2 Million Compared to Second Quarter 2008; Net Loss Increases by $0.6 Million

ROANOKE, Va.–Sep. 9, 2009–Luna Innovations Incorporated (NASDAQ:LUNA), a company focusing on sensing & instrumentation and pharmaceutical nanomedicines, today announced its financial results for the quarter endedJune 30, 2009.

As compared to the same quarter last year, second quarter 2009 revenues decreased from$9.9 million to $8.7 million, gross profit decreased from$4.1 million to $3.3 million, and loss per share increased from$0.16to$0.21. The increase in loss per share resulted from lower product sales in addition to higher costs associated with continuing litigation activities, partially offset by improvements in other areas of operating expenses.

Kent Murphy, Chairman and Chief Executive Officer, provided this comment related to the second quarter results and the company’s decision to file for reorganization under Chapter 11 in July: “The slowdown in product sales that began in the fourth quarter of last year with the country’s overall economic decline continued to affect our product sales in the second quarter. While the costs of our ongoing litigation withHansen Medicalalso continue to adversely impact our bottom-line results, we have made significant improvements in the efficiency of our operations and continue to conduct business in the ordinary course. Our costs associated with legal matters increased approximately$1 million, to$1.6 million, in the second quarter of 2009 compared with approximately$0.8 millionin the second quarter of 2008. Excluding that increase in our legal costs, our operating expenses for the most recent quarter would have decreased by approximately$1 millioncompared to the same period last year. When we filed for reorganization in mid-July, our objective was to protect the interests of all of our stakeholders while trying to resolve our legal matters as quickly as possible. If we are able to emerge from Chapter 11 quickly and in accordance with the plan that we have filed with the court, we will be positioned for continued success into the future.”

The company also announced today that it received notice onSeptember 8, 2009, that theNasdaq Listing Qualifications Paneldecided to transfer its common stock from theNASDAQ Global Marketto theNASDAQ Capital Marketand continue listing of its common stock. The company had previously received a delisting letter onJuly 17, 2009, and the company had appealed the proposed delisting to the Panel. The hearing on the appeal was held onAugust 27, 2009. The company’s continued listing is subject to several conditions, including its emergence from Chapter 11 reorganization byDecember 31, 2009.

Second Quarter Financial Highlights

  • Total revenues for the second quarter of 2009 decreased by$1.2 million to $8.7 millioncompared to$9.9 millionduring the second quarter of 2008.
  • Product and license revenues decreased$0.7 millionto approximately$2.2 millionin the second quarter of 2009 compared to$2.9 millionin the second quarter of 2008.
  • Technology Development Division revenues decreased by$0.5 millionas compared to the second quarter of 2008.
  • Gross profit for the second quarter of 2009 decreased to$3.3 millionfrom$4.1 millionfor the corresponding period of 2008.
  • Operating expenses decreased to$5.6 millionin the second quarter of 2009 from$5.8 millionduring the second quarter of 2008, notwithstanding an increase in legal fees of approximately$1 million.
  • Net loss per share for the second quarter of 2009 was$0.21per share, an increase from a loss per share of$0.16for the second quarter of 2008.
  • Cash and cash equivalents decreased to$12.1 millionatJune 30, 2009, as compared to$13.2 millionatMarch 31, 2009and$15.5 millionatDecember 31, 2008.

Second Quarter Business Highlights

Technology Development Division

  • Awarded$1.5 millioncorrosion test methods contract
  • Selected for negotiations in NREL’s Photovoltaic Technology Pre-Incubator Program
  • Demonstrated advanced material technologies in hydrophobic watershedding coatings for windshields and impact damage indicating paints during the Warrior 2009 demonstration sponsored by theAir Force Research Laboratory (AFRL), which highlights promising new technologies in the field during actual military exercise scenarios
  • With the Mayo Clinic, published a paper in the international journal Annals of Biomedical Engineering discussing a next-generation fiber optic pressure microsensor that improves size and performance over previous generation sensors

Pharmaceuticals / Nanomedicine

Instrumentation, Test & Measurement

  • Launched our distributed sensing system with potential application in areas such as structural health monitoring of carbon fiber reinforced materials of new aircraft, aviation electronic systems and sink hole monitoring systems for railways

Outlook for Remainder of 2009

Given the uncertainties associated with Luna’s Chapter 11 reorganization and the Hansen litigation, the company is unable to provide a reasonable projection for its expected results of operations for the remainder of 2009 at this time.

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 for the second quarter of 2009. The call can be accessed by dialing 1.866.314.4865 domestically or 1.617.213.8050 internationally prior to the start of the call. The access code is 77289631. 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, http://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) develops and manufactures new-generation products for the healthcare, telecommunications, energy and defense markets. Our 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:
This release includes information that constitutes “forward-looking statements” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding, but not limited to (i) Luna’s intention to continue to serve its customers’ needs; (ii) improvements in operating efficiencies; (iii) the company’s position if it can emerge from Chapter 11 quickly under its filed plan of reorganization; (iv) demonstration of material technologies; and (v) the potential expansion of applications for the company’s distributing sensing technology. The company attempts, whenever possible, to identify forward-looking statements by words such as “intends,” “will,” “plans,” “anticipates,” “expects,” “may,” “estimates,” “believes,” “should,” “projects,” or “continue,” or the negative of those words and other comparable words. Similarly, statements that describe the company’s business strategy, goals, prospects, opportunities, outlook, objectives, plans or intentions are also forward-looking statements. Actual events or results may differ materially from the expectations expressed in such forward-looking statements as a result of various factors, including risks and uncertainties, many of which are beyond the company’s control. Factors that could cause actual results to differ materially from the expectations expressed in such forward-looking statements include, but are not limited to risks inherent in current or future litigation proceedings, particularly with respect to Hansen Medical, Inc.; the company’s inability to continue to operate its business in the normal course; whether the company can emerge from Chapter 11 reorganization in the near future; and difficulties with the application of the company’s technologies. Additional factors that may affect the future results of the company are set forth in the company’s quarterly and annual reports on Form 10-Q and Form 10-K, respectively, and other filings with the Securities and Exchange Commission (“SEC”), which are available at the SEC’s website at http://www.sec.gov, and at the company’s website at http://www.lunainnovations.com. These risk factors are updated from time to time through the filing of periodic reports with theSEC. The statements made in this press 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 herein after the date of this press release.

                   
                   

Luna Innovations Incorporated Consolidated Statements of Operations

                   
           
      Three Months Ended   Six Months Ended
      June 30,   June 30,
      2009   2008   2009   2008
      (unaudited)   (unaudited)   (unaudited)   (unaudited)
Revenues:                  
Contract research revenues     $ 6,446,971     $ 6,947,276     $ 13,329,343     $ 13,549,023  
Product and license revenues       2,214,808       2,931,027       3,825,991       5,249,203  
Total revenues       8,661,779       9,878,303       17,155,334       18,798,226  
Cost of revenues:                  
Contract research costs       4,271,252       4,382,001       9,169,008       8,575,648  
Product and license costs       1,048,249       1,427,553       1,926,850       2,769,232  
Total cost of revenues       5,319,501       5,809,554       11,095,858       11,344,880  
Gross profit       3,342,278       4,068,749       6,059,476       7,453,346  
                   
Operating expense:                  
Selling, general, and administrative       4,907,564       4,899,559       9,142,073       9,455,192  
Research, development, and engineering       684,755       934,111       1,681,475       1,638,910  
Litigation reserve                   36,303,643        
                    1,310,598        
Operating expense       5,592,319       5,833,670       48,437,789       11,094,102  
                   
Operating loss       (2,250,041 )     (1,764,921 )     (42,378,313 )     (3,640,756 )
Other expense                  
Other       (17,244 )           (18,167 )      
Interest expense, net       (139,875 )     (33,576 )     (298,864 )     (9,689 )
Total other income       (157,119 )     (33,576 )     (317,031 )     (9,689 )
Loss before income taxes       (2,407,160 )     (1,798,497 )     (42,695,344 )     (3,650,445 )
Income tax expense                   600,000        
Net loss     $ (2,407,160 )   $ (1,798,497 )   $ (43,295,344 )   $ (3,650,445 )
Net loss per share:                  
Basic     $ (0.21 )   $ (0.16 )   $ (3.87 )   $ (0.34 )
Diluted     $ (0.21 )   $ (0.16 )   $ (3.87 )   $ (0.34 )
Weighted average shares:                  
Basic       11,207,021       10,935,370       11,184,348       10,858,367  
Diluted       11,207,021       10,935,370       11,184,348       10,858,367  
                   
           

Luna Innovations Incorporated Consolidated Balance Sheets

           
           
      June 30,   December 31,
      2009   2008
           
Assets     (unaudited)    
Current assets          
Cash and cash equivalents     $ 12,110,258     $ 15,518,960  
Accounts receivable, net       6,879,920       7,332,034  
Refundable income taxes       98,092       98,092  
Inventory       2,851,581       2,828,991  
Other current assets       418,980       342,598  
Total current assets       22,358,831       26,120,675  
Property and equipment, net       4,710,871       5,363,957  
Intangible assets, net       175,862       1,813,643  
Deferred tax asset             600,000  
Other assets       101,981       118,292  
Total assets     $ 27,347,545     $ 34,016,567  

Liabilities and stockholders’ equity

         
Current liabilities          
Current portion of capital lease obligation     $ 11,782     $ 17,396  
Current portion of long-term debt obligation       4,285,715       1,428,572  
Accounts payable       1,778,275       2,667,192  
Accrued liabilities       5,491,100       5,161,308  
Litigation reserve       36,303,643        
Deferred credits       1,866,249       1,854,282  
Total current liabilities       49,736,764       11,128,750  
           
Long-term debt obligation       5,000,000       8,571,428  
Total liabilities       54,736,764       19,700,178  
           

Stockholders’ equity:

         

Preferred stock, par value $0.001, 5,000,000 shares authorized, no shares issued and outstanding

             

Common stock, par value $0.001, 100,000,000 shares authorized, 11,209,836 and 11,137,882 shares issued and outstanding

      11,209       11,138  
Additional paid-in capital       39,550,593       37,960,928  
Accumulated deficit       (66,951,021 )     (23,655,677 )

Total stockholders’ equity

      (27,389,219 )     14,316,389  

Total liabilities and stockholders’ equity

    $ 27,347,545     $ 34,016,567  
           
         

Luna Innovations Incorporated Consolidated Statements of Cash Flows

         
       
      Six months ended
      June 30,
      2009   2008
      (unaudited)   (unaudited)
Cash flows used in operating activities          
Net loss     $ (43,295,344 )   $ (3,650,445 )

Adjustments to reconcile net loss to net cash used in operating activities:

         
Depreciation and amortization       1,142,846       958,953  
Impairment of intangible assets       1,310,598        
Share-based compensation       1,569,043       1,422,902  
Deferred tax expense       600,000        
Change in assets and liabilities:          
Accounts receivable       452,114       1,220,259  
Refundable income taxes             5,401  
Inventory       (22,590 )     (605,471 )
Other assets       (60,071 )     (160,362 )
Litigation reserve       36,303,643        
Accounts payable and accrued expenses       (559,125 )     138,964  
Deferred credits       11,967       (297,695 )
Net cash used in operating activities       (2,546,919 )     (967,494 )
Cash flows used in investing activities          
Acquisition of property and equipment       (41,445 )     (552,355 )
Intangible property costs       (121,132 )     (291,452 )
Net cash used in investing activities       (162,577 )     (843,807 )
Cash flows from financing activities          
Proceeds from/ (Payments on) debt obligations       (714,285 )     4,928,150  
Payments on capital lease obligations       (5,614 )     (16,517 )
Proceeds from the exercise of options and warrants       20,693       105,362  
Net cash used in financing activities       (699,206 )     5,016,995  
Net change in cash       (3,408,702 )     3,205,694  
Cash – beginning of period       15,518,960       12,046,945  
Cash – end of period     $ 12,110,258     $ 15,252,639  
                   
 

Luna Innovations Incorporated Reconciliation of EBITDA and Adjusted EBITDA to Net Loss

                     
Luna Innovations Incorporated
Reconciliation of EBITDA and Adjusted EBITDA to Net Loss
                     
                     
      Three Months Ended     Six Months Ended
      June 30,     June 30,
      2009   2008     2009   2008
      (unaudited)   (unaudited)     (unaudited)   (unaudited)
                     
Net Loss     $ (2,407,160 )   $ (1,798,497 )     $ (43,295,344 )   $ (3,650,445 )
                     
Interest       139,875       33,576         298,864       9,689  
Taxes                     600,000        
Depreciation and amortization       523,058       477,121         1,142,846       958,953  
                     
EBITDA       (1,744,227 )     (1,287,800 )       (41,253,634 )     (2,681,803 )
                     
Share based compensation       779,532       663,260         1,569,043       1,422,902  
Litigation reserve                     36,303,643        
Impairment of intangible assets                     1,310,598        
                     
Adjusted EBITDA     $ (964,695 )   $ (624,540 )     $ (2,070,350 )   $ (1,258,901 )
                                     

Luna Innovations Incorporated
Investor Contact:
Dale Messick, CFO
1-540-769-8400
[email protected]
or
Media Contact:
Karin Clark
1-540-769-8400
[email protected]