Luna Innovations Reports Fourth Quarter 2008 and Full Year Financial Results

ROANOKE, Va.–Mar. 3, 2009–Luna Innovations Incorporated (NASDAQ: LUNA), a company focusing on sensing & instrumentation and pharmaceutical nanomedicines, today announced its financial results for the fourth quarter and year endedDecember 31, 2008.

As compared to the same quarter last year, fourth quarter 2008 revenues decreased by 26%, from$9.9 million to $7.4 million, gross profit decreased from$3.7 million to $2.3 million, and loss per share increased from$0.11 to $0.19. For the year, revenues increased by 10% from$33.7 million to $36.9 millioncompared to 2007. Gross profit increased from$12.3 million to $14.0 million, or 14%. The loss per share decreased from$0.77in 2007 to$0.57in 2008.

Kent Murphy, Chairman and Chief Executive Officer, provided this overview of Luna’s results:
“Through the first three quarters of 2008, revenues increased 24% over the first three quarters of 2007. We were having a strong year until the fourth quarter, when the economy changed dramatically. The lower than expected fourth quarter 2008 revenues were primarily caused by a decline in orders for telecommunications products we believe related to customers reducing their capital expenditures in this uncertain economy. In recognition of this decline, we took the appropriate steps to control our expenses and cash flow. We ended 2008 with$15.5 million in cash, a net increase of approximately$0.3 million for the fourth quarter.

“A major portion of our business is geared toward partnerships with industry leaders in selected market spaces. During 2008, we entered into or continued partnership relationships with global market leaders in surgical robotics, heart bypass equipment, oilfield services, telecommunications equipment, power generation equipment and defense systems. The company continues to make progress towards new opportunities for partnering in solar and wind energy generation, non-robotic medical devices, pharmaceuticals and defense solutions.

“In addition, our Technology Development Division, which provides applied contract research to customers, achieved our planned revenue growth of 15% in 2008 and has continued to be successful in attracting new contract awards in early 2009. We believe our backlog of$29 millionas of year-end in new research opportunities will continue to support product development in sensors, nanomedicines and defense in accordance with our long-term business strategy.

“In the fourth quarter, we were awarded work with GE Aviation on aU.S. Army program to develop an integrated corrosion health monitoring system. GE Aviation selected Luna for this project due to our experience and knowledge of aircraft corrosion and materials and our concurrent development efforts in corrosion monitoring, modeling, and prediction. The goals of thisArmy program are to improve rotorcraft safety, decrease maintenance costs, and increase rotorcraft readiness.

“We also continue to garner interest in our unique organic solar cells, which use patented carbon nanomaterials to capture energy more efficiently than many existing organic solar cells to convert to electricity. Our research was recently published in Nature Materials, and demonstrates an entirely new approach of enhancing organic photovoltaic device performance. We are collaborating with solar cell manufacturers for testing and evaluation of Luna’s proprietary nanomaterial technology.”

On the outlook for 2009, Murphy commented, “Given these times of economic uncertainty, it is difficult to project 2009 revenue. We currently expect flat to modest revenue growth in 2009. We believe that our development relationships with industry leaders in broadband, alternative energy and healthcare markets, in addition to our opportunities within the federal government, position us to offset some of the uncertainty in our sensing and instrumentation product sales. As the economy recovers, we believe our Luna-branded test & measurement products will be attractive products to address the needs of broadband access and high speed network infrastructure in 2009 and beyond.”

Fourth Quarter Financial Highlights

  • Total revenues for the fourth quarter of 2008 decreased 26% compared to the fourth quarter of 2007.
  • Product and license revenues decreased 63% to approximately$1.4 millionin the fourth quarter of 2008, compared to$3.7 millionin the fourth quarter of 2007. Approximately$0.6 millionof this decline is attributable to a change in the estimated percentage of completion on certain product development activities.
  • Gross profit for the fourth quarter of 2008 decreased to$2.3 million, or 31% of total revenues, from$3.7 million, or 37% of total revenues, for the corresponding period of 2007. The aforementioned percentage-of-completion adjustment alone reduced the fourth quarter 2008 gross margin by approximately 8 percentage points.
  • Operating expenses were flat at$4.9 millionin the fourth quarters of 2007 and 2008. Operating expenses for the fourth quarter of 2008 include a$0.7 millionincrease in legal expenses and a reduction of$1.0 millionin incentive compensation costs.
  • Net loss per share for the fourth quarter of 2008 was$0.19per share from a loss per share of$0.11for the fourth quarter of 2007.
  • Cash and cash equivalents totaled$15.5 millionatDecember 31, 2008, as compared to$15.2 millionatSeptember 30, 2008.

Fourth Quarter Business Highlights

Sensing and Instrumentation

  • Launched the PHOENIXâ„¢ 1400 swept tunable benchtop laser, which offers best-in-class wavelength precision and tuning linearity.
  • Demonstrated the feasibility of removing gaseous emboli from the bloodstream using our acoustic expertise along with our EDAC®medical device, which detects and verifies the removal of emboli.

Pharmaceuticals / Nanomedicine

  • Demonstrated our nanomaterial-based hair growth compounds in topical form and successfully repeated efficacy testing by an independent third party.
  • Selected two contrast media agent candidates with the core technology for developing targeted agents for imaging both inside blood vessels, or intravascular, and in the small structural space between tissues or parts of an organ, or interstitial sites.
  • Demonstrated in vitro that our TRIMETASPHERE®-based contrast agent can possibly be used to target and image arterial plaque, which could lead to improved diagnosis and treatment of coronary artery and other diseases.

Technology Development

  • Demonstrated a new approach of enhancing organic photovoltaic (OPV) device performance using Luna’s exclusive TRIMETASPHERE® carbon nanomaterials in place of the empty cage fullerenes. Research published in the prestigious journal Nature Materials.
  • Luna’s nanomaterials were independently verified at theU.S. Departmentof Energy’sNational Renewable Energy Lab(NREL) as setting a new record for efficiency of the commercially available P3HT organic solar cell polymer.

Year-End Financial Highlights

  • For the year endedDecember 31, 2008, total revenues grew$3.2 million, or 10%, to$36.9 million, compared to$33.7 millionin 2007.
  • Technology Development Division revenues grew 15% in 2008, increasing from$23.4 millionfor the year endedDecember 31, 2007to$26.8 millionfor the year endedDecember 31, 2008. Product and license revenue was$10.1 millionin 2008 as compared to$10.3 millionin 2007.
  • Gross profit increased to$14 million, or 38% of revenues, for 2008, from$12.3 million, or 37% of revenues, in 2007.
  • Operating expenses were$21.3 millionin 2008, compared to$20.6 millionin 2007.
  • Net loss from operations was$7.3 millionin 2008, versus a loss from operations of$8.3 millionfor the prior year, an improvement of 12%.
  • For the first nine months of 2008, prior to the global economic crisis, the company had increased revenues by 24% and improved its net loss by 33% compared to the first nine months of 2007.
  • The net loss applicable to common stockholders for 2008 was$6.3 million, or$0.57per share on a diluted basis, compared to the net loss applicable to common stockholders of$7.8 million, or$0.77per share on a diluted basis, for 2007.
  • Entered into a$10 millioncredit facility withSilicon Valley Bank, including a four-year term debt of$5 millionoutstanding as ofDecember 31, 2008, with the remaining facility available under a revolving line of credit.

Year-End Business Highlights

Sensing and Instrumentation

  • Luna Technologies’ common optical platform continues into expanding markets, including medical devices, both robotic and non-robotic monitoring, energy generation and delivery monitoring. We are currently meeting the development objectives and timeline of our partnership with Intuitive Surgical to adapt Luna’s shape sensing technology for use in medical robotics for minimally invasive surgery. We are applying our shape sensing technology to underwater surveillance arrays, which may allow theNavy to detect and assess enemy threats in the ocean with greater accuracy. We are also applying our shape technology in a joint program with a leading global security company developing a flexible positioning system for manufacturing metrology.
  • Launched Luna’s first tunable laser (our PHOENIXâ„¢1000 device), which provides users with a high-performance, rugged and cost-effective tunable laser solution for applications in fiber sensing, metrology, spectroscopy and instrumentation. Launched the Precision Reflectometer (PRâ„¢ 4400) instrument for increased throughput in optical manufacturing.

Pharmaceuticals / Nanomedicine

  • Selected to work with the National Cancer Institutes’ National Characterization Labs (NCL) in preclinical studies, with the intent of accelerating the transition of basic nanomedicine research into clinical applications.
  • Results from animal studies reinforced findings that Luna’s nanomedicine prototype encourages existing hair follicles to grow, hair to grow faster and the numbers of hair follicles to increase.
  • During 2008, received several new projects from theNational Institutes of Health(NIH) covering areas of allergic response, MRI contrast, and nanomedicines.

Technology Development

  • Development milestone met with the Missile Defense Agencyon the contact for development of low cost common, sensor electronics for use in next-generation exoatmospheric interceptor kill vehicles for ballistic missile defense. A successful technology demonstration flight test was made from the NASA Wallops Flights Facility,Virginia onJune 26, 2008.
  • Awarded $3.9 millionsubcontract from General Dynamics Information Technology in support of an Air Force Research Laboratory (AFRL) prime contract to continue work improving the performance of nanomaterials for military applications

Outlook 2009

The company expects flat to modest growth in 2009 with total revenue to be in the range of approximately$37 million to $40 million, consisting of product and license revenue of approximately$7 to $9 millionand technology development revenue of approximately$30 to $31 million. Also for 2009, the company anticipates a net loss in the range of approximately$5.5 to $6.0 million.

For the first quarter of 2009, the company expects revenue of approximately$9 millionand a net loss of approximately$2.2 million.

Conference Call Information

As previously announced, Luna Innovationswill conduct an investor conference call at 11:00 a.m. (EST)today to discuss its financial results and business developments for 2008 and expectations for 2009. The call can be accessed by dialing 1.866.770.7129 domestically or 1.617.213.8067 internationally prior to the start of the call. The access code is 54417420. 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,, 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( is focused on sensing and instrumentation, and pharmaceutical nanomedicines. Luna 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) expectations regarding Luna’s customers and the effects of the current economic crisis; (ii) Luna’s actions to react to a downturn in customer purchases; (iii) expectations for partnerships with industry leaders; (iv) expectations regarding Luna’s technology and product development contracts including those with GE Aviation, the National Renewable Energy Lab, Intuitive Surgical, the National Cancer Institutes’ National Characterization Lab, the Missile Defense Agencyand General Dynamics; (v) expectations regarding the successful development and commercialization of certain technologies including sensors, organic solar cells, nanomaterial-based hair growth compounds and contrast agents, and sensor electronics; (vi) expectations regarding Luna’s contract backlog and continued growth thereof; (vii) expectations of capabilities and success of new products including the PHOENIXTM 1400 laser; (viii) anticipated revenues and activity in its product and license and technology development divisions in 2009 and the corresponding financial results for each of those areas; and (ix) Luna’s financial outlook for its first quarter and full fiscal year 2009, including expected revenues and net loss as well as the underlying growth rates assumptions and expected components thereof. 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, continued or further weakness in the global economy; the company’s ability to transition its revenue mix to product revenues; risks inherent in current or future litigation proceedings; the company’s ability to successfully identify market needs for new products; the company’s continued reliance on contract research, including government grants and contracts available only to small businesses, for a significant portion of its revenue; the company’s ability to remain eligible for small business government grants and contracts in the future; technical difficulties in developing or engineering new products or in meeting contract research requirements; the company’s ability to manage its cash and costs as well as to raise additional capital; competition from alternative, more affordable energy sources; the potential adverse effects of nanotechnology, whether real or perceived; and the potential limitations of regulatory requirements in obtaining clearance by the U.S. Food and Drug Administration or other regulatory agencies for the company’s products. 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, and at the company’s website at 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 Twelve Months Ended
                December 31,   December 31,
                  2008       2007       2008       2007  
                (unaudited)   (unaudited)
  Contract research revenues   $ 6,042,895     $ 6,265,004     $ 26,838,592     $ 23,356,456  
  Product and license revenues     1,353,654       3,671,462       10,059,728       10,325,659  
    Total revenues         7,396,549       9,936,466       36,898,320       33,682,115  
Cost of revenues:                    
  Contract research costs     4,067,511       4,626,536       17,626,495       16,546,140  
  Product and license costs     1,008,369       1,648,822       5,231,067       4,819,825  
    Total cost of revenues     5,075,880       6,275,358       22,857,562       21,365,965  
Gross Profit           2,320,669       3,661,108       14,040,758       12,316,150  
Operating expense         4,864,826       4,870,622       21,334,655       20,570,479  
Operating loss           (2,544,157 )     (1,209,514 )     (7,293,897 )     (8,254,329 )
Other income (expense)                  
  Other income (expense)     530,628       (18,112 )     1,197,755       32,722  
  Interest income / (expense), net     (147,684 )     76,231       (189,501 )     371,991  
Total other income (expense)     382,944       58,119       1,008,254       404,713  
Loss before income taxes     (2,161,213 )     (1,151,395 )     (6,285,643 )     (7,849,616 )
Income tax expense (benefit)                  
Net loss           $ (2,161,213 )   $ (1,151,395 )   $ (6,285,643 )   $ (7,849,616 )
Net loss per share:                    
  Basic           $ (0.19 )   $ (0.11 )   $ (0.57 )   $ (0.77 )
  Diluted         $ (0.19 )   $ (0.11 )   $ (0.57 )   $ (0.77 )
Weighted average shares:            
  Basic             11,118,249       10,465,501       10,974,010       10,219,711  
  Diluted           11,118,249       10,465,501       10,974,010       10,219,711  


Luna Innovations Incorporated Consolidated Balance Sheets

                December 31,   December 31,
                  2008       2007  
Assets             (unaudited)    
Current assets              
  Cash and cash equivalents       $ 15,518,960     $ 12,046,945  
  Accounts receivable, net         7,332,034       9,716,610  
  Refundable income taxes         98,092       396,062  
  Inventory           2,828,991       1,675,239  
  Other current assets         342,598       333,105  
    Total current assets         26,120,675       24,167,961  
Property and equipment, net         5,363,957       5,859,515  
Intangible assets, net           1,813,643       1,911,132  
Deferred tax asset           600,000       600,000  
Other assets             118,292       10,270  
      Total assets       $ 34,016,567     $ 32,548,878  
Liabilities and stockholders’ equity          
Current liabilities              
  Current portion of capital lease obligation   $ 17,396     $ 23,885  
  Current portion of long-term debt obligation     1,428,572        
  Accounts payable         2,667,192       3,024,973  
  Accrued liabilities           5,161,308       5,331,798  
  Deferred credits           1,854,282       1,672,400  
    Total current liabilities         11,128,750       10,053,056  
Long-term capital lease obligation             4,671  
Long-term debt obligation         8,571,428       5,000,000  
Deferred credits and other long term liabilities           354,418  
    Total liabilities         19,700,178       15,412,145  
Stockholders’ equity:              

Preferred stock, par value $0.001, 5,000,000 shares authorized at December 31, 2008, no shares issued and outstanding at December 31, 2007

  Common stock              

Common stock, par value $0.001, 100,000,000 shares authorized 11,137,882 shares issued and outstanding at December 31, 2008

  11,138       10,704  
  Additional paid-in capital         37,960,928       34,496,063  
  Accumulated deficit         (23,655,677 )     (17,370,034 )
    Total stockholders’ equity       14,316,389       17,136,733  
      Total liabilities and stockholders’ equity $ 34,016,567     $ 32,548,878  


Luna Innovations Incorporated Consolidated Statements of Cash Flows

          Twelve Months Ended
          December 31,
            2008       2007  
Cash flows used in operating activities          
  Net loss   $ (6,285,643 )   $ (7,849,616 )
  Adjustments to reconcile net loss to net          
    cash provided by operating activities:          
    Depreciation and amortization     1,933,566       1,780,877  
    Deferred income taxes  

    Share-based compensation     2,867,487       2,425,143  
  Change in assets and liabilities:          
    Accounts receivable     2,384,576       (2,483,204 )
    Refundable income taxes     297,970        
    Other assets     (1,626,131 )     (659,205 )
    Accounts payable and accrued expenses     (157,628 )     1,972,111  
    Deferred revenues     (172,536 )     597,724  
      Net cash used in operating activities     (758,339 )     (4,216,170 )
Cash flows used in investing activities          
  Acquisition of property and equipment     (391,210 )     (1,375,612 )
  Intangible property costs     (536,251 )     (414,328 )
      Net cash used in investing activities     (927,461 )     (1,789,940 )
Cash flows from financing activities          
  Borrowings on term loan     5,000,000      
  Payments on debt obligation           (214,953 )
  Payments on capital lease obligations     (11,160 )     (84,695 )
  Proceeds from the exercise of options and warrants   168,975       485,950  
      Net cash from financing activities     5,157,815       186,302  
Net change in cash     3,472,015       (5,819,808 )
Cash – beginning of period     12,046,945       17,866,753  
Cash – end of period   $ 15,518,960     $ 12,046,945  

Luna Innovations Incorporated
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John Baldissera
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