Luna Innovations Reports First Quarter 2009 Financial Results

Litigation Adversely Impacts Quarterly Results
Net loss of $40.9 million; revenues decline 5% compared to last year

ROANOKE, Va.–May. 13, 2009–Luna Innovations Incorporated (NASDAQ:LUNA), a company focusing on sensing & instrumentation and pharmaceutical nanomedicines, today announced its financial results for the first quarter endedMarch 31, 2009.

As compared to the same quarter last year, first quarter 2009 revenues decreased from$8.9 million to $8.5 million, gross profit decreased from$3.4 million to $2.7 million, and loss per share increased from$0.17to$3.66. The increase in loss per share was driven primarily by$38.2 millionin additional aggregate expenses that the company recognized in connection with the estimated loss resulting from the company’s litigation withHansen Medical.

Kent Murphy, Chairman and Chief Executive Officer, provided this comment related to the recent verdict on the Hansen lawsuit and its effect on the first quarter’s earnings results: “We are disappointed with the decision of the jury and are directing all efforts towards opportunities to reduce the loss exposure. While we are preparing our post-trial motions, we are committed to continuing to serve our customers’ needs and develop industry leading products.

“Apart from the litigation, I am pleased with the continuing successes throughout the organization. Despite the severity of the weakened economy, we were able to deliver higher revenues in our Technology Development Division and total overall revenues that were down less than 5% as compared to the first quarter 2008. We have achieved significant efficiencies in our operating costs over the past two years. Excluding the impact of the estimated outcome of our litigation and the related impairment of certain intangible assets, our operating expenses of$42.8 millionduring the first quarter of 2009 would have been$5.2 million. That level of operating expenses is the same level that we realized in the first quarter of 2007, despite including approximately$0.9 millionof legal fees in 2009 that we were not incurring back in 2007. In other words, since the first quarter of 2007, we grew our revenue base by approximately 20% while we also reduced our baseline expenses by approximately 17%, all of which increased the efficiency of our operations.”

First Quarter Financial Highlights

  • Total revenues for the first quarter of 2009 decreased by$0.4 millionto$8.5 millioncompared to$8.9 millionduring the first quarter of 2008.
  • Product and license revenues decreased 30% to approximately$1.6 millionin the first quarter of 2009 compared to$2.3 millionin the first quarter of 2008.
  • Gross profit for the first quarter of 2009 decreased to$2.7 million, or 32% of total revenues, from$3.4 million, or 38% of total revenues, for the corresponding period of 2008.
  • Operating expenses increased to$42.8 millionin the first quarter of 2009 due primarily to the impact of an estimated$36.3 millionlitigation loss accrual related to the Hansen lawsuit and a related impairment charge of$1.3 millionon intangible assets related to the potential outcome of that litigation. Not including those items, operating expenses for the first quarter of 2009 would have been consistent with the levels experienced during the first quarter of 2008.
  • Income tax expense increased$0.6 milliondue to an increase in the valuation allowance provided against the company’s deferred tax asset.
  • Net loss per share for the first quarter of 2009 was$3.66per share, an increase from a loss per share of$0.17for the first quarter of 2008.
  • Cash and cash equivalents decreased to$13.2 millionatMarch 31, 2009, as compared to$15.5 millionatDecember 31, 2008.
  • The current portion of long term debt increased in the first quarter, primarily due to non-compliance with certain financial covenants under the facility withSilicon Valley Bankdriven by additional expenses recognized related to the Hansen lawsuit.

First Quarter Business Highlights

Technology Development Division

  • Revenues grew by 4% compared to the first quarter of 2008.
  • Contract backlog remains consistent with prior periods at$26.4 million.

Pharmaceuticals / Nanomedicine

  • Presented the results of Luna’s nanomedicines to treat allergies at several medical conferences including the annual meeting of theAmerican Association of Immunologists. The company has been invited to speak at theCongressof theEuropean Academy of Allergology and Clinical ImmunologyinWarsaw, Poland, to be held inJune 2009.
  • Demonstrated progress in targeting Luna’s exclusive HYDROCHALARONE™ nanomaterials to atherosclerotic plaque, which could lead to improved diagnosis and treatment of coronary artery and other diseases.

Instrumentation, Test & Measurement

  • Product and license revenue decreased 30%, from$2.3 millionin the first quarter of 2008 to$1.6 millionin first quarter of 2009
  • Improved performance of our underlying platform technology in terms of speed, accuracy, and precision.
  • Continued progress in business development activities related to the platform in:
    • non-robotic medical,
    • energy,
    • aerospace and
    • defense.

Outlook for Remainder of 2009

Luna projects flat to modest revenue growth in 2009 with total revenues between approximately$37 millionand$40 million, which is expected to consist of product and license revenue of approximately$7 to $9 millionand technology development revenue of approximately$30 to $31 million. The company is currently expecting revenues in the second quarter of 2009 of approximately$9.0 to $9.5 million. Given the continued uncertainty of the Hansen litigation, which is pending post-trial motions and final judgments, Luna is unable to provide a reasonable projection for its expected net income for the second quarter or full year 2009 at this time.

Conference Call Information

As previously announced, Luna Innovationswill conduct an investor conference call at 11:00 a.m. (EDT)today to discuss its financial results for the first quarter and expectations for 2009. The call can be accessed by dialing 1.866.578.5747 domestically or 1.617.213.8054 internationally prior to the start of the call. The access code is 21871366. 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( 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 the outcome of Luna’s litigation with Hansen, including post-trial motions; (ii) plans and expectations to reduce loss exposure; (iii) Luna’s intention to continue to serve its customers’ needs; (iv) expectations for continued growth of Luna’s business; (v) expectations of achieving continued operating efficiencies; (vi) expectations of continued backlog of contracts; (vii) expectations regarding the successful development and commercialization of new and existing technologies including, but not limited to, nanomedicines and nanomaterial-based products; (viii) continued development and improvement of instrumentation, test & measurement products; (ix) the expected availability of capital, including Luna’s line of credit and term loan with Silicon Valley Bank; and (x) Luna’s financial outlook for the second quarter and the remainder of the 2009 fiscal year, including expected revenues and the 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, particularly with respect to Hansen Medical, Inc.; the company’s ability to successfully identify market needs for new products; the company’s ability to manage its cash and costs as well as to raise additional capital; 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 Administrationor 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
    March 31,
    2009   2008
    (unaudited)   (unaudited)
Technology development revenues   $ 6,882,372     $ 6,601,748  
Product and license revenues     1,611,184       2,318,176  
Total revenues     8,493,556       8,919,924  
Cost of revenues:        
Technology development costs     4,897,756       4,193,646  
Product and license costs     878,601       1,344,411  
Total cost of revenues     5,776,357       5,538,057  
Gross profit     2,717,199       3,381,867  
Operating expense:        
Selling, general and administrative     4,235,588       4,517,290  
Research and development     995,643       740,830  
Litigation reserve     36,303,643        
Impairment of intangible assets     1,310,598        
Total operating expense     42,845,472       5,258,120  
Operating loss     (40,128,273 )     (1,876,253 )
Other (income)/ expense        
Other (income)/ expense     923       777  
Interest income (income)/ expense     158,988       (25,082 )
Total other income (expense)     159,911       (24,305 )
Loss before income taxes     (40,288,184 )     (1,851,948 )
Income tax expense     600,000        
Net loss   $ (40,888,184 )   $ (1,851,948 )
Net loss per share:        
Basic   $ (3.66 )   $ (0.17 )
Diluted   $ (3.66 )   $ (0.17 )
Weighted average shares:        
Basic     11,161,423       10,781,363  
Diluted     11,161,423       10,781,363  


Luna Innovations Incorporated Consolidated Balance Sheets

    March 31,   December 31,
    2009   2008
Assets   (unaudited)    
Current assets        
Cash and cash equivalents   $ 13,179,040     $ 15,518,960  
Accounts receivable, net     7,921,282       7,332,034  
Refundable income taxes     98,092       98,092  
Inventory     2,850,327       2,828,991  
Other current assets     347,915       342,598  
Total current assets     24,396,656       26,120,675  
Property and equipment, net     5,037,947       5,363,957  
Intangible assets, net     274,051       1,813,643  
Deferred tax asset           600,000  
Other assets     100,564       118,292  
Total assets   $ 29,809,218     $ 34,016,567  
Liabilities and stockholders’ equity        
Current liabilities        
Current portion of capital lease obligation   $ 14,597     $ 17,396  
Current portion of long term debt     4,642,857       1,428,572  
Accounts payable     3,215,412       2,667,192  
Accrued liabilities     4,349,627       5,161,308  
Litigation Reserve     36,303,643        
Deferred credits     2,054,542       1,854,282  
Total current liabilities     50,580,678       11,128,750  
Long-term debt obligation     5,000,000       8,571,428  
Total liabilities     55,580,678       19,700,178  
Stockholders’ equity:        

Common stock, par value $0.001, 100,000,000 shares authorized, 11,181,197 and 11,137,882 shares issued and outstanding

    11,181       11,138  
Additional paid-in capital     38,761,220       37,960,928  
Accumulated deficit     (64,543,861 )     (23,655,677 )
Total stockholders’ (deficit)/equity     (25,771,460 )     14,316,389  
Total liabilities & stockholders’ (deficit)/equity   $ 29,809,218     $ 34,016,567  

Luna Innovations Incorporated Consolidated Statements of Cash Flows

    Three months ended
    March 31,
    2009   2008
    (unaudited)   (unaudited)
Cash flows used in operating activities        

Net loss

  $ (40,888,184 )   $ (1,851,948 )

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization     619,788       481,832  
Impairment of Intangible Assets     1,310,598        
Share-based compensation     789,511       759,642  
Change in assets and liabilities:        
Accounts receivable     (589,248 )     1,659,207  
Inventory     (21,336 )     (309,153 )
Other current assets     (5,317 )     58,660  
Deferred tax asset     600,000        
Other assets     17,728        
Accounts payable and accrued expenses     36,040,184       (1,211,503 )
Deferred revenues     200,260       (205,822 )
Net cash used in operating activities     (1,926,016 )     (619,085 )
Cash flows used in investing activities        
Acquisition of property and equipment     (34,037 )     (219,602 )
Intangible property costs     (30,749 )     (93,771 )
Net cash used in investing activities     (64,786 )     (313,373 )
Cash flows from financing activities        
Payments on capital lease obligations     (2,799 )     (11,380 )
Payments on debt obligations     (357,143 )      
Proceeds from the exercise of options and warrants     10,824       75,669  
Net cash from financing activities     (349,118 )     64,289  
Net change in cash     (2,339,920 )     (868,169 )
Cash – beginning of period     15,518,960       12,046,945  
Cash – end of period   $ 13,179,040     $ 11,178,776  
Supplemental disclosure of cash flow information        
Cash paid for interest   $ 85,815     $ 10,099  

Luna Innovations Incorporated
Investor Contact:
Dale Messick, CFO
Media Contact:
Karin Clark