Luna Innovations Reports Third Quarter 2010 Financial Results

November 9, 2010

Product & license revenues increase 49% over prior year quarter;
Total revenues decrease 3% compared to prior year quarter;
Positive cash flow of $0.9 million for the quarter

ROANOKE, Va., Nov 09, 2010  –Luna Innovations Incorporated (NASDAQ:LUNA), a company focusing on sensing, instrumentation and nanotechnology, today announced its financial results for the third quarter and nine months ended September 30, 2010.

 As compared to the same quarter last year, total revenue decreased by 3%, from $8.9 million in the third quarter of 2009 to $8.6 million in the third quarter of 2010. Revenue in the company’s product and license segment improved by 49%, from $2.4 million in the third quarter of 2009 to $3.6 million in the third quarter of 2010. Technology development revenues decreased by 23% to $5.0 million for the third quarter of 2010 from $6.5 million for the third quarter of 2009.

Operating expenses improved by $1.7 million, or 31%, primarily due to the non-recurring litigation and reorganization costs in 2009 and to the company’s ongoing expense savings initiatives. The company reported a net loss attributable to common stockholders of $0.5 million, or $0.04 per common share, for the third quarter of 2010, as compared to a net loss of $2.0 million, or $0.18 per common share for the third quarter of 2009.

Adjusted EBITDA less litigation- and reorganization-related items improved to $0.9 million for the third quarter of 2010, as compared to $0.8 million for the third quarter of 2009. Adjusted EBITDA reflects the company’s earnings before interest, taxes, depreciation and amortization, non-cash stock-based compensation expense, warrant expense, and non-cash charges for impairment of intangible assets. In addition, the company achieved positive cash flow for the quarter of $0.9 million.

Dale Messick, Interim President and Chief Operating Officer, provided this overview of Luna’s results: “We are extremely pleased to report positive cash flow for the quarter along with a nearly 50% growth in our product and license revenues. As we have anticipated, with the elimination of last year’s litigation and Chapter 11 reorganization expenses from our quarterly results, we have realized significant improvement in our bottom line and in our cash flow.”

Third Quarter Financial and Business Highlights

— Product and license revenues improved by 49%, from $2.4 million in the third quarter of 2009 to $3.6 million in the third quarter of 2010. Technology development revenues decreased by 23% to $5.0 million for the third quarter of 2010 from $6.5 million for the third quarter of 2009.

— Gross profit for the third quarter of 2010 decreased 2% from $3.5 million in the third quarter 2009 to $3.4 million in 2010.

— Selling, general and administrative expenses decreased by $0.5 million to $3.4 million, or 39% of total revenues for the third quarter of 2010, from $3.9 million, or 44% of total revenues, for the third quarter of 2009, driven by a reduction in legal expenses.

— Total operating expenses decreased by 31%, from $5.4 million in the third quarter of 2009 to $3.7 million in the third quarter of 2010, primarily driven by a reduction in litigation and Chapter 11 reorganization expenses, as well as by the company’s ongoing expense savings initiatives.

— Adjusted EBITDA excluding litigation and reorganization-related items increased to $0.9 million in the third quarter of 2010 from $0.8 million in the third quarter of 2009.

— Net loss attributable to common stockholders improved to $0.5 million for the third quarter of 2010, compared to a net loss attributable to common stockholders of $2.0 million for the third quarter of 2009.

— Cash and cash equivalents totaled $7.2 million at September 30, 2010, as compared to $5.7 million at September 30, 2009 and $5.2 million at December 31, 2009. At September 30, 2010, $2.5 million continued to be outstanding under the company’s $5.0 million revolving line of credit.

— Launched the Optical Backscatter Reflectometer(TM)(OBR) 4600 product in the third quarter offering high resolution, high sensitivity measurements of optical fiber assemblies and networks up to two kilometers in length with substantially increased speed over predecessor versions of the OBR.

–Increased the backlog for future technology development to $29.6 million at September 30, 2010 compared to $23.5 million at September 30, 2009.

Outlook for 2010

Based on information as of November 9, 2010, the company continues to expect a net loss for the year in the range of $3.0 million to $4.0 million. The company also expects revenue for the year to be in the range of $33.0 million to $34.0 million, a narrowing of the company’s previous revenue guidance of $33.0 million to $35.5 million.

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 non-cash items or they are unusual items that the company does not expect to recur in the ordinary course of its business or 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 Innovations will conduct an investor conference call at 5:00 p.m. (EST) today to discuss its financial results and business developments for the third quarter of 2010. The investor conference call will be available via live webcast on the Luna Innovations website at http://www.lunainnovations.com under the tab “Investor Relations.” To participate by telephone, the domestic dial-in number is 866.770.7146 and the international dial-in number is 617.213.8068. The participant access code is 55009308. Investors are advised to dial in at least five minutes prior to the call to register. The webcast will be archived on the company’s website under “Webcasts and Presentations” for 30 days following the conference call.

About Luna Innovations:

Luna Innovations Incorporated (www.lunainnovations.com) is focused on sensing and instrumentation, and pharmaceutical nanomedicines. 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 in Roanoke, 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 financial results for the full year 2010 and capabilities of the Company’s OBR 4600 product. 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 the fact that the outlook for full year 2010 could change, and also include, without limitations, 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 http://www.sec.gov, and at the company’s website at http://www.lunainnovations.com. The statements made in this release are based on information available to the company as of the date of this release and Luna Innovations undertakes no obligation to update any of the forward-looking statements after the date of this release.

                   
Luna Innovations Consolidated Statements of Operations
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
    2010     2009   2010   2009
    (unaudited)   (unaudited)
Revenues:                            
Technology development revenues   $ 5,027,024       $ 6,493,741     $ 16,929,621     $ 19,795,638  
Product and license revenues     3,558,118         2,381,184       8,539,953       6,234,621  
                             
Total revenues     8,585,142         8,874,925       25,469,574       26,030,259  
                             
Cost of revenues:                            
Technology development costs     3,534,089         4,136,935       11,559,351       13,189,007  
Product and license costs     1,613,499         1,231,289       4,332,600       3,275,076  
                             
Total cost of revenues     5,147,588         5,368,224       15,891,951       16,464,083  
                             
                             
Gross Profit     3,437,554         3,506,701       9,577,623       9,566,176  
Operating expense:                            
                                   
Selling, general and administrative     3,383,121         3,892,238      

10,044,549

       13,033,818  
Research, development, and engineering     307,777         660,836       1,249,385       2,343,176  
Litigation reserve     —         —       —       36,303,643  
Impairment of intangible assets     —         —       —       1,310,598  
Reorganization expense     53,597         872,644       161,801       872,644  
                             
Total operating expense     3,744,495         5,425,718       11,455,735       53,863,879  
                             
                             
Operating loss     (306,941 )       (1,919,017 )     (1,878,112 )     (44,297,703 )
                             
Other income (expense):                            
Other income (expense)     10,000         —       (5,477 )     (18,167 )
Interest expense     (124,756 )       (124,208 )     (352,282 )     (422,702 )
                             
                             
Total other (expense)     (114,756 )       (124,208 )     (357,759 )     (440,869 )
                             
                             
Loss before income taxes     (421,697 )       (2,043,225 )     (2,235,871 )     (44,738,572 )
Income tax expense     1,817         —       1,817       600,000  
                             
                             
Net loss     (423,514 )       (2,043,225 )     (2,237,688 )     (45,338,572 )
                             
Preferred stock dividend     93,000         —       267,633       —  
                             

Net loss attributable to common stockholders

   $ (516,514 )     $ (2,043,225 )   $ (2,505,321 )   $ (45,338,572 )
                             
Net loss per share:                            
Basic and Diluted   $ (0.04 )     $ (0.18 )   $ (0.19 )   $ (4.05 )
                             
Weighted average shares:                            
Basic and Diluted     13,188,913         11,247,749       12,890,752       11,205,575  
                             
             
Luna Innovations Consolidated Balance Sheets
    September 30,   December 31,
    2010   2009
    (unaudited)
Assets            
Current assets            
Cash and cash equivalents   $ 7,152,228     $ 5,228,802  
Accounts receivable, net     6,578,187       7,203,203  
Inventory, net     2,984,848       2,890,364  
Prepaid expenses     508,138       560,964  
Other current assets     45,524       729,532  
             
Total current assets     17,268,925       16,612,865  
Property and equipment, net     3,428,076       4,129,015  
Intangible assets, net     571,444       580,785  
Other assets     322,002       435,259  
             
Total assets   $ 21,590,447     $ 21,757,924  
             
Liabilities and stockholders’ equity (deficit)            
Liabilities not subject to compromise:            
Current Liabilities:            
Revolving line of credit   $ 2,500,000     $ —  
Current portion of long term-debt obligation     1,164,005       —  
Accounts payable     1,279,763       1,142,267  
Accrued liabilities     3,234,115       3,386,849  
Deferred credits     1,343,348       1,027,016  
             
Total current liabilities     9,521,231       5,556,132  
Long-term debt obligation     2,993,296       —  
             
Liabilities subject to compromise     —       19,062,000  
             
Total liabilities     12,514,527       24,618,132  
             
Commitments and contingencies            
Stockholders’ equity (deficit):            
Preferred stock, par value $0.001, 1,321,514 shares authorized, issued and outstanding at September 30, 2010     1,322       —  

Common stock, par value $0.001, 100,000,000 shares authorized, 13,280,696 and 11,351,967 shares issued
and outstanding at September 30, 2010 and December 31, 2009, respectively

     13,338       11,352  
Additional paid-in capital     55,666,838       41,228,698  
Accumulated deficit     (46,605,578 )     (44,100,258 )
             
Total stockholders’ equity (deficit)     9,075,920       (2,860,208 )
             
Total liabilities and stockholders’ equity (deficit)   $ 21,590,447     $ 21,757,924  
             
             
Luna Innovations Consolidated Statements of Cash Flows
    Nine months ended
    September 30,
    2010   2009
    (unaudited)
Cash flows used in operating activities            
Net loss   $ (2,237,688 )   $ (45,338,572 )
Adjustments to reconcile net loss to net cash used in operating activities            
Depreciation and amortization     953,630       1,504,211  
Impairment of intangible assets     —       1,310,598  
Share-based compensation     2,616,024       2,378,968  
Deferred tax expense    

—

       600,000  
Reorganization expense in excess of cash payments    

—

       88,210  
Reorganization accrual    

—

       146,964  
Change in assets and liabilities:            
Accounts receivable     625,016       (263,620 )
Inventory     (140,220 )     (1,181,901 )
Other current assets     736,834       —  
Other assets     71,029       (34,581 )
Accounts payable and accrued expenses     (3,267,285 )     (102,956 )
Litigation reserve     —       36,303,643  
Deferred credits     316,332       (102,391 )
             
             
Net cash used in operating activities     (326,328 )     (4,691,427 )
             
             
Cash flows used in investing activities            
Acquisition of property and equipment     (50,540 )     (49,295 )
Intangible property costs     (152,404 )     (152,011 )
             
             
Net cash used in investing activities     (202,944 )     (201,306 )
             
Cash flows provided by (used in) financing activities            
Payments on capital lease obligations     (4,000 )     (7,927 )
Proceeds from debt obligations     2,500,000       —  
Payment of debt obligations     (842,699 )     (5,000,000 )
Proceeds from the exercise of options and warrants     799,397       35,556  
             
Net cash provided by (used in) financing activities     2,452,698       (4,972,371 )
             
Net change in cash     1,923,426       (9,865,104 )
Cash and cash equivalents–beginning of period     5,228,802       15,518,960  
             
Cash and cash equivalents–end of period   $ 7,152,228     $ 5,653,856  
             
 

Luna Innovations Incorporated Reconciliation of Net Loss to EBITDA and Adjusted EBITDA
      Three Months Ended   Nine Months Ended
 

September 30,

 September 30,
      2010   2009   2010   2009
      (unaudited)   (unaudited)
                         
                         
                         
Net loss       $ (423,514 )   $ (2,043,225 )     $ (2,237,688 )     $ (45,338,572 )
                         
Interest         124,756       124,208         352,282         422,702  
Taxes         1,817      

—

         1,817         600,000  
Depreciation and amortization       311,652       361,365         953,630         1,504,211  
Impairment of intangible assets      

—

      

—

        

—

         1,310,598  
EBITDA       14,711       (1,557,652 )       (929,959 )       (41,501,061 )
                         
Stock-based compensation       853,009       809,925         2,616,024         2,378,968  
Warrant expense       27,667      

—

         149,850        

—

  
                                       
Adjusted EBITDA       895,387       (747,727 )       1,835,915         (39,122,093 )
                         
                         
Litigation reserve      

—

      

—

        

—

         36,303,643  

Fees associated with litigation and reorganization

       53,597       1,556,952         284,193         4,155,008  
Adjusted EBITDA less litigation and reorganization-related items     $ 948,984     $ 809,225       $ 2,120,108       $ 1,336,558  
                                       

Luna Innovations Incorporated
Scott Graeff, Interim CFO
1-540-769-8400
IR@lunainnovations.com