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Luna Innovations Reports Record Second Quarter 2018

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Luna Innovations Incorporated (NASDAQ:LUNA), a global leader in
advanced optical technology, today reported record financial results for
the three and six months ended June 30, 2018.

  • Fifth consecutive quarter of year-over-year revenue growth and
    positive net income from continuing operations
  • Total revenues of $13.8 million for the three months ended June 30,
    2018, up 22% compared to the three months ended June 30, 2017
  • Net income improved significantly to $1.1 million for the three
    months ended June 30, 2018, compared to $(0.2) million for the
    prior-year fiscal quarter
  • Adjusted EBITDA improved to $1.3 million for the three months ended
    June 30, 2018 compared to $0.6 million for the prior-year fiscal
    quarter

Adjusted earnings before interest, taxes, depreciation and amortization
("Adjusted EBITDA") is a non-GAAP financial metric used by management to
measure operating performance. This term is defined elsewhere in this
release. Please see schedules appearing later in this release for
reconciliation of non-GAAP financial measures to the most directly
comparable GAAP measures.

"I'm very proud of the Luna team for driving the businesses to another
strong quarter of growth," said Scott Graeff, President and Chief
Executive Officer of Luna. "The double-digit revenue percentage
increases we saw across our business segments led to strong revenue
growth year-over-year, and we achieved positive net income from
continuing operations for a record fifth consecutive quarter."

In a separate release issued today, Luna also announced it has sold its
Optoelectronic Solutions business to OSI Optoelectronics, Inc. a
subsidiary of OSI Systems, Inc., a leader in the development and
manufacture of optoelectronic OEM and custom solutions for leading
technologies and industries.

"As we've mentioned previously, we are well positioned to drive growth
in Luna's core fiber optic-based test and measurement business to better
serve this rapidly expanding market, which is projected to grow to more
than $9 billion by 2025," Graeff continued. "Divesting our
Optoelectronics Solutions business to an industry leader such as OSI
allows us to focus on our core strengths and competitive advantages, as
well as underscores our overall reputation for technological excellence.
Culturally, the divestiture is a great fit with OSI, and we thank all of
the Optoelectronic Solutions employees for their many contributions
while they were part of the Luna team."

Second-Quarter and Six-Month Financial Summary

Total revenues for the three months ended June 30, 2018 were $13.8
million compared to $11.3 million for the three months ended June 30,
2017. Technology development revenues increased 19% to $5.5 million for
the three months ended June 30, 2018, compared to $4.6 million for the
three months ended June 30, 2017. Total products and licensing revenues
increased 24% to $8.3 million for the three months ended June 30, 2018,
compared to $6.7 million for the three months ended June 30, 2017. The
increase in the products and licensing revenues for the three months
ended June 30, 2018 compared to the three months ended June 30, 2017 was
partially due to a 146% increase in sensing equipment, which includes
Luna's ODiSI products. The increase in technology development revenues
for the three months ended June 30, 2018 compared to the prior-year
period was due to continued growth in government research in advancing
optical and bio-medical technologies and Luna's success in winning these
research contracts.

Gross profit was $5.7 million, or 41% of revenues, for the three months
ended June 30, 2018, compared to gross profit of $4.4 million, or 39% of
revenues, for the three months ended June 30, 2017.

Selling, general and administrative ("SG&A") expenses were $3.8 million
for the three months ended June 30, 2018, compared to $3.4 million for
the three months ended June 30, 2017. Research, development and
engineering ("R&D") expenses were $1.0 million for the three months
ended June 30, 2018, compared to $0.8 million for the three months ended
June 30, 2017. The increase in SG&A and in R&D expenses were due
partially to the hiring of additional sales and marketing professionals
as well as engineers in the Lightwave division, Luna's fiber optic test
and measurement business.

Net income from continuing operations improved to $1.1 million for the
three months ended June 30, 2018, compared to $0.1 million for the three
months ended June 30, 2017.

Net income attributable to common stockholders for the three months
ended June 30, 2018 was $1.0 million, compared to a net loss
attributable to common stockholders of $(0.3) million for the three
months ended June 30, 2017. Adjusted EBITDA was $1.3 million for the
three months ended June 30, 2018, compared to $0.6 million for the three
months ended June 30, 2017.

For the first six months of fiscal 2018, Luna reported net income of
$1.2 million compared to a net loss of $(1.6) million. Net income from
continuing operations improved by $2.0 million, to $1.2 million, or
$0.04 per share, for the six months ended June 30, 2018, compared to a
net loss from continuing operations of $(0.8) million, or $(0.03) per
share, for the six months ended June 30, 2017. Adjusted EBITDA was $1.9
million for the six months ended June 30, 2018 compared $0.4 million for
the six months ended June 30, 2017. A reconciliation of net
income/(loss) to adjusted EBITDA can be found in the schedules included
in this release.

Non-GAAP Measures

In evaluating the operating performance of its business, Luna's
management considers Adjusted EBITDA, which excludes certain charges and
credits that are required by generally accepted accounting principles
("GAAP"). Adjusted EBITDA provides useful information to both management
and investors by excluding the effect of certain non-cash expenses and
items that Luna believes may not be indicative of its operating
performance, because either they are unusual and Luna 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. Adjusted EBITDA should be considered in addition to results
prepared in accordance with GAAP, but should not be considered a
substitute for, or superior to, GAAP results. Adjusted EBITDA has 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 will conduct an investor conference call
at 8:30 am (EDT) today to discuss its financial results for the three
and six months ended June 30, 2018, the sale of the Optoelectronic
Solutions business and other recent business developments. The call can
be accessed by dialing 844.578.9643 domestically or 270.823.1522
internationally prior to the start of the call. The participant access
code is 9985726. 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 website, www.lunainc.com,
prior to the event. The webcast will be archived under the "Webcasts and
Presentations" section of the Luna website for at least 30 days
following the conference call.

About Luna

Luna Innovations Incorporated (www.lunainc.com)
is a leader in optical technology, providing unique capabilities in
high-performance fiber optic test products for the telecommunications
industry and distributed fiber optic sensing for the aerospace and
automotive industries. Luna is organized into two business segments,
which work closely together to turn ideas into products: a Technology
Development segment and a Products and Licensing segment. Luna's
business model is designed to accelerate the process of bringing new and
innovative technologies to market.

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 Luna's expectations
regarding its growth potential, the growth of the fiber optic-based test
and measurement market, and its business focus. 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
Luna 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 Luna's products and services to meet
expectations, failure of target market to grow and expand, technological
and strategic challenges and those risks and uncertainties set forth in
Luna's periodic reports and other filings with the Securities and
Exchange Commission ("SEC"). Such filings are available on the SEC's
website at www.sec.gov
and on Luna's website at www.lunainc.com.
The statements made in this release are based on information available
to Luna as of the date of this release and Luna undertakes no obligation
to update any of the forward-looking statements after the date of this
release.

 
Luna Innovations Incorporated
Consolidated Statements of Operations
 
  Three Months Ended June 30,   Six Months Ended June 30,
2018   2017 2018   2017
(unaudited) (unaudited)
Revenues:
Technology development $ 5,466,281 $ 4,602,272 $ 10,103,056 $ 8,838,375
Products and licensing 8,306,367   6,690,759   15,862,763   12,541,554  
Total revenues 13,772,648   11,293,031   25,965,819   21,379,929  
Cost of revenues:
Technology development 3,945,126 3,443,954 7,298,628 6,553,423
Products and licensing 4,155,054   3,482,867   7,968,605   6,583,913  
Total cost of revenues 8,100,180   6,926,821   15,267,233   13,137,336  
Gross profit 5,672,468   4,366,210   10,698,586   8,242,593  
Operating expense:
Selling, general and administrative 3,767,456 3,367,716 7,577,072 7,089,889
Research, development and engineering 1,003,863   818,891   2,105,352   1,747,662  
Total operating expense 4,771,319   4,186,607   9,682,424   8,837,551  
Operating income/(loss) 901,149   179,603   1,016,162   (594,958 )
Other income/(expense):
Investment income 100,846 175,756
Other income/(expense) 1,187 (1,225 ) 2,583 (869 )
Interest expense (33,988 ) (60,386 ) (75,234 ) (124,760 )
Total other income/(expense) 68,045   (61,611 ) 103,105   (125,629 )
Income/(loss) from continuing operations before income taxes 969,194 117,992 1,119,267 (720,587 )
Income tax (benefit)/expense (98,133 ) 40,937   (96,736 ) 67,627  
Net income/(loss) from continuing operations 1,067,327 77,055 1,216,003 (788,214 )
Loss from discontinued operations, net of income tax of $0   (298,817 )   (789,534 )
Net loss from discontinued operations   (298,817 )   (789,534 )
Net income/(loss) 1,067,327 (221,762 ) 1,216,003 (1,577,748 )
Preferred stock dividend 63,235   29,536   127,660   63,632  
Net income/(loss) attributable to common stockholders $ 1,004,092   $ (251,298 ) $ 1,088,343   $ (1,641,380 )
Net income/(loss) per share from continuing operations:
Basic $ 0.04   $   $ 0.04   $ (0.03 )
Diluted $ 0.03   $   $ 0.04   $ (0.03 )
Net loss per share from discontinued operations:
Basic $   $ (0.01 ) $   $ (0.03 )
Diluted $   $ (0.01 ) $   $ (0.03 )
Net income/(loss) per share attributable to common stockholders:

Basic

$ 0.04   $ (0.01 ) $ 0.04   $ (0.06 )

Diluted

$ 0.03   $ (0.01 ) $ 0.03   $ (0.06 )
Weighted average common shares and common equivalent shares
outstanding:
Basic 27,531,361 27,600,147 27,368,185 27,570,919
Diluted 31,506,745 32,579,379 31,257,277 27,570,919
 
 
Luna Innovations Incorporated
Consolidated Balance Sheets
 
    December 31,
June 30, 2018 2017
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 33,292,800 $ 36,981,533
Accounts receivable, net 9,385,772 7,869,168
Receivable from sale of HSOR business 4,001,833 4,000,976
Contract assets 3,231,770 1,778,142
Inventory 6,906,998 6,951,110
Prepaid expenses and other current assets 1,054,984   1,220,650  
Total current assets 57,874,157 58,801,579
Long-term contract assets 308,093 209,699
Property and equipment, net 3,323,749 3,453,741
Intangible assets, net 3,137,083 3,237,593
Goodwill 502,000 502,000
Other assets 18,024   18,024  
Total assets $ 65,163,106   $ 66,222,636  
Liabilities and stockholders' equity
Liabilities:
Current liabilities:
Current portion of long-term debt obligations $ 1,527,828 $ 1,833,333
Current portion of capital lease obligations 34,661 43,665
Accounts payable 3,787,701 2,962,863
Accrued liabilities 5,554,481 6,557,649
Contract liabilities 1,400,922   3,428,625  
Total current liabilities 12,305,593 14,826,135
Long-term deferred rent 1,109,397 1,184,438
Long-term debt obligations 603,007
Long-term capital lease obligations 54,970   71,275  
Total liabilities 13,469,960   16,684,855  
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.001, 1,321,514 shares authorized,
issued and outstanding at June 30, 2018 and December 31, 2017
1,322 1,322
Common stock, par value $0.001, 100,000,000 shares authorized,
29,025,529 and 28,354,822 shares issued, 27,772,424 and 27,283,918
shares outstanding at June 30, 2018 and December 31, 2017
29,897 29,186
Treasury stock at cost, 1,253,105 and 1,070,904 shares at June 30,
2018 and December 31, 2017
(2,116,640 ) (1,649,746 )
Additional paid-in capital 84,742,385 83,563,208
Accumulated deficit (30,963,818 ) (32,406,189 )
Total stockholders' equity 51,693,146   49,537,781  
Total liabilities and stockholders' equity $ 65,163,106   $ 66,222,636  
 
 
Luna Innovations Incorporated
Consolidated Statements of Cash Flows
 
  Six Months Ended June 30,
2018   2017
(unaudited)
Cash flows used in operating activities
Net income/(loss) $ 1,216,003 $ (1,577,748 )
Adjustments to reconcile net income/(loss) to net cash (used
in)/provided by operating activities
Depreciation and amortization 622,577 1,753,748
Share-based compensation 212,149 321,756
Bad debt expense 6,000 40,753
Gain on disposal of fixed assets (1,000 ) (670 )
Change in assets and liabilities
Accounts receivable (1,522,604 ) 1,433,014
Contract assets (645,824 ) (326,333 )
Inventory (482,194 ) (1,170,519 )
Other current assets 164,809 325,005
Accounts payable and accrued expenses (253,372 ) (894,315 )
Contract liabilities (2,053,566 ) (215,555 )

Net cash used in operating activities

(2,737,022 ) (314,321 )
Cash flows used in investing activities
Acquisition of property and equipment (198,012 ) (796,217 )
Intangible property costs (185,909 ) (318,942 )
Proceeds from sale of property and equipment 1,000   3,000  
Net cash used in investing activities (382,921 ) (1,112,159 )
Cash flows used in financing activities
Payments on capital lease obligations (25,309 ) (25,611 )
Payments of debt obligations (916,665 ) (916,666 )
Repurchase of common stock (466,894 ) (143,266 )
Proceeds from the exercise of options and warrants 840,078   820  
Net cash used in financing activities (568,790 ) (1,084,723 )
Net decrease in cash or cash equivalents (3,688,733 ) (2,511,203 )
Cash and cash equivalents-beginning of period 36,981,533   12,802,458  
Cash and cash equivalents-end of period $ 33,292,800   $ 10,291,255  
 
 
Luna Innovations Incorporated
Reconciliation of Net Income/(Loss) to EBITDA and Adjusted EBITDA
 
  Three Months Ended June 30,   Six Months Ended June 30,
2018   2017   2018   2017
(unaudited)   (unaudited)
Net income/(loss) $ 1,067,327 $ (221,762 ) $ 1,216,003 $ (1,577,748 )

Less loss from discontinued operations, net of income taxes

    (298,817 )     (789,534 )
Net income/(loss) from continuing operations 1,067,327 77,055 1,216,003 (788,214 )
Interest expense 33,988 60,386 75,234 124,760
Investment income (100,846 ) (175,756 )
Tax expense (98,133 ) 40,937 (96,736 ) 67,627
Depreciation and amortization 314,725   285,253   622,577   646,145  
EBITDA 1,217,061 463,631 1,641,322 50,318
Share-based compensation 117,823   151,672   212,149     321,756  
Adjusted EBITDA $ 1,334,884   $ 615,303   $ 1,853,471     $ 372,074  
 

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