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Luna Innovations Reports Strong First Quarter 2018 Results

Luna Innovations Incorporated (NASDAQ: LUNA), a global leader in advanced optical technology, today announced its financial results for the three months ended March 31, 2018.

“By continuing to focus on our strategic priorities, we delivered a profitable first quarter for the first time in our history. We drove robust organic revenue growth of over 20% compared to the three months ended March 31, 2017 in a quarter that is typically our weakest, and we delivered the corresponding improvement to our bottom line," said Scott Graeff, President and Chief Executive Officer of Luna. "The strong revenue performance, resulting largely from a nearly 70% increase in sales of our test and measurement products, along with prudent cost management, allowed us to realize positive net income from continuing operations for the fourth consecutive quarter, also a company record. Luna is positioned to continue to leverage the trends of growth in optical connectivity in high speed networks and data centers as well as the expanding use of composite materials and the need for improved means of testing their structural integrity. We expect those trends to drive top line growth into the future."

For the three months ended March 31, 2018, Luna reported net income of $0.1 million compared to a net loss of $(1.4) million for the three months ended March 31, 2017. Net income from continuing operations improved by $1.0 million, to $0.1 million, or $0.01 per share, for the three months ended March 31, 2018, compared to a net loss from continuing operations of $(0.9) million, or $(0.03) per share, for the three months ended March 31, 2017. Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") was $0.6 million for the three months ended March 31, 2018 compared to a loss of $(0.2) million for the three months ended March 31, 2017. A reconciliation of net income/(loss) to adjusted EBITDA can be found in the schedules included in this release.

First Quarter Financial Summary

Total revenues for the three months ended March 31, 2018 were $12.2 million compared to $10.1 million for the three months ended March 31, 2017. Technology development revenues increased 9% to $4.6 million for the three months ended March 31, 2018, compared to $4.2 million for the three months ended March 31, 2017. Products and licensing revenues increased 29% to $7.6 million for the three months ended March 31, 2018, compared to $5.9 million for the three months ended March 31, 2017. The increase in the products and licensing revenues for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 was realized primarily in Luna's ODiSI, Optical Backscatter Reflectometer, and tunable laser products.

Gross profit was $5.0 million, or 41% of revenues, for the three months ended March 31, 2018, compared to gross profit of $3.9 million, or 38% of revenues, for the three months ended March 31, 2017.

Selling, general and administrative expenses were $3.8 million for the three months ended March 31, 2018, compared to $3.7 million for the three months ended March 31, 2017.

Research, development and engineering expenses were $1.1 million for the three months ended March 31, 2018, compared to $0.9 million for the three months ended March 31, 2017 due to increased development costs associated with Luna's ODiSI and Terahertz instruments.

Net income from continuing operations improved to $0.1 million for the three months ended March 31, 2018, compared to a net loss from continuing operations of $(0.9) million for the three months ended March 31, 2017. Net loss from discontinued operations was $(0.5) million for the three months ended March 31, 2017.

Net income attributable to common stockholders for the three months ended March 31, 2018 was $0.1 million, compared to a net loss attributable to common stockholders of $(1.4) million for the three months ended March 31, 2017. Adjusted EBITDA was $0.6 million for the three months ended March 31, 2018, compared to $(0.2) million for the three months ended March 31, 2017.

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 5:00 pm (EDT) today to discuss its financial results for the three months ended March 31, 2018, and 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 2475628. 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 speed optoelectronics and 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 Luna's future top line growth and Luna continuing to leverage the trends of growth in optical connectivity in high speed networks and data centers, as well as the expanding use of composite materials and the need for improved means of testing their structural integrity. 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, technological 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
March 31,
20182017
(unaudited)
Revenues:
Technology development $ 4,636,776 $ 4,236,102
Products and licensing 7,556,396 5,850,795
Total revenues 12,193,172 10,086,897
Cost of revenues:
Technology development 3,353,501 3,109,467
Products and licensing 3,813,553 3,101,045
Total cost of revenues 7,167,054 6,210,512
Gross profit 5,026,118 3,876,385
Operating expense:
Selling, general and administrative 3,809,617 3,722,170
Research, development and engineering 1,101,488 928,772
Total operating expense 4,911,105 4,650,942
Operating income/(loss) 115,013 (774,557 )
Other income/(expense):
Investment income 75,912
Other (expense)/income (115 ) 351
Interest expense (40,738 ) (64,374 )
Total other income/(expense) 35,059 (64,023 )
Income/(loss) from continuing operations before income taxes 150,072 (838,580 )
Income tax expense 1,396 26,690
Net income/(loss) from continuing operations 148,676 (865,270 )
Loss from discontinued operations, net of income tax of $0 (490,717 )
Net loss from discontinued operations (490,717 )
Net income/(loss) 148,676 (1,355,987 )
Preferred stock dividend 64,425 34,096
Net income/(loss) attributable to common stockholders $ 84,251 $ (1,390,083 )
Net income/(loss) per share from continuing operations:
Basic $ 0.01 $ (0.03 )
Diluted $ $ (0.03 )
Net loss per share from discontinued operations:
Basic $ $ (0.02 )
Diluted $ $ (0.02 )
Net income/(loss) per share attributable to common stockholders:
Basic $ $ (0.05 )
Diluted $ $ (0.05 )
Weighted average common shares and common equivalent shares outstanding:
Basic 27,204,989 27,541,356
Diluted 31,198,833 27,541,356
Luna Innovations Incorporated
Consolidated Balance Sheets
March 31, 2018December 31, 2017
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 33,442,674 $ 36,981,533
Accounts receivable, net 8,098,703 7,869,168
Receivable from sale of HSOR business 4,001,496 4,000,976
Contract assets 2,408,930 1,778,142
Inventory 6,534,899 6,951,110
Prepaid expenses and other current assets 1,086,837 1,220,650
Total current assets 55,573,539 58,801,579
Long-term contract assets 263,722 209,699
Property and equipment, net 3,425,544 3,453,741
Intangible assets, net 3,204,843 3,237,593
Goodwill 502,000 502,000
Other assets 18,024 18,024
Total assets $ 62,987,672 $ 66,222,636
Liabilities and stockholders’ equity
Liabilities:
Current liabilities:
Current portion of long-term debt obligations $ 1,750,000 $ 1,833,333
Current portion of capital lease obligations 38,145 43,665
Accounts payable 2,357,649 2,962,863
Accrued liabilities 5,742,777 6,557,649
Contract liabilities 1,804,125 3,428,625
Total current liabilities 11,692,696 14,826,135
Long-term deferred rent 1,148,370 1,184,438
Long-term debt obligations 232,084 603,007
Long-term capital lease obligations 63,184 71,275
Total liabilities 13,136,334 16,684,855
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $0.001, 1,321,514 shares authorized, issued and outstanding at March 31, 2018 and December 31, 2017 1,322 1,322
Common stock, par value $0.001, 100,000,000 shares authorized, 28,365,549 and 28,354,822 shares issued, 27,162,195 and 27,283,918 shares outstanding at March 31, 2018 and December 31, 2017 29,217 29,186
Treasury stock at cost, 1,203,354 and 1,070,904 shares at March 31, 2018 and December 31, 2017 (1,955,787 ) (1,649,746 )
Additional paid-in capital 83,744,496 83,563,208
Accumulated deficit (31,967,910 ) (32,406,189 )
Total stockholders’ equity 49,851,338 49,537,781
Total liabilities and stockholders’ equity $ 62,987,672 $ 66,222,636
Luna Innovations Incorporated
Consolidated Statements of Cash Flows
Three Months Ended March 31,
20182017
(unaudited)
Cash flows provided by/(used in) operating activities
Net income/(loss) $ 148,676 $ (1,355,987 )
Adjustments to reconcile net income/(loss) to net cash (used in)/provided by operating activities
Depreciation and amortization 307,852 956,687
Share-based compensation 94,606 170,084
Bad debt expense 29,671
Change in assets and liabilities
Accounts receivable (229,535 ) 1,824,454
Contract assets 221,386 187,448
Inventory (110,095 ) (352,435 )
Other current assets 133,293 55,092
Accounts payable and accrued expenses (1,456,154 ) (1,464,847 )
Contract liabilities (1,650,363 ) 13,880
Net cash (used in)/provided by operating activities (2,540,334 ) 64,047
Cash flows used in investing activities
Acquisition of property and equipment (129,720 ) (157,308 )
Intangible property costs (113,108 ) (133,054 )
Net cash used in investing activities (242,828 ) (290,362 )
Cash flows used in financing activities
Payments on capital lease obligations (13,611 ) (12,697 )
Payments of debt obligations (458,333 ) (458,333 )
Repurchase of common stock (306,041 )
Proceeds from the exercise of options 22,288 820
Net cash used in financing activities (755,697 ) (470,210 )
Net decrease in cash or cash equivalents (3,538,859 ) (696,525 )
Cash and cash equivalents-beginning of period 36,981,533 12,802,458
Cash and cash equivalents-end of period $ 33,442,674 $ 12,105,933
Luna Innovations Incorporated
Reconciliation of Net Income/(Loss) to EBITDA and Adjusted EBITDA
Three Months Ended
March 31,
20182017
(unaudited)
Net income/(loss) $ 148,676 $ (1,355,987 )
Less loss from discontinued operations, net of income taxes (490,717 )
Net income/(loss) from continuing operations 148,676 (865,270 )
Interest expense 40,738 64,374
Tax expense 1,396 26,690
Depreciation and amortization 307,852 356,816
EBITDA 498,662 (417,390 )
Share-based compensation 94,606 170,084
Adjusted EBITDA $ 593,268 $ (247,306 )

Contacts:

Investor Contact:
Luna Innovations Incorporated
Dale Messick, CFO, 1-540-769-8400
IR@lunainc.com

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