LUNA Luna Innovations Incorporated

Luna Innovations Incorporated (NASDAQ: LUNA) today announced its financial results for the fourth quarter and year ended December 31, 2010.

As compared to the same quarter last year, total revenue increased 6.2%, from $8.5 million in the fourth quarter of 2009 to $9.1 million in the fourth quarter of 2010. Gross profit increased 5.5% from $3.2 million in the fourth quarter of 2009 to $3.4 million in 2010. In the fourth quarter of 2009, the company reported net income of $24.9 million due to a one-time benefit associated with a $26.6 million reduction in litigation reserves. Excluding that reduction in litigation reserves, the company would have reported a net loss attributable to common stockholders of $1.7 million for the fourth quarter of 2009 compared to a net loss attributable to common stockholders of $0.5 million for the fourth quarter of 2010. Adjusted EBITDA, excluding reorganization and Hansen litigation related costs, was $1.0 million for both the fourth quarter of 2009 and 2010.

For the full year, revenues decreased slightly from $34.6 million in 2009 to $34.5 million in 2010, reflecting a 29.4% increase in product and license revenues offset by an 11% decrease in technology development revenues. Gross profit increased 1.5% from $12.8 million in 2009 to $12.9 million in 2010. Net loss decreased 87.2% from 2009 to 2010 from $20.4 million to $2.6 million due primarily to costs incurred in connection with the company’s litigation with Hansen and the company’s reorganization during 2009. Adjusted EBITDA, excluding litigation and bankruptcy related costs, improved 25.3% from $2.3 million in 2009 to $2.9 million in 2010.

Dale Messick, interim President and Chief Operating Officer, provided this overview of Luna’s results: “We are pleased to report improvements in both revenues and operating expenses, excluding litigation and reorganization costs, for the quarter as we continue our progress toward profitability. Our net loss attributable to common stockholders of less than $0.5 million for the quarter and positive adjusted EBITDA of approximately $1.0 million for the quarter clearly demonstrate the benefits we have realized through our cost reduction initiatives over the past two years while at the same time continuing to expand our market presence, particularly in providing industry leading fiber-optic solutions to our customers.”

Fourth Quarter Financial and Business Highlights

-- Total revenues for the fourth quarter of 2010 increased 6.2% compared to the fourth quarter of 2009.

-- Product and license revenues grew 14.5% to $3.6 million in the fourth quarter of 2010 compared to $3.1 million in the fourth quarter of 2009.

-- Technology Development Division revenues increased approximately 1% from $5.4 million in the fourth quarter of 2009 to $5.5 million in the fourth quarter of 2010.

-- Gross profit improved 5.5% from $3.2 million in the fourth quarter of 2009 to $3.4 million in the fourth quarter of 2010.

-- Selling, general and administrative expenses decreased 2.0% to $3.2 million in the fourth quarter of 2010 compared to $3.3 million in the corresponding quarter of 2009.

-- Adjusted EBITDA excluding reorganization and litigation related items remained essentially unchanged at approximately $1.0 million in both the fourth quarter of 2010 and the fourth quarter of 2009.

-- Net income attributable to common stockholders in the fourth quarter of 2009 totaled $24.9 million, largely due to the one-time litigation reserve benefit, compared to a net loss of $0.5 million in the fourth quarter of 2010.

-- Cash and cash equivalents totaled $7.2 million at December 31, 2010, as compared to $5.2 million at December 31, 2009. During 2010, Luna paid the pre-petition amounts due under its plan of reorganization and borrowed $2.5 million from its revolving line of credit with Silicon Valley Bank. The line of credit was scheduled to mature in the first quarter of 2011 but has been extended until May 2011.

-- Received orders in the fourth quarter of 2010 for approximately $3.5 million in test and measurement products compared to $2.4 million in the same quarter of 2009, representing a 46% increase.

-- Total Backlog in our Technology Development Division business segment was $26.3 million at December 31, 2010 compared to $19.6 million at December 31, 2009.

Full Year Financial and Business Highlights

-- Revenues of $34.5 million for 2010 were essentially flat compared to revenues of $34.6 million in 2009.

-- Operating expenses, excluding non-recurring charges for litigation, reorganization, and asset impairments, decreased 4.0% from $15.5 million in 2009 to $14.9 million in 2010.

-- Adjusted EBITDA, excluding reorganization and Hansen litigation related costs, improved 25.3% to $2.9 million in 2010 from $2.3 million in 2009.

-- Gross profit increased 1.5% to $12.9 million in 2010 from $12.8 million in 2009.

-- Net loss decreased 87.2% from 2009 to 2010 from $20.4 million to $2.6 million, due primarily to costs incurred in connection with the company’s litigation with Hansen and reorganization during 2009.

-- Net cash outflow for the year 2010, excluding the $2.5 million in borrowings under the company’s revolving credit facility, was $0.5 million. Luna paid substantially all of the prepetition amounts due under its plan of reorganization and the legal fees related to the reorganization during the first six months of 2010. Luna’s total cash and cash equivalents increased from $6.3 million at June 30, 2010, to $7.2 million at December 31, 2010, an improvement of $0.9 million over the second half of 2010.

Outlook for First Quarter and Full Year 2011

For 2011, the company anticipates continued growth in both its product and license segment and its technology development segment. Based on information as of March 8, 2011, the company currently expects total revenue for 2011 to be in the range of $37.0 million to $39.0 million, consisting of product and license revenue of $14.0 million to $15.0 million and technology development revenue of $23.0 to $24.0 million. Also for 2011, the company anticipates a net loss to common stockholders in the range of $2.0 million to $2.5 million. For the first quarter of 2011, the company expects revenue of approximately $8.0 million to $8.5 million and a net loss to common stockholders of approximately $1.3 million to $1.6 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 2010 and expectations for 2011. 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 800.901.5218 and the international dial-in number is 617.786.4511. The participant access code is 23583290. 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. 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 first quarter and full year 2011 and growth in both the company’s product and license segment and its technology development business segment. 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 the first quarter of and full year 2011 could change, failure of its product and license segment and/or its technology development business segment to grow, including from decreased sales and/or government funding, 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 Incorporated Consolidated Statements of Operations     Three Months Ended Year Ended December 31, December 31, 2010 2009 2010 2009 (Unaudited) (Unaudited) (Unaudited) Revenues: Technology development $ 5,475,310 $ 5,402,400 $ 22,404,931 $ 25,198,038 Product and license   3,593,510     3,139,228     12,133,463     9,373,849   Total   9,068,820     8,541,628     34,538,394     34,571,887     Cost of revenues: Technology development 4,248,758 3,842,761 15,808,108 17,031,768 Product and license   1,453,967     1,508,510     5,786,567     4,783,586   Total   5,702,725     5,351,271     21,594,675     21,815,354     Gross profit   3,366,095     3,190,357     12,943,719     12,756,533     Operating expense: Selling, general, and administrative 3,246,191 3,311,760 13,297,705 16,345,578 Research, development, and engineering 451,701 531,490 1,694,643 2,874,666 Litigation reserve - (26,633,915 ) - 9,669,728 Impairment of intangible assets - - - 1,310,598 Reorganization costs   12,490     1,024,936     174,292     1,897,580   Total   3,710,382     (21,765,729 )   15,166,640     32,098,150     Operating income/ (loss)   (344,287 )   24,956,086     (2,222,921 )   (19,341,617 )   Other income/(expense) Interest expense, net (122,163 ) (80,997 ) (474,408 ) (503,699 ) Other   84,109     18,902     77,299     735   Total   (38,054 )   (62,095 )   (397,109 )   (502,964 )   Income/(loss) before income taxes (382,341 ) 24,893,991 (2,620,030 ) (19,844,581 )   Income tax expense   -     -     -     600,000           Net income/ (loss)   (382,341 )   24,893,991     (2,620,030 )   (20,444,581 )   Preferred stock dividend 93,000 - 360,633 -   Net income/(loss) attributable to common stockholders $ (475,341 ) $ 24,893,991   $ (2,980,663 ) $ (20,444,581 )       Luna Innovations Incorporated Condensed Consolidated Balance Sheets   December 31, December 31, 2010 2009 (Unaudited) Assets Current Assets Cash and cash equivalents $ 7,216,580 $ 5,228,802 Accounts receivable, net 7,669,625 7,203,203 Inventory 3,106,600 2,890,364 Other current assets   710,558     1,290,496   Total current assets 18,703,363 16,612,865   Property and equipment, net 3,204,670 4,129,015 Intangible assets, net 664,418 580,785 Other assets   303,210     435,259     Total assets $ 22,875,661   $ 21,757,924     Liabilities and stockholders' equity (deficit) Liabilities not subject to compromise Current portion of long term debt $ 1,195,784 $ - Current portion of capital lease obligation 2,194 7,510 Line of credit 2,500,000 - Accounts payable 2,008,182 1,142,267 Accrued liabilities 3,549,604 3,379,339 Deferred credits   1,392,602     1,027,016   Total liabilities not subject to compromise 10,648,366 5,556,132   Liabilities subject to compromise - 19,062,000   Long term debt   2,611,609     -     Total liabilities   13,259,975     24,618,132     Stockholders' equity Preferred stock 1,322 - Common stock 13,526 11,352 Additional paid-in capital 56,681,757 41,228,698 Accumulated deficit   (47,080,919 )   (44,100,258 ) Total stockholders' equity (deficit)   9,615,686     (2,860,208 )   Total liabilities and stockholders' equity $ 22,875,661   $ 21,757,924         Luna Innovations Incorporated Condensed Statements of Cash Flows Year ended December 31, 2010 2009 (Unaudited) Cash used in operating activities Net loss $ (2,620,030 ) $ (20,444,581 )

Adjustments to reconcile net loss to net cash used in operating activities

Depreciation and amortization 1,331,802 1,853,188 Impairment of intangible assets - 1,310,598 Share-based compensation 3,448,330 3,216,780 Deferred tax expense - 600,000 Bad debt expense - 135,162 Reorganization costs - 826,234 Changes in operating assets and liabilities: Accounts receivable (466,422 ) (6,332 ) Refundable income taxes - 98,092 Inventory (261,972 ) (61,373 ) Other assets 669,759 (1,264,865 ) Accounts payable and accrued expenses 7,091,386 259,145 Litigation reserve (9,669,728 ) 9,669,728 Deferred credits   365,586     (827,266 ) Net cash used in operating activities   (111,289 )   (4,635,490 )   Cash used in investing activities Acquisition of property and equipment (85,149 ) (53,111 ) Intangible property costs   (365,533 )   (642,875 ) Net cash used in investing activities   (450,682 )   (695,986 )   Cash from (used in) financing activities Payments on capital lease obligations (5,316 ) (9,886 ) Proceeds from debt obligations 2,500,000 - Payments of debt obligations (834,119 ) (5,000,000 ) Proceeds from exercise of options and warrants   889,184     51,204   Net cash from (used in) financing activities   2,549,749     (4,958,682 )   Net change in cash 1,987,778 (10,290,158 ) Cash and cash equivalents, beginning of period   5,228,802     15,518,960   Cash and cash equivalents, end of period $ 7,216,580   $ 5,228,802             Luna Innovations Incorporated Reconciliation of Non-GAAP Financial Amounts   Three months ended Year ended December 31, December 31, 2010 2009 2010 2009 (Unaudited) (Unaudited) (Unaudited) (Unaudited)   Net loss $ (382,341 ) $ 24,893,991 $ (2,620,030 ) $ (20,444,581 ) Interest 122,163 80,997 474,408 503,699 Taxes - - - 600,000 Depreciation and amortization 378,172 348,977 1,331,802 1,853,188 Impairment of intangible assets   -     -     -     1,310,598   EBITDA 117,994 25,323,965 (813,819 ) (16,177,096 )   Share-based compensation 832,306 837,810 3,448,330 3,216,780 Litigation reserve/ (settlement)   -     (26,633,915 )   -     9,669,728   Adjusted EBITDA 950,300 (472,140 ) 2,634,511 (3,290,588 )   Costs of reorganization and Hansen litigation   12,490     1,474,137     296,683     5,629,145  

Adjusted EBITDA excluding reorganization and Hansen litigation

$ 962,790   $ 1,001,997   $ 2,931,194   $ 2,338,557             Operating Expenses $ 3,710,382 $ (21,765,729 ) $ 15,166,640 $ 32,098,150 Litigation reserve - (26,633,915 ) - 9,669,728 Impairment of intangible assets - - - 1,310,598 Reorganization costs 12,490 1,024,936 174,292 1,897,580 Litigation costs included in SG&A   -     449,201     122,391     3,731,565   Adjusted Operating Expenses $ 3,697,892   $ 3,394,049   $ 14,869,957   $ 15,488,679