LUNA Luna Innovations Incorporated

Luna Innovations Incorporated (NASDAQ: LUNA) today announced its financial results for the second quarter and six months ended June 30, 2011.

As compared to the same quarter last year, product and license revenue increased by 38%, from $2.9 million in the second quarter of 2010 to $4.0 million in the second quarter of 2011, while total revenue increased by 7%, from $9.0 million in the second quarter of 2010 to $9.6 million in the second quarter of 2011. Gross profit increased from $3.3 million for the second quarter of 2010 to $3.7 million for the second quarter of 2011. The company reported a net loss attributable to common stockholders of $0.3 million, or $0.02 per common share for the second quarter of 2011, as compared to a net loss attributable to common stockholders of $0.7 million, or $0.05 per common share for the second quarter of 2010. Adjusted EBITDA, a non-GAAP measure, which is earnings before interest, taxes, depreciation and amortization, excluding litigation and reorganization related items and non-cash stock-based compensation and warrant expense, decreased to $0.7 million for the second quarter of 2011, as compared to $0.8 million for the second quarter of 2010. Cash increased to $8.1 million at June 30, 2011 compared to $6.3 million at June 30, 2010.

“We are pleased to see continued improvement in our bottom line and cash flow, largely being accomplished through growth in our product and license revenue, which saw a year-over-year increase of 38%,” said My Chung, chief executive officer of Luna. “We remain focused on molding our corporate strategy to align product development, contract research, and services with a commercialization strategy that will facilitate long-term growth and increased shareholder value.”

Second Quarter Financial and Business Summary

-- Total revenues increased by 7%, from $9.0 million in the second quarter of 2010 to $9.6 million in the second quarter of 2011.

-- Product and license revenue increased by 38%, from $2.9 million in the second quarter of 2010 to $4.0 million in the second quarter of 2011. Technology development revenues decreased by 8%, to $5.6 million, for the second quarter of 2011 from $6.1 million for the second quarter of 2010.

-- Gross profit for the second quarter of 2011 increased to $3.7 million, or 38% of total revenues, from $3.3 million, or 37% of total revenues, for the corresponding period of 2010.

-- Selling, general and administrative expenses decreased by 3% to $3.3 million, or 34% of total revenues for the second quarter of 2011, from $3.4 million, or 37% of total revenues, for the second quarter of 2010.

-- Total operating expenses increased to $3.9 million, or 40% of total revenues, for the second quarter of 2011 from $3.8 million, or 42% of total revenues for the second quarter of 2010.

-- Adjusted EBITDA decreased to $0.7 million in the second quarter 2011 from $0.8 million in the second quarter of 2010.

-- Net loss attributable to common stockholders improved to $0.3 million for the second quarter of 2011 compared to a net loss attributable to common stockholders of $0.7 million for the second quarter of 2010.

-- Achieved fourth consecutive quarter of positive cash flow. Cash and cash equivalents totaled $8.1 million at June 30, 2011, as compared to $7.5 million at March 31, 2011. The second quarter of 2011 included $0.4 million of additional indebtedness as a part of the refinancing with Silicon Valley Bank discussed below.

-- My E. Chung appointed as Luna’s president, chief executive officer and a member of the board of directors.

-- Luna refinanced its credit facility with Silicon Valley Bank to establish a $6.0 million term loan and a $1.0 million revolving line of credit. With the proceeds of the term loan, Luna repaid the remaining balance on the promissory note to Hansen Medical, Inc. of $3.0 million and its prior balance on its revolving line of credit with Silicon Valley Bank of $2.5 million.

Six Months Ended June 30, 2011 Financial Summary

-- Total revenue increased $1.7 million, or 10%, to $18.6 million for the six months ended June 30, 2011 compared to $16.9 million for the six months ended June 30, 2010.

-- Product and license revenue increased by 48%, from $5.0 million for the six months ended June 30, 2010 to $7.4 million for the six months ended June 30, 2011. Technology development revenues decreased by 6%, from $11.9 million for the six months ended June 30, 2010 to $11.2 million for the six months ended June 30, 2011.

-- Gross profit for the six months ended June 30, 2011 increased by 14%, to $7.0 million, compared to a gross profit of $6.1 million for the six months ended June 30, 2010.

-- Selling, general and administrative expenses increased by 2% from $6.8 million, or 40% of total revenues, for the six months ended June 30, 2010 to $6.9 million, or 37% of total revenues, for the six months ended June 30, 2011.

-- Total operating expenses increased by 5% to $8.1 million, or 44% of total revenues, for the six months ended June 30, 2011 compared to $7.7 million, or 46% of total revenues, for the six months ended June 30, 2010.

-- Adjusted EBITDA decreased to $1.0 million for the six months ended June 30, 2011 from $1.4 million for the six months ended June 30, 2010.

-- Net loss attributable to common stockholders improved to $1.4 million for the six months ended June 30, 2011 compared to a net loss attributable to common stockholders of $2.0 million for the six months ended June 30, 2010.

Outlook 2011

Based on information as of August 9, 2011, the company expects total revenue for 2011 to be in the range of $35.0 million to $37.0 million. Also for 2011, the company anticipates a net loss to common stockholders in the range of $2.5 million to $3.0 million. For the third quarter of 2011, the company expects revenue of approximately $8.5 million to $9.0 million and a net loss attributable to common stockholders of approximately $0.5 million to $0.7 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 unusual and the company 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. 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. (EDT) today to discuss its financial results and business developments for the second quarter of 2011 and expectations for the remainder of 2011. The call can be accessed by dialing 866.356.3095 domestically or 617.597.5391 internationally prior to the start of the call. The participant access code is 73844771. 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 Innovations website, www.lunainnovations.com, prior to the event. The webcast will be archived under the “Webcasts and Presentations” section of the Luna Innovations website for at least 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 third quarter and full year 2011, as well as the demand for the company’s fiber optic equipment and technologies. 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 third quarter and full year 2011 could change, failure of demand for the company’s products and services to meet expectations, and 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 www.sec.gov and at the company’s website at 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 Condensed Consolidated Statements of Operations   Three Months Ended Six Months Ended June 30,

June 30,

2011 2010 2011 2010 (unaudited) (unaudited) Revenues: Technology development revenues $ 5,623,074 $ 6,091,503 $ 11,244,689 $ 11,902,597 Product and license revenues   4,000,515     2,907,139     7,377,525     4,981,836     Total revenues 9,623,589 8,998,642 18,622,214 16,884,433   Cost of revenues: Technology development costs 4,194,442 4,192,920 8,280,608 8,025,260 Product and license costs   1,767,778     1,499,861     3,340,469     2,719,102     Total cost of revenues   5,962,220     5,692,781     11,621,077     10,744,362     Gross Profit 3,661,369 3,305,861 7,001,137 6,140,071   Operating expense: Selling, general and administrative 3,251,073 3,350,524 6,929,593 6,765,036 Research, development, and engineering   620,470     430,181     1,180,159     946,809     Total operating expense   3,871,543     3,780,705     8,109,752     7,711,845     Operating loss (210,174 ) (474,844 ) (1,108,615 ) (1,571,774 )   Other income/(expense) 37,823 — 35,835 (14,872 ) Interest expense   (84,303 )   (143,485 )   (198,725 )   (227,526 )   Total other income/(expense) (46,480 ) (143,485 ) (162,890 ) (242,398 )   Loss before income taxes (256,654 ) (618,329 ) (1,271,505 ) (1,814,172 ) Income tax expense  

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    10,020     —     Net loss (256,654 ) (618,329 ) (1,281,525 ) (1,814 ,172 )   Preferred stock dividend 32,708 93,000 74,336 174,633  

Net loss attributable to common stockholders

$ (289,362 ) $ (711,329 ) $ (1,355,861 ) $ (1,988,805 )   Net loss per share of common stock: $ (0.02 ) $ (0.05 ) $ (0.10 ) $ (0.16 )       Luna Innovations Incorporated Condensed Consolidated Balance Sheets   June 30, December 31, 2011 2010 (unaudited) Assets Current assets Cash and cash equivalents $ 8,066,006 $ 7,216,580 Accounts receivable, net 6,675,480 7,669,625 Inventory, net 3,772,483 3,106,600 Prepaid expenses 688,057 665,210 Other current assets   45,004     45,348     Total current assets 19,247,030 18,703,363 Property and equipment, net 3,144,099 3,204,670 Intangible assets, net 662,551 664,418 Other assets   265,627     303,210     Total assets $ 23,319,307   $ 22,875,661    

Liabilities and stockholders’ equity

Liabilities:

Current Liabilities Line of credit $

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$ 2,500,000 Current portion of long term debt obligation 1,500,000 1,195,784 Current portion of capital lease obligation 49,446 2,194 Accounts payable 1,498,678 2,008,183 Accrued liabilities 4,209,901 3,549,604 Deferred credits   1,685,740     1,392,602     Total current liabilities 8,943,765 10,648,367 Long-term debt obligation 4,375,000 2,611,609 Long-term lease obligation   208,864     —     Total liabilities 13,527,629 13,259,976   Commitments and contingencies Stockholders’ equity: Preferred stock 1,322 1,322 Common stock 13,763 13,526 Additional paid-in capital 58,213,370 56,681,756 Accumulated deficit   (48,436,777 )   (47,080,919 )   Total stockholders’ equity   9,791,678     9,615,685     Total liabilities and stockholders’ equity $ 23,319,307   $ 22,875,661         Luna Innovations Incorporated Condensed Consolidated Statements of Cash Flows   Six months ended June 30, 2011 2010 (unaudited) Cash flows used in operating activities Net loss $ (1,281,525 ) $ (1,814,172 ) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 710,269 641,979 Share-based compensation 1,275,147 1,763,015 Warrant expense 38,893 122,183 Change in assets and liabilities: Accounts receivable 994,149 (1,007,451 ) Inventory (665,883 ) (127,163 ) Other current assets (22,503 ) 668,871 Other assets 37,583 31,024 Accounts payable and accrued expenses 111,900 (2,386,304 ) Deferred credits   103,138     426,444     Net cash used in operating activities   1,301,168     (1,681,574 )   Cash flows used in investing activities Acquisition of property and equipment (173,945 ) (39,146 ) Intangible property costs   (199,741 )   (88,712 )     Net cash used in investing activities   (373,686 )   (127,858 )   Cash flows provided by (used in) financing activities Payments on capital lease obligations (18,030 ) (2,684 ) Proceeds from debt obligations 6,000,000 2,500,000 Payment of debt obligations (6,242,394 ) (265,657 ) Proceeds from the exercise of options and warrants   182,368     616,940     Net cash provided by (used in) financing activities   (78,056 )   2,848,599     Net change in cash 849,426 1,039,167 Cash and cash equivalents—beginning of period   7,216,580     5,228,802     Cash and cash equivalents—end of period $ 8,066,006   $ 6,267,969             Luna Innovations Incorporated Reconciliation of EBITDA and Adjusted EBITDA to Net Loss  

Three Months Ended

Six Months Ended

June 30, June 30, 2011 2010 2011

2010

(unaudited) (unaudited) Reconciliation of EBITDA and Adjusted EBITDA   Net loss $ (256,654 ) $ (618,329 ) $ (1,281,525 ) (1,814,172 ) Interest expense 84,303 143,485 198,725 227,526 Income tax expense

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10,020 — Depreciation and amortization   382,856     313,020     710,269   641,979   EBITDA 210,505 (161,824 ) (362,511 ) (944,667 ) Stock-based compensation and warrant expense 472,328 950,814 1,314,040 1,886,198 Fees associated with Hansen litigation and Chapter 11 reorganization  

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    39,863    

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  422,750     Adjusted EBITDA $ 682,833   $ 828,853   $ 951,529   1,364,281