LUNA Luna Innovations Incorporated

Luna Innovations Incorporated (NASDAQ: LUNA) today announced its financial results for the second quarter and six months ended June 30, 2013.

As compared to the same quarter last year, total revenue decreased by 11%, from $6.7 million in the second quarter of 2012 to $6.0 million in the second quarter of 2013. Products and licensing revenues increased 11% compared to the second quarter of 2012 driven by higher sales of the company’s ODiSI product line in addition to increased revenue from the development of the company’s fiber optic shape sensing product. Products and licensing revenues for the second quarter also increased 69% compared to the first quarter of 2013.

Technology development revenues declined by 28% compared to the second quarter of 2012 due primarily to the continued lower level of contract research projects within the company’s optical systems group. Technology development revenues grew by 7% compared to the first quarter of 2013. Gross profit decreased from $2.7 million for the second quarter of 2012 to $2.4 million for the second quarter of 2013. Operating expenses for the second quarter of 2013 increased $0.2 million, or 6%, over the second quarter of 2012.

The company reported a net loss attributable to common stockholders of $1.0 million, or $0.07 per common share, for the second quarter of 2013, compared to a net loss of $0.3 million, or $0.02 per common share, in the same quarter last year. Adjusted EBITDA, a non-GAAP measure, which is earnings before interest, taxes, and non-cash expenses of share-based compensation, depreciation, amortization and warrant expense, decreased to $(0.3) million for the second quarter of 2013, as compared to $0.4 million for the second quarter of 2012.

“I am pleased to report growth in the Products and Licensing segment of our business,” said My Chung, chief executive officer of Luna. “Growth in sales of our ODiSI products for measuring strain and temperature continued to offset the softness of the telecom test and measurement market for us. The multi-year renewal of our agreement with Intuitive Surgical during the second quarter also provides a strong base for growth in the future as we work toward the commercialization of the shape sensing platform.”

Second Quarter Financial and Business Summary

-- Total revenues decreased by 11%, from $6.7 million in the second quarter of 2012 to $6.0 million in the second quarter of 2013.

--Technology development revenues decreased by 28%, to $2.8 million, for the second quarter of 2013, from $3.9 million for the second quarter of 2012. Technology development revenues increased by 7% compared to the first quarter of 2013.

-- Products and licensing revenue increased by 11%, from $2.8 million in the second quarter of 2012 to $3.2 million in the second quarter of 2013. Products and licensing revenue increased 69% over the first quarter of 2013.

-- Gross profit for the second quarter of 2013 decreased to $2.4 million, or 40% of total revenues, from $2.7 million, or 41% of total revenues, for the second quarter of 2012.

-- Selling, general and administrative expenses increased by 5% to $2.7 million, or 45% of total revenues for the second quarter of 2013, from $2.5 million, or 37% of total revenues, for the second quarter of 2012.

-- Total operating expenses increased to $3.3 million, or 56% of total revenues, for the second quarter of 2013 from $3.1 million, or 47% of total revenues for the second quarter of 2012.

-- Adjusted EBITDA decreased to $(0.3) million in the second quarter 2013 from $0.4 million in the second quarter of 2012.

-- Net loss attributable to common stockholders for the second quarter of 2013 increased to $1.0 million from $0.3 million for the second quarter of 2012.

-- Cash and cash equivalents totaled $8.7 million at June 30, 2013, as compared to $6.3 million at December 31, 2012 and $10.3 million at March 31, 2013. Net cash used during the quarter was adversely impacted by a $1.1 million increase in accounts receivable at June 30 compared to March 31, driven primarily by the timing of sales during the second quarter.

Six Months Ended June 30, 2013 Financial Summary

-- Total revenue decreased by 22% to $10.5 million for the six months ended June 30, 2013 compared to $13.4 million for the six months ended June 30, 2012.

--Technology development revenues decreased by 31%, from $7.8 million for the six months ended June 30, 2012 to $5.4 million for the six months ended June 30, 2013.

-- Products and licensing revenue decreased by 9%, from $5.6 million for the six months ended June 30, 2012 to $5.0 million for the six months ended June 30, 2013.

-- Gross profit for the six months ended June 30, 2013 decreased by 30%, to $3.8 million, compared to a gross profit of $5.5 million for the six months ended June 30, 2012. Gross margin percentages decreased to 36% of revenues for the first six months of 2013 from 41% of revenues for the first six month of 2012.

-- Selling, general and administrative expenses was relatively unchanged at $5.2 million, representing 49% of total revenues for the six months ended June 30, 2013 compared to 39% of total revenues for the six months ended June 30, 2013.

-- Total operating expenses increased to $6.7 million, or 64% of total revenues, for the six months ended June 30, 2013, from $6.5 million or 48% of total revenues, for the six months ended June 30, 2012.

-- Adjusted EBITDA decreased to $(1.7) million for the six months ended June 30, 2013 from $0.5 million for the six months ended June 30, 2012.

-- Net income attributable to common stockholders improved to $1.8 million for the six months ended June 30, 2013, compared to a net loss attributable to common stockholders of $0.6 million for the six months ended June 30, 2012 largely the result of a net after-tax gain of $3.9 million realized on the sale of the company’s Secure Computing and Communications group in the first quarter.

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 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 2013. The call can be accessed by dialing 800.299.9630 domestically or 617.786.2904 internationally prior to the start of the call. The participant access code is 24290407. 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 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 it serves.

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 the company’s future growth and commercialization of the company’s shape sensing platform. 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, failure of demand for the company’s products and services to meet expectations, technological challenges 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.lunainc.com. The statements made in this release are based on information available to the company 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 Condensed Consolidated Statements of Operations   Three Months Ended Six Months Ended June 30,

June 30,

2013 2012 2013 2012 (unaudited) (unaudited) Revenues: Technology development revenues $ 2,807,296 $ 3,894,846 $ 5,434,537 $ 7,837,546 Products and licensing revenues   3,165,764   2,845,864   5,035,439   5,559,677     Total revenues 5,973,060 6,740,710 10,469,976 13,397,223   Cost of revenues: Technology development costs 2,209,158 2,729,108 4,381,135 5,428,304 Products and license costs   1,355,643   1,267,201   2,288,062   2,514,696     Total cost of revenues   3,564,801   3,996,309   6,669,197   7,943,000     Gross Profit   2,408,259 2,744,401 3,800,779 5,454,223   Operating expense: Selling, general and administrative 2,658,605 2,526,638 5,167,251 5,183,614 Research, development, and engineering   666,632   608,459   1,507,124   1,293,240     Total operating expense   3,325,237   3,135,097   6,674,375   6,476,854     Operating loss (916,978 ) (390,696 ) (2,873,596 ) (1,022,631 )   Other income/(expense): Other income, net 15,307 23,265 86,540 46,533 Interest expense   (49,781 )   (74,357 )   (107,960 )   (154,015 )     Total other expense (34,474 ) (51,092 ) (21,420 ) (107,482 )   Loss from continuing operations before income taxes (951,452 ) (441,788 ) (2,895,016 ) (1,130,113 ) Income tax (benefit)/expense   (160,855 )  

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  (956,055 )   5,799     Loss from continuing operations (790,597 ) (441,788 ) (1,938,961 ) (1,135,912 ) (Loss)/income from discontinued operations, net of income taxes (161,485 ) 199,268 3,772,476 558,644 Net (loss)/income (952,082 ) (242,520 ) 1,833,515 (577,268 )   Preferred stock dividend 26,366 26,784 49,995 60,880   Net (loss)/income attributable to common stockholders $ (978,448 ) $ (269,304 ) $ 1,783,520 $ (638,148 )     Net loss per share from continuing operations: Basic $ (0.06 ) $ (0.03 ) $ (0.14) $ (0.08 ) Diluted $ (0.06 ) $ (0.03 ) $ (0.14)   $ (0.08 ) Net (loss)/income per share from discontinued operations: Basic $ (0.01 ) $ 0.01 $ 0.27 $ 0.04 Diluted $ (0.01 ) $ 0.01   $ 0.23 $ 0.03 Net (loss)/income per share attributable to common stockholders: Basic $ (0.07 ) $ (0.02 ) $ 0.13 $ (0.05 ) Diluted $ (0.07 ) $ (0.02 ) $ 0.11 $ (0.05 ) Weighted average common shares and common equivalent shares outstanding: Basic 14,362,494 13,892,816 14,206,598 13,885,684 Diluted 14,362,494 16,314,620 16,558,357 16,325,402       Luna Innovations Incorporated Condensed Consolidated Balance Sheets   June 30, December 31, 2013 2012 (unaudited) Assets Current assets: Cash and cash equivalents $ 8,742,869 $ 6,340,461 Accounts receivable, net 6,702,987 7,059,635 Inventory, net 3,646,133 3,336,916 Prepaid expenses 560,275 667,773 Other current assets   70,207   35,629   Total current assets 19,722,471 17,440,414 Property and equipment, net 2,141,390 2,426,638 Intangible assets, net 377,638 437,839 Other assets   80,293   152,877   Total assets $ 22,321,792 $ 20,457,768   Liabilities and stockholders’ equity Liabilities : Current Liabilities Current portion of long term debt obligation 1,625,000 1,500,000 Current portion of capital lease obligation 55,734 54,091 Accounts payable 2,238,501 1,797,571 Accrued liabilities 2,531,515 2,747,175 Deferred credits   611,269   832,822   Total current liabilities 7,062,019 6,931,659 Long-term debt obligation 1,375,000 2,125,000 Long-term lease obligation   100,633   128,917   Total liabilities 8,537,652 9,185,576   Commitments and contingencies Stockholders’ equity: Preferred stock 1,322 1,322 Common stock 14,688 14,245 Additional paid-in capital 62,089,490 61,361,505 Accumulated deficit   (48,321,360 )   (50,104,880 )   Total stockholders’ equity   13,784,140   11,272,192   Total liabilities and stockholders’ equity $ 22,321,792 $ 20,457,768       Luna Innovations Incorporated Condensed Consolidated Statements of Cash Flows   Six months ended June 30, 2013 2012 (unaudited) Cash used in operating activities Net income (loss) $ 1,833,515 $ (577,268 ) Adjustments to reconcile net income (loss) to net cash used in operating activities Depreciation and amortization 489,244 528,113 Share-based compensation 618,084 928,368 Warrant expense - 12,032 Gain on sale of discontinued operations, net of income taxes (3,868,114 )

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Allowance for doubtful accounts or bad debt expense 124,810

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Change in assets and liabilities: Accounts receivable 834,122 (1,212,864 ) Inventory (309,217 ) (69,186 ) Other current assets (40,647 ) 150,289 Other assets 72,584 37,583 Accounts payable and accrued expenses 174,916 (847,341 ) Deferred credits   (221,553 )   (328,491 )   Net cash used in operating activities   (1,313,794 )   (1,378,765 )   Cash flows provided by/(used in) investing activities Acquisition of property and equipment (69,108 ) (123,732 ) Intangible property costs (145,858 ) (55,847 ) Proceeds from sale of discontinued operations, net of fees   4,522,460   -   Net cash provided by/(used in) investing activities   4,307,494   (179,579 )   Cash flows used in financing activities   Payments on capital lease obligations (26,641 ) (25,094 ) Payment of debt obligations (625,000 ) (750,000 ) Proceeds from the exercise of options and warrants   60,349   33,830   Net cash used in financing activities   (591,292 )   (741,264)   Net increase/(decrease) in cash or cash equivalents 2,402,408 (2,299,608 ) Cash and cash equivalents, beginning of period   6,340,461   8,939,127   Cash and cash equivalents, end of period $ 8,742,869 $ 6,639,519           Luna Innovations Incorporated Reconciliation of Net Income/(Loss) to EBITDA and Adjusted EBITDA  

Three Months Ended

Six Months Ended

June 30, June 30, 2013 2012 2013 2012 (unaudited) (unaudited)     Net income/(loss) $ (952,082 ) $ (242,520 ) $ 1,833,515 $ (577,268 ) Less (loss)/income from discontinued operations, net of income taxes (161,485 ) 199,268 3,772,476 558,644 Loss from continuing operations (790,597 ) (441,788 ) (1,938,961 ) (1,135,912 ) Interest expense 49,781 74,357 107,960 154,015 Tax (benefit) expense (160,855)

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(956,055 ) 5,799 Depreciation and amortization   260,979   244,012   489,244   528,113   EBITDA (640,692 ) (123,419 ) (2,297,812 ) (447,985 ) Share-based compensation 304,568 473,784 618,084 928,368 Warrant expense   -   147   -   12,032   Adjusted EBITDA $ (336,124 ) $ 350,512 $ (1,679,728) $ 492,415