LUNA Luna Innovations Incorporated

Adjusted EBITDA of $0.6 million and net loss of $(2.2) million, including non-recurring merger-related expenses of $1.7 million, for the second quarter of 2015, the company's first reporting period following its merger with Advanced Photonix, Inc.

Luna Innovations Incorporated (NASDAQ: LUNA) today announced its financial results for the three months and six months ended June 30, 2015, the company's first reporting period following its merger with Advanced Photonix, Inc. ("API").

The company's adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") was $0.6 million for the second quarter of 2015 compared to an Adjusted EBITDA loss of $(0.5) million for the second quarter of 2014. Net loss for the second quarter of 2015 was $(2.2) million compared to a net loss of $(0.9) million for the second quarter of 2014. For the six months ended June 30, 2015, Adjusted EBITDA was $0.2 million compared to $(2.0) million for the first six months of 2014. Net loss for the six months ended June 30, 2015 was $(4.8) million compared to net income of $7.6 million for the first six months of 2014.

“Our positive Adjusted EBITDA in this first quarter following our merger with Advanced Photonix clearly demonstrates the value that we expected to achieve in combining these two companies,” said My Chung, president and chief executive officer of Luna. "With the expected level of deployment of new fiber optic networks, including 100G networks in Asia and North America, creating significant potential demand for our high speed optical receiver and detector products and with the rate of growth that we have seen in our historical test and measurement equipment, I believe we are well positioned for growth."

• Total revenues for the second quarter of 2015 were $10.0 million, including revenues from API's business from the date of the closing of the merger on May 8, 2015 through June 30, 2015.
• Products and licensing revenues for the second quarter of 2015 were $6.3 million, including revenues from API's business from the closing of the merger through June 30, 2015.
  • Revenues from sales of legacy Luna products increased $0.7 million, or 35%, for the second quarter of 2015 compared to the second quarter of 2014.
• Gross margin for the second quarter of 2015 improved to 42% compared to 38% for the second quarter of 2014.

"With our potential for accelerated growth and spreading our operating costs over a broader revenue base, we remain excited about the opportunity for improved financial results in the coming periods,” Chung said.

Second Quarter Financial Summary

Total revenues for the three months ended June 30, 2015, were $10.0 million, compared to $5.2 million for the same period of 2014. Revenues of $10.0 million included $4.0 million of revenue from the operations of API for the period from May 8, 2015, the date of the closing of the merger, through June 30, 2015. The increase in legacy Luna revenues resulted primarily from growth in the products and licensing segment, whose revenues grew by 35% to $2.7 million during the second quarter of 2015, compared to $2.0 million during the same period in 2014, driven by increased sales of the company's ODiSI products for measurement of strain and temperature.

Gross profit increased to $4.2 million, or 42% of total revenues, for the three months ended June 30, 2015, compared to gross profit of $2.0 million, or 38% of total revenues, for the same period in 2014. The improved margin resulted from the change in revenue mix, with products and licensing revenues, which typically provide a higher gross margin than technology development revenues, representing a higher proportion of total revenues in the second quarter of 2015. This change in revenue mix was attributable to the merger, as well as growth in sales of Luna's products.

Selling, general and administrative expenses increased to $5.5 million for the second quarter of 2015, compared to $2.5 million for the second quarter of 2014. Selling, general and administrative expenses of $5.5 million in the second quarter of 2015 included $1.7 million of non-recurring costs associated with the merger. Selling, general and administrative expenses for the three months ended June 30, 2015 also include $0.3 million in incremental depreciation and amortization expense due to the accounting for the merger with API and the related step up in bases of the API assets acquired.

Research, development and engineering expenses increased to $0.8 million for the second quarter of 2015 compared to $0.5 million for the second quarter of 2014. Research, development and engineering expenses for the second quarter of 2015 included $0.4 million of costs from the operations of API from the date of the closing of the merger through June 30, 2015.

Growth in revenues and margins were offset by increased operating expenses, particularly as a result of the costs incurred in connection with the merger, resulting in an operating loss of $(2.1) million for the second quarter of 2015 compared to an operating loss of $(1.0) million for the same period in 2014. Excluding the $1.7 million of non-recurring transaction expenses related to the merger, the company's operating loss would have been $(0.4) million for the second quarter of 2015, an improvement of $0.6 million compared to the second quarter of 2014.

Net loss attributable to common stockholders for the second quarter of 2015 was $(2.2) million compared to a net loss attributable to common stockholders of $(0.9) million during the second quarter of 2014.

Adjusted EBITDA improved to $0.6 million for the second quarter of 2015, compared to $(0.5) million for the second quarter of 2014.

Year to Date Financial Summary

For the six months ended June 30, 2015, revenues were $15.4 million compared to $9.7 million for the six months ended June 30, 2014. Revenues for the six months ended June 30, 2015 included $4.0 million of revenues from API during the period from the closing of the merger with API through June 30, 2015. Revenues from Luna's legacy business grew $1.7 million, or 17% for the first six months of 2015 compared to the first six months of 2014. The increased revenue from Luna's legacy business resulted primarily from increased sales of the company's ODiSI and Optical Backscatter Reflectometer products.

Gross profit increased to $6.5 million, or 42% of total revenues, for the six months ended June 30, 2015 compared to $3.5 million, or 36% of total revenues for the first six months of 2014. The improved margin is attributable to the greater proportion of product sales within the total revenue mix as a result of the addition of revenues from API's business in the company's operating results as well as the continued growth in sales of the legacy Luna products.

Selling, general and administrative expenses increased to $10.1 million for the six months ended June 30, 2015 compared to $5.2 million for the six months ended June 30, 2014. Selling, general and administrative expenses for the first six months of 2015 include $3.5 million of non-recurring merger- related expenses. Research, development and engineering costs were $1.1 million for the six months ended June 30, 2014 compared to $1.2 million for the first six months of 2014. Research, development and engineering expenses for the first half of 2015 included $0.2 million in labor and associated benefit costs of the company's medical shape sensing business that it sold in January 2014. Research, development and engineering expenses for the first half of 2015 include $0.4 million of expenses related to the operations of API for the period from the closing of the merger through June 30, 2015.

Net loss attributable to common stockholders was $(4.8) million for the six months ended June 30, 2015 compared to net income attributable to common stockholders of $7.6 million for the six months ended June 30, 2014. Net income for the first half of 2014 was favorably impacted by an after-tax gain on discontinued operations of $9.3 million resulting from the sale of the company's medical shape sensing business in January 2014. Adjusted EBITDA improved to $0.2 million for the six months ended June 30, 2015 compared to adjusted EBITDA loss of $(2.0) million for the six months ended June 30, 2014.

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 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, including expenses incurred in connection with Luna's merger with API. 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 p.m. (EDT) today to discuss its financial results and business developments for the second quarter of 2015. The call can be accessed by dialing 855.236.2056 domestically or 267.753.2162 internationally prior to the start of the call. The participant access code is 3056296. 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) develops, manufactures and markets fiber optic sensing, test and measurement products and is focused on bringing new and innovative technology solutions to measure, monitor, protect and improve critical processes in the aerospace, automotive, energy, composite, telecommunications and defense industries. Following its merger with Advanced Photonix, Inc., the company also packages optoelectronic semiconductors into high speed optical receivers (HSOR products), custom optoelectronic subsystems (Optosolutions products) and Terahertz (THz) instrumentation. 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 the company's expectations regarding the company’s future financial performance, operating results and future growth of the company’s business, greater capabilities following the completion of the merger with API, potential demand for the company's high speed optical receiver and detector products, and potential for improved financial performance. 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, integration or other operational issues related to the merger, 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

Consolidated Statements of Operations

        Three Months Ended June 30,     Six Months Ended June 30, 2014     2015 2014     2015 (unaudited) (unaudited) Revenues: Technology development revenues $ 3,219,435 $ 3,728,271 $ 5,894,887 $ 6,603,786 Products and licensing revenues   2,008,862     6,297,475     3,805,291     8,761,062   Total revenues   5,228,297     10,025,746     9,700,178     15,364,848   Cost of revenues: Technology development costs 2,388,801 2,576,145 4,413,956 4,659,769 Products and licensing costs   851,490     3,252,627     1,746,130     4,219,317   Total cost of revenues   3,240,291     5,828,772     6,160,086     8,879,086   Gross Profit   1,988,006     4,196,974     3,540,092     6,485,762   Operating expense: Selling, general and administrative 2,466,626 5,518,656 5,221,704 10,087,609 Research, development and engineering   484,509     801,221     1,233,663     1,136,111   Total operating expense   2,951,135     6,319,877     6,455,367     11,223,720   Operating loss   (963,129 )   (2,122,903 )   (2,915,275 )   (4,737,958 ) Other income/(expense): Other income, net 29,325 4,264 111,431 4,109 Interest expense   (27,302 )   (49,966 )   (59,667 )   (59,103 ) Total other income/(expense)   2,023     (45,702 )   51,764     (54,994 ) Loss from continuing operations, before income taxes (961,106 ) (2,168,605 ) (2,863,511 ) (4,792,952 ) Income tax (benefit)/expense   (375,983 )   —     (1,145,173 )   2,808   Net loss from continuing operations   (585,123 )   (2,168,605 )   (1,718,338 )   (4,795,760 ) (Loss)/income from discontinued operations, net of income taxes   (330,716 )   —     9,342,723     —   Net (loss)/income (915,839 ) (2,168,605 ) 7,624,385 (4,795,760 ) Preferred stock dividend   27,334     20,021     56,870     46,581   Net (loss)/income attributable to common stockholders $ (943,173 ) $ (2,188,626 ) $ 7,567,515   $ (4,842,341 ) Net loss per share from continuing operations: Basic and diluted $ (0.04 ) $ (0.10 ) $ (0.12 ) $ (0.26 ) Net (loss)/income per share from discontinued operations: Basic and diluted $ (0.02 ) $ —   $ 0.63   $ —   Net (loss)/income per share attributable to common stockholders: Basic and diluted $ (0.06 ) $ (0.10 ) $ 0.51   $ (0.26 ) Weighted average common shares and common equivalent shares outstanding: Basic and diluted   14,817,084     21,997,768     14,722,474     18,577,006      

Luna Innovations Incorporated

Consolidated Balance Sheets

        December 31, 2014     June 30, 2015 (unaudited) Assets Current assets: Cash and cash equivalents $ 14,116,969 $ 7,512,513 Accounts receivable, net 5,689,615 9,330,045 Inventory, net 3,364,233 9,955,920 Prepaid expenses   715,302     1,933,984   Total current assets 23,886,119 28,732,462 Property and equipment, net 3,497,057 6,719,424 Intangible assets, net 199,277 11,528,262 Goodwill — 614,184 Other assets   1,995     88,948   Total assets $ 27,584,448   $ 47,683,280   Liabilities and stockholders’ equity Liabilities: Current Liabilities: Current portion of long-term debt obligation $ 625,000 $ 1,500,000 Current portion of capital lease obligation 70,725 61,552 Accounts payable 1,447,177 4,074,732 Accrued liabilities 5,468,849 6,179,975 Deferred revenue   861,081     706,892   Total current liabilities 8,472,832 12,523,151 Long-term deferred rent 1,570,377 1,507,814 Long-term debt — 4,375,000 Long-term lease obligation   39,582     45,922   Total liabilities   10,082,791     18,451,887   Commitments and contingencies Stockholders’ equity: Preferred stock, par value $ 0.001, 1,321,514 shares authorized, issued and outstanding at December 31, 2014 and June 30, 2015 1,322 1,322 Common stock, par value $ 0.001, 100,000,000 shares authorized, 15,110,924 and 27,558,569 shares issued, 15,088,199 and 27,505,917 shares outstanding at December 31, 2014 and June 30, 2015 15,541 28,052 Less treasury stock at cost, 22,725 and 52,650 shares at December 31, 2014 and June 30, 2015 (32,221 ) (65,334 ) Additional paid-in capital 64,147,666 80,734,306 Accumulated deficit   (46,630,651 )   (51,466,953 ) Total stockholders’ equity   17,501,657     29,231,393   Total liabilities and stockholders’ equity $ 27,584,448   $ 47,683,280      

Luna Innovations Incorporated

Consolidated Statements of Cash Flows

        Six Months Ended June 30, 2015 2014     2015 (unaudited) Cash flows used in operating activities Net income/(loss) $ 7,624,385 $ (4,795,760 ) Adjustments to reconcile net income/(loss) to net cash used in operating activities Depreciation and amortization 336,564 824,251 Share-based compensation 488,593 571,439 Bad debt expense — 10,375 Gain on sale of discontinued operations, net of income taxes (9,370,799 ) — Tax benefit from utilization of loss from current year operations (1,163,301 ) — Change in assets and liabilities Accounts receivable (73,857 ) (335,811 ) Inventory (6,796 ) (1,345,687 ) Other current assets 72,141 (358,794 ) Other assets 37,584 — Accounts payable and accrued expenses (761,149 ) (1,271,686 ) Deferred revenue   (299,712 )   (154,189 ) Net cash used in operating activities   (3,116,347 )   (6,855,862 ) Cash flows provided by investing activities Acquisition of property and equipment (135,136 ) (50,175 ) Intangible property costs (138,118 ) (123,578 ) Proceeds from sale of discontinued operations, net of fees 10,927,268 — Cash from merger with Advanced Photonix, Inc.   —     374,517   Net cash provided by investing activities   10,654,014     200,764   Cash flows (used in)/provided by financing activities Payments on capital lease obligations (32,810 ) (36,406 ) Payments of debt obligations (750,000 ) (5,962,355 ) Proceeds from long-term debt obligation — 6,000,000 Purchase of treasury stock (32,221 ) (33,113 ) Proceeds from the exercise of options and warrants   173,796     82,516   Net cash (used in)/provided by financing activities   (641,235 )   50,642   Net increase in cash or cash equivalents 6,896,432 (6,604,456 ) Cash and cash equivalents-beginning of period   7,778,541     14,116,969   Cash and cash equivalents-end of period $ 14,674,973   $ 7,512,513      

Luna Innovations Incorporated

Reconciliation of Net (Loss)/Income to EBITDA and Adjusted EBITDA

        Three Months Ended June 30,     Six Months Ended June 30, 2014     2015     2014     2015 (unaudited)     (unaudited) Net (loss)/income $ (915,839 )     $ (2,168,605 ) $ 7,624,385     $ (4,795,760 ) Less (loss)/income from discontinued operations, net of income taxes   (330,716 )   —     9,342,723     —   Net loss from continuing operations (585,123 ) (2,168,605 ) (1,718,338 ) (4,795,760 ) Interest expense 27,302 49,966 59,667 59,103 Tax (benefit)/expense (375,983 ) — (1,145,173 ) 2,808 Depreciation and amortization   134,259     659,170     336,564     824,251   EBITDA (799,545 ) (1,459,469 ) (2,467,280 ) (3,909,598 ) Share-based compensation 257,654 300,362 488,593 571,439 Non-recurring charges   —     1,740,286     —     3,541,502   Adjusted EBITDA $ (541,891 ) $ 581,179   $ (1,978,687 ) $ 203,343    

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Luna Innovations IncorporatedInvestor Contact:Dale Messick, CFO1.540.769.8400IR@lunainc.com