Luna Innovations Incorporated (NASDAQ: LUNA), a global leader in advanced optical technology, today reported record financial results for the three and six months ended June 30, 2018.

  • Fifth consecutive quarter of year-over-year revenue growth and positive net income from continuing operations
  • Total revenues of $13.8 million for the three months ended June 30, 2018, up 22% compared to the three months ended June 30, 2017
  • Net income improved significantly to $1.1 million for the three months ended June 30, 2018, compared to $(0.2) million for the prior-year fiscal quarter
  • Adjusted EBITDA improved to $1.3 million for the three months ended June 30, 2018 compared to $0.6 million for the prior-year fiscal quarter

Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") is a non-GAAP financial metric used by management to measure operating performance. This term is defined elsewhere in this release. Please see schedules appearing later in this release for reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures.

“I’m very proud of the Luna team for driving the businesses to another strong quarter of growth,” said Scott Graeff, President and Chief Executive Officer of Luna. “The double-digit revenue percentage increases we saw across our business segments led to strong revenue growth year-over-year, and we achieved positive net income from continuing operations for a record fifth consecutive quarter.”

In a separate release issued today, Luna also announced it has sold its Optoelectronic Solutions business to OSI Optoelectronics, Inc. a subsidiary of OSI Systems, Inc., a leader in the development and manufacture of optoelectronic OEM and custom solutions for leading technologies and industries.

“As we’ve mentioned previously, we are well positioned to drive growth in Luna’s core fiber optic-based test and measurement business to better serve this rapidly expanding market, which is projected to grow to more than $9 billion by 2025,” Graeff continued. “Divesting our Optoelectronics Solutions business to an industry leader such as OSI allows us to focus on our core strengths and competitive advantages, as well as underscores our overall reputation for technological excellence. Culturally, the divestiture is a great fit with OSI, and we thank all of the Optoelectronic Solutions employees for their many contributions while they were part of the Luna team.”

Second-Quarter and Six-Month Financial Summary

Total revenues for the three months ended June 30, 2018 were $13.8 million compared to $11.3 million for the three months ended June 30, 2017. Technology development revenues increased 19% to $5.5 million for the three months ended June 30, 2018, compared to $4.6 million for the three months ended June 30, 2017. Total products and licensing revenues increased 24% to $8.3 million for the three months ended June 30, 2018, compared to $6.7 million for the three months ended June 30, 2017. The increase in the products and licensing revenues for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 was partially due to a 146% increase in sensing equipment, which includes Luna's ODiSI products. The increase in technology development revenues for the three months ended June 30, 2018 compared to the prior-year period was due to continued growth in government research in advancing optical and bio-medical technologies and Luna's success in winning these research contracts.

Gross profit was $5.7 million, or 41% of revenues, for the three months ended June 30, 2018, compared to gross profit of $4.4 million, or 39% of revenues, for the three months ended June 30, 2017.

Selling, general and administrative ("SG&A") expenses were $3.8 million for the three months ended June 30, 2018, compared to $3.4 million for the three months ended June 30, 2017. Research, development and engineering ("R&D") expenses were $1.0 million for the three months ended June 30, 2018, compared to $0.8 million for the three months ended June 30, 2017. The increase in SG&A and in R&D expenses were due partially to the hiring of additional sales and marketing professionals as well as engineers in the Lightwave division, Luna's fiber optic test and measurement business.

Net income from continuing operations improved to $1.1 million for the three months ended June 30, 2018, compared to $0.1 million for the three months ended June 30, 2017.

Net income attributable to common stockholders for the three months ended June 30, 2018 was $1.0 million, compared to a net loss attributable to common stockholders of $(0.3) million for the three months ended June 30, 2017. Adjusted EBITDA was $1.3 million for the three months ended June 30, 2018, compared to $0.6 million for the three months ended June 30, 2017.

For the first six months of fiscal 2018, Luna reported net income of $1.2 million compared to a net loss of $(1.6) million. Net income from continuing operations improved by $2.0 million, to $1.2 million, or $0.04 per share, for the six months ended June 30, 2018, compared to a net loss from continuing operations of $(0.8) million, or $(0.03) per share, for the six months ended June 30, 2017. Adjusted EBITDA was $1.9 million for the six months ended June 30, 2018 compared $0.4 million for the six months ended June 30, 2017. A reconciliation of net income/(loss) to adjusted EBITDA can be found in the schedules included in this release.

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 8:30 am (EDT) today to discuss its financial results for the three and six months ended June 30, 2018, the sale of the Optoelectronic Solutions business and other 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 9985726. 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-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 its growth potential, the growth of the fiber optic-based test and measurement market, and its business focus. 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, failure of target market to grow and expand, technological and strategic 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 June 30,   Six Months Ended June 30, 2018   2017 2018   2017 (unaudited) (unaudited) Revenues: Technology development $ 5,466,281 $ 4,602,272 $ 10,103,056 $ 8,838,375 Products and licensing 8,306,367   6,690,759   15,862,763   12,541,554   Total revenues 13,772,648   11,293,031   25,965,819   21,379,929   Cost of revenues: Technology development 3,945,126 3,443,954 7,298,628 6,553,423 Products and licensing 4,155,054   3,482,867   7,968,605   6,583,913   Total cost of revenues 8,100,180   6,926,821   15,267,233   13,137,336   Gross profit 5,672,468   4,366,210   10,698,586   8,242,593   Operating expense: Selling, general and administrative 3,767,456 3,367,716 7,577,072 7,089,889 Research, development and engineering 1,003,863   818,891   2,105,352   1,747,662   Total operating expense 4,771,319   4,186,607   9,682,424   8,837,551   Operating income/(loss) 901,149   179,603   1,016,162   (594,958 ) Other income/(expense): Investment income 100,846 — 175,756 — Other income/(expense) 1,187 (1,225 ) 2,583 (869 ) Interest expense (33,988 ) (60,386 ) (75,234 ) (124,760 ) Total other income/(expense) 68,045   (61,611 ) 103,105   (125,629 ) Income/(loss) from continuing operations before income taxes 969,194 117,992 1,119,267 (720,587 ) Income tax (benefit)/expense (98,133 ) 40,937   (96,736 ) 67,627   Net income/(loss) from continuing operations 1,067,327 77,055 1,216,003 (788,214 ) Loss from discontinued operations, net of income tax of $0 —   (298,817 ) —   (789,534 ) Net loss from discontinued operations —   (298,817 ) —   (789,534 ) Net income/(loss) 1,067,327 (221,762 ) 1,216,003 (1,577,748 ) Preferred stock dividend 63,235   29,536   127,660   63,632   Net income/(loss) attributable to common stockholders $ 1,004,092   $ (251,298 ) $ 1,088,343   $ (1,641,380 ) Net income/(loss) per share from continuing operations: Basic $ 0.04   $ —   $ 0.04   $ (0.03 ) Diluted $ 0.03   $ —   $ 0.04   $ (0.03 ) Net loss per share from discontinued operations: Basic $ —   $ (0.01 ) $ —   $ (0.03 ) Diluted $ —   $ (0.01 ) $ —   $ (0.03 ) Net income/(loss) per share attributable to common stockholders:

Basic

$ 0.04   $ (0.01 ) $ 0.04   $ (0.06 )

Diluted

$ 0.03   $ (0.01 ) $ 0.03   $ (0.06 ) Weighted average common shares and common equivalent shares outstanding: Basic 27,531,361 27,600,147 27,368,185 27,570,919 Diluted 31,506,745 32,579,379 31,257,277 27,570,919     Luna Innovations Incorporated Consolidated Balance Sheets       December 31, June 30, 2018 2017 (unaudited) Assets Current assets: Cash and cash equivalents $ 33,292,800 $ 36,981,533 Accounts receivable, net 9,385,772 7,869,168 Receivable from sale of HSOR business 4,001,833 4,000,976 Contract assets 3,231,770 1,778,142 Inventory 6,906,998 6,951,110 Prepaid expenses and other current assets 1,054,984   1,220,650   Total current assets 57,874,157 58,801,579 Long-term contract assets 308,093 209,699 Property and equipment, net 3,323,749 3,453,741 Intangible assets, net 3,137,083 3,237,593 Goodwill 502,000 502,000 Other assets 18,024   18,024   Total assets $ 65,163,106   $ 66,222,636   Liabilities and stockholders’ equity Liabilities: Current liabilities: Current portion of long-term debt obligations $ 1,527,828 $ 1,833,333 Current portion of capital lease obligations 34,661 43,665 Accounts payable 3,787,701 2,962,863 Accrued liabilities 5,554,481 6,557,649 Contract liabilities 1,400,922   3,428,625   Total current liabilities 12,305,593 14,826,135 Long-term deferred rent 1,109,397 1,184,438 Long-term debt obligations — 603,007 Long-term capital lease obligations 54,970   71,275   Total liabilities 13,469,960   16,684,855   Commitments and contingencies Stockholders’ equity: Preferred stock, par value $0.001, 1,321,514 shares authorized, issued and outstanding at June 30, 2018 and December 31, 2017 1,322 1,322 Common stock, par value $0.001, 100,000,000 shares authorized, 29,025,529 and 28,354,822 shares issued, 27,772,424 and 27,283,918 shares outstanding at June 30, 2018 and December 31, 2017 29,897 29,186 Treasury stock at cost, 1,253,105 and 1,070,904 shares at June 30, 2018 and December 31, 2017 (2,116,640 ) (1,649,746 ) Additional paid-in capital 84,742,385 83,563,208 Accumulated deficit (30,963,818 ) (32,406,189 ) Total stockholders’ equity 51,693,146   49,537,781   Total liabilities and stockholders’ equity $ 65,163,106   $ 66,222,636       Luna Innovations Incorporated Consolidated Statements of Cash Flows     Six Months Ended June 30, 2018   2017 (unaudited) Cash flows used in operating activities Net income/(loss) $ 1,216,003 $ (1,577,748 ) Adjustments to reconcile net income/(loss) to net cash (used in)/provided by operating activities Depreciation and amortization 622,577 1,753,748 Share-based compensation 212,149 321,756 Bad debt expense 6,000 40,753 Gain on disposal of fixed assets (1,000 ) (670 ) Change in assets and liabilities Accounts receivable (1,522,604 ) 1,433,014 Contract assets (645,824 ) (326,333 ) Inventory (482,194 ) (1,170,519 ) Other current assets 164,809 325,005 Accounts payable and accrued expenses (253,372 ) (894,315 ) Contract liabilities (2,053,566 ) (215,555 )

Net cash used in operating activities

(2,737,022 ) (314,321 ) Cash flows used in investing activities Acquisition of property and equipment (198,012 ) (796,217 ) Intangible property costs (185,909 ) (318,942 ) Proceeds from sale of property and equipment 1,000   3,000   Net cash used in investing activities (382,921 ) (1,112,159 ) Cash flows used in financing activities Payments on capital lease obligations (25,309 ) (25,611 ) Payments of debt obligations (916,665 ) (916,666 ) Repurchase of common stock (466,894 ) (143,266 ) Proceeds from the exercise of options and warrants 840,078   820   Net cash used in financing activities (568,790 ) (1,084,723 ) Net decrease in cash or cash equivalents (3,688,733 ) (2,511,203 ) Cash and cash equivalents-beginning of period 36,981,533   12,802,458   Cash and cash equivalents-end of period $ 33,292,800   $ 10,291,255       Luna Innovations Incorporated Reconciliation of Net Income/(Loss) to EBITDA and Adjusted EBITDA     Three Months Ended June 30,   Six Months Ended June 30, 2018   2017   2018   2017 (unaudited)   (unaudited) Net income/(loss) $ 1,067,327 $ (221,762 ) $ 1,216,003 $ (1,577,748 )

Less loss from discontinued operations, net of income taxes

—     (298,817 ) —     (789,534 ) Net income/(loss) from continuing operations 1,067,327 77,055 1,216,003 (788,214 ) Interest expense 33,988 60,386 75,234 124,760 Investment income (100,846 ) — (175,756 ) — Tax expense (98,133 ) 40,937 (96,736 ) 67,627 Depreciation and amortization 314,725   285,253   622,577   646,145   EBITDA 1,217,061 463,631 1,641,322 50,318 Share-based compensation 117,823   151,672   212,149     321,756   Adjusted EBITDA $ 1,334,884   $ 615,303   $ 1,853,471     $ 372,074    

Luna Innovations IncorporatedJane Bomba, 1-303-829-1211IR@lunainc.com

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