LUNA Luna Innovations Incorporated

• Fourth consecutive quarter of year-over-year, double-digit revenue growth
• Total revenues of $10.7 million for the three months ended September 30, 2018, up 29% compared to the three months ended September 30, 2017
• Net income from continuing operations improved significantly to $1.3 million for the three months ended September 30, 2018, compared to $0.2 million for the prior year fiscal quarter

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

“Our third quarter represents the fourth consecutive quarter of double-digit top-line growth. We posted strong operating income, net income and adjusted EBITDA growth as well, and I’m extremely pleased with and proud of the way our teams are executing,” said Scott Graeff, President and Chief Executive Officer of Luna. “Since the end of fiscal 2017, we have been laser focused on executing our strategy, streamlining our businesses and driving growth in our core, fiber optic-based test and measurement business. I am particularly proud of Luna’s performance this quarter, which builds extremely well on the acquisition and divestitures we announced previously.”

Graeff continued, “We are committed to being prudent stewards of capital. Our most recent acquisition of Micron Optics, a leading provider of innovative optical components and laser-based measurement technology for approximately $5 million in cash with Micron 2017 revenues of approximately $8 million, underscores our ability to acquire assets that fit squarely within our core and deliver an excellent return on invested capital. While we continue to invest organically, we will always have our eye on external opportunities that fit well with our organization and can accelerate our growth.”

Third-Quarter and Nine Month Financial Summary

Total revenues for the three months ended September 30, 2018 were $10.7 million compared to $8.3 million for the three months ended September 30, 2017. Technology development revenues increased to $5.3 million for the three months ended September 30, 2018, compared to $4.6 million for the three months ended September 30, 2017. Total products and licensing revenues increased to $5.4 million for the three months ended September 30, 2018, compared to $3.7 million for the three months ended September 30, 2017. The increase in the products and licensing revenues for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 was due to continued growth in sales of Luna's fiber optic-based sensing products, including its ODiSI products and its Terahertz products. The increase in technology development revenues for the three months ended September 30, 2018 compared to the prior-year period was due to continued growth in government research advancing optical and biomedical technologies and Luna's success in winning these research contracts.

Gross profit was $4.7 million, or 44% of revenues, for the three months ended September 30, 2018, compared to gross profit of $3.3 million, or 40% of revenues, for the three months ended September 30, 2017.

Selling, general and administrative ("SG&A") expenses were $3.2 million for the three months ended September 30, 2018, compared to $2.8 million for the three months ended September 30, 2017. Research, development and engineering ("R&D") expenses were $0.9 million for the three months ended September 30, 2018, compared to $0.7 million for the three months ended September 30, 2017. The increase in SG&A expenses was due primarily to investment in Luna's sales force and other selling expenses associated with supporting the strong revenue growth in its products and licensing segment.

Net income from continuing operations improved to $1.3 million for the three months ended September 30, 2018, compared to $0.2 million for the three months ended September 30, 2017.

Net income attributable to common stockholders for the three months ended September 30, 2018 was $8.8 million, compared to $15.7 million for the three months ended September 30, 2017. The decline in net income attributable to common stockholders was primarily due to the gain of $15.1 million recognized on the sale of Luna's high-speed optical receiver business during the third quarter of 2017 compared to the gain of $7.6 million recognized on the sale of Luna's optoelectronic components business during the third quarter of 2018. Adjusted EBITDA was $0.9 million for the three months ended September 30, 2018, compared to $0.2 million for the three months ended September 30, 2017.

For the first nine months of fiscal 2018, Luna reported net income attributable to common stockholders of $9.9 million compared to $14.1 million for the first nine months of 2017. The year-over-year decline was again due primarily to the gain recognized on the sales of both Luna's high-speed optical receivers business in 2017 and its optoelectronic components business in 2018. Net income from continuing operations improved to $1.4 million, or $0.04 per diluted share, for the nine months ended September 30, 2018, compared to a net loss from continuing operations of $(1.3) million, or $(0.05) per diluted share, for the nine months ended September 30, 2017. Adjusted EBITDA was $1.5 million for the nine months ended September 30, 2018 compared to $(0.6) million for the nine months ended September 30, 2017. A reconciliation of net income to adjusted EBITDA can be found in the schedules included in this release.

2018 Fourth-Quarter and Year End Outlook (forward-looking statement):

Luna expects:

• Revenue in the range of $12 million to $12.5 million for the fourth quarter of fiscal 2018;
• Revenue in the range of $41.5 million to $42 million for full fiscal 2018;
• Net income per diluted share attributable to common stockholders of breakeven to $0.01 for the fourth quarter of fiscal 2018; and
• Net income per diluted share attributable to common stockholders in a range of $0.31 to $0.32 for full fiscal 2018.

The outlook above includes the expected operating results from Luna's acquisition of Micron Optics, Inc. on October 16, 2018, along with the associated acquisition costs. It does not include any future acquisitions, divestitures, or unanticipated events.

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

Luna will host a conference call today at 8:30 a.m. (EST), to discuss the financial results and provide a general business update. The third quarter earnings 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 9194505. 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-based test products for the telecommunications industry and distributed fiber optic-based 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, its projected financial results for the fourth quarter of fiscal 2018 and the full year ended December 31, 2018, 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 Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, and Luna's other periodic reports and 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 Nine Months Ended September 30, September 30, 2018   2017 2018   2017 (unaudited) (unaudited) Revenues: Technology development $ 5,315,861 $ 4,590,054 $ 15,418,919 $ 13,428,428 Products and licensing 5,371,165   3,712,657   13,960,003   9,791,213   Total revenues 10,687,026   8,302,711   29,378,922   23,219,641   Cost of revenues: Technology development 3,918,666 3,491,840 11,131,965 10,045,261 Products and licensing 2,079,749   1,469,961   5,381,333   3,994,044   Total cost of revenues 5,998,415   4,961,801   16,513,298   14,039,305   Gross profit 4,688,611   3,340,910   12,865,624   9,180,336   Operating expense: Selling, general and administrative 3,233,485 2,831,493 9,898,064 8,983,016 Research, development and engineering 873,629   662,142   2,513,497   1,961,770   Total operating expense 4,107,114   3,493,635   12,411,561   10,944,786   Operating income/(loss) 581,497   (152,725 ) 454,063   (1,764,450 ) Other income/(expense): Investment income 171,896 — 350,976 — Other income/(expense) 8,319 13,733 (16,001 ) 26,286 Interest expense (28,029 ) (54,847 ) (103,208 ) (178,879 ) Total other income/(expense) 152,186   (41,114 ) 231,767   (152,593 ) Income/(loss) from continuing operations before income taxes 733,683 (193,839 ) 685,830 (1,917,043 ) Income tax benefit (559,093 ) (388,787 ) (674,329 ) (662,049 ) Net income/(loss) from continuing operations 1,292,776   194,948   1,360,159   (1,254,994 ) Gain on sale, net of income taxes of $1,866,232 and $1,508,373 7,612,044 15,096,666 7,571,810 15,096,666

(Loss)/income from discontinued operations, net of income tax of $216,813, $(91,705), $235,312, and $249,184

(56,418 ) 465,710   1,132,436   337,904   Net income from discontinued operations 7,555,626   15,562,376   8,704,246   15,434,570   Net income 8,848,402 15,757,324 10,064,405 14,179,576 Preferred stock dividend 63,235   33,699   190,895   97,331   Net income attributable to common stockholders $ 8,785,167   $ 15,723,625   $ 9,873,510   $ 14,082,245   Net income/(loss) per share from continuing operations: Basic $ 0.05   $ 0.01   $ 0.05   $ (0.05 ) Diluted $ 0.04   $ 0.01   $ 0.04   $ (0.05 ) Net income per share from discontinued operations: Basic $ 0.27   $ 0.56   $ 0.32   $ 0.56   Diluted $ 0.23   $ 0.48   $ 0.27   $ 0.56   Net income per share attributable to common stockholders: Basic $ 0.31   $ 0.57   $ 0.36   $ 0.51   Diluted $ 0.27   $ 0.48   $ 0.30   $ 0.51   Weighted average common shares and common equivalent shares outstanding: Basic 27,901,631 27,692,539 27,547,955 27,611,905 Diluted 33,055,881 32,714,389 32,721,860 27,611,905       Luna Innovations Incorporated Consolidated Balance Sheets   September 30, December 31, 2018 2017 (unaudited) Assets Current assets: Cash and cash equivalents $ 47,144,719 $ 36,981,533 Accounts receivable, net 9,110,713 5,929,042 Receivable from sale of HSOR business 4,002,342 4,000,976 Contract assets 2,611,122 1,778,142 Inventory 5,462,414 4,634,781 Prepaid expenses and other current assets 730,368 1,140,999 Current assets held for sale —   4,336,105   Total current assets 69,061,678 58,801,578 Long-term contract assets 343,492 209,699 Property and equipment, net 2,678,411 2,854,641 Intangible assets, net 1,709,003 1,727,390 Other assets 1,995 1,995 Non-current assets held for sale —   2,627,333   Total assets $ 73,794,579   $ 66,222,636   Liabilities and stockholders’ equity Liabilities: Current liabilities: Current portion of long-term debt obligations $ 1,073,571 $ 1,833,333 Current portion of capital lease obligations 39,748 43,665 Accounts payable 2,297,457 2,111,077 Accrued liabilities 6,589,310 6,547,230 Contract liabilities 1,548,371 3,318,379 Current liabilities held for sale —   972,451   Total current liabilities 11,548,457 14,826,135 Long-term deferred rent 1,072,696 1,184,438 Long-term debt obligations — 603,007 Long-term capital lease obligations 83,405   71,275   Total liabilities 12,704,558   16,684,855   Commitments and contingencies Stockholders’ equity: Preferred stock, par value $0.001, 1,321,514 shares authorized, issued and outstanding at September 30, 2018 and December 31, 2017 1,322 1,322 Common stock, par value $0.001, 100,000,000 shares authorized, 29,189,506 and 28,354,822 shares issued, 27,936,401 and 27,283,918 shares outstanding at September 30, 2018 and December 31, 2017 30,081 29,186 Treasury stock at cost, 1,253,105 and 1,070,904 shares at September 30, 2018 and December 31, 2017 (2,116,640 ) (1,649,746 ) Additional paid-in capital 85,353,909 83,563,208 Accumulated deficit (22,178,651 ) (32,406,189 ) Total stockholders’ equity 61,090,021   49,537,781   Total liabilities and stockholders’ equity $ 73,794,579   $ 66,222,636       Luna Innovations Incorporated Consolidated Statements of Cash Flows   Nine Months Ended September 30, 2018   2017 (unaudited) Cash flows (used in)/ provided by operating activities Net income $ 10,064,405 $ 14,179,576 Adjustments to reconcile net income to net cash (used in)/provided by operating activities Depreciation and amortization 898,215 2,241,867 Share-based compensation 345,582 476,428 Bad debt expense 6,000 40,753 (Gain)/loss on disposal of fixed assets (1,000 ) 3,640 Gain on sale of discontinued operations, net of tax (7,571,810 ) (15,096,666 ) Tax benefit from utilization of net operating loss Change in assets and liabilities Accounts receivable (4,056,716 ) 2,127,794 Contract assets (957,012 ) — Inventory (992,075 ) (2,251,236 ) Other current assets 482,155 380,858 Accounts payable and accrued expenses 243,965 (1,581,608 ) Contract liabilities (1,906,117 ) — Deferred revenue —   59,980   Net cash (used in)/provided by operating activities (3,444,408 ) 581,386   Cash flows provided by investing activities Acquisition of property and equipment (272,039 ) (893,698 ) Intangible property costs (277,068 ) (392,485 ) Proceeds from sale of property and equipment 1,000 3,000 Proceeds from sales of discontinued operations 14,775,541   28,026,528   Net cash provided by investing activities 14,227,434   26,743,345   Cash flows used in financing activities Payments on capital lease obligations (33,064 ) (38,753 ) Payments of debt obligations (1,375,000 ) (1,374,999 ) Repurchase of common stock (466,894 ) (228,020 ) Proceeds from the exercise of options and warrants 1,255,118   29,020   Net cash used in financing activities (619,840 ) (1,612,752 ) Net increase in cash or cash equivalents 10,163,186 25,711,979 Cash and cash equivalents-beginning of period 36,981,533   12,802,458   Cash and cash equivalents-end of period $ 47,144,719   $ 38,514,437         Luna Innovations Incorporated Reconciliation of Net Income to EBITDA and Adjusted EBITDA   Three Months Ended Nine Months Ended September 30,   September 30, 2018   2017   2018   2017 (unaudited) (unaudited) Net income $ 8,848,402 $ 15,757,324 $ 10,064,405 $ 14,179,576 Less income from discontinued operations, net of income taxes 7,555,626     15,562,376   8,704,246     15,434,570   Net income/(loss) from continuing operations 1,292,776 194,948 1,360,159 (1,254,994 ) Interest expense 28,029 54,847 103,208 178,879 Investment income (171,896 ) — (350,976 ) — Tax benefit (559,093 ) (388,787 ) (674,329 ) (662,049 ) Depreciation and amortization 238,002   208,958   711,144   644,001   EBITDA 827,818 69,966 1,149,206 (1,094,163 ) Share-based compensation 117,823   151,672   345,582     476,428   Adjusted EBITDA $ 945,641   $ 221,638   $ 1,494,788     $ (617,735 )  

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Investors:Jane BombaLuna Innovations IncorporatedPhone: 303-829-1211IR@lunainc.comorSally J. CurleyLuna Innovations Incorporated614-530-3002IR@lunainc.com