LUNA Luna Innovations Incorporated

Net loss improved to $(1.4) million for the three months ended March 31, 2017 compared to $(1.5) million for the three months ended March 31, 2016

Luna Innovations Incorporated (NASDAQ: LUNA) today announced its financial results for the three months ended March 31, 2017.

For the three months ended March 31, 2017, Luna reported revenues of $13.1 million and a net loss of $(1.4) million compared to revenues of $14.0 million and a net loss of $(1.5) million for the three months ended March 31, 2016. Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") was $0.1 million for the three months ended March 31, 2017 and 2016. A reconciliation of net loss to Adjusted EBITDA can be found in the schedules included in this release.

“As we described last quarter, with the transition to a new vendor managed inventory arrangement with our largest customer in Asia as of January 1, 2017, we shipped fewer of our 100G integrated coherent receivers during the first quarter of 2017 than we did in the first quarter of 2016. As a result, our overall products and licensing revenue declined year over year," said My Chung, president and chief executive officer of Luna. "We anticipate the market for 100G products to return to significant growth in the second half of this year, driven by the build-out of metro networks in China and the adoption of our second generation 100G integrated coherent receivers. We remain focused on the execution of our key strategic growth initiatives, and continue to be excited about the growth opportunities they provide for the full year of 2017 and beyond."

First Quarter Financial Summary

Total revenues for the three months ended March 31, 2017 were $13.1 million compared to $14.0 million for the three months ended March 31, 2016. Technology development revenues increased 15% to $4.3 million for the three months ended March 31, 2017, compared to $3.7 million for the three months ended March 31, 2016. Products and licensing revenues were $8.8 million for the three months ended March 31, 2017, compared to $10.3 million for the three months ended March 31, 2016. The decline in products and licensing revenues year over year resulted primarily from lower sales of 100G receivers in Asia compared to the first quarter of the previous year as Luna transitioned to a new vendor managed inventory arrangement with its largest customer in that region.

Gross profit was $4.7 million, or 36% of revenues, for the three months ended March 31, 2017, compared to gross profit of $4.8 million, or 35% of revenues, for the three months ended March 31, 2016.

Selling, general and administrative expenses were $4.5 million for the three months ended March 31, 2017, compared to $4.6 million for the three months ended March 31, 2016.

Research, development and engineering expenses decreased to $1.4 million for the three months ended March 31, 2017 compared to $1.6 million for the three months ended March 31, 2016.

Operating loss improved to $(1.3) million for the three months ended March 31, 2017, compared to an operating loss of $(1.4) million for the three months ended March 31, 2016. Net loss attributable to common stockholders improved to $(1.4) million for the three months ended March 31, 2017, compared to a net loss attributable to common stockholders of $(1.5) million for the three months ended March 31, 2016. Adjusted EBITDA was unchanged at $(0.1) million for the three months ended March 31, 2017 and 2016.

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 5:00 p.m. (EDT) today to discuss its financial results for the three months ended March 31, 2017, and 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 18890708. 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 speed optoelectronics and 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 Luna’s future financial performance, the significant growth of the market for Luna's 100G products in the second half of 2017, the adoption of Luna's second generation 100G integrated coherent receivers, and additional potential growth opportunities. 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, technological 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 March 31, 2017   2016 (unaudited) Revenues: Technology development $ 4,276,448 $ 3,723,262 Products and licensing 8,841,936   10,263,753   Total revenues 13,118,384   13,987,015   Cost of revenues: Technology development 3,222,354 2,846,723 Products and licensing 5,220,775   6,296,685   Total cost of revenues 8,443,129   9,143,408   Gross profit 4,675,255   4,843,607   Operating expense: Selling, general and administrative 4,495,701 4,645,282 Research, development and engineering 1,444,828   1,550,491   Total operating expense 5,940,529   6,195,773   Operating loss (1,265,274 ) (1,352,166 ) Other income (expense): Other income, net 351 3,940 Interest expense (64,374 ) (86,173 ) Total other expense (64,023 ) (82,233 ) Loss before income taxes (1,329,297 ) (1,434,399 ) Income tax expense 26,690   25,175   Net loss (1,355,987 ) (1,459,574 ) Preferred stock dividend 34,096   21,210   Net loss attributable to common stockholders $ (1,390,083 ) $ (1,480,784 ) Net loss per share attributable to common stockholders: Basic and diluted $ (0.05 ) $ (0.05 ) Weighted average common shares and common equivalent shares outstanding: Basic and diluted 27,541,356   27,477,181      

Luna Innovations Incorporated

Consolidated Balance Sheets

  March 31, 2017 December 31, 2016 (unaudited) Assets Current assets: Cash and cash equivalents $ 12,105,934 $ 12,802,458 Accounts receivable, net 12,256,152 14,297,725 Inventory 8,722,670 8,370,235 Prepaid expenses and other current assets 1,536,003   1,627,175   Total current assets 34,620,759 37,097,593 Property and equipment, net 6,575,200 6,780,838 Intangible assets, net 8,280,903 8,681,263 Goodwill 2,348,331 2,348,331 Other assets 68,778   88,948   Total assets $ 51,893,971   $ 54,996,973   Liabilities and stockholders’ equity Liabilities: Current Liabilities: Current portion of long-term debt obligations $ 1,833,333 $ 1,833,333 Current portion of capital lease obligations 53,043 52,128 Accounts payable 3,147,754 4,466,192 Accrued liabilities 8,672,431 8,667,100 Deferred revenue 843,345   949,603   Total current liabilities 14,549,906 15,968,356 Long-term deferred rent 1,372,356 1,403,957 Long-term debt obligations 1,965,776 2,420,032 Long-term capital lease obligations 101,328   114,940   Total liabilities 17,989,366   19,907,285   Commitments and contingencies Stockholders’ equity: Preferred stock, par value $0.001, 1,321,514 shares authorized, issued and outstanding at March 31, 2017 and December 31, 2016 1,322 1,322 Common stock, par value $0.001, 100,000,000 shares authorized, 27,989,104 and 27,988,104 shares issued, 27,542,277 and 27,541,277 shares outstanding at March 31, 2017 and December 31, 2016 28,621 28,600 Treasury stock at cost, 446,827 shares at March 31, 2017 and December 31, 2016 (517,987 ) (517,987 ) Additional paid-in capital 82,656,937 82,451,958 Accumulated deficit (48,264,288 ) (46,874,205 ) Total stockholders’ equity 33,904,605   35,089,688   Total liabilities and stockholders’ equity $ 51,893,971   $ 54,996,973    

Luna Innovations Incorporated

Consolidated Statements of Cash Flows

  Three Months Ended March 31, 2017   2016 (unaudited) Cash flows provided by/(used in) operating activities Net loss $ (1,355,987 ) $ (1,459,574 ) Adjustments to reconcile net loss to net cash provided by/(used in) operating activities Depreciation and amortization 956,687 939,799 Share-based compensation 170,084 258,803 Bad debt expense 29,671 — Change in assets and liabilities Accounts receivable 2,011,902 (298,309 ) Inventory (352,435 ) 20,375 Other current assets 55,092 (376,642 ) Accounts payable and accrued expenses (1,313,107 ) (721,289 ) Deferred revenue (137,859 ) 92,259   Net cash provided by/(used in) operating activities 64,048   (1,544,578 ) Cash flows used in investing activities Acquisition of property and equipment (157,308 ) (138,099 ) Intangible property costs (133,054 ) (101,467 ) Net cash used in investing activities (290,362 ) (239,566 ) Cash flows used in financing activities Payments on capital lease obligations (12,697 ) (20,106 ) Payments of debt obligations (458,333 ) (458,334 ) Proceeds from the exercise of options 820   —   Net cash used in financing activities (470,210 ) (478,440 ) Net decrease in cash or cash equivalents (696,524 ) (2,262,584 ) Cash and cash equivalents-beginning of period 12,802,458   17,464,040   Cash and cash equivalents-end of period $ 12,105,934   $ 15,201,456    

Luna Innovations Incorporated

Reconciliation of Net Loss to EBITDA and Adjusted EBITDA

  Three Months Ended March 31, 2017   2016 (unaudited) Net loss $ (1,355,987 ) $ (1,459,574 ) Interest expense 64,374 86,173 Tax expense 26,690 25,175 Depreciation and amortization 956,687   939,799   EBITDA (308,236 ) (408,427 ) Share-based compensation 170,084 258,803 Non-recurring merger-related charges —   —   Adjusted EBITDA $ (138,152 ) $ (149,624 )

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Investor Contact:Luna Innovations IncorporatedDale Messick, CFO, 1 540-769-8400IR@lunainc.com