Luna Innovations, Inc. (NASDAQ:LUNA) Q3 2020 Earnings Conference Call November 9, 2020 5:00 PM ET Company Participants Allison Woody - Director of Administration Scott Graeff - President & Chief Executive Officer Gene Nestro - Chief Financial Officer Brian Soller - Senior Vice President & General Manager-Lightwave Division James Garrett - Senior Vice President & General Manager of Technology Development Conference Call Participants Barry Sine - Spartan Capital Securities Jim Marrone - Singular Research Dave ...

Revenue Performance - Total revenues for the three months ended September 30, 2020, were $21.05 million, representing a 14% increase from $18.39 million in the same period of 2019[127]. - Lightwave segment revenues increased by 17% to $15.35 million for the three months ended September 30, 2020, compared to $13.09 million in 2019[127]. - Luna Labs segment revenues grew by 8% to $5.7 million for the three months ended September 30, 2020, up from $5.3 million in 2019[127]. - Total revenues for the nine months ended September 30, 2020, increased by $5.7 million, or 11%, to $56.8 million compared to $51.0 million for the same period in 2019[139]. - Lightwave segment revenues for the nine months ended September 30, 2020, increased by $4.7 million, or 13%, to $39.8 million compared to $35.1 million for the same period in 2019[139]. - Total revenues for the three months ended September 30, 2020, increased by $2.7 million, or 14%, to $21.1 million compared to $18.4 million for the same period in 2019[127]. Segment Contributions - The Lightwave segment accounted for 73% of total revenues for the three months ended September 30, 2020, while the Luna Labs segment represented 27%[111][118]. - Lightwave segment revenues for the three months ended September 30, 2020 were $15.4 million, representing 73% of total revenues, compared to $13.1 million and 71% for the same period in 2019[111]. - Luna Labs segment revenues for the three months ended September 30, 2020 were $5.7 million, accounting for 27% of total revenues, compared to $5.3 million and 29% in 2019[114]. Backlog Information - The approximate value of the Lightwave segment backlog was $21.6 million at September 30, 2020, compared to $16.1 million at December 31, 2019[113]. - The Luna Labs segment backlog was approximately $24.4 million at September 30, 2020, down from $31.3 million at December 31, 2019[114]. - Total backlog for the Lightwave segment was approximately $21.6 million as of September 30, 2020, up from $16.1 million at December 31, 2019[113]. - Total backlog for the Luna Labs segment was approximately $24.4 million as of September 30, 2020, down from $31.3 million at December 31, 2019[114]. Financial Performance - Overall gross margin increased to 52% for the three months ended September 30, 2020, compared to 50% for the same period in 2019[133]. - Income from continuing operations before income taxes was $2.3 million for the three months ended September 30, 2020, compared to $1.6 million for the same period in 2019[137]. - Gross profit for the three months ended September 30, 2020, increased by $1.7 million, or 18%, to $10.9 million, resulting in a gross margin of 52% compared to 50% in the prior year[131][133]. - Total operating expenses for the three months ended September 30, 2020, increased by $0.9 million, or 12%, to $8.7 million, primarily due to increased selling, general, and administrative expenses[134]. - Total operating expenses for the nine months ended September 30, 2020, increased by $1.2 million, or 5%, to $24.4 million compared to $23.2 million for the same period in 2019[145]. - Overall gross margin for the nine months ended September 30, 2020, increased to 51% compared to 49% for the same period in 2019, attributed to a favorable revenue mix[144]. Cash Flow and Liquidity - Cash and cash equivalents were $26.4 million as of September 30, 2020[152]. - Net cash provided by operating activities for the nine months ended September 30, 2020 was $0.1 million, a decrease of $0.988 million compared to $1.1 million in the same period of 2019[154]. - Net cash provided by investing activities for the nine months ended September 30, 2020 was $0.29 million, a significant improvement from a net cash outflow of $19.7 million in the same period of 2019[157]. - Net cash provided by financing activities for the nine months ended September 30, 2020 was $1.029 million, compared to a net cash outflow of $2.434 million in 2019, reflecting a positive change of $3.463 million[158]. - The company believes its cash balance and available credit will provide adequate liquidity for the next twelve months, despite potential impacts from the COVID-19 pandemic[153]. Acquisitions and Investments - The company acquired General Photonics Corporation for $19 million, with an additional earn-out provision of up to $1 million, completed in the second quarter of 2020[114]. - The company anticipates continued investment in product development and commercialization to drive future sales growth[108]. - The company continues to invest in product development and commercialization, anticipating increased product sales growth in the future[108]. Impact of COVID-19 - The impact of the COVID-19 pandemic has introduced uncertainties in supply chain management, but the company has managed minor impacts thus far[116]. - The impact of the COVID-19 pandemic on the company's operations remains uncertain, with minor supply chain impacts managed through existing inventory[116]. - There are no off-balance sheet arrangements as of September 30, 2020[159].

Financial Data and Key Metrics Changes - Total revenues for Q2 2020 increased by 4% to $18.6 million compared to $17.8 million in Q2 2019 [45] - Adjusted EBITDA rose to $3 million, up from $2.4 million in the same quarter last year [49] - Operating profit improved to $1.8 million in Q2 2020 compared to a loss of $1 million in Q2 2019 [48] Business Line Data and Key Metrics Changes - The Lightwave segment saw a 3% year-over-year revenue increase to $12.9 million, driven by the sensing business [17][45] - Luna Labs reported total revenues of $5.6 million in Q2 2020, representing a 7% increase compared to the prior year [34][45] - Gross margin improved to over 51% in Q2 2020, up from approximately 49% in Q2 2019 [45] Market Data and Key Metrics Changes - Demand in military aerospace and infrastructure remained strong, while the automotive and commercial aerospace sectors were more significantly impacted by COVID-19 [28][102] - The communications test business experienced a slight decline in revenues year-over-year due to delays in capital spending [19][28] Company Strategy and Development Direction - The company continues to invest strategically in its business, including hiring new talent and implementing an ERP project to modernize operations [13][14] - The focus remains on leveraging growth in fiber optics and expanding international sales channels [21][22] - The company is actively pursuing digital marketing efforts to maintain customer engagement during the pandemic [30] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate the challenges posed by the pandemic, noting that no major disruptions to the supply chain are anticipated in the second half of the year [27][36] - The company tightened its 2020 revenue guidance to a range of $81 million to $83 million, reflecting a more optimistic outlook for the second half of the year [37][51] Other Important Information - The company hired 29 new employees in 2020, with about half in new positions and the rest as replacements [69][71] - The majority of revenues stemmed from the Lightwave segment, which accounted for approximately 70% of total revenues in Q2 2020 [46] Q&A Session Summary Question: Impact of COVID on revenue - Management confirmed that there were delays in purchase orders due to COVID-19, but these were not significant and orders were expected to come through in July [57][58] Question: Guidance for second half growth - Management explained that the second half guidance implies stronger growth due to delayed orders from the first half and the reopening of academic labs [60][64] Question: Employee headcount increase - The company reported hiring 29 employees, with a focus on sales and marketing roles to drive revenue growth [69][71] Question: M&A activity - Management indicated that they are actively pursuing M&A opportunities but emphasized the importance of finding the right fit and not overpaying [75][79] Question: Supply chain disruptions - Management noted that supply chain issues were manageable and did not expect significant impacts on product lines, including the OBR [90][91]

Financial Performance - Total revenues for the second quarter of 2020 were $186 million, up 4% year-over-year[3] - Lightwave revenue reached $129 million, a 3% increase year-over-year[3] - Luna Labs revenue increased to $56 million, representing a 7% growth year-over-year[3] - Operating income improved to $18 million, or 10% of total revenues, in Q2 2020, compared to $10 million, or 6% of total revenues, in Q2 2019[3] - Net income for the three months ended June 30, 2020, was $14 million, or $004 per fully diluted share, compared to $08 million, or $002 per fully diluted share, for the three months ended June 30, 2019[3] - Adjusted EBITDA increased to $30 million for the three months ended June 30, 2020, compared to $24 million for the three months ended June 30, 2019[3] Financial Position and Outlook - The company reaffirmed its 2020 outlook, tightening the range to $81 million to $83 million in total revenues[3] - The company has $912 million in total assets, including $265 million in cash and cash equivalents, and $448 million in working capital as of June 30, 2020[7] - The company maintains its FY2020 outlook with total revenues of $81 million to $83 million and Adjusted EBITDA of $10 million to $12 million[9] COVID-19 Impact and Response - The company took immediate action in mid-March to create a safer work environment, with many actions remaining in effect and new initiatives added[8] - The company has not had any staff reductions to date and does not anticipate any[8]

Revenue Performance - Lightwave segment revenues were $12.9 million for Q2 2020, a 3.2% increase from $12.5 million in Q2 2019, representing 70% of total revenues [106]. - Luna Labs segment revenues were $5.6 million for Q2 2020, up from $5.3 million in Q2 2019, accounting for 30% of total revenues [108]. - Total revenues for the three months ended June 30, 2020 increased by $762,000, or 4%, to $18.6 million compared to $17.8 million for the same period in 2019 [124]. - Lightwave segment revenues increased by $410,000, or 3%, to $12.9 million, driven primarily by growth in sales of sensing products [124]. - Luna Labs segment revenues increased by $352,000, or 7%, to $5.6 million, continuing a growth trend largely driven by Phase 2 SBIR awards [125]. - Total revenues for the six months ended June 30, 2020 increased by $3.1 million, or 9%, to $35.7 million compared to $32.6 million for the same period in 2019 [133]. - Lightwave segment revenues for the six months ended June 30, 2020 increased by $2.4 million, or 11%, to $24.5 million, primarily due to incremental revenues from acquired operations [133]. - Luna Labs segment revenues for the six months ended June 30, 2020 increased by $624,000, or 6%, to $11.2 million, driven by successes in Phase 2 SBIR awards [134]. Backlog Information - Total backlog for the Lightwave segment was approximately $21.3 million as of June 30, 2020, compared to $16.1 million at December 31, 2019 [108]. - Total backlog for the Luna Labs segment was approximately $21.0 million as of June 30, 2020, down from $31.3 million at December 31, 2019 [109]. - Funded backlog for the Lightwave segment is expected to generate $6.9 million in future revenue, while unfunded backlog is projected to yield $14.4 million [108]. - Funded backlog for the Luna Labs segment is expected to generate $18.7 million in future revenue, with an additional $2.2 million from unfunded backlog [109]. - The backlog for the Luna Labs segment was approximately $21.0 million as of June 30, 2020, down from $31.3 million at December 31, 2019, with expected future revenue recognition detailed in a breakdown [109]. Profitability and Expenses - Gross profit for the three months ended June 30, 2020 increased by $765,000, or 9%, to $9.5 million, resulting in a gross margin of 51% compared to 49% in the prior year [126][128]. - Overall gross margin for the six months ended June 30, 2020 increased to 50% compared to 48% for the same period in 2019 [138]. - Operating expenses for the three months ended June 30, 2020 decreased slightly by $31,000, remaining stable at $7.7 million [129]. - Operating expenses increased by $0.3 million, or 2%, to $15.7 million for the six months ended June 30, 2020, compared to $15.4 million for the same period in 2019 [139]. - Income from continuing operations before income taxes for the three months ended June 30, 2020 was $1.8 million, compared to $1.1 million for the same period in 2019 [132]. - Income from continuing operations before income taxes was $2.3 million for the six months ended June 30, 2020, compared to $0.3 million for the same period in 2019 [143]. Cash Flow and Liquidity - As of June 30, 2020, the company had total cash and cash equivalents of $26.5 million [145]. - Net cash provided by operating activities for the first six months of 2020 was $0.1 million, a decrease of $1.0 million compared to $1.1 million in 2019 [148]. - Net cash provided by investing activities in the first half of 2020 was $0.3 million, a significant improvement compared to a cash outflow of $19.5 million in 2019 [150]. - The company reported a net increase in cash and cash equivalents of $1.5 million for the first six months of 2020, compared to a decrease of $18.9 million in 2019, marking a positive change of $20.4 million [148]. - The company anticipates adequate liquidity to meet working capital needs over the next twelve months, despite potential impacts from the ongoing COVID-19 pandemic [147]. Acquisitions and Investments - The company acquired General Photonics Corporation for $19.0 million, with an additional earn-out provision of up to $1.0 million, completed in Q2 2020 [110]. - The company continues to invest in product development and commercialization, anticipating increased product sales growth in the future [107]. - The company expects revenues from product sales to continue to grow, particularly in the areas of sensing and test, measurement, and control fiber optic test platforms [107]. Discontinued Operations - Net loss from discontinued operations was $1.4 million for the six months ended June 30, 2020, related to the sale of the High Speed Optical Receiver business [144].

Financial Data and Key Metrics Changes - Total revenues for Q1 2020 increased by 16% to $17.1 million compared to $14.8 million in Q1 2019 [15][39] - Adjusted EBITDA for Q1 2020 was $1.6 million, up from $960,000 in Q1 2019 [43] - Gross margin improved by 320 basis points to approximately 49% in Q1 2020 compared to over 45% in Q1 2019 [15][40] - Net income from continuing operations for Q1 2020 was $0.3 million or $0.01 per share, down from $1.1 million in Q1 2019, which included a one-time tax benefit of $1.9 million [42] Business Line Data and Key Metrics Changes - The Lightwave division reported a 24% year-over-year increase in product revenues, driven by strong performance in the communications test segment [16] - The sensing segment saw a decline in total revenue for Q1 2020 compared to the prior year, with several large orders shifting to Q2 [20][26] - Luna Labs revenues increased by 3% year-over-year to $6.8 million in Q1 2020 [26] Market Data and Key Metrics Changes - The company expects a slowdown in the aerospace and automotive industries due to COVID-19, but does not anticipate a material impact on infrastructure, defense, and communications segments [25][56] - The company has not seen significant impacts on sales or the health of the sales pipeline within the Lightwave division as of now [25] Company Strategy and Development Direction - The company is focused on maintaining its skilled workforce during the pandemic to ensure operational continuity [10] - The strategy includes leveraging growth in fiber optics and continuing to invest in sales and engineering capabilities [21] - The company is actively exploring acquisition opportunities that may arise due to market stress caused by COVID-19 [60][62] Management's Comments on Operating Environment and Future Outlook - Management reaffirmed guidance for the full year, expecting total revenues of $81 million to $84 million, trending towards the lower end of the range [33][46] - The company has maintained a strong cash position of $26.3 million with no debt, allowing for flexibility in navigating the current environment [44][60] - Management emphasized the importance of adapting to the new business environment through virtual engagement with customers [24] Other Important Information - The company has not furloughed any employees or reduced compensation during the pandemic [30] - The annual shareholder meeting will be held virtually due to the pandemic [78] Q&A Session Summary Question: Impact of trade shows on revenue - Management noted that trade shows historically generate a significant portion of leads, estimated at around 40% [53][54] Question: COVID-19 impact on specific industries - Management indicated that the commercial aerospace segment is expected to be hit hard, but much of the work is in R&D for future products, which may not impact 2020 revenues significantly [55][56][57] Question: Cash balance and acquisition strategy - Management confirmed that the company is actively looking for acquisition opportunities, particularly those that may be under stress due to COVID-19 [60][62]

Financial Performance - Q1 2020 - Total revenues reached $17.1 million, a 16% increase year-over-year[3] - Products and licensing revenue increased by 26% year-over-year, reaching $10.3 million[3] - Technology development revenue increased by 3% year-over-year, reaching $6.8 million[3] - Adjusted EBITDA increased to $1.6 million, compared to $1.0 million for the same period in the previous year[3] - Operating income improved to $0.4 million, compared to a loss of ($0.9) million in Q1 2019[3] - Net income from continuing operations was $0.3 million, or $0.01 per fully diluted share[3] Financial Outlook - 2020 - The company reaffirmed its FY2020 outlook, guiding towards the lower end of the ranges, with total revenues of $81 million to $84 million and Adjusted EBITDA of $10 million to $12 million[3, 11] Balance Sheet - The company reported $85.0 million in total assets, including $26.3 million in cash and cash equivalents, and $41.9 million in working capital as of March 31, 2020[8]

Revenue Performance - Total revenues for the three months ended March 31, 2020, increased by $2.3 million, or 16%, to $17.1 million compared to $14.8 million for the same period in 2019[117]. - Revenues from the Products and Licensing segment rose by $2.1 million, or 26%, to $10.3 million, driven primarily by $1.8 million from the legacy business of General Photonics Corporation (GP) and growth in communications test instruments[117]. - Technology Development segment revenues increased by $0.2 million, or 3%, to $6.8 million, continuing a growth trend attributed to successes in Phase 2 SBIR awards and non-SBIR contracts[118]. - The Products and Licensing segment accounted for 60% of total revenues for the three months ended March 31, 2020, compared to 55% for the same period in 2019[106]. - The Technology Development segment represented 40% of total revenues for the three months ended March 31, 2020, down from 45% in the same period in 2019[107]. Backlog Information - The backlog for the Products and Licensing segment was approximately $14.3 million as of March 31, 2020, expected to be recognized as revenue in future periods[101]. - The Technology Development segment backlog was approximately $29.0 million as of March 31, 2020, with a significant portion expected to be recognized as revenue in the coming years[102]. - The backlog for the Products and Licensing segment was approximately $14.3 million as of March 31, 2020, down from $16.1 million at December 31, 2019[101]. - The Technology Development segment backlog was approximately $29.0 million at March 31, 2020, compared to $31.3 million at December 31, 2019[102]. Profitability and Expenses - Gross profit for the same period increased by $1.6 million, or 24%, to $8.4 million, resulting in a gross margin of 49%, up from 46% in 2019[122]. - For the three months ended March 31, 2020, the total cost of revenues increased by $0.7 million, or 9%, to $8.8 million compared to $8.1 million for the same period in 2019[119]. - Operating expenses rose by $0.3 million, or 4%, to $8.0 million, with selling, general and administrative expenses increasing by 3% and research, development, and engineering expenses increasing by 10%[123][124]. - Total operating expenses rose by $309,000, or 4%, to $7.974 million for the three months ended March 31, 2020, compared to $7.665 million in 2019[123]. - Research, development, and engineering expenses increased by $139,000, or 10%, to $1.597 million for the three months ended March 31, 2020[124]. Income and Loss - Income from continuing operations before income taxes was $0.5 million for the three months ended March 31, 2020, compared to a loss of $0.7 million for the same period in 2019[127]. - The net loss from discontinued operations was $1.4 million, primarily due to the sale of the High Speed Optical Receiver business[128]. Cash Flow and Financial Position - As of March 31, 2020, total cash and cash equivalents were $26.3 million, with an available Revolving Line of credit of up to $10.0 million[129][130]. - Net cash used in operating activities was $0.3 million, a decrease of $1.9 million compared to $1.6 million provided in the same period of 2019[132]. - Cash provided by investing activities was $0.4 million, significantly improved from a cash outflow of $19.3 million in the prior year, which included a $19.0 million acquisition[134]. - Net cash provided by financing activities was $1.2 million, primarily from the exercise of stock options[135]. - The company anticipates that its cash balance and available credit will meet its working capital needs over the next twelve months, although potential impacts from the COVID-19 pandemic are acknowledged[131]. - The company believes its cash balance and available credit will meet working capital needs over the next twelve months, despite potential impacts from the COVID-19 pandemic[131]. Strategic Initiatives - The company continues to invest in product development and commercialization, anticipating increased product sales growth in the future[100]. - The acquisition of General Photonics Corporation was completed for a total consideration of $19.0 million, with an additional potential earn-out of up to $1.0 million[102]. - The company is exploring growth through acquisitions of additional companies and complementary technologies[103]. - The company expects to continue investing in product development and commercialization to drive future sales growth[100]. COVID-19 Impact - The impact of the COVID-19 pandemic on operations remains uncertain, with minor supply chain impacts managed through existing inventory[104].

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 000-52008 LUNA INNOVATIONS INCORPORATED (Exact name of Registrant as Specified in its Charter) (Address of Principal Ex ...

Financial Performance - Q4 2019 - Total revenues reached $19.5 million, a 44% increase year-over-year[3] - Products and licensing revenue increased by 63% year-over-year, reaching $13.0 million[3] - Technology development revenue increased by 16% year-over-year, reaching $6.4 million[3] - Adjusted EBITDA doubled to $3.2 million, compared to $1.6 million in the same period of the previous year[3] - Net income from continuing operations was $2.1 million, or $0.07 per fully diluted share, compared to a loss of $0.1 million, or $0.00 per fully diluted share, in the same period of the previous year[3] Financial Performance - Full Year 2019 - Total revenues reached $70.5 million, a 64% increase year-over-year[5] - Products and licensing revenue increased by 103% year-over-year, reaching $44.5 million[5] - Technology development revenue increased by 24% year-over-year, reaching $26.0 million[5] - Adjusted EBITDA improved to $9.5 million, a 201% growth, compared to $3.1 million in the previous year[5] - Net income from continuing operations was $5.3 million, or $0.17 per fully diluted share, compared to $1.2 million, or $0.04 per fully diluted share, in the previous year[5] 2020 Financial Outlook - The company projects total revenues of $81 million to $84 million for fiscal year 2020[9] - The company projects Adjusted EBITDA of $10 million to $12 million for fiscal year 2020[9]