LUNA Luna Innovations Incorporated

Luna Innovations Incorporated (NASDAQ:LUNA) today announced its financial results for its second quarter ended June 30, 2007. As compared to the same quarter last year, revenues grew by 59%, from $4.9 million to $7.9 million, gross profit increased from $1.4 million to $2.9 million, and the loss per share declined from $0.37 to $0.21. Kent Murphy, Chairman and Chief Executive Officer, provided this overview: �While we are still in the early stages of realizing a return on our investments in the product side of our business, those investments are being validated by strong financial trends, including increasing revenues, substantially improved margins and more efficient cash usage, as well as the achievement of significant operating milestones. Our technology portfolio and contracts for additional development opportunities continue to expand - as do the product sales and licensing transactions that emerge from those contracts. The high-growth, higher-margin product and license revenues are becoming a larger percentage of our total revenues, increasing from 15% of total revenues in the second quarter of 2006 to 25% in this year�s second quarter. Product and license sales increased year-over-year by 163%, from $762,442 to $2.0 million, driving gross profit, as a percentage of revenue, from 29% in the second quarter of 2006 to 37% in our most recent quarter.� Murphy added, �We also achieved two important milestones in medical devices this past quarter. The first was the Food and Drug Administration (FDA) clearance of our emboli detection and classification system, the EDAC� QUANTIFIER, and second was the signing of a multi-year intellectual property licensing, development and supply agreement with Intuitive Surgical, the world leader in robotic-assisted minimally invasive surgery (MIS). �Now that the EDAC QUANTIFIER has received FDA clearance, we are pursuing our next steps for the device, which include certification of its manufacturing process so that it can be deployed in a clinical environment in the United States, and entering into a strategic marketing agreement with a third party distributor for the device. �Another important event was the announcement of our partnership with Intuitive Surgical. Upon successful completion of the multi-year development effort, Intuitive intends to integrate Luna�s shape sensing technology into its product line, which includes the da Vinci� Surgical System. Intuitive plans to broaden the application of its MIS approach to an expanding range of procedures, which represents a great, long-term growth opportunity for Luna. �In addition to medical devices, we are also developing nanotechnology that has potential pharmaceutical applications. In partnership with Virginia Commonwealth University, we have shown that carbon nanospheres are capable of blocking the allergic response in both human cell culture experiments and in mice. Although this technology is still in the early stages of development, we believe this discovery could potentially lead to new therapies for allergies using nanomaterials and the creation of an entirely new field of medicine we are calling nanoImmunology. In keeping with our business model, we intend to seek strategic partners to help further these developments.� Second Quarter Financial Highlights Total revenues for the second quarter of 2007 increased 59% compared to the second quarter of 2006. Product revenues represented over 25% of total revenues in the second quarter of 2007, compared to 15% in the second quarter of 2006. Product revenues grew 163% to approximately $2.0 million in the second quarter of 2007, compared to $762,442 in the second quarter of 2006. Gross profit for the second quarter of 2007 increased to $2.9 million, or 37% of revenues, from $1.4 million, or 29% of revenues, for the corresponding period of 2006. While operating expenses grew compared to last year, operating expenses as a percentage of revenue decreased from 86% in the second quarter of 2006, to 66% in the second quarter of 2007, and have remained consistent at a range of $5.2 million to $5.4 million for each of the past three quarters. The company reported a loss per share for the second quarter of 2007 of $0.21 per share, compared to a loss per share of $0.37 for the second quarter of 2006. On a sequential basis, the company�s cash and cash equivalents increased to approximately $13,933,000 at June 30, 2007, compared to approximately $13,889,000 at March 31, 2007. Cash flows for the second quarter included approximately $338,000 cash provided by operating activities, $472,000 cash used in investing activities, and $178,000 cash provided by financing activities. Cash flows from operating activities also included an increase of approximately $1.4 million in deferred revenues during the quarter. Business Highlights Technology Development Reinforced leadership position in harsh environment sensors by winning a $2.1 million contract with a U.S. government agency for the development of sensors and electronics that have the potential to be deployed in future transport vehicles and nuclear power plants. Awarded $1.6 million in continuation contracts for development of potential nanomaterial photonic applications, including increased solar cell efficiency, development of higher-speed telecommunication devices, and more sensitive medical diagnostic equipment. Published a paper in collaboration with Virginia Commonwealth University in the July 1, 2007, issue of the Journal of Immunology. The study is the first to demonstrate that carbon nanospheres are capable of blocking allergic response in human cell culture experiments and mice, setting the stage for the development of new potential therapies for allergies using nanomaterials. According to the Asthma and Allergy Foundation of America, allergy is the fifth leading chronic disease in the United States among all ages, and the third most common chronic disease among children under 18 years old. Healthcare Products Received FDA clearance to market the EDAC QUANTIFER for clinical use in the United States. Entered into a development and supply agreement with Intuitive Surgical, Inc. Under the terms of the multi-year agreement, Luna has agreed to develop and supply its fiber optic-based shape sensing and position tracking system for integration into Intuitive Surgical�s products, which includes the da Vinci� Surgical System. Instrumentation, Test & Measurement Products Booked twice as much business as compared to the same quarter of 2006 � receiving orders for more than $2.0 million and recognizing $1.2 million of revenues from shipment of optical instrumentation, test and measurement products. Received the largest order in the history of the company�s Luna Technologies division for multiple Optical Vector Analyzer systems. The purchase allows an optical components manufacturer to replace multiple test stands with a single Luna instrument and is estimated by the customer to reduce their cost of testing by over 80%. Outlook for Fiscal Year 2007 The company reiterates its guidance for continued strong growth in both its product and technology development divisions for the remainder of 2007. For fiscal year 2007, the company expects total revenue to be in the range of $30.0 million to $32.0 million, consisting of product and license revenue of $7.0 to $8.0 million and technology development revenue of $23.0 to $24.0 million. For the full year 2007, the company anticipates a net loss in the range of $9.0 to $9.5 million. For the third quarter of 2007, the company expects revenue of approximately $8.7 million and a net loss of approximately $2.3 million. The company plans to discuss its third quarter and fiscal year 2007 guidance on its investor conference call to be held later today. Conference Call Information As previously announced, Luna Innovations will conduct an investor conference call at 5:00 p.m. (EDT) today to discuss its second quarter financial results and expectations for the remainder of 2007. The call can be accessed by dialing 1.866.770.7146 domestically or 1.617.213.8068 internationally prior to the start of the call. The access code is 99587972. 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 Innovations website, http://www.lunainnovations.com, prior to the event. The webcast will be archived under the �Webcasts and Presentations� section of the Luna Innovations website for at least 30 days following the conference call. About Luna Innovations Luna Innovations Incorporated develops and manufactures new-generation products for the healthcare, telecommunications, energy and defense markets. Our products are used to measure, monitor, protect and improve critical processes in the markets we serve. Through its disciplined commercialization business model, Luna has become a recognized leader in transitioning science to solutions. Luna is headquartered in Roanoke, Virginia. Additional information can be found at www.lunainnovations.com. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 This press release includes information that constitutes �forward-looking statements� made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995, including but not limited to statements regarding, (i) expected realization of a return on investment in the company�s products, (ii) continued expansion of Luna�s technology portfolio and contracts for additional development opportunities; (iii) continued growth in higher-margin product and license revenues, (iv) the company�s plans to obtain certification for its EDAC product manufacturing process and entering into a strategic marketing agreement with a third-party distributor, (v) Intuitive�s plans to integrate Luna�s shape sensing technology into its product line pending successful completion of the multi-year development agreement, (vi) potential pharmaceutical applications for the company�s nanotechnology, including new potential therapies for allergies using nanomaterials and the creation of an entirely new field of medicine, (vii) the company�s plans to seek strategic partners to help further development of nanomaterial pharmaceuticals applications, (viii) potential deployment of the company�s sensor and electronic products in future transport vehicles and nuclear power plants, (ix) potential nanomaterial photonic applications, including increased solar cell efficiency, development of higher-speed telecommunication devices, and more sensitive medical diagnostic equipment, (x) the company�s guidance for continued strong growth in the both the product and technology development divisions for the remainder of 2007, and (xi) revenue and net loss guidance for the third quarter and full year 2007. The company attempts, whenever possible, to identify forward-looking statements by words such as �intends,� �will,� �plans,� �anticipates,� �expects,� �may,� �estimates,� �believes,� �should,� �projects,� or �continue,� or the negative of those words and other comparable words. Similarly, statements that describe the company�s business strategy, goals, prospects, opportunities, outlook, objectives, plans or intentions are also forward-looking statements. Actual events or results may differ materially from the expectations expressed in such forward-looking statements as a result of various factors, including risks and uncertainties, many of which are beyond the company�s control. Factors that could cause actual results to differ materially from the expectations expressed in such forward-looking statements include, but are not limited to: the company�s ability to manage its growth effectively; the company�s ability to transition its revenue mix from technology development revenues to product and licensing revenues; the company�s ability to successfully identify market needs for new products; the risk that company�s proprietary rights may be insufficient to protect its technologies, including potential claims by third parties that the company infringes their intellectual property rights; the company�s continued reliance on contract research, including government grants and contracts available only to small businesses, for a significant portion of its revenue; the risk that the company may become ineligible for small business government grants and contracts in the future; the effect of competition in its markets and changes in customer demand; the potential impact of federal audits and investigations; delay in obtaining clearance by the U.S. Food and Drug Administration or meeting other regulatory requirements, and failure to comply fully with such regulations; the company�s ability to secure third-party reimbursement for its healthcare products; continued difficulty in, or increased costs related to, hiring, training and retaining skilled employees; unanticipated manufacturing or supply problems; the potential for the company�s nanotechnology products to be perceived as harmful; a slowdown in the overall economy; and uncertainty in the global political environment. Additional factors that may affect the future results of the company are set forth in its annual and quarterly reports on Form 10-K and Form 10-Q, respectively, and other filings with the Securities and Exchange Commission (�SEC�), which are available at the SEC�s website at http://www.sec.gov, and at Luna Innovations� website at http://www.lunainnovations.com. These risk factors are updated from time to time through the filing of periodic reports with the SEC. The statements made in this press release are based on information available to the company as of the date of this release and Luna Innovations undertakes no obligation to update any of the forward-looking statements herein after the date of this press release. Luna Innovations Incorporated Consolidated Statements of Operations � � Three Months Ended Six Months Ended � June 30, June 30, 2007 � � 2006 � � 2007 � � 2006 � � (unaudited) (unaudited) (unaudited) (unaudited) Revenues: Contract research revenues $ 5,852,109 $ 4,170,273 $ 11,138,706 $ 8,091,212 Product and license revenues 2,003,171 � � 762,442 � � 3,786,747 � � 1,357,740 � Total revenues 7,855,280 4,932,715 14,925,453 9,448,952 Cost of revenues: Contract research costs 4,048,424 3,105,289 7,898,039 6,013,124 Product and license costs 911,768 � � 408,219 � � 1,712,189 � � 674,270 � Total cost of revenues 4,960,192 � � 3,513,508 � � 9,610,228 � � 6,687,394 � Gross Profit 2,895,088 1,419,207 5,315,225 2,761,558 Operating expense 5,185,965 � � 4,252,343 � � 10,400,984 � � 7,694,351 � Operating loss (2,290,877 ) � (2,833,136 ) � (5,085,759 ) � (4,932,793 ) Other income (expense) Other income � - 3,110 519 9,397 Interest income, net 113,107 � � 109,185 � � 225,375 � � 113,145 � Total other income 113,107 � � 112,295 � � 225,894 � � 122,542 � Loss before income taxes (2,177,770 ) (2,720,841 ) (4,859,865 ) (4,810,251 ) Income tax expense - � � - � � - � � - � Net loss $ (2,177,770 ) $ (2,720,841 ) $ (4,859,865 ) $ (4,810,251 ) Net loss per share: Basic $ (0.21 ) $ (0.37 ) $ (0.48 ) $ (0.72 ) Diluted $ (0.21 ) $ (0.37 ) $ (0.48 ) $ (0.72 ) Weighted average shares: Basic 10,136,446 � � 7,277,964 � � 10,053,371 � � 6,677,306 � Diluted 10,136,446 � � 7,277,964 � � 10,053,371 � � 6,677,306 � Luna Innovations Incorporated Consolidated Balance Sheets � June 30, December 31, � 2007 � � 2006 � � Assets (unaudited) Current assets Cash and cash equivalents $ 13,933,115 $ 17,866,753 Accounts receivable, net 7,999,979 7,233,406 Refundable income taxes 396,062 396,062 Inventory 1,334,619 843,294 Other current assets � 447,039 � � 503,703 � Total current assets 24,110,814 26,843,218 Property and equipment, net 6,271,336 5,730,094 Intangible assets, net 1,965,947 2,031,489 Deferred tax asset 600,000 600,000 Other assets � 12,355 � � 12,413 � Total assets $ 32,960,452 � $ 35,217,214 � Liabilities and stockholders' equity Current liabilities Current portion of capital lease obligation $ 58,708 $ 85,378 Current portion of long-term debt obligation - 214,955 Accounts payable 2,093,850 2,757,381 Accrued liabilities 4,367,025 3,627,277 Deferred credits � 2,268,262 � � 874,676 � Total current liabilities 8,787,845 7,559,667 Long-term capital lease obligation 12,039 27,873 Long-term debt obligation 5,000,000 5,000,000 Deferred credits and other long term liabilities � 604,418 � � 554,418 � Total liabilities � 14,404,302 � � 13,141,958 � Stockholders' equity: Preferred stock, par value $0.001, 5,000,000 shares authorized at March 31, 2007, no shares issued and outstanding - - Common stock, par value $0.001, 100,000,000 shares authorized, 10,022,254 and 9,911,546 shares issued and outstanding 10,250 9,912 Additional paid-in capital 32,926,183 31,585,762 Accumulated deficit � (14,380,283 ) � (9,520,418 ) Total stockholders' equity � 18,556,150 � � 22,075,256 � Total liabilities and stockholders' equity $ 32,960,452 � $ 35,217,214 � Luna Innovations Incorporated Consolidated Statements of Cash Flows � � Six months ended � June 30, 2007 � 2006 � � (unaudited) � (unaudited) Cash flows used in operating activities Net loss $ (4,859,865 ) $ (4,810,251 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 892,838 502,401 Share-based compensation 1,096,555 761,282 Change in assets and liabilities: Accounts receivable (766,573 ) 981,715 Inventory (491,325 ) - Other assets 56,721 (347,358 ) Accounts payable and accrued expenses 76,216 703,875 Deferred revenues 1,443,585 � (489,876 ) Net cash used in operating activities (2,551,848 ) (2,698,212 ) Cash flows used in investing activities Acquisition of property and equipment (1,171,747 ) (632,587 ) Intangible property costs (196,790 ) (197,300 ) Net cash used in investing activities (1,368,537 ) (829,887 ) Cash flows from financing activities Payments on debt obligations (214,955 ) - Payments on capital lease obligations (42,504 ) (49,899 ) Proceeds from issuance of common stock, net - 17,660,608 Proceeds from the exercise of options and warrants 244,206 � 79,028 � Net cash used in financing activities (13,253 ) 17,689,737 � Net change in cash (3,933,638 ) 14,161,638 Cash - beginning of period 17,866,753 � 12,514,839 � Cash - end of period $ 13,933,115 � $ 26,676,477 �