Luna Innovations Reports Second Quarter 2006 Results Luna Innovations Achieves 26% Revenue Growth for the Second Quarter 2006

    ROANOKE, Va., Aug. 10 /PRNewswire-FirstCall/ -- Luna Innovations
 Incorporated (Nasdaq:   LUNA) today announced its financial results for the
 quarter ended June 30, 2006.
     (Logo: )
     Revenues for the 2006 second quarter increased 26% to $4.9 million,
 from $3.9 million for the same quarter of 2005, reflecting growth in
 contract research revenues of approximately $0.3 million and product and
 license revenues of approximately $0.8 million. Gross profit increased to
 $1.4 million, or 29% of revenues, in the second quarter of 2006, from $1.1
 million, or 28% of revenues, in the second quarter of 2005. Operating
 expense increased to $4.3 million in the second quarter of 2006, from $1.0
 million in the second quarter of 2005. The increase in year over year
 operating expense reflects the company's strategy, begun in late 2005, to
 increase its product portfolio and product sales, which included the
 acquisition of Luna Technologies in September 2005, and hiring of twelve
 additional employees focused specifically on new product development,
 including nanotechnology and ultrasound-related product candidates.
 Operating expenses in the second quarter of 2006 also include an additional
 $0.4 million in share-based compensation expense, as well as administrative
 costs associated with the company's growing employee base and its
 transformation to a public company. Fifteen employees have also been added
 since the comparable prior year period in administrative positions
 including management, contracts, facilities, finance, and sales. As a
 result of these increases in operating expenses, the company incurred a
 loss from operations of $2.8 million in the second quarter of 2006, versus
 an income of $0.1 million for the prior year's comparable quarter.
     The net loss applicable to common stockholders for the second quarter
 of 2006 was $2.7 million, or $0.37 per share on a diluted basis, compared
 to a net income applicable to common stockholders of $0.04 million or $0.01
 per share, for the second quarter of the previous year.
     Kent Murphy, Chairman, President and Chief Executive Officer,
 commented, "Our contract backlog remains strong and continues to grow. In
 addition to achieving a growth rate of 7% in contract research revenues for
 the second quarter of 2006, our contract research backlog has grown over
 24% from the same period in 2005. As a result of this increased backlog, we
 have stepped- up our efforts to recruit the highly trained and skilled
 technical and professional individuals that we need to continue our
 contract revenue growth for the remainder of 2006."
     Murphy continued, "We remain excited about our investments in our
 products pipeline. These include products such as the Emboli Detection and
 Classification ("EDAC") blood circuit monitor, which we launched in the
 second quarter of 2006, the development of the next generation Distributed
 Sensing System, and other products with long term opportunity to support
 our growth."
     Business Highlights
     * Raised $17.7 million in net proceeds from the company's June 2, 2006,
       initial public offering.  These proceeds will allow the company to
       accelerate its process of researching and developing technologies in
       funding alliances with valued partners and then seeking to commercialize
       the most promising technologies.
     * Significantly improved the number of active Small Business Innovation
       Research (SBIR) Phase II contracts.  At the end of June 30, 2006, Luna
       Innovations had 28 active SBIR Phase II contracts, compared to 17 in
       same period of 2005, marking a 65% percent increase.
     * Launched the company's EDAC(TM) blood circuit monitor product in May
       2006 and have since started receiving orders for products.  Employing
       missile tracking algorithms originally developed for the defense
       industry, the system is designed to provide cardiothoracic surgeons,
       perfusionists and anesthesiologists with a means of accurately counting
       and classifying emboli in the blood stream.
     * Announced the appointment of Dale Messick to the role of Chief Financial
       Officer, and the appointment of Scott Graeff, Luna Innovations' former
       CFO, to the role of Chief Commercialization Officer.  Graeff will lead
       the company's product commercialization and business development
       efforts, while Messick will focus on the company's financial
     * Hired 38 new employees in the second quarter of 2006, including new
       sales team members, and materials science, optics, and life sciences
       professionals.  This brings the total number of new hires to date in
       2006 to 65, which includes 54 full-time and 11 part-time employees.
     Financial Highlights
     * Revenues for the second quarter of 2006 increased 26% compared to the
       second quarter of 2005 and 9% compared to the first quarter of 2006.
     * Product revenues represented over 15% of total revenues in the second
       quarter of 2006, versus 0% in the second quarter of 2005, and 13% in the
       first quarter of 2006.  Product revenues grew to approximately $0.8
       million in the second quarter of 2006, versus $0.6 million in the first
       quarter of 2006.
     * Gross profit for the second quarter of 2006 increased to $1.4 million,
       or 29% of revenues, from $1.1 million, or 28% of revenues, for the
       corresponding period of 2005.
     * The company reported a loss per share for the second quarter of 2006 of
       $0.37 per share, on a diluted basis, compared to earnings per share of
       $0.01 for the second quarter of 2005.
     * Cash and cash equivalents totaled $26.7 million at June 30, 2006,
       compared to $12.5 million at December 31, 2005.
     Conference Call Information
     As previously announced, Luna Innovations will conduct an investor
 conference call at 5:30 p.m. (EDT) today to discuss the company's second
 quarter 2006 financial results. The call can be accessed by dialing (866)
 713-8395 domestically or (617) 597-5309 internationally prior to the start
 of the call. The access code is 70216945. 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,, 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 (Nasdaq:   LUNA) researches, develops and commercializes
 innovative technologies in molecular technology and sensing solutions. Luna
 accelerates the process of bringing new and innovative products to market
 by focusing on technologies that can fulfill identified market needs and
 then takes these technologies from the applied research stage through
 commercialization. Since its inception, Luna has successfully developed
 products for the energy, telecommunications, life sciences and defense
 industries. Headquartered in Roanoke, Virginia, the company has research,
 development and manufacturing facilities in Blacksburg, Charlottesville,
 Hampton, and Danville, Virginia, and a sales office in McLean, Virginia.
 Additional information can be found at the company's website,
     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 (i) our contract backlog remains strong and continues to grow,
 (ii) our product pipeline includes products with long-term opportunity to
 support our growth, and (iii) proceeds from the company's initial public
 offering will allow the company to accelerate its process of researching
 and developing technologies. The company has attempted, whenever possible,
 to identify these 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. Luna Innovations
 wishes to take advantage of the "safe harbor" provided by the Private
 Securities Litigation Reform Act of 1995 and you are cautioned that 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 Luna Innovations'
 control. Luna Innovations cannot guarantee future results, levels of
 activity, performance, or achievements. Factors that could cause actual
 results to differ materially from the expectations expressed in such
 forward-looking statements include, but are not limited to: (1) we may be
 unable to manage our growth effectively, (2) we may experience continuing
 losses, (3) we may not be successful in identifying market needs for new
 products, (4) we will continue to rely on contract research, including
 government grants and contracts available only to small businesses, for a
 significant portion of our revenue, (5) we may become ineligible for small
 business government grants and contracts in the future, (6) we face
 substantial competition in our markets, (7) our proprietary rights may be
 insufficient to protect our technologies, (8) third parties may claim that
 we infringe their intellectual property rights, (9) as a provider of
 contract research for the U.S. government, we may be subject to federal
 audits and investigations, (10) our ability to develop and market certain
 of our products may be delayed by U.S. Food and Drug Administration or
 other regulatory requirements, (11) we may continue to face difficulty in,
 or increased costs related to, hiring, training and retaining skilled
 employees, (12) we have limited manufacturing experience and may experience
 unanticipated manufacturing or supply problems, (13) changes in customer
 demand for our products and product candidates, (14) the impact of a
 slowdown in the overall economy, and (15) the uncertainty of the current
 global political environment and the potential for terrorist attacks.
 Additional factors that may affect the future results of Luna Innovations
 are set forth in its Registration Statement on Form S-1, its quarterly
 report on Form 10-Q and other filings with the Securities and Exchange
 Commission ("SEC"), which are available at the SEC's website at, and at Luna Innovations' website at These risk factors are updated from time to
 time through the filing of periodic reports and registration statements
 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,
                                  2006        2005         2006        2005
                                    (unaudited)              (unaudited)
       Contract research
        revenues              $ 4,170,273  $3,913,145  $ 8,091,212  $7,169,526
       Product and license
        revenues                  762,442         -      1,357,740         -
          Total revenues        4,932,715   3,913,145    9,448,952   7,169,526
     Cost of revenues:
       Contract research costs  3,105,289   2,800,075    6,013,124   5,471,195
       Product and license
        costs                     408,219         -        674,270         -
          Total cost of
           revenues             3,513,508   2,800,075    6,687,394   5,471,195
     Gross Profit               1,419,207   1,113,070    2,761,558   1,698,331
     Operating expense          4,252,343   1,030,904    7,694,351   1,912,431
     Operating income (loss)   (2,833,136)     82,166   (4,932,793)   (214,100)
     Other income (expense)
       Other income (expense)       3,110         177        9,397         690
       Interest income /
        (expense), net            109,185     (25,545)     113,145     (65,313)
     Total other income
      (expense)                   112,295     (25,368)     122,542     (64,623)
     Income (loss) before
      income taxes             (2,720,841)     56,798   (4,810,251)   (278,723)
     Income tax expense
      (benefit)                       -        12,406          -       (60,877)
     Net income (loss)        $(2,720,841) $   44,392  $(4,810,251) $ (217,846)
     Net income (loss) per
       Basic                  $     (0.37) $     0.02  $     (0.72) $    (0.07)
       Diluted                $     (0.37) $     0.01  $     (0.72) $    (0.07)
     Weighted average shares:
       Basic                    7,277,964   2,911,255    6,677,306   2,911,255
       Diluted                  7,277,964   4,928,242    6,677,306   2,911,255
                           Luna Innovations Incorporated
                            Consolidated Balance Sheets
                                                      June 30,     December 31,
                                                        2006          2005
     Assets                                          (unaudited)
     Current assets
       Cash and cash equivalents                    $ 26,676,477  $ 12,514,839
       Accounts receivable, net                        4,148,196     5,129,911
       Refundable income taxes                           396,062       514,797
       Inventory                                         669,219       448,475
       Other current assets                              474,827       227,409
        Total current assets                          32,364,781    18,835,431
     Property and equipment, net                       3,287,947     2,972,287
     Intangible assets, net                            1,429,443       999,544
     Deferred offering costs                                 -         710,018
     Deferred tax asset                                  600,000       600,000
     Other assets                                         14,482        16,550
               Total assets                         $ 37,696,653  $ 24,133,830
     Liabilities and stockholders' equity
     Current liabilities
       Current portion of capital lease obligation       $95,307       $98,820
       Current portion of long-term debt obligation      214,955           -
       Accounts payable                                2,316,327     3,647,505
       Accrued liabilities                             3,113,197     1,788,162
       Deferred credits                                  968,517     1,458,393
         Total current liabilities                     6,708,303     6,992,880
     Long-term capital lease obligation                   70,748       117,134
     Long-term debt obligation                         5,000,000     5,214,955
     Deferred credits                                    450,000       450,000
         Total liabilities                            12,229,051    12,774,969
     Redeemable Class B common stock,
      308,216 shares at December 31, 2005                    -         504,984
     Stockholders' equity:
       Common stock; 49,785,326 shares authorized
        for the following classes:
          Common stock, par value $0.001; 9,829,038
           shares issued and outstanding at June 30,
           2006                                            9,829           -
          Class A voting common stock, par value
           $0.001; 2,834,814 issued and outstanding
           at December 31, 2005                              -           2,835
          Class B non-voting common stock, par
           value $0.001; 734,427 shares issued and
           outstanding at December 31, 2005                  -             734
          Class C voting common stock, par value
           $0.001; 2,131,474 issued and
           outstanding at December 31, 2005                  -           2,131
       Additional paid-in capital                     30,350,713    10,935,049
       Accumulated deficit                            (4,892,940)      (86,872)
         Total stockholders' equity                   25,467,602    10,853,877
               Total liabilities and stockholders'
                equity                              $ 37,696,653  $ 24,133,830
                         Luna Innovations Incorporated
                     Consolidated Statements of Cash Flows
                                                          Six Months Ended
                                                               June 30,
                                                          2006         2005
     Cash flows from (used in) operating
       Net loss                                     $ (4,810,251)  $  (217,846)
       Adjustments to reconcile net loss to net
        cash provided by operating activities:
         Depreciation and amortization                   502,401       179,187
         Deferred income taxes                               -         (30,106)
         Share-based compensation                        761,282        98,101
       Change in assets and liabilities:
         Accounts receivable                             981,715      (252,668)
         Refundable income taxes                         118,735       731,234
         Other assets                                   (466,093)      (81,079)
         Accounts payable and accrued expenses           703,875      (203,378)
         Deferred revenues                              (489,876)      (31,296)
           Net cash from (used in) operating
            activities                                (2,698,212)      192,149
     Cash flows used in investing activities
      Acquisition of property and equipment             (632,587)     (389,047)
      Intangible property costs                         (197,300)     (156,185)
      Capitalized software development costs                 -         (14,468)
           Net cash used in investing activities        (829,887)     (559,700)
     Cash flows from (used in) financing
        Net payments on line of credit                       -        (170,000)
        Payments on capital lease obligations            (49,899)      (12,956)
        Proceeds from the issuance of common
         stock, net                                   17,660,608           -
        Proceeds from the exercise of options
         and warrants                                     79,028           -
           Net cash from (used in) financing
            activities                                17,689,737      (182,956)
     Net change in cash                               14,161,638      (550,507)
     Cash -- beginning of period                      12,514,839       609,636
     Cash -- end of period                          $ 26,676,477   $    59,129
     Supplemental disclosure of cash flow
     Cash paid for interest                         $     22,717   $    47,727
     Cash paid for income taxes                     $       -      $      -
     Property and equipment financed by
      capital leases                                $       -      $    11,700

SOURCE Luna Innovations Incorporated

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