Luna Innovations Inc (LUNA) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Luna Innovations third quarter 2006 earnings conference call. My name is Tim, and I will be your operator today.

[OPERATORS INSTRUCTIONS]

At this time, I would like to turn the call over to Mr. Dale Messick, Chief Financial Advisor for Luna Innovations. Please proceed.

Thank you, Tim. Before I proceed further with our presentation, I would like to remind each of you that statements by Luna's executives during this presentation include information that constitutes forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, including without limitation statements about Luna's plans, objectives and strategies and management's expectations and beliefs about business results in the future.

Forward-looking statements are subject to many assumptions, risk and uncertainties that may cause future results to differ materially from those anticipated, including the risk and other factors listed in Luna's filings with the Securities and Exchange Commission. Such filings include Luna's registration statement on Form S-1 dated June 2, 2006, and its quarterly report on Form 10-Q for the quarter ended September 30, 2006.

All forward-looking statements are based on information available to Luna as of today's date. Luna undertakes no obligations to update any forward-looking statements as a result of any new information, future events, changed expectations or otherwise.

And now, I'd like to turn the call over to Kent Murphy, Chairman, President and Chief Executive Officer of Luna Innovations.

Thank you, Dale, and welcome to those of you who are listening. I'm going to begin today's call with a broader review of our third quarter financial results, and then I am going to talk about what we have accomplished this past quarter and what that might mean for our future. Then Dale Messick will review our quarterly financial results in more detail after which we welcome any questions you may have.

As you've probably already seen from our release, we issued after the market close today. Our net loss for the quarter was $1.9 million, which is consistent with our revised expectation. Our revenue of $6 million was the highest quarter in our history, excluding one-time events such as the sale of a product line. Revenues were 53% greater than in the same quarter last year and 23% greater than last quarter.

In more specific terms, we achieve 24% year-over-year growth in contract research. Our product revenue of $1.2 million came primarily from the operations of Luna Technologies, which was acquired by the Company on September 30th of last year. Sales of optical sensing and instrumentation equipment from Luna Technologies were approximately $1 million for the quarter and represented a 58% increase over sales in the third quarter of 2005. Additional product revenues of $0.2 million came from Luna Advanced Systems, including sales of our Emboli Detection and Classification or EDAC product.

I think the growth in our product and licensing revenue is encouraging, because it is one indication of success in our overall goal of commercialization technology. It's important to understand our achievements in the context of Luna's core business model and the just mentioned overall goal of commercializing products. Each quarter, I plan to discuss events and accomplishments within this context.

The first area for discussion will be what's happening in contract research, the engine of our business model. Second, I will report on product sales, strategies and growth and any new product launches that occurred during the quarter. And finally, we'll review what's happening in the most dynamic part of our business model, commercialization. Typically, this will be a discussion of those innovations that are being targeted for future development, because we believe given the market poll and demand they are commercially viable.

In contract research, our world-class scientists and engineers are developing new market driven technologies designed to improve the way things get done. We conduct that research in funding alliances with such entities as government agencies, research labs or commercial enterprises that have a strong interest in Luna developing products to solve their specific problem or market need.

In the third quarter, we booked more than $6.1 million in new research contracts, including the $4 million in nano-related new contract that came in August, which we mentioned in our last investor call. We also recently demonstrated in our facility a weapons detection platform, which is capable of detecting metallic and non-metallic weapons or explosives carried on the body.

As you might imagine, it has many potential application in law enforcement, Homeland Security, corrections and national defense. Given the potential of this new technology, we've received additional funding from the Department of Defense and the Department of Justice for future development of this product. This is just a sample of the high potential opportunities we are pursuing in our engine to innovation.

On the product side of the business, we generated our most impressive quarterly customer list to-date were optical sensing and instrumentation equipment. We did this by expanding our existing relationships with an international communications in information and technology company two top-tier semiconductor companies, two major Federal Government contractors, then oil and gas fueled equipment provider, a fiber cable manufacturer, a major optical network component manufacturer, and a fiber optic sensing company.

We were also very successful in establishing relationships with several new clients in the third quarter, including a leading producer of super computers, a manufacturer of optical components on hybrid optoelectrical integrated chips in a major federal laboratory. A another commercial milestone, we achieved recently was the introduction of our EN-TACT system for emergency, non-invasive tissue and compartment testing. This is an ultrasonic medical device that quickly and easily measures and monitors intramuscular pressures.

This is another example of the power of our business model after initially discovering and developing a technology through one of our funding alliances with the key government partner we recognized it's commercial potential. The portable system will be operated by non specialist with minimal training and is ideal for traumatic injuries, sports medicine, and military combat situations where compartment syndrome is common. This system is designed to replace the current diagnostic process, which involves a large board needle repeatedly injected into the muscle.

The EN-TACT system was launched this August at the advance technology applications for Combat Casualty Care Conference and was more recently exhibited at the October Ultrasonic Measurement and Tissue Elasticity Conference. You may remember, we announced launch of our EDAC system in the second quarter, since then this ground breaking technology has received the Frost & Sullivan 2006 Patient Monitoring Technology of the Year Award.

This system allows cardiothoracic surgeons, perfusionist and anesthesiologists to quickly detect air bubbles in the bloodstream that can occur during critical medical procedures such as cardiopulmonary bypass surgery. In additional to the Frost & Sullivan award, our EDAC system was also favorably mentioned in an article in the Journal of Extra-Corporeal Technology written by renowned Perfusionist in the industry. The article is a strong affirmation of the capabilities of our system and specifically mentions that Luna's device was remarkably more sensitive than a competing device.

Currently, our EDAC System is for investigational use only and we remain on track to submit an application for FDA clearance of this product by the end of the year. And now, I'd like to review what is happening with respect to our commercialization strategy. Commercializing technology may take one of three forms. A Luna branded product, the licensing of a Luna technology to a third party or an OEM arrangement; for example, we have LUNA brand and optical testing measurement equipment that we market directly to our end customers.

Our agreement with the Fortune 500 tier two company represents an example of an arrangement where another company license our technology for use in their own sensing products. An excellent example of an OEM arrangement is our recent joint product development and distribution agreement with Acterna, a division of JDS Uniphase, one of the largest fiber optics test and measurement companies in world. We expect that the new fiber optic measurement technology that will resolve will have a major impact on lowering the cost of deployment and maintenance of optical networks that are bringing fiber into the home or business and replacing traditional corporate networks on both air and marine craft.

As the world demand for a faster Internet grows, because of the advent things like streaming video, our instrument is designed to allow installers to readily inspect optical fiber as it replaces traditional wiring. But what is really exciting about the arrangement is that while its start out as the joint development project, it will eventually allow the product, which our innovation is an integral component of to be sold through JDS use extensive distribution channels.

Traction in the commercialization area of our business model was also evident in the advanced systems product development and nanomaterials manufacturing. This quarter we won a development contract from a major defense department prime contractor for an advanced electronic subsystem for a next generation defense system. This is ultimately another OEM opportunity where if the technology is adopted, Luna will be a supplier of a critical electronics component within a major strategic defense system.

With respect to our proprietary shape sensing technology, we secured product development funding for applying our fiber optic sensing technology in an OEM capacity for new medical applications. Also this quarter, Luna engineers designed and built a new piece of processing equipment that expands our ability to produce our Trimetasphere nanomaterials in quantities necessary for product development including MRI contrast agents. Luna has made some significant achievements over the past three months and we are very optimistic about our future.

Now, Dale will focus on our financial results.

Thank you Kent. For the quarter ended September 31st, 2006 our revenues were $6.0 million representing a $2.1 million or 53% increase over the third quarter of 2005. The growth in year-over-year revenue was achieved by the addition of $1.2 million in product revenue coupled with a $0.9 million growth in contract research revenue.

The product revenue of $1.2 million came primarily from the Luna technologies division, which was acquired by the company on September 31st, last year, in addition to the sales activates of Luna advanced systems as Kent mentioned previously. For comparative purposes, product revenues for the standalone entity Luna technologies for the third quarter 2005 were approximately $750,000.

Our third quarter product and license revenue of approximately 1.2 million represents a 55% increase over the third quarter 2005 revenue of Luna technologies. Contract research revenue grew approximately 24% compared to the third quarter of last year, you may record we reported on our second quarter earnings calls a growth rate of 6.6% in contract revenues for the second quarter of '06 compared to 2005.

And then additional hiring would allow us to increase that growth rate, the additional hiring efforts that were underway at that time of our last earnings call and throughout the third quarter resulted in our continuing to increase the billable activates under our backlog of awarding contracts driving the third quarters year-over-year growth rate.

On the cost of sales side, our contract research cost increase 17% compared to the revenue growth of 24%, gross profit on contract research increased by $0.5 million and the gross margin percentage for contract research improved from 22% in the third quarter of 2005 to 27% in the third quarter of 2006, as we were able to shift resources to greater productivity. Product sales provided gross profit of $0.6 million in the third quarter of 2006 representing a gross margin of 55%. Operating expenses grew from $1 million in the third quarter 2005 to $4.1 million in the third quarter of 2006, a level consistent with our expenses since the IPO in June.

As we discussed last quarter this level expense does reflect our current base line of operations and increase significantly year-over-year because of factors including among other things investments and development of new technologies, additional infrastructure associated with being a public company, the additional operating expenses resulting from the acquisition of Luna technologies and the expense recognition for share-based compensation.

Our overall business strategy centers around developing a pipeline of potential products that we intend to commercialize to meet identified market needs. In order to progress this strategy we have increased the amount of resources devoted to product development for promising technologies and applications. We've increased our level of activity year-over-year in several areas including nano technologies and ultrasound technologies. Our spending in these two groups alone increased $0.9 million compared to the third quarter of 2005.

The acquisition of Luna technologies added approximately $0.6 million to our third quarter operating expenses compared to third quarter 2005 which was prior to our acquisition of that entity. And we incurred charge for share-based compensation of approximately $0.4 million in the third quarter of 2006 that we didn't have in 2005. Interest income expense improved to be income of $232,000 in the third quarter of 2006 versus an expense of $10,000 in the third quarter of 2005.

The improvement was driven by interest earned on the invested cash balance, which includes the proceeds from the [Coralian] financing in 2005 and the proceeds from our IPO in June 2006. We incurred a net loss of $1.9 million or $0.20 per weighted average share outstanding in the third quarter of 2006 compared to a net loss of $51,000 or $0.01 per weighted share outstanding in the third quarter 2005 and a net loss of $2.7 million or $0.38 per share in the second quarter of 2006.

Turning to our balance sheet for a moment you can see the greatest change since December of 2005, has been in the cash balance reflecting the proceed received from our IPO in June of this year. We ended the quarter with a cash balance of $22.4 million. There are a couple of large movements in balance sheet accounts, which also impacted cash flow during the quarter that I'll point out.

First we had a larger than usual capital spending, CapEx for the six -- for the first six months of the year was approximately $630,000. In the third quarter we had capital spending of approximately $740,000 of which $400,000 related to movement of our head quarters from Blacksburg Virginia to Roanoke and also relocating our remaining operations in Blacksburg to a new facility.We'll have some additional carry over capital spending related to the moves in the fourth quarter and then we expect to see our ongoing capital needs return to more normal levels.

The other unusual movement in the balance sheet and also impacting cash flow during the third quarter related to accrued liabilities. At the end of the second quarter we had approximately $900,000 in outstanding accruals related to cost associated with our IPO including things such as legal fees and paying cost. We paid those amounts during the third quarter. Finally cash flow is impacted by growth of approximately $1 million in our accounts receivable during the third quarter.

This increase AR is attributable to the growth and revenues quarter-over-quarter, as well as normal timings differences of revenue recognition and actual invoicing of amounts earned for work performed on our contracts, and does not reflect any deterioration in our [ageing] of receivables. Recapping our cash flow we had a net use of cash in the amount of $4.2 million during the quarter, the primaries in the cash flow where the net loss of $1.9 million non-cash charges for deprecation, amortization and share based compensation of approximately $0.7 million. Capital spending of 0.7 million, payments of IPO related cost of $0.9 million and a growth in account receivable of approximately $1 million. And again we ended the quarter with cash of $22.4 million.

And with that I will turn the call back over to Kent.

Thank you, Dale. Before we open up the call for questions I just wanted to reiterate that Luna's on track to meet our expectations for P&L. Expenses are under control. We successfully hired the additional staff that we need to execute on our backlog of contracts. Our product revenue was growing and new products are coming on line. All showing signs that our business model is working. Tim we are now ready to receive questions from the participants.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of [Paul Chang] from ThinkEquity. Please proceed.

Good afternoon guys. This is Paul, stepping in for Dave Edwards. Congratulations on the solid quarter.

Thanks, Paul we appreciate it.

Great. If you could just kind of give us an overview of the EDAC product I think at last count we understand that you had showed I think three rehearsal units for research purposes. I just wanted to so we can get a kind of general update on that front?

We have booked the sales of a couple more systems. We continued to move forward on the FTA application and are currently developing methods for removal of the bubbles in the blood.

Great. Thanks so much, guys.

Thanks, Paul.

Your next question comes from line of Mr. John Roy from Hambrecht. Please proceed.

Hey guys. I had a quick question on cash-burn, all the one-time items aside, what would you feel like for the cash-burn for this quarter, and do you see the same thing kind of going forward?

Well, if fortunately, I want to continue to improve the cash-burn as we go through time, you know, I think that -- the loss, a more normal rate of CapEx would have been something in the 3 or $400,000 range, instead of $7 million. So, realistically, we should have had absent those other items I described in the cash-burn would have been closer to the 2 million -- 2 to 2.5 million. And I think that's a more of a model kind of number for you and as we go through time obviously, we want to increase our product sales, improve the margins and hopefully bring the cash-burn down.

I am going to bring it to party, you know turn it around obviously.

Yes.

You want to try and get all things beside what's on kind of regular number so 2 and 2.5. Great. Thank you.

Okay.

Your next question comes from the line of [John Moses], Private Investor. Please proceed.

Two questions please. First excellent quarter. Very impressive. First, how many people did you hire in the third quarter and how many people do you expect to hire in the fourth quarter?

Well, we are up to -- we're up to about 200 people right now we have -- as of the end of third quarter we're at a 188 full-time, and I believe it was 14 or 15 part time so, I think that's over the fourth quarter we'll probably look at hiring an additional 15 or so.

Okay. Thank you, one more question if I may. I noticed that on November 7th and 8th you [are] attending a PIPEs conference in the New York City.

Yes.

Does that indicate any possibility, which you are going to be involved in the PIPEs transactions?

We are not looking at any kind of a pipe transaction at this point, what we did was we looked at that as an opportunity to find lots of small cap investors in one place and hopefully just increase the exposure and interest level in Luna Innovations -- as I am sure you know this stock doesn't have a lot of activity, which is good and bad. But we would like to have additional buyers sitting out there, so that we can accommodate market needs and the [security]. But no, we are not perusing a pipe at this time.

Excellent. Thank you.

[OPERATIONS INSTRUCTIONS]

There are no further questions in queue at this time. I would like to hand the call over to Dr. Murphy for closing remarks.

Thank you Tim, and thank you all for your interest in Luna and your participation on the call today. Just to reiterate tomorrow on Wednesday we will be presenting at the PIPEs conference here in New York, and basically as Dale mentioned before to increase the awareness interest in Luna Innovations. And we will look forward to seeing many of you at up coming investor events, and to speaking with you again on our fourth earnings call.

Thank you for your participation in today's conference. This concludes the presentation you may now disconnect. Good day.