Luna Innovations Inc (LUNA) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Luna Innovations second quarter earnings conference call.

(OPERATOR INSTRUCTIONS)

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

Thank you, Denise. Before we proceed further with our presentation, I would like to remind each of you that statements made by Luna's executives during the 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, risks and uncertainties that may cause future results to differ materially from those anticipated, including the risks and other factors listed in Luna's filings with the Securities and Exchange Commission.

Such filings include Luna's quarterly reports on Form 10-Q and its annual report on Form 10-K. 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 and Chief Executive Officer of Luna Innovations.

Thank you, Dale, and welcome to everyone on the call. As you've already seen from our earnings release, the fourth quarter proved to be a successful one for us. Our revenues increased over 23% for the fourth quarter of last year, product and license sales increased by 64% year-over-year, which drove gross margins from 31% in the fourth quarter of 2006 to 37% in our most recent quarter. With our growing backlog of new research opportunities and a pipeline of potential new products, we remain well positioned to pursue our strategy and long term business model of investing in the product side of our business.

As usual, Dale will review the quarterly financial results in more detail in a few moments. Before he does, I would like to discuss some of our recent business developments. After Dale reviews the financial results, we'll open up the call for your questions. On previous calls we've devoted more time describing the sensing instrumentation part of our business rather than our nanotechnology developments.

It was very important to us to have made substantial progress in the nanotechnology area prior to communicating to you the potential opportunities we think it provides. Now we feel the right time is now to update you on the progress in MRI contrast agents and also, for the first time, give you insight into some of the other things we've been able to accomplish in nanomaterials, specifically with respect to therapeutics and solar applications.

We've designed a molecule as an MRI contrast agent based on our Trimetasphere that exhibits the following desired properties. It significantly enhances relaxivity, is extremely stable, it is water soluble, it can be designed to remain in the body longer or clear the body more quickly and it can be modified to seek out specific biological targets. Recently, we have successfully adapted our gadolinium Trimetasphere to obtain a versatile platform to enhance magnetic resonance imaging in lab animals.

I'm extremely excited about the images we were able to achieve. We were able to use one 25th the dose of the conventional contrast agent used in procedures today and obtain quality images. Also, we recently synthesized Trimetasphere molecules with ligands which are designed to target plaque. What this means is that we have specifically modified the exterior of the contrast agent molecule in such a way that it would facilitate the specific identification of arterial plaque and enhance the image of that area.

This achievement is related to our announcement this past November that we had been awarded a grant from the National Institutes of Health to develop a new diagnostic agent that could improve the diagnosis of coronary artery disease. This new discovery is important because it potentially provides a noninvasive way for detecting and evaluating arterial plaque without the use of potentially harmful diagnostic procedures in use today such as ionizing radiation and catheters. We believe that improved MRI technology, including improved contrast agents, could shift diagnostic procedures away from those that utilize ionizing radiation, such as x-rays and positron emission tomography, otherwise known as PET scans, to the MRI platform.

Our tests continue to indicate that Trimetasphere is effective in keeping the gadolinium safely encapsulated, thereby reducing the risk that the FDA has been warning about. The unique structure of the Trimetasphere-based contrast agent encloses the metallic signal molecule in such a way that it will not escape and cause harm to the patient. For example, we have had to raise the temperature of the molecule in excess of 1,000 degrees Fahrenheit to release the gadolinium from inside the carbon cage.

While there are many hurdles to overcome before any of these Trimetasphere-based agents could be approved for marketing, we are excited because we have continued to achieve important milestones along our development path for the platform technology that could produce many new varieties of contrast agents, expanding the use of MRI to improve diagnostics in the management of diseases where it's currently not used.

We have also been pursuing therapeutic applications using our proprietary nanomaterials and have made significant progress in the design of new nanomedicines and our beneficial effects on inflammatory and allergic responses. Inflammation is an important component of many diseases and our program is directed at significant markets, including arthritis, autoimmune disease, hair loss and diabetes. We have exciting preliminary efficacy results in several of these diseases and we expect to issue results soon describing our discovery that nanomedicines promote hair growth.

As we have been successful in progressing these potentially breakthrough technologies, we have also been successful in attracting leading experts like Doctors Chris Kepley and Krishan Kumar to our nanomaterials division. Dr. Kumar, as the new nanoWorks Vice President of R&D, brings decades of experience in pharmaceutical development to enhance our skills base in pharmaceuticals and regulatory issues. Leading our nanoImmunology efforts, Dr. Kepley is a noted pioneer in the use of nanomaterials to control the immune system.

Luna continues to make important breakthroughs in the alternative energy area as well. Organic solar cells are a low cost, lightweight potential alternative to silicon-based solar panels in wide use today. Significant improvements in performance are required before organic solar cells will become commercially successful. Luna's made significant progress in advancing the efficiencies of organic solar cells by applying patented Trimetasphere carbon nanomaterials technology, which could lead to the development of more efficient and less expensive alternative energy solutions.

The U.S. Department of Energy's National Renewable Energy Lab, or NREL, recently verified that using Luna's Trimetasphere and nanomaterials significantly increased open circuit voltage and organic solar cells by more than 40% compared to today's standard C60 fullerenes. Although further improvements are necessary, we are encouraged by our progress and we believe we're on the path to reach higher efficiencies. As previously mentioned, we are not anticipating being a manufacturer of solar cell products. Instead, we intend to develop and design our proprietary compound to enhance other's solar energy products.

Turning now to medical devices, you may remember from our last call that as part of our relationship with Terumo Cardiovascular Systems, we stated that we would be initiating clinical trials with our EDAC Quantifier to validate claims of effectiveness and benefit. The first of the clinical trials are now underway. We continue to make the scheduled progress in our development for Intuitive Surgical, the world leader in robotic assisted minimally invasive surgery. We're on track for achieving our contractual milestones incorporating our fiber optic-based shape sensing and positions technologies for possible integration into Intuitive Surgical's products.

Turning to our instrumentation and test and measurement products, this month at the premier North American Conference for Optical Test and Measurement, the Optical Fiber Communication and the National Fiber Optic Engineers Conference, our Luna technologies division announced two new products. The Phoenix 1000 laser improves the performance of fiber optic test and measurement equipment, such as our OBR product, while reducing the size and cost of the equipment. This laser, which will do -- which will also do -- offer a standalone product, is an important component in our development of handheld equipment in the shape sensing platform.

The PR 4400, an advanced precision reflectometer offering industry leading micrometer special resolution. This device improves the measurement, range, speed and ease of use for optical component testing in the manufacturing environment. In addition to introducing these new products and opportunities, we have -- working with companies like Intuitive, we continue to expand the market for our existing telecommunications test and measurement gear.

During the fourth quarter our revenue from sales of these devices increased 23% compared to the fourth quarter of 2006. Given the positive trends in instrumentation and test products, it made sense to promote our VP and General Manager of Luna Technologies, Brian Soller, to president of the products division for Luna Innovations. Brian, who has been with Luna since 2001, has been leading the Luna Technologies fiber optic test business with responsibilities for product planning and development as well as overall profit and loss responsibility for that division.

Ken Ferris, formerly President of Luna's product division, will continue to serve in a corporate advisor role as he gradually transitions into retirement. In summary, we had record product sales, we launched several new products, we made significant progress on new product development efforts and it was a great quarter for us financially. Now I'd like to turn the call over to Dale.

Thanks, Kent. As you just heard Kent refer to, we had a very good quarter from several financial perspectives. Our revenues for the quarter were $9.9 million, representing an increase of 23% over the fourth quarter of last year. Our net loss improved by $1.5 million compared to the fourth quarter of the previous year. And our net cash usage was less than $500,000.

Technology development grew 8%, while our product and license revenue grew 64% compared to the fourth quarter of last year. That 64% growth in our product and license revenue was largely driven by a 23% increase in our sensing and instrumentation products predominantly sold under the Luna Technologies brand. In addition to the product development and licensing revenue, we earned our agreements with Intuitive Surgical and various federal programs.

Gross profit for the quarter increased to $3.7 million, or 37% of revenues, compared to $2.5 million, or 31% of revenues, in the fourth quarter of 2006. The increase in gross margin percentage reflects the increasing proportion of product and license revenue to our total revenues as well as an improvement in margin within our technology development line of business.

Technology development margins increased to 26% in the fourth quarter of '07 compared to 22% in the fourth quarter of the preceding year. Product and license margins remained consistent at 55% in the last quarter of 2007 compared to 54% in the fourth quarter of 2006. Operating expenses decreased to $4.9 million in the fourth quarter of 2007 from $5.3 million in the last quarter of 2006. That decrease was largely driven by significant recruiting and relocation costs during 2006 and some duplicative facilities costs while we were transitioning to new and larger space in Roanoke and Blacksburg, as well as the costs associated with the actual moves to those new locations.

Operating expenses were also below our recent run rate, primarily due to lower professional fees that we incurred in the fourth quarter. We do expect operating expenses to increase back to normal levels next quarter and I'll give you our current expectations for the next quarter in a few minutes. Our net loss decreased to $1.2 million for the fourth quarter of 2007 versus a loss of $2.7 million in the fourth quarter of the prior year. On a per share basis, the loss was $0.11 compared to $0.27 in Q4 of 2006. Included in our net loss for the last quarter of '07 were depreciation and amortization of approximately $450,000 and share-based compensation expense of approximately $700,000, for a total of $1.2 million in these non-cash items.

Our balance sheet has remained fairly consistent, reflecting normal growth in our working capital accounts as the business has grown and very controlled capital spending during the year. I'll focus the discussion on cash, where we ended the year with $12 million, which, as I said earlier, was a net cash usage of approximately $480,000 for the quarter.

Our cash used in operations in the fourth quarter was $427,000, comprised primarily of our $1.2 million loss offset by non-cash charges for depreciation and amortization of $450,000 and the share-based comp of approximately $700,000 for a total of $1.2 million. Changes in receivables and payables and accruals essentially offset each other from a cash flow perspective. And other balance sheet changes impacting cash flow include an increase in inventory of approximately $100,000 and recognition of approximately $300,000 of our deferred revenues during the quarter. Cash used in investing activities for capital expenditures was approximately $235,000 and net cash provided from financing activities, primarily proceeds from stock option exercises, was approximately $200,000 during the fourth quarter.

That covers the fourth quarter, so let me touch on just a couple of the financial highlights for the year. We ended the year with $33.7 million in revenue, a 43% increase year-over-year, technology development revenues increased 24%, while product and license revenues more than doubled. Our gross profit for the year was $12.3 million compared to $7.2 million in 2006 and our overall gross margin percentage increased to 36.5% in 2007 from 30.5% in 2006. Our net loss improved by nearly $1.6 million year-over-year to $7.8 million in 2007 from $9.4 million in 2006. And for the full year we used $5.8 million in cash.

With that, I'll turn to our outlook for the first quarter and full year of 2008. We currently expect our revenues for 2008 to be in the range of $40 million to $42 million, representing a 19% to 25% growth over 2007. We expect our net loss to continue to improve and are currently projecting a range of $6.5 million to $7 million for the year.

As we think about the first quarter, it's very important to remember that our business has historically shown significant seasonality impacts. Our revenues, particularly in the products area, are typically lower in the first half of the year and higher in the second half of the year. For instance, of our $33.7 million revenues in 2007, only $7.1 million was realized in the first quarter. Along with that, our rate of cash usage should also be expected to be highest in the first quarter and moderating as we go through the year and product revenues increase.

So again looking back at 2007 as a reference, our cash usage was $3.9 million in the first quarter of 2007 and only a net $1.9 million for the remaining three quarters combined. With that seasonality in mind, our current outlook for the first quarter of 2008 is revenue of approximately $8.8 million, which we expect to be comprised of approximately $6.4 million in technology development revenue and $2.4 million in product and license revenue. We expect our net loss for the quarter to be approximately $2.8 million and our net cash usage to be approximately $2.5 million. And now I'd like to turn the call back over to Kent.

Thank you very much, Dale. Denise, we are now ready to receive questions from the participants.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Michael Lew from ThinkEquity. Please proceed.

Hi, Kent. Hi, Dale.

Hi, Michael. How are you today?

Good. How about yourself?

Great. Thank you.

Good. It seems like you're making progress, a lot of progress with the nanomaterials development efforts. And wanted to know with regards to the coronary artery disease initiative there, can you characterize the market opportunity and could you elaborate on the milestones you're working on to achieve and when do you think could be earliest when we could see some application in clinical trials?

We are -- we've just been funded by the NIH to do that work. We've just begun to attach the ligands to the molecules and we'll begin animal trials sometime this year and hopefully move that towards an IND probably towards the earlier part of next year.

Michael, this is an area where we think that we'd really be expanding the market for MRI beyond its current uses today. The ability to actually do disease targeting in MRI procedure has not been accomplished. And that's really what we're going after here is the opportunity to bring this platform into actually picking disease states that we want the contrast agent to go and accumulate around within the body and really give the physician a much better opportunity to identify that state on an earlier time frame.

Okay, great. And also on the [EX] side, can you comment on the marketing with Terumo? Could you elaborate on the success so far and how many new leads have generated from that agreement? And has the -- I think the agreement's been extended. I thought it was supposed to be expired by year-end '07.

No, it was a one-year agreement and we signed it towards the end of '07. And we have -- we've been placing systems with key opinion leaders that we've identified through Terumo's sales contacts and we've got roughly about eight systems out into the hands of key opinion leaders who are in various stages of clinical trials, either they've already started or they're writing up their clinical procedures at this time.

And when would you expect to see some feedback from them?

The --

In regards --

The trial -- there are several trials that we're going to do with different entities and depending upon the claims that we're trying to validate with the trials, they last six months to over a year. So I think it's going -- it's probably going to be toward the end of the year before you start actually getting the real detailed results of the efforts.

Okay. And also on the OpEx side, a question on the OpEx. You had mentioned --could you comment on the level of OpEx going -- what we should use going forward throughout '08? Obviously you were lower but you mentioned you weren't going to be able to sustain those levels.

Yes, in the fourth quarter we were a lot lighter on some of the professional fees and what we typically run and that has to do, of course, with things like holidays, where we're incurring less of those costs. I think that you're going to see in the first quarter the OpEx are going to come back to the level that you have been expecting to see and we'll start seeing some inflation in there as well in things like salary adjustments for the employees and things like that that'll kick in in the first quarter. So again, I think that $2.5 million loss for the quarter -- I'm sorry; $2.8 million loss for the quarter is a pretty good sense of how these OpEx are going to come back.

Okay, great. Thank you.

Here from Global Crown Capital, your next question comes from John Roy.

Hey, guys. Hey, on the solar stuff you were saying that NREL was - it verified the enhancement open voltage. I mean, what is that going -- before you said it [gets] 40% up. Is that going to imply what? What percentage might that imply in terms of efficiency improvement if they were to get 40% on that?

It could translate through the entire device at 40%. But at this point we can't guarantee that it will.

Right. So there should -- there are probably some losses somewhere in there. But you could theoretically get up to a 40% improvement in efficiency, theoretically?

Up to, yes.

And what about a timeline for that? I know that you're going to sell it to other people. Are we talking something '09-ish or is it something '08-ish or what's the timeline you think when you'll have something that will be going to partners?

We expect to make progress in '08 towards partnerships.

And you didn't mention anything about JDSU. Is that still on track or how's that going?

Yes, we still think that that's going to be something that's going to come in in the second half of this year. I think that the new laser that we just announced is a significant component of being able to achieve that. So yes, that work is -- that work is progressing and still expected to come in late this year.

Great. Thanks, guys. Great quarter.

Thanks, John.

Okay, thanks very much, John.

And from Equity Partners you next question comes from [Lisa Leventhal]. Please proceed.

Hi, Dale. Hi, Kent.

Hi, Lisa. How are you today?

Good. How are you?

All right.

I wanted to congratulate you first on the quarter and I had a quick question. You had mentioned with Intuitive on track with milestones for potential integration of the Da Vinci into Intuitive products. How much more development before you begin clinical trials?

Well, Lisa, that's -- it's a good question and it's -- just to remind everybody, we've talked about this before that we've agreed with Intuitive that we're not going to really disclose milestones and timelines for their product. And just suffice it to say that the work is proceeding as planned. We've been spending some time out in their offices recently and it's going well. We do not expect that it's going to be recognized in product revenue this year for us. But I think that the work is proceeding exactly as planned.

Okay. My next question was you're working on initiatives across multiple markets with big potential opportunity. That includes life sciences, optic, advanced materials for CleanTech. Which of these areas do you expect to be the largest component of product revenues in the long term?

In the long term it would be the pharmaceutical work that we're doing and the medical products that we're working on.

Okay. Okay, thank you very much.

You're welcome. Thank you, Lisa.

Thank you, Lisa.

And [John Moses], a private investor, is on the line with your next question.

John, you with us?

Oh, I apologize. I missed that. First, you had a heck of a good year, not just the quarter. You made great progress in controlling your expenses with all the hiring you've done. So I take my hat off to you on that. And the future looks pretty damn bright given the product -- potential product pipeline you've got.

My specific question is several months ago in an 8-K you made a statement or several sentences that you'd received a waiver from the SEC to omit a material event from the 8-K that particular time but were going to be forced to make a public announcement on that situation by March 31st of this year. Am I correct?

John, I'll admit you caught me off guard. I don't recall that 8-K. I apologize, John. I honestly do not recall that particular filing.

Okay.

I'll have to go back and look at that for you.

I believe it was in October. Could have been in November, but I think October.

Okay.

Are you anticipating making a material event announcement by March 31st?

No.

Okay, fair enough. Once again, congratulations.

Thanks, John. I appreciate it. Good to talk to you.

At this time we have no further questions in the queue. I apologize, we have a follow-up question from the line of Michael Lew from ThinkEquity.

I just had a follow-up. Last quarter you mentioned shipments of the sensor interface cards for the Hit to Kill vehicle program. Could you update us on that? Have you had follow-on orders there?

That was a shipment for a -- I believe for a test of the unit. It's not the overall product. This is the Raytheon missile program [inaudible] program, that's not in full production yet. What we had shipped out was the test cards for them.

Okay. When do you -- can you give us, like, a timeline on that when you expect some potential additional shipments? Anything in '08?

I don't think it's going to -- I don't think it's going to be a material amount in '08. There may be some, but there's still additional tests that are planned in '08. So until they get through all of the testing programs, you're not going to see a lot of real volume from that.

Okay. When do you expect to get some feedback -- some more feedback on the tests from the tests being run?

It should be sometime the first half of this year.

All right, thank you.

Thanks, Michael.

Thanks.

We have no further questions. I'll turn the call back to Dr. Kent Murphy for closing remarks.

Thank you very much, Denise. Thank you all very much for your interest in Luna and your participation on the call. I look forward to speaking with you again on the first quarter 2008 earnings call. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.