Luna Innovations Inc (LUNA) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Luna Innovations Incorporated first quarter 2008 conference call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr. Dale Messick, Chief Financial Officer. You may proceed.

Thank you, Silvana. Before I proceed further with the presentation, I would like to remind everybody that statements made 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, 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. Those 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 and 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.

Thank you, Dale, and thanks to all of you for joining us today and your continued interest in Luna. First quarter 2008 proved to be an excellent start to the year, both from the perspective of our financial results and from operations.

First, I'll spend time giving an update on specific initiatives and also provide insight into recent announcements from Luna. Then Dale will cover financial results in greater detail. And at the end, I will open up the call for your questions.

The first quarter of 2008, revenues increased over 26% from the same quarter of last year. Product and license sales increased year over year by 30%. Gross margins increased from 34% in the first quarter of 2007 to 38% in our most recent quarter.

We remain well positioned for future growth with our continued expansion of backlog of new opportunities and our improved rate of cash usage, which was less than $1 million during the most recent quarter.

From an operations perspective, I will first cover our technology development contracts. Next I will discuss our tremendous progress in development of new nanomedicines. And finally, I will cover the continued growth and focus of our sensing instrumentation business.

Our engine of innovation is the long-term technology development contracts that we enter into with government agencies and commercial enterprises and are a source of our intellectual property and innovations that we ultimately use in developing new products. The revenue from these contracts helps us support our research and development infrastructure and to vet the commercial potential for new ideas.

In technology development, we booked more than $8.2 million in new contracts during the quarter, an increase of more than 36% over the first quarter of 2007. These new contracts included a $3.9 million follow-on contract from the Air Force Research Laboratory to continue work on improving the performance of nanostructured materials over the next two years to support military applications.

In the earlier phases of this program, our nanoWorks team developed and demonstrated the ability to produce carbon nanomaterials in quantities and at costs compatible with insertion into military applications. Now with this Phase IV program, we are seeking to further demonstrate its commercial viability in a variety of applications, including efficient organic solar sales and in nanomaterials for diagnostic and therapeutic uses in military medicine. We hope to have a broader announcement of this contract within the next few weeks.

As we talked about on the call last quarter, we have already made significant improvements to the open circuit voltage core of organic solar cells. That work will continue under this contract with the Air Force that I just mentioned. Additionally, we continue to discuss potential partnerships to ultimately commercialize this technology with major solar cell manufacturers.

Nanomaterials used to enhance solar cell efficiency are just one of the many opportunities in our technology development group. This segment of our business generally has many other initiatives underway at any point in time across various core competencies, specifically sensing and instrumentation, life sciences, and pharmaceutical developments.

Moving onto progress in our development of nanomedicines, we continue to make great strides with our exclusive carbon nanomaterials and are developing products in both diagnostics and therapeutics. In our work on diagnostics, you may remember from our previous investor conference call an innovative technology that we developed, which may provide a completely new approach to enhancing contrast during magnetic resonance imaging, or MRI.

As we mentioned before, the current MRI contrast agent market is over $1 billion and is dominated by contrast agents that are gadolinium chelate technology and to date have no disease-targeting compounds available on the market. Today's contrast agents are metal ion compounds that have been around for more than 20 years and have significant limitations in image enhancement and in the amount of time they can stay inside the patient to capture a meaningful image due to safety concerns. The U.S. Food and Drug Administration recently began requiring a black box warning of the potential for disease and death, particular with patients with impaired kidney function.

Hopefully, you have seen our recent press release detailing our latest progress with animal testing and images obtained during those tests. The molecule we have developed we call Hydrochalarone was used in animal studies showing our contrast agent prototype provides high-quality images for at least 30 minutes after dosing and is stable, which may eliminate the toxicity currently associated with gadolinium chelate agents. All this was accomplished with only 1/25 of a dose compared to today's agents.

The process of getting a new drug to market can be a lengthy one. That is why we are extremely excited about the National Cancer Institute's Nanotechnology Characterization Laboratory, or NCL, has selected our Hydrochalarone for preclinical analysis. With the support of the NCL, we hope to move forward more quickly bringing our next-generation solution for MRI contrast agents to market.

We estimate within 12 months the NCL will provide us a preclinical package, which may include much of the data and test results necessary for an investigational new drug application. Accordingly, we currently expect to file an IND for a general contrast agent shortly after receiving the data from the NCL.

In addition to the general blood pooling agent, we continue to work through National Institute of Health program to develop additional contrast agents based on the Hydrochalarone. Through our own investment in these NIH programs, we are developing several disease-targeting agents which could significantly expand the MRI market and ultimately provide better diagnosis and improve patient outcomes.

Additionally, we continue to move forward with discussions with potential commercial partners. And we are making significant progress with our diagnostic platform creating more value with each success.

From the therapeutic side of our nanomedicine work, we have also been making great progress. Scientists at our nanoWorks Division have been designing new proprietary compounds using Fullerene, which are known to have a natural thirst for absorbing free radicals. Free radicals are believed to be the cause of many AIDS-related diseases. Our exclusive carbon nanomaterials have the potential to be a potent antioxidant to neutralize the free radicals which cause diseases.

We can direct our proprietary nanomaterials to concentrate in places where they will be effective at intercepting free radicals that are responsible for cell and tissue damage. An example of this work was announced last June in our release "First Demonstration of nanoImmunology: a Nanomaterials-based Therapeutic Approach to Treat Allergy".

We've expanded this initial discovery to explore the potential of our nanomedicine candidate in other types of inflammation. Our results in treating an animal model of arthritis are very encouraging. You will definitely be hearing more about these results in the near future.

Recently, we also discovered that our nanomedicine prototype aids in the growth of new hair follicles when we first noticed that wounds on mice treated with one of our compounds appeared to regrow hair faster than expected. After subsequent experiments with genetically hairless mice, we documented that in only two weeks of treatment, the number of hair follicles on the mice treated with our nanomedicine increased fourfold.

The significance of this discovery is that it reveals a previously unknown pathway to potentially restore hair follicles which are undergoing atrophy. While human hair follicles atrophy for different reasons, our hope is that the discovery of this new pathway may lead to effective ways to reverse the processes that cause hair follicles to degenerate. And that may one day lead to a new treatment for hair loss. We expect to schedule a pre-IND meeting later this year and file an IND in the second quarter of 2009.

I'm very excited about these results we've seen to date and the potential this family of materials has demonstrated for the treatment of diseases where the suppression of free radicals can improve the lives of so many people.

Now I will move on to discuss the growth and direction of our sensing and instrumentation business. This segment of our business is built on a common optical platform that we are driving into new markets as well as continuing to launch new products in areas where we are well established.

We are expanding into medical devices, both robotic and non-robotic monitoring, energy generation and delivery monitoring, and we continue to launch new products and gain market share in our existing telco and defense businesses.

This quarter's results show our suite of sensing instruments and their market acceptance are driving up our performance year over year. Product and licensing revenues for the total division were $2.3 million, up 30% over the first quarter of 2007. And bookings for our Luna Technology branded products were $1.2 million, up 87% from bookings in the first quarter of 2007.

In the medical arena, we continue to progress on schedule with Intuitive and both sides are pleased with the results. We also believe there may be a large market application for our optical platform and the nonrobotic diagnostic equipment and are currently pursuing opportunities in that area.

We continue our relationship with a Fortune 300 oil tool company in developing distributed sensing for oil and gas and are also making significant progress in the application of our optical sensing platform and power generation applications in both gas and wind turbines and in perimeter security monitoring.

Our strategy continues to be commercializing these products through partnerships with recognized leaders in their respective industries. In sensing systems for defense applications, we just received a $1.9 million contract from the Office of Naval Research to adapt our distributed sensing technology for use in shape sensing of fiber optic arrays used in naval surveillance. Luna's technology will extend the Navy's ability to detect and assess enemy threats in the ocean with greater accuracy.

In addition, we signed a contract with a major defense integrator to develop a portable measurement system for shipbuilding. This contract further demonstrates how our distributed sensing platform extends to a variety of applications, including position and location sensing as well as other physical properties, such as temperature and strain, all with the same optical platform.

At the heart of this optical platform is a tunable laser. During the first quarter, we launched the PHOENIX 1000 laser, our newest optical product. This new laser allows us to compete more effectively in the fiber optic test and measurement markets by incorporating the now fastest scanning laser of its kind inside of our products, providing our customers with high-speed, flexible, and cost-effective test and measurement products.

Tunable lasers have become a key enabling element in a variety of fiber optic measurement and sensing applications. And in third quarter of this year, we plan to launch a standalone compact solution that can be used in other non-Luna instruments. Our laser will offer better performance in a smaller package than similar laser devices being used today. With twice the performance at half the price, this laser will allow Luna Technologies to capitalize on the vast installed base of thousands of tunable laser sources that are ending their service life. Our laser will enable cost-effective optical manufacturing in the fast-growing Asia-Pacific markets.

Now I would like to outline a few other pending product launches and key milestones we're planning for the future. In the second half of 2008, Luna expects to pursue partnerships for the commercialization of our fiber optic sensing technology into industrial monitoring and clean energy generation industries with entities that have been funding the product development today.

We expect to sign a commercial partnership for incorporating our nanomaterials in organic solar cells. In the first half of 2009, we expect to launch a new product to enter the field test market with a major telecom test industry partner; sign-up partnership for non-robotic medical diagnostic applications of our shape sensing technology; launch enhanced versions of our optical test to measurement product line to address cost-effective telecommunications component and subassembly manufacturing processes; field portable tests of the growing fiber and commercial military, aviation, and fibers of home segments, as well as field portable optical sensing solutions; file an IND application for our therapeutic nanomedicines, most likely the hair follicle rejuvenation, and soon after file an IND for our contrast agent. We will also be continuing to pursue long-term partnerships with leaders in these markets.

What strikes me about this ambitious list is how far we've come. A few years ago, we made a calculated decision to invest in the product side of our business because of its potential for greater revenues and higher margins. To accomplish this, we adopted a business model that allowed us to develop technologies through funding alliances with businesses, government agencies, and universities.

We were able to identify market need and define the business case. Luna then focused its resources and capital to commercialize the technology, all with the ultimate goal of seeing the technology developed into a viable product and businesses.

As you can tell from the discussion and the list I just went through, we've accomplished many of the things we set out to do. And we're announcing the concrete results of our hard work and investment. And most importantly, we're on track to reach our goal of profitability.

Now I'd like to turn the call over to Dale.

Thanks, Kent. For the first quarter of 2008, Luna reported revenues of $8.9 million, representing a growth of 26% over the first quarter of last year and in line with the expectations that we had for the quarter. Technology development revenues grew 25% to $6.6 million, while product and license revenues grew 30% over last year to $2.3 million in the first quarter.

The growth in our technology development area reflects the impact of the larger new development contracts that we were awarded or announced in the latter part of 2007 as well as the ones that Kent just mentioned that came in during the first quarter of this year. Revenue for our Luna branded optical test and measurement products sold through our Luna Technology subsidiary grew 22% compared to the first quarter of last year.

With the growth in revenues, our gross profit increased 40% compared to the first quarter of last year from $2.4 million to $3.4 million. Gross margins grew to 38% in the first quarter of '08 from 34% in the first quarter of 2007. Gross margin on our product and license segment declined to 42% in the quarter compared to 55% in the first quarter of last year.

This decrease occurred because during the quarter we identified certain of our product development contracts that we account for using the percent of completion method where our estimated cost to complete increased significantly from our prior estimates. As a result, we reduced the revenue recognized for those contracts by approximately $300,000 in the first quarter.

Absent this adjustment, our product and license revenues would've increased 47% in the first quarter compared to last year. And our gross margin in our products and license segment would've been 49%.

Operating expenses returned to the level that we saw throughout most of 2007 and were essentially flat year over year at $5.3 million in the first quarter of 2008 compared to $5.2 million in the first quarter of 2007. So you can see that we continue to focus on cost control as well as revenue growth as we continue to improve the bottom line.

Our net loss for the quarter improved to $1.9 million, or $0.17 per share, in the first quarter of 2008 compared to $2.7 million, or $0.27 per share, in the first quarter of 2007. Of our $1.9 million loss for the quarter, approximately $1.2 million related to non-cash charges for depreciation, amortization, and share-based compensation.

Turning to our balance sheet, I'd like to highlight that during the first quarter we used a net $868,000 of cash for the quarter. This rate is a significant improvement over our net cash usage of nearly $4 million in the first quarter of last year. For the past 12 months ended March 31, 2008, our net cash usage was $2.7 million.

Accounts receivable decreased $1.7 million since December 31st, reflecting a very good cash collections quarter for us as well as the impact of the normal seasonality in our revenues, namely the higher product sales of Q4 in the year-end receivables balance.

Accounts payable and accruals decreased approximately $1.6 million since year end as some obligations which accrued throughout the year generally become payable soon after year end. As part of that decrease in accrued liabilities, the company also paid approximately $300,000 in employee compensation with common stock rather than in cash.

Looking at the cash flows for the quarter, I've already covered the major items impacting cash flows, namely the net loss of $1.9 million, including $1.2 million in non-cash expenses for depreciation, amortization, and stock comp; the decrease in accounts receivable of $1.7 million; and the decrease of $1.2 million in accounts payable and accruals from a cash perspective.

Overall, cash used in operating activities was approximately $600,000 in the first quarter of 2008 compared to $3 million in the first quarter of 2007, an improvement of $2.4 million. The improvement was primarily driven by a $1.1 million reduction in the net loss before depreciation, amortization, and share-based comp, and improved collections of the outstanding accounts receivable balances. We were also successful in delaying approximately $500,000 of planned spending into Q2.

Capitalized spending for fixed asset acquisitions and IP expenditures was $300,000 in the first quarter of 2008 compared to approximately $800,000 in the first quarter of '07 when the company was incurring the cost of capital improvements to its new facilities. Again, our overall cash usage for the quarter was $868,000 compared to just under $4 million in the first quarter of last year. And we ended the quarter with a cash balance of $11.2 million.

Looking ahead, we still expect our revenues for the year to be in the range of $40 million to $42 million, as we discussed on the last call. We currently expect our revenues for the second quarter to be in the range of $9.3 million to $9.6 million with an associated net loss of approximately $1.7 million to $1.8 million.

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

Thank you, Dale. Silvana, we are now ready to receive questions from the participants.

(OPERATOR INSTRUCTIONS) And the first question comes from the line of Michael Lew from ThinkPanmure. You may proceed, sir.

Hello?

Hello?

Hi, it's [Liza] calling in for Michael Lew. How are you?

Good, Liza. How are you today?

Good, very good. Congratulations on the quarter. I had several questions. But I guess I'll only ask a couple and then get back in line.

Okay.

Hold on one second. My first question is that you've elaborated on your product roadmap and also mentioned profitability. What is the timeline for reaching breakeven? In the best case scenario, what has happened to reach breakeven?

I think that it's something that we haven't set out in the past, a specific time that we're going to do that. And it depends on several factors. I mean, there's a lot of opportunity for us in things like the R&D efforts in the nanomaterials world that we can accelerate or we could slow down depending upon what that goal looks like. Certainly, we think that -- and toward the end of 2009, we'll start to see on quarterly bases some profitable quarters. But we'll also be subject to the seasonality impacts that you've seen where we've got the better revenues in the second half of the year.

Okay. My next question was that you guys mentioned opportunities in non-robotic business. Can you elaborate on that? And when do you think you'll be able to provide additional information?

We have been able to demonstrate our technology for potential partners in that space. And we'll most likely be making some announcement towards the latter half of the year.

Okay. Okay. And then one more question, and I'm going to get back in queue. You were talking about the solar material and solar cells and how you guys were looking to commit with a partnership at the end of this year.

Yes.

Is that correct? How is that playing out? And do you guys see anything that would be a good idea or find anything that would be a good partnership?

We have several potential partners that we're in discussions with. And we've done the demonstrations of our material and proven that they work better than the materials that are being used today in organic solar cells and believe there's a license deal for us to manufacture the material and license that and sell that to the partnership manufacturer.

Okay. Now is yours -- you said yours is working better. Is this something that you guys would be collaborating together and making something work a lot better? Will you be using their technology or just something that's solely yours?

They would be using our compound, our materials in processes that they already have for manufacturing organic solar cells. So we'd be partnering with people who make organic solar cells and providing them with materials.

And what's the percentage of efficiency that you guys are up to now?

We're a little bit over 5%.

And what's the expected number that you were planning to get to?

In total, I believe the military targets are 7% makes them commercially viable for the military applications. And 10% makes them commercially viable for commercial applications.

Okay. Thank you.

You're welcome.

Thank you, Liza.

And the next question comes from the line of John Roy from Global Crown Capital. You may proceed, sir.

Hi, guys.

Hey, John.

John.

Hey, real quick, you were talking about the MRI contrast agents that are out there today. And you said the ones that are out there are 20 years old. I mean, with that long a lifetime out there, someone else must be working on something that's competitive. What does your competitive landscape look like for that?

There are organizations that are turning away from the gadolinium chelate-based targets and using iron particles. And there are some companies that have made some good progress in that space. But it is mainly a contrast agent that enhances the dark part of the image rather than the light part of the image. So there's inherently some limitations to what can be done with it. And it is not especially well suited for targeting disease states either.

Okay. And the work with the NCL, are you going to have to pay for that? Or is that on the government's nickel?

No, the NCL pays for that. That's why we're extremely excited to be one of the very few nanomedicines selected to be part of their program.

Right. And one last question, then I'll get back in the queue. JDSU, how's that going?

We're still making good progress there and expect that to be launched right at the beginning of next year.

Great. Thanks.

Welcome.

Thanks, John.

(OPERATOR INSTRUCTIONS) And at this time, we don't have any further questions in the queue. I will pass the call over to management for closing remarks.

Thank you, Silvana. And thank you, all, for your participation on the call today. As a reminder, we will be having our annual shareholder's meeting next Thursday, May 15th, in Washington D.C. I look forward to seeing many of you there and speaking with you on our second quarter conference call. Thank you, all, very much.

Thank you for your participation. This concludes the presentation. You may now disconnect.