Luna Innovations Inc (LUNA) 2008 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to Luna Innovations Second Quarter 2008 Earnings Conference Call. My name is Jenn, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference.

(OPERATOR INSTRUCTIONS)

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

Thanks, Jenn. Before we proceed further with our presentation, I would like to remind each of you that statements by Luna's Executives during this presentation as well as during any discussions and question-and-answer periods include information that constitute 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, expected new products and results of research, management's expectations and beliefs about business results in the future and forecasts of future financial performance including related assumptions for the second half and the full year of 2008.

Such statements are only predictions, based on management's current expectations and 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.

Those documents specifically include, but not are not limited to, Luna's Form 8-K filed earlier today relating to the subject matter of this earnings call, Luna's Form 10-K for the year ended December 31st, 2007, and Luna's Form 10-Q for the quarter ended March 31, 2008.

These filings may contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. 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 so with that, I'd like to turn the call over to Kent Murphy, our Chairman, Chief Executive Officer of Luna Innovations.

Thank you Dale, and thanks to all of you for joining us today as we review the progress we've made in the second quarter. As on our previous calls, I will use this opportunity to put our results in the context of where we are in the execution of our growth strategy. Then, Dale will review our results in more quantitative terms after which we'll welcome any questions you may have.

Our financial results and operational achievements were strong during the second quarter as we continue to gain significant traction from our growth strategy. I'm very pleased with the growth in the product and licensing side of our business, which is up over 46% from the same quarter of last year, and as a result of that strong growth, our gross profit margins have continued to expand from 37% in the second quarter of 2007 to 41% in our most recent quarter.

We incurred a net loss of $1.8 million compared to a net loss of $2.3 million in the second quarter of 2007, well within our previously announced guidance. Additionally, we strengthened our cash position with a $10 million credit facility, which we will support our working capital needs as we execute on our business model of developing and commercializing our market-driven technologies into marketable products.

In reviewing Luna's operational achievements, we continue to make substantial progress across all areas of our business. Our Technology Development division, we had more than $6.9 million in revenue during the quarter, an increase of almost 19% over the second quarter of 2007. We continue to sign the kind of large, multi-year contracts that support our research and development infrastructure and are the source of innovations for potential commercial products.

During the second quarter, we were selected by the National Institutes of Health for a $2.1 million award to develop a biodefense agent to treat infectious diseases. Bacterial, viral and parasitic intracellular pathogens sustain infection by living inside a person's cells. To commandeer their host, they use the cells' signalling pathways to establish and maintain infection.

Approaching an involved and cell-to-cell communication called ribosomal S6 kinase, otherwise known as RKS, or "risk," is critical for intracellular pathogens to maintain infection. The science -- the significance of the RSK pathways as well as the first RSK inhibitor compounds were discovered by scientists at the University of Virginia. Luna has exclusively licensed the technology and has worked closely with UVA and other collaborators to better understand the RSK pathway and develop novel RSK inhibitors.

For this particular program, Luna will advance a new class of anti-infective therapeutics based on RSK inhibition to block the pathogen from establishing an infection and surviving inside the host mechanism. Anti-infective therapeutics are critical because of the potential to weaponize these pathogens in biowarfare. In addition to the treatment of infectious diseases, the RSK pathway and our novel RSK inhibitors have shown early promise for the treatment of other conditions such as cancer and arthritis.

Also in our Technology Development segment, we received a $3.9 million follow-on contract with General Dynamics Information Technology, which I mentioned during our last conference call. Under the subcontract, we'll continue to work on improving the performance of nanostructured materials over the next two years to support military applications for the Air Force Research Laboratory.

Using funded research, we've previously demonstrated that the use of Luna's exclusive carbon nanomaterials could dramatically enhance magnetic resonance imaging while reducing the potential toxic side effects prevalent with existing [kelate-based] contrast agents. This program will allow us to continue to build on our past progress in medical imaging, and we advance our carbon nanomaterials for medical -- military medical applications and investigate new areas such as the promotion of wound healing and alternative energy solutions using organic solar cells.

Moving on to our work in nanomedicines with applications in both diagnostics and therapeutics, I will first highlight our development efforts in diagnostics. As we announced last quarter, the National Cancer Institute's Nanotechnology Characterization Laboratory, whose focus is to accelerate the transition of basic nanomedicine research into clinical application, selected Luna's HYDROCHALARONE for preclinical analysis. Just to clarify for everyone, HYDROCHALARONE is the name that we have given to our TRIMETASPHERE molecules, specifically functionalized for use as a contrast agent.

The preliminary characterization data Luna will obtain through its collaboration with the NCL can be used to aid in the ultimate regulatory approval process, and I'm pleased to report that in the second quarter, we delivered the MRI contrast agent sample materials for NCL to begin these preclinical characterization studies. As a reminder, the NCL studies are for a general [blood-pooling] agent. We continue to also make progress on developing targeted agents, specifically targeting unstable arterial plaque and brain tumors.

On the therapeutic side of our nanomedicine efforts, we also recently announced a $1.6 million National Institutes of Health funding through an R01 to investigate the use of fullerene-based nanomedicines as a pathway to treat allergies and other inflammatory diseases.

Allergic conditions and other autoimmune diseases affect millions of people worldwide. These diseases are induced in tissues that contain mast cells and basophils. Mast cells are one of the cells in the immune system that line the surfaces of the skin, mouth, nose, eyes, sinuses and lungs while basophils are the type of white blood cell that are also involved in allergy. Both cells contain histamine, the main cause of inflammatory allergic diseases.

Fullerenes are a novel class of carbon molecules that are highly potent antioxidants due to their unique structure. Luna's team of scientists are synthesizing a variety of fullerenes to develop new or improved technologies to treat certain medical conditions caused by inflammation, including allergies.

We first brought this work to light in a publication last year. Since then, we have discovered that our fullerene prototypes block the allergic response and other important inflammatory responses and may represent a new pathway to control diseases that are caused by mast cell and basophil responses. This award from NIH is recognition of the potential these studies represent to find new treatments for important diseases such as multiple sclerosis, allergy and asthma.

Because these nanomedicine prototypes appear to work through a unique pathway, it's possible that they could synergize with existing medicines and make a significant impact on these chronic and difficult-to-treat diseases. This NIH program is under NIH's National Institute of General Medical Sciences. Under this program, Luna will explore how fullerenes control allergies by investigating the responses to our nanomedicine prototypes by looking at responses at the molecular level, at the cellular level and in laboratory animals.

The program will be directed by Dr. Chris Kepley, Luna's nanoimmunology group leader, who is a renowned scientist and has worked for over two decades on mechanisms of allergic disease. He will lead an interdisciplinary research team of expertise in the chemical, physical and biological sciences, state-of-the-art methodologies and models to accomplish these studies. These awards provide us significant resources to support our discovery program to identify new product opportunities, and they validate the importance of our nanomedicine program.

We previously reported on our therapeutic program's efforts to develop products to treat dermatological diseases and stimulate hair growth. We are currently making substantial progress in the structure and activity relationship studies to optimize a lead candidate.

In this program, we have extended the studies to include additional models for evaluating prototypes, including the study of follicle development in cultured human skin using a topical application. We are encouraged that these new studies improve the likelihood that our prototype will be effective in stimulating hair growth in people.

Now, I'd like to move on to discuss the growth and direction of our Sensing and Instrumentation business. Our strong product and license growth in the second quarter was largely driven by the expanding acceptance of the Luna Technologies brand of fiber optic test and measurement products.

Product and licensing revenues were $2.9 million, an increase of 46% over second quarter of last year. In particular, in the second quarter, our Luna Technologies products excelled in three critical areas, market penetration, overseas growth and penetration into the higher-volume manufacturing segments.

Let's take a look at some of these accomplishments. We had a substantial increase in first-time customers for this quarter over the same quarter of 2007. We expanded our global reach by investing in the Asia-Pacific region. We've already received orders for nearly $0.5 million in just a few months.

We continue to win multiple-unit orders for manufacturing applications, driven primarily by expansion of high-speed, optical networks and our products' unique capability to help our customer produce high-quality components for such networks in a cost-effective manner.

It's the Luna Technologies Common Optical Platform that is allowing us to penetrate into new markets, including medical devices, both robotic and non-robotic monitoring, energy generation and delivery monitoring, and we are continuing to launch new products and gain market share in existing Telco and defense businesses.

In the medical arena, we continue to deliver on schedule in the development of shape-sensing technology that will enhance the medical robotic applications for our partner, Intuitive Surgical. We are pleased with the progress and results we have achieved to date, and we believe that we're meeting or exceeding all the technical specifications at this point in the project.

With the close of the second quarter, we have reached the two-year anniversary of our life as a public company. During those two years, we've seen our product and license revenue nearly triple. Our gross margins expand from 29% in the second quarter of 2006 to 41% in the most recent quarter. The Technology and Development group has grown at 20% annually, providing new opportunities for our pipeline of new products.

Our investment in research and development of nanomedicines has resulted in exciting breakthroughs that I believe create long-term value for our shareholders. We have also executed long-term partnerships with the world leaders in the areas of optical test and measurement and robotic surgery, relationships that we believe position us for significant long-term growth in those areas and continue to purse similar partnership arrangements in other areas where our platform technology solutions can have a significant market impact.

And on the road to profitability, we have improved our rate of cash usage, which has now been less than $1.5 million each of the past five quarters and less than $1 million in four of the last five quarters. With all of these accomplishments, this is another very strong quarter for Luna and an exciting time for all of us. Now, we'll turn the call back over to Dale, who will discuss what that growth means in financial terms.

Thanks, Kent. As Kent mentioned already, we had another solid quarter of growth and financial improvement. For the second quarter of 2008, our revenues grew by 26% to $9.9 million compared to $7.9 million in the second quarter of last year. Both of our business segments continued to achieve the growth we've expected.

Our Technology Development segment increased its revenue by 19% to $6.9 million for the quarter with notable growth in our secure computing group and through our various NIH programs, such as those that Kent just talked about.

Our product and license revenue increased 46% compared to last year's second quarter to $2.9 million. Within this segment, our sales of optical test and measurement equipment accounted for $1.8 million this past quarter, a growth of 49% over the same period last year.

Other revenues in our product and license segment grew by 42% year-over-year. With the growth in our product and license revenues, we also improved our overall gross margin. For the quarter, our gross margin was 41% compared to 37% in the second quarter of '07. Product and license margins returned to normal levels this quarter at 51%.

We also improved our margins in the Technology Development segment from 31% in the second quarter of last year to 37% in the most recent quarter through a number of factors, including better labor utilization rates, winning larger programs that often carry higher margins and efficiencies from our overall growth. Overall, our gross profit improved to $5.8 million compared to $5 million in the second quarter of last year.

Operating expenses increased 12% to $5.9 million in the second quarter compared to last year. This is a notable increase in the operating expense levels we've seen over the past few quarters and was largely driven by increased outside legal fees associated with our various litigation matters. These expenses grew approximately $400,000 from the first quarter of this year.

We may continue to see this higher level of cost into the future. Even with these higher professional fees, we continue to improve the efficiency of our operating expenses through our growth. Operating expenses as a percentage of revenue improved from 66% of revenue in the second quarter of last year to 59% in the second quarter of this year.

In our non-operating expenses, you can see that we've begun to incur a net interest expense compared to our historical net interest income. This line has been impacted by declining yields on our invested cash balance in addition to the incremental interest cost associated with our new term loan, which I'll cover when we get to the cash and balance sheet.

Our net loss improved to $1.8 million, or $0.16 per share, in the most recent quarter compared to $2.2 million, or $0.21 per share, in the second quarter of last year. Included in our loss of $1.8 million for the quarter were non-cash charges for depreciation, amortization and stock compensation of $1.1 million in the aggregate.

Turning to the balance sheet, you'll see that we ended the quarter with a cash balance of $15.3 million, an increase of $3.2 million over the prior year-end. During the quarter, we entered into a new four-year credit facility totaling $10 million of which $5 million was in an amortizing term loan in excess of the outstanding principle on the term loan, up to $10 million in total is available to us on a revolver, subject to customary credit covenants.

As of June 30th, we had drawn no amounts under the revolving credit facility. The term loan is repaid interest-only through the remainder of 2008 and then amortizes over 42 months beginning in January 2009. There are really no other what I would consider significant balance sheet movements since year-end other than those related to cash and the debt facility.

With regard to cash flow, you can see that we continue to make significant progress with respect to our rate of cash usage. For the first half of the year, we had a net increase in cash of $3.2 million compared to a net cash usage of $3.9 million for the first half of last year. If we exclude the impact of net proceeds from our new credit facility, our net cash usage for the six months would have been $1.7 million compared to the $3.9 million usage last year.

Our cash use in operating activities improved $1.6 million, largely attributable to the improvement in our net loss excluding the non-cash charges for depreciation, amortization and share-based comp. Capital spending remains below prior-year amounts as we were incurring costs in 2007 for the expansion of our facilities in the first part of the year. Again, we ended the year with $15.3 million of cash and cash equivalents on hand.

Looking forward into Q3 and the full year, we continue to believe that our revenue will be within our previous guidance of $40 million to $42 million for the year and a net loss in the range of $6.5 million to $7 million. We expect third quarter revenues to be $10.3 million to $10.5 million and our operating loss to be in the range of $1.8 million to $2 million. And with that, I'll turn the call back over to Kent.

Thank you, Dale. Jenn, we are now ready to receive questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). Our first question comes from [Lee Briand] with [Shamrock].

How are you guys doing?

Good, Lee, how are you?

Good.

Congratulations on the quarter.

Thank you.

I guess I have a -- I can kind of just rapid-fire them to you here, and then you can order them -- answer them in the order that I've given them to you, if you would, just three questions. Just where are you with the EDAC? Specifically, have you had your manufacturing site approved yet?

And then secondly, I've noticed that you have some coating for corrosion and then the paint thing that was mentioned on your website for the planes. Where are you guys at in the testing process with that? And how long until you could potentially commercialize the products?

With the EDAC, we have just recently demonstrated a bubble-removal technique that we've been developing for the last year. And with EDAC, we're able to measure the microemboli, [Class 5M] air and solid particles and now we're able to remove those bubbles, at lest for some of the pumps that are out there today.

So, that's moving along nicely for us with our partner. And on the corrosion coatings, we have signed joint development agreements with some defense contract suppliers, and we are at the early stages of demonstrating many of those coatings that the military needs.

Well, thanks a lot.

Okay.

Thank you, Lee.

Oh, I'm sorry. And the manufacturing site has been approved for the manufacturing of the EDAC, and we continue to place those in the hands of key opinion leaders.

(OPERATOR INSTRUCTIONS). As there are no more questions in the queue at this time, I'll turn the call back to management for any closing remarks.

Thank you, very much for your participation on the call today. We look forward to speaking with you on our next quarter conference call. Thank you, again.

Ladies and gentlemen, we do thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a good day.