Luna Innovations Inc (LUNA) 2008 Q3 法說會逐字稿

You may proceed, sir.

Good day. My name is Landon Barretto and I'll be the Moderator for today's presentation, which is being recorded and will be accessible following this call for 30 days on the Luna Innovations website at www.lunainnovations.com. Please go to the Webcasts and Presentations portion of the website.

Thank you for your interest in Luna Innovations. With me today are the CEO, Dr. Kent Murphy and Chief Financial Officer Dale Messick. Dr. Murphy and Mr. Messick are going to discuss the company's financial results for the third quarter ended September 30th, 2008. At the conclusion of the prepared remarks, we'll open the conference for questions.

In compliance with SEC requirements, I must read the following statement. Except for historical information, the matters discussed in the conference call are forward looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward looking statements. The factors that could cause results to differ materially are included in the company's filings with the Securities and Exchange Commission.

Forward looking statements made during today's call are only made as of the date of this conference call and the company undertakes no obligation to publicly update such forward looking statements to reflect subsequent events or circumstances. Dr. Murphy, please proceed.

Thank you, Landon, and thanks to all of you for joining us today as we review the progress we've made during the third quarter. It was on previous calls I will use the 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.

For financial results and operational achievements were strong during the third quarter as we continue to gain significant traction from our growth strategy. During the third quarter we continued to achieved our planned improvement in both revenue and bottom line results.

For the first time, we achieved quarterly revenue in excess of $10 million. Our revenues of $10.7 million represent an increase of 21% as compared to the same quarter last year with growth of more than 20% in both lines of our business. Our gross profit increased from $3.5 million to $4.3 million and with continued focus on operating expenses our loss per share declined from $0.18 per share to $0.10 per share for special items and $0.04 per share overall.

We incurred a net loss of $1.1 million before a one time benefit we realized on a litigation settlement with our former auditors compared to a net loss of $1.8 million on the third quarter of 2007.

Cash usage for the quarter was well below $1 million at less than $750,000 excluding the one time benefit, making it one of five of the last six quarters we have used less than $1 million. During the last six quarters we have used a total of $3.7 million in cash, not counting the proceeds from the term loan.

In reviewing Luna's operational achievements, we continue to make substantial progress across all areas of our business. In our Technology Development division, we had a record quarter at more than 7.2 million in revenue, an increase of more than 20%. We also had continued success in strengthening our Technology Development division and have a solid backlog of contracts specifically supporting much of our product development efforts.

Our high margin product and licensing revenues continue to grow and we remain on track to achieve a growth of approximately 30% in this segment this year as compared to last year.

Focusing now on our nanomedicine development efforts in both diagnostic and therapeutics, I will first talk about diagnostics. During the third quarter we were selected by the National Institutes of Health, National Cancer Institute, to develop an agent that is targeted to image brain cancers.

Under this program, we will adapt our exclusive contract agent technology using carbon nanospheres to produce an improved magnetic resonance imaging agent to enhance tumor imaging and advance the diagnostic and treatment of this disease by directing nanomolecules to specific biological targets such as glioblastoma tumors, one specific form of brain cancer.

We also continue to optimize the performance of our general contract agent prototype as testing continues with the National Institutes of Health, Nanotechnology Characterization Laboratory whose focus is to accelerate the transition of basic nanomedicine research into clinical applications.

On the therapeutic side of our nanomedicine efforts, earlier this year we had announced that we had discovered our nanomedicine prototypes aid in the growth of new hair follicles. Results from recent animal studies at the Hamner Institutes of Health and Sciences have reinforced our initial findings that our nanomedicine prototype, now in topical form, does encourage existing hair follicles as well as growing hair faster and at the same time, increases the actual number of hair follicles.

This is a new mouse model in addition to the genetically hairless mouse that we started with. Using these results, we've selected a lead compound to begin development for an investigational new drug.

On other applications of our proprietary nanomaterial development, we have commented in the past on our ability to use our carbon nanomaterials known as Trimetaspheres to increase the open circuit voltage of organic photovoltaic devices by approximately 50%.

During the third quarter, we were able to translate that increase in open circuit voltage to an overall improvement of approximately 20% in organic solar cells. There is more room for improvement and further development is underway. We continue to discussions of potential partnerships with major solar cell manufacturers to ultimately commercialize this technology.

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 third quarter was again driven by the expanding acceptance of the Luna Technologies' brand of fiber optic test and measurement products. Product and licensing revenues were $3.5 million, an increase of 21% over third quarter of last year.

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 that gain market share in existing telecommunications and defense businesses.

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

In summary, we've had a record quarter at $10.7 million in revenue. We had cash usage of less than $750,000, making this one of five out of the last six quarters we've had less than $1 million in cash burn.

Our product development efforts are on track. We will provide specific 2009 guidance later this year after we have approval of our 2009 plans at our next board meeting. We expect EBITDA plus stock comp to be positive beginning in Q3 2009.

I will say it again, we expect our earnings before interest, taxes, depreciation, amortization and stock compensation charges to be positive beginning in Q3 2009. Now, we'll turn the call back over to Dale who will discuss what that growth means in financial terms.

Thanks, Kent. For the third quarter 2008, we recognize revenue of $10.7 million, representing growth in excess of 20% in both of our business segments. As we anticipate on our last call, the third quarter represents the first time that our technology development revenues exceeded $7 million with a growth rate of 22% compared to the third quarter of last year.

Our revenues for the quarter were a continuation of the growth that we have seen throughout the first nine months of the year with a year to date growth of almost 22% compared to the first nine months of 2007.

In the product and license excitement, revenues grew 21% compared to the third quarter of last year with the growth in this area coming predominantly from incremental sales of our OBA and OBR product lines.

Gross margins remain constant at an overall 40% for both the third quarter of 2008 and 2007. Within segments, the Technology Development margin declined very slightly from 32% to 31% while margins in the Product and License segment increased from 55% to 58%.

The higher margin in the Product and License segment in the third quarter this year was attributable to a larger proportion of the revenue coming from our branded products as opposed to our funded product development activities in addition to an increase in some higher margin services type revenue.

Operating expenses, $5.4 million represent a small decrease from the $5.5 million level incurred in the third quarter of last year and also a decrease from the most recent quarter. The decrease in expenses is primarily due to lower legal fees in the quarter as we settled through mediation in July a claim we filed against our former accounting firm that we used prior to the IPO and also incurred lower legal costs in the quarter with respect to our ongoing dispute with Hanson Medical, compared to recent quarters. I'll touch more on those costs when I cover the outlook for the remainder of the year.

With the mediation settlement reached in July, we realized a $667,000 non-recurring benefit, reflected in the other income section of our income statement in the third quarter of 2008, we incurred a net interest expense of $36,000 compared to a net interest income of $94,000 in the third quarter of last year. That change in net interest is attributable to the additional interest incurred on the $5 million term loan that we entered into in May of this year as well as lower overall yields on our invested cash balance.

We reported a new loss for the quarter of this year of $474,000 compared to a net loss of $1.8 million in the third quarter of last year. Excluding that $667,000 non-recurring benefit in the third quarter of this year, our net loss would have been $1.1 million, an improvement of 38% compared to last year's third quarter.

On a per share basis, our net loss for the third quarter of this year was $0.04 or $0.10 again, excluding that one time gain, compared to $0.18 in the third quarter of last year.

Turning to the balance sheet, we ended the third quarter with cash of $15.2 million compared to $15.3 million at the end of the second quarter of this year and $12 million at the end of last year. Our net usage of cash for the quarter was approximately $100,000. The $3.1 million increase in cash since the end of last year includes the additional $5 million from our term loan executed in the second quarter, excluding the bank financing, our net cash usage for the first nine months of the year has been $1.9 million.

Receivables of $10.4 million have grown 7% since last year end due to the overall growth in our business. To date we've not seen any deterioration in collectability of our receivables due to the status of the economy and the credit markets. Our inventory balance has increased approximately $600,000 principally in additions to our on hand supply of lasers to support growth in our optical platform.

On the liability side of the balance sheet, we now reflect approximately $1.1 million in the current portion of our $5 million term loan. Repayment of this loan is in monthly installments beginning in January of next year. The remaining balance of the $5 million term loan accounts for the increase in our long term debt compared to the prior year end.

Just to point out a couple of highlights on the cash flow statements. You can see that our $4.1 million loss, year to date, approximately $3.6 million of that related to non-cash charges for depreciation, amortization, and stock compensation. As I mentioned previously, year to date we have a net increase in cash of $3.1 million, which represents also a net cash usage of only $1.9 million for the nine months excluding the new debt facility and we ended the quarter with $15.2 million.

Looking ahead to our expectations for the year, we currently expect our revenues for the year to be in the range of $40 million to $41 million, we expect that our operating expenses will increase compared to Q3, principally in the area of legal fees as we moved into more active preparation now for our trial with Hanson Medical, which is currently scheduled to take place toward the end of the first quarter of 2009.

Throughout the year, we've given an expectation of a net loss between $6.5 and 7 million for the year. Now with the impact of that one time benefit that we realized in Q3 of approximately $600,000, we're forecasting a net loss for the year in the range of $6 million to $6.5 million. And with that, I'll turn the call back over to Kent.

Thank you, Dale. Landon, we're prepared for any questions.

Ladies and gentlemen -- certainly. (Operator Instructions). Questions will be taken in the order they are received. Your first question comes from the line of [Michael Lu] with ThinkEquity. Please proceed, sir.

Thank you and good morning.

Hi, Michael.

Good morning Kent. Good morning Dale. Hi.

Hey, first is -- when is the board meeting that you've alluded -- talked about Kent?

The board meeting is towards the end of this month.

Towards the end of this month. Okay. And also, you mentioned the economy, given the state of the economy, are you starting to feel any impact of the -- any slow down with regards to the R&D funding and grants for a product -- product development efforts?

At the moment we've not seen any slow down -- any measurable slow down at all.

Okay. And also you've mentioned the backlog of contracts, what's the current level of them?

The current level, off the top of my head, is about $26 million.

$26 million. And what is that on a year over year?

I don't recall what it was the third quarter of last year. I would venture to say it's pretty similar.

Okay.

We had -- it's typically been running between $25 million and $30 million.

All right. And can you also provide some granularity? Like you've talked about a lot of the initiatives lets say, like when do you think some of these could start to commercialize in a -- lets say in a best case scenario. Let's say -- let's start with like the shape sensing technology. You've talked about meeting, exceeding technical specifications, so like what is the next milestone we should be looking for?

As we've mentioned before, Intuitive prefers that we not talk about their business efforts. We are taking shape sensor into other markets at the moment. We're looking at launching it as an integrated strain sensing system for materials evaluation, for industrial applications.

Certainly some of the federal applications we're working on for the Navy we would expect to launch sometime later next year. We're also working with some very large manufacturers of power generation turbines, both gas and wind turbines. We expect those to launch later to next year in the gas turbines, and the wind turbines shortly thereafter.

Okay, how about also on the organic [floatable] tax you mentioned that a 20% improvement in -- what does that -- what does that translate right now to conversion efficiency?

It's on the order of 5% where we're using off the shelf polymers. So if you look at our ability to increases off the shelf polymers by 20% today, and again, we still believe there's room for more increased efficiency as we improve other factors that relate to the full efficiency other than open circuit voltage.

When you combine that 20% increase with state of the art polymers that some of these potential partners have, it puts it into the realm of commercial viability, which is why we're seeking a partner. So some of these partners have polymers that would combine with our Trimetospheres to reach the commercial viability threshold.

Got it. Okay, thank you very much.

Thank you, Michael.

Thank you.

and your next question comes form the line of [Jim Strayline], a private investor. Please proceed.

Hey good morning.

Hello, Jim.

Thank you for the great work you've all been doing.

Thank you.

Thank you.

I just had some questions on the MIR contrast agents. I know you're in the preclinical work with the NCL now. Do you still anticipate forming a partnership with a pharma company prior to seeking approval or what's your plans in that area? And about how long does the approval process take for a diagnostic agent compared with a therapeutic. I assume it's somewhat less.

Yes, that's correct. To answer your first question, we at the moment, because of the partnership that we've done with NIH, with the National Characterization Lab, which is a partnership between NIH and the FDA, formed specifically to accelerate nanomedicines to the marketplace, we believe that in combination with some of the other funding that we've received for NIH for targeting plaque in arteries and more recently the targeting of the glioblastoma.

We believe we're creating a tremendous amount of value through progress on those programs and are in no real hurry to form a partnership immediately. We can certainly create more value before that partnership is done. We expect if NIH stays on track with their national characterization lab results that they will have the majority of the date needed for an IND by the end of Q3 next year. We hope that that remains true.

Once the IND is filed, you can get a diagnostic through the FDA in two years. It certainly could take longer, but as you mentioned, it is a shorter period of time for --when compared to a therapeutic. A therapeutic has to prove that it is doing some good. A diagnostic just has to prove its doing no harm.

Okay, thank -- it sounds like then we get to keep a great deal more of the profits, or get a -- get a much more lucrative partnership when it comes time to -- is that what you're thinking? Along those lines?

That is our strategy and that is our hope.

All right. Great. Thank you.

Thanks, Jim.

Thank you.

and your next question comes from the line of [Stanley Sholov] with Sholov Associates. Please proceed.

Yes, my question relates to that backlog that you mentioned a few minutes ago. You mentioned you have the $26 million backlog. Now that would be, I assume, contract research revenues and when you specified $26 million in a contract, you would think the contract has an end date. So with that backlog, what are the end dates to that $26 million?

Well the -- that $26 million is not a single contract, it's a -- we typically have 80 to 100 active contracts at any point in time, those contracts typically range in duration from six months to a year and a half, as much as two years. But there's not a specific end date for that $26 million.

Okay. After the six months to one-and-a-half years, what would you say is the new business you would be seeking because you've mentioned a very diverse group of interests, what would be the end business of the firm?

Are you referring to the technology development division backlog or the company as a whole?

Well, the company as a whole is very important beyond a year and a half.

Yes, our intention is to focus on two major platforms over the next couple of years. The one platform is an optical platform from which we built the telecommunications gear, which is our ability to measure things inside of an optical fiber that no one else can.

By measuring what's called the transfer function, we can calculate any loss in dispersion parameters for the telco industry and compete head to head with major players and win on a regular basis.

With that same technology platform, literally 95% the same, we can also solve problems for someone like Intuitive Surgical by measuring the shape of the robotic arms during a surgical process and provide better data and data they've never had before concerning shape.

We can can measure thermal profiles inside of power generation turbines that allow them to run more accurate and efficiently. They can get up to 10% more power out of a turbine without getting any damage by being able to measure parameters inside the turbine.

A long list of different markets we can go after with that same optical platform. So that's one key core part of our business and when you think about it, some of those were doing Luna branded products that were on sales marketing and distribution channels, say the telecommunications gear, and in other areas such as the medical world, we're looking for OEM and partnership type deals where we can leverage our products, integrate them into someone else's product, and get our market -- our products to the market much faster.

The other platform that we're focusing on over the next couple of years is the nanomedicine platform where we have very specific intellectual property surrounding the carbon nanomaterials. We actually have issued composition of matter patents.

We've covered the molecules themselves, thousands of different combinations of those, the way we make them, purify them, the uses of them and in functionalizing them to perform as both contrast agents to enhance imaging and diagnostics as well as on the therapeutic side growing hair, suppressing allergies, suppressing the response to arthritis and many other diseases.

Okay that's a very enthusiastic goal and how many employees have you put together to reach those goals?

We have about 250 full time people today and probably a dozen openings at the moment.

Okay, thanks a lot and lots of luck (inaudible).

Thank you, Stan.

Thank you.

And gentlemen, you have no additional questions.

Thank you very much Geri. I would like to thank everyone on the call today for their participation and the interest in Luna and look forward to talking with you at the end of our fourth quarter results.

Thank you.

This concludes your presentation, you may now disconnect. Good day.