Luna Innovations Inc (LUNA) 2017 Q3 法說會逐字稿

Welcome to Luna Innovations' Third Quarter 2017 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Chief Financial Officer, Dale Messick. Sir.

Thank you, James. Good afternoon everyone and thank you for joining us today as we review our operations and results for the third quarter of 2017. A recording of this conference call will subsequently be posted on our website.

Before we proceed with our presentation today, let me remind each of you that statements made in this conference call as well as our public filings, releases and websites, which are not historical facts, may be forward-looking statements that involve risk and uncertainties and are subject to changes at any time including but not limited to, statements about our expectations regarding future operating results or the ongoing prospects of the company.

We caution investors that any forward-looking statements made by us or management's beliefs based on currently available information and should not be taken as a guarantee of future results or performance. Actual results may differ materially as a result of a variety of factors discussed in our latest forms filed with the Securities and Exchange Commission.

We disclaim any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments except as required by law. There is more complete information regarding forward-looking statements, risk and uncertainties in the company's filings with the SEC available on the SEC website and our website.

At this time, I'd like to turn the call over to Scott Graeff, President and CEO of Luna Innovations.

Thank you, Dale and thank you all for joining us today. I would like to start by saying I'm honored to be serving as the new CEO for Luna Innovations. I've been with the company for nearly 15 years going back even before the IPO and have seen the company undergo many changes along the way. My Chung took on the CEO role a little over six years ago.

And over his tenure, we have narrowed our focus on a couple of strategic initiatives, sold off some non-core businesses, completed a merger with API and most recently spun off the HSOR business. Following his retirement a few weeks ago, I am excited to now have the opportunity to drive higher growth and success of the company and its stakeholders.

As we mentioned on our call in August, Luna sold its high speed optical receiver business in the third quarter for $33.5 million in cash to MACOM. $29.5 million of cash that was received in closing and $4 million remains in escrow until December 2018. These assets were part of the Picometrix division located in Ann Arbor, Michigan. Luna did retain the Terahertz assets, they are also located in Michigan.

Luna is starting its new chapter on solid footing with the strongest balance sheet that the company has ever had and our focus on fiber optics test and measurement as our strategic growth platform which is slightly expanded to include the communication test products as well as the structure and material test products.

Both of these product lines are built upon the same underlying hardware, software platforms and are targeting the markets that currently represent new high growth opportunities such as high speed communication systems, moving to silicon photonics and aerospace and automotive moving into composites.

With this being my first opportunity to discuss the company with you, I thought it would be a good time to briefly review the various segments of Luna and my high level views on where we are with each of these businesses. I've asked Brian Soller, the Vice President and General Manager of our Lightwave Division which is the home of all our fiber optic test and measurement products to join us on this call. So if there are questions at the end, we can gladly address them at all levels.

The first revenue line item when you look at our P&L is technology development. This is our contract research group of approximately 75 people doing mostly applied research activities under various government contracts with the goal of discovering or advancing new technologies with commercialization opportunities.

This group takes advantage of the external funding from commercial and government organizations to explore new technologies and markets. Mature solutions and products from this division can be sold or licensed. For example, we licensed two hydrophobic coating solutions over the past couple of years to UltraTech International. Luna continues to work on advancing these efforts and was recently awarded two patents to cover the technology.

One variant, a water and stain resistant textile treatment marketed as Ever Shield was awarded the Industrial Fabric Foundations 2017 Innovation Award in the third quarter. Working with these emerging technologies while keeping an eye on customer needs, the contract research group continues to grow.

In Q3, the revenues were up nearly 7% from the same year, same quarter of last year. They have had improved success over the past couple of years in increasing their win rates for follow on contracts and thus we have seen solid growth in this area for the past couple of years. We have more than $20 million of backlog for future R&D work in this group.

And so I expect to continue to see strong revenues in this segment going forward. As you think about where this group fits into the organization, keep in mind that not only does this area have the opportunity to create new technologies, we also used this area as an opportunity to fund development for the enhancement of our optical products. For example, the fiber optic shape sensing technology that we sold to Intuitive Surgical in the medical robotic field back in 2014 was started in this group through a research contract.

Much of our terahertz technology development has been completed under government contracts, as has some of the development of our fiber optic sensing platform, which leads me to the second segment of our business, our products and licensing segment. The activities in this segment are focused on optical products, from custom optical components and subsystems to the very high end optical test and measurement equipment that we see as our strategic growth engine for the coming years.

The optical components and subsystems business based in California was part of the business we acquired in the merger with API in 2015. About 75% of what this division does, is related to custom devices for military and industrial applications. Because they're custom products, the business relationship tend to be long-term and new business tends to require long lead times.

So, we typically have good insights into the next couple of quarters and expect to see a dependable solid contribution to the bottom line from our custom components and subsystems. Our optical test and measurement products include the terahertz platform, our OVA and OBR products for communication test and our ODiSI platform for strain and temperature measurement.

Performance in the terahertz area has been pretty consistent since the API merger. Our focus in that area right now is in reducing the size of the sensor and engineering some of the cost out of the unit. Both in terms of the component cost and the manufacturing time in order to bring the price down to meet the necessary specifications for penetrating additional industrial process control markets that we have been pursuing.

Reducing the cost in these markets will allow us to penetrate manufacturing applications which would in turn lead to multiple unit orders over long periods of times. We have seen increasing sales activity in communication test this year, which we attribute broadly to the continued growth in global demand for high-speed fiber-optic communication systems.

More specifically, we can attribute our growth to investments in the development of silicon photonics technology, which is an enabling technology in the latest generation of high-speed communications networks. Our communications test products are especially well-suited to help our customers advance their research and development of new products that incorporate silicon photonic devices.

New bookings in the third quarter of 2017 for Comtest equipment increased 23% compared to Q3 last year. Our backlog of orders at the end of the quarter included purchase orders for multiple units of both our OVA and our OBR from a new institute focused on the development of silicon photonics.

We believe that the unmatched capabilities of our test instruments leaves us well positioned to continue to capitalize on the growth of the data center market and the advancement of silicon photonic integrated circuits. Using that same technology platform, we developed our ODiSI product for measuring strain and temperature using fiber-optic sensors.

We have focused our commercialization efforts on applications involving the use of composite materials, specifically in the aerospace and automotive markets. We recently released a multichannel version of the ODiSI product which will allow for up to eight sensing fibers to be measured by a single ODiSI interrogator, dramatically increasing the surface area that can be tested by a single unit and have received our first order for the new system from a customer in the aerospace market.

During the third quarter, we received orders for 17 ODiSI units. Six of which were in the aerospace market and two in automotive. This represents approximately a 35% increase in bookings for ODiSI units compared to Q3 of last year. We are seeing success in getting into these key customers and creating interest in the technology in our product.

Our challenge now is to expand our presence throughout those customer organizations, creating a new standard of test and turning those single unit sales into recurring multiple unit opportunities. So how will we get there? I mentioned earlier that the company currently has the strongest balance sheet it has ever had.

The sale of the HSOR of our business in August added nearly $30 million of cash to the balance sheet as of September 30th. With more than $40 million of working capital at the end of the quarter, that transaction left us with tremendous liquidity. On the last call, we also talked about using that liquidity to potentially seek another acquisition target.

While we may ultimately move in that direction, we first want to better understand the possibilities for organic growth within the existing growth verticals, I spoke of earlier. We will not rush into a transaction until that is fully evaluated. Our first actions need to be to conduct a thorough self-evaluation of where we are and what it takes to accelerate the success of our fiber optic test and measurement initiative within the markets we are already selling into.

I believe we have tremendous organic growth opportunities in those areas that what we need to better exploit before we bolt on another operation. We need more feet on the street through expansion of our sales, presence in the market and to enhance our product marketing efforts and capabilities. After we have done those things and identified where we have gaps, we can then see if those areas can be best filled through M&A.

Only then will we take a targeted approach towards a new strategic transaction. I have great confidence in the team here at Luna including world class engineers, leaders and industry experience salespeople, and I believe we can execute on our initiatives and our vision.

With that, I'll turn the call over to Dale to review the Q3 financial results.

Thank you, Scott. Before I go through the numbers, I'd like to highlight that with the sales of the HSOR business in August, we've now reclassified the operating results associated with the HSOR business as discontinued operations in our income statement. So if you look at the income statement now for all the periods presented the revenues and expenses in the top part of the statement reflect our now ongoing business activities.

And towards the bottom of the statement, you'll see captioned as discontinued operations, the operating results of the HSOR business activities and the gain we recognized on the sale of HSOR. So to start with continuing operations, revenues for the three months ended September 30th, 2017 were $11.6 million compared to revenues of $11.2 million for the three months ended September 30, 2016.

The increase in revenues year-over-year was driven by the technology development segment which grew 11% year-over-year while revenues within the products and licensing segments were flat year-over-year. Scott mentioned in his remarks earlier that bookings in the test and measurement products increased significantly year-over-year. So what that means is that while revenues in the products and licensing segment were flat year-over-year, we are creating a greater backlog into the fourth quarter of this year.

Our gross profit realized on those revenues increased to $4.5 million for the third quarter of 2017 compared to $4.4 million for the third quarter last year representing a gross margin of 39% in each period. Operating expenses decreased to $0.5 million to $4.1 million or 35% of revenue for the three months ended September 30, 2017, compared to $4.6 million or 41% of revenue for the three months ended September 30, 2016.

The decrease in operating expenses resulted primarily from a $0.2 million decrease in bad debt expense and $0.2 million decrease associated with open positions we have in marketing.

With the year-over-year increase in revenues and gross profit and the decrease in operating expenses, we recognize income from continuing operations of $0.4 million or $0.02 per share for the three months ended September 30, 2017 compared to a loss from continuing operations of $0.03 million or $0.01 per share for the three months ended September 30, 2016.

We recognized income from discontinued operations of $15.2 million for the three months ended September 30, 2017 compared to a loss of $0.1 million from discontinued operations for the third quarter of 2016. The pretax gain that we recognized on the sale of HSOR was $16.6 million which was offset by a $1.5 million of taxes for a net gain of $15.1 million.

Following this transaction, we have approximately $8 million of federal tax NOLs available for future periods. Including both continuing and discontinuing operations, our net income attributable to common stock holders was $15.7 million or $0.48 per diluted share for the three months ended September 30th, 2017, compared to a net loss of $0.5 million or $0.02 per diluted share for the three months ended in December 31st or September 30th rather 2016.

Year-to-date revenues have increased 10% to $33 million for the first nine months of 2017 compared to $30.1 million for the first nine months of 2016. The year-over-year increase in revenues includes a 14% growth in technology development revenues and a 7% growth in products and licensing revenues.

Within the products and licensing segment, our sales related to fiber optic test and measurement increased 11% year-over-year. Gross profit improved to $12.8 million or 39% of revenue for the first nine months of 2017 compared to $11.1 million or 37% of revenue for the first nine months of 2016.

Operating expenses were $12.9 million or 39% of revenue for the nine months ended September 30, 2017 compared to $14.1 million or 47% revenue for the nine months ended September 30, 2016. SG&A expenses declined nearly $1 million driven by lower bad debt expense, share based compensation expense and sales and marketing cost.

Our resulting loss from continuing operations was $0.3 million or $0.01 per share for the nine months ended September 30, 2017, compared to a loss from continuing operations of $3 million or $0.11 per share for the nine months ended September 30, 2016. We recognized after tax income from discontinued operations of $14.5 million for the first nine months of 2017 compared to $0.3 million for the first nine months of 2016.

Our resulting net income attributable to common stock holders was $14.1 million or $0.51 per share for the nine months ended September 30, 2017 compared to a net loss attributable to common stockholders of $2.8 million or $0.10 per share for the nine months ended September 30, 2016.

Turning to the balance sheet, I'll start by pointing out here that the value of assets and liabilities associated with the HSOR business that was sold in August are reflected separately in the December 31st, 2016, column under the captions of assets or liabilities held for sale.

We ended the third quarter with cash of $38.5 million, representing an increase of $25.7 million since December 31, 2016, and an increase of $28.2 million over our June 30th balance. This increase resulted primarily from $28 million of net proceeds received in the sale the HSOR business.

We also have on the balance sheet a long-term receivable of $4 million reflecting the funds held in escrow from the HSOR sales transaction. The escrow receivable is subject to future indemnification claims by the buyer and is scheduled to be released in December of 2018.

On the liability side, the balance sheet, our accrued liabilities increased $1.7 million compared to year end, driven by the recognition of $1 million in income taxes payable in addition to $0.9 million remained to be paid under the transition services agreement with the buyer of the HSOR business.

Our remaining balance of our bank debts is $2.9 million and we initiated a stock repurchase program in mid-September for a period of one year and up to $2 million. Through September 30, we had repurchased just over 50,000 shares. To date, we have purchased over 340,000 shares totaling more than $567,000.

And with that, I'll turn the call back over to Scott.

All right, thanks Dale. At this time, I'd like to open up the call for questions. And I want to point out again, with Dale and I here made available to address your questions is Brian Soller, our VP and general manager of our fiber-optics test management business. So James, with that, we'll open it up for questions.

(Operator Instructions)

[Anthony Marchese]. Your line is open.

Congratulations on, you know, an outstanding quarter, continuing operations especially. I have two questions and I'll cede the floor. First, you've got an enterprise value of roughly $6 million today. You've got a run rate of $45 million. So I guess the first question is why aren't you guys a little more aggressive in buying back stock? It just seems as though 50,000 shares is not a heck of a lot given, you know given the balance sheet and given where you are on a valuation standpoint, so that's my first question.

Yes, so Anthony it's Dale. The 50,000 shares were just what we did in the last two weeks of September. The plan only went in place in mid-September around the 20th or so and so the 50,000 were just a couple of weeks' worth of activity. As I said, we purchased now over 300,000 shares of stock, so you know much more. We've been buying every day since the plan was put in place.

Great, OK, that's fantastic. I appreciate that as a shareholder. Second question, it seems as though the growth in your test and measurement business for composites for the aircraft and auto relies to a certain extent on you guys being established as a standard of testing. Where do you guys stand in that regard? Are your processes yet considered as standard and if not what are you doing to become a standard?

Yes, it is something that we identified early that we needed to do and I'm going to let Brian talk a little bit about that because there are some things that we are working on, Anthony, we are a part of in getting that so, Brian.

Yes, hi, so this is Brian Soller. The -- you're correct, that is an important part of the process of accelerating our growth, and the standards are really developed jointly between industry and consortia of academics and standard bodies. So, the process that we follow is to work with industry experts within the companies that we sell our systems into, to ensure that we have the industry buy in.

And so we've been doing that now for a number of years since the product was launched. And the other side of that equation is to work with the standards bodies that establish the actual physical standard. So a good example is ASTM, that's the standards for the measurement of strain on any material that would go into [same] aircraft.

And besides, we are working with an ASTM conference this week. We have two individuals there that are participating to essentially present and develop Luna as a standard for the measurement of strain that could be accepted by aircraft manufacturers.

So, fiber optics is a still a relatively new part of the measurements within our target industries and we are working pretty hard with the industry partners and standards bodies to make sure that our technology is acceptable and established.

Great. And just a final thought, you guys present very well. I hope you are a little more aggressive in getting the story out because with these valuations frankly, it's ludicrous, thanks.

No, look I think you're right, you are right Anthony. We talked about it. Every call we've had since I've taken over, that Dale and I have had when we're at an investor meeting last week, we talked about, we've got to be out telling a story. Because if you are looking at those type of enterprise values, clearly the company is not doing a good job of getting the story out, so we will -- that is the focus of ours and you'll see us out and hopefully we can meet in person.

Tim Savageaux with the Northland Capital Management.

Sorry. Hi. Good afternoon.

Hi, Tim.

I wondered if you might be able to speak to the contribution from the HSOR business in the September quarter that was announced sort of mid-quarter there. And what sort of run rate we might be looking at for the business heading into the December quarter? And I'll follow-up from there.

So, Tim, you see down at the -- in our income statement, the HSOR business is in the discontinued operations section. And so, we talk about our list there that we had a contribution of $145,000 from that business during the third quarter up through the point that we sold it in August.

So that contribution of $145,000 is actually an after-tax number. And we've recognized a tax benefit actually of nearly $350,000 associated with those operations for that same period. So, pretax, it would've been about $200,000 negative contribution. And after tax, it's there as $145,000 positive contribution.

Okay. But you've excluded it from the topline for the whole period?

Yes.

Got some apples to apples. Okay. Great. And then moving on to the test and measurement business in various aspects of it, you put forward some pretty solid sort of bookings growth type numbers for a couple of different segments.

So I'm wondering if you could speak to kind of if there's an overall book-to-bill metric or something that you can talk about for the product side of the business on the one hand. And on the other I think you're pretty clear about some of the drivers on the ODiSI side.

But as you look at the fiber-optic or the communications oriented test and measurement business, I wonder if you can comments on kind of what the key bookings growth drivers there either by application or end market or how would you like to address it? Thanks.

Sure. Yes. I can take that one. This is Brian again. As far as the book-to-bill metric goes, Q3 was a good quarter as both Scott and Dale mentioned in their -- right in that 1.2, 1.3 range. I believe. Of course, we would continue to look to try and drive that as we grow this business as a whole.

In terms of the drivers behind the communication test market, Scott hit on a little bit in his section. Primarily, if the development and introduction of new communication of [test] inter-connectivity products based on optical waveguide to build into silicon primarily -- not entirely silicon, there are other materials -- but that sort of catchphrase or [term we use] of Silicon Photonics and this is being either moves through development or in the new products by folks that you have heard about. Big players in the silicon development area from electronics are moving into optics.

And what that does is it allows multiple optical components, which used to be discreet, to be integrated into a single smaller chip. So a good analogy is the move from transistors 30, 40 years ago moving into silicon, and being integrated into silicon platform. The same thing is happening in optics. And our products are just very well suited based on the speed and resolution test, for measurement of this type of device. So that's really what's rejuvenated and has been driving our growth.

And the markets for that are various -- primarily, I think, the products that are out in the market today are in mostly at the data center. And that's because data center -- the band of requirement are huge now and the space is very limited. So they're trying to shuffle off more bandwidth within the smaller space and integrating optics from silicons would enable that at least to a certain extent.

Okay. Thanks. And if I could follow with one final question and if -- and this has to do with sort of strategic aspect and to the extent that I think you're maybe adopting a more measured approach towards deployment of this fixed capital that's come in via the MACOM sale.

As you look across I guess, the elements of that fiber optic test business being focused on composites, communications, or terahertz, is there kind of a bias there towards a focus on in terms of strategic activity heading forward among those three units or perhaps even a new one understanding it's pretty early? But as you think about it now and take, again, what appears to be a more deliberate approach, I wonder if you have any the focus in mind within the segments that you're operating in currently.

Yes. Look, we look at it from we believe the fiber optic test and measurement is the umbrella that that we're placing over this and really looking at the com test, which Brian just talked about with the move to the Silicon Photonics as well as what we've been going after in the composite market here with the temperature and strain.

We believe that those have growth opportunities and we're focusing on that. Like I talked about on the terahertz side, we believe that engineering some cost out of that product is beneficial and we have some opportunities right -- out there right now that could take off if we're able to get that -- the price down in that unit to be able to buy the multiple purchase. So, that is our focus right now. As we talk about -- you'll hear us talk about fiber optics tests and measurements specifically in com test and the strain in temp in the sensing side.

Okay. Thanks. I'll pass it on.

Thanks, Tim.

Jim Kennedy with Marathon Capital.

Hey, guys. Question, how many systems did you place this quarter? Did you say 17?

That was the number of orders that were taken. Some of this are still in backlog to ship in Q4, but that's the -- that's the bookings number.

Okay. So, you had 17. Did I hear you correctly that 6 were into aerospace and 1 or 2 in the auto?

Six and two, yes.

Six and two. Okay.

Yes.

What happened -- where the other nine go or where are they going?

They go into research institutes or universities.

Yes. It's a bit of a mix. The other -- aerospace and automotive tend to kind of overtime average out to at least 30% each to makeup of 60% or 65% and the balances are in the applications, often driven by composite engineering. So, it may be an automotive and aerospace application, but it's embedded within, say, university or a lot of it.

Okay.

[Easier smashing].

Yes, interestingly, Jim, when I wrote that, I thought, I can give the six and two to your point of giving a little more transparency, but it may -- it may be the question as what about the other nine, but -- and it did, but that's okay. So I think we --

Well, just wondering if those other nine are being put to some uses that maybe you all are not aware of yet?

We tend to be pretty closely aligned with the uses, some are exotic, frankly, but one example would be battery development for electric vehicles but embedded within university lab, so we didn't count that in our automotive.

Got you. Got you. And then, Brian, question for you or maybe Scott. When you place one of these in aerospace and let's suppose it's in one of the many labs here in the U.S., are you aware or are you working with the person using it on a regular basis or is it a sale and then at some point they may tell you exactly what they're doing or you holding hands with them through the process of using the actual system?

It's a mix. It depends more often than not I'd say especially on our target growth areas where we're doing some hand holding. We want to ensure they are successful with the product, so we do a little bit off our way in fact to make sure that they could set up properly. We deploy application engineering resources we have on board to walk especially first time users through the sort of first battery test and make sure that they are comfortable.

Okay. And I may have missed it earlier. Do you have any upcoming conferences where you will be appearing?

We do. We're going to be at the LD Micro Investor Conference first week of December.

Okay. Good. Okay. And then you'll be out at B Riley or you're not sure yet?

In the spring, yes. Yes, in the spring, we'll be ay B Riley. And we did place -- Jim, we placed that presentation that we gave to your investor group last week, that's up on our website now or [two weeks already] (inaudible).

Okay. Great. Okay. That's it from me. Thank you.

All right. Thanks.

Thanks, Jim.

(Operator Instructions)

[Mark Dalton]. Your line is open.

Hi. Good evening. Thanks for taking my call. Scott, are you sure you want this job?

Is that my wife on the phone?

No. This is a long-term shareholder.

Oh, I got no more.

Yes. Listen. I want to say this measured and respectively, but I can congratulate you on a lot of stuff here other than the fact that -- and please, please don't let me make any statements that aren't in [blood] correct. Your essentially a single digit revenue increases aren't particularly remarkable for microcap companies. Would you agree with that statement?

Single digit?

You've got -- you're essentially -- you're still losing money essentially. You got some single digit -- single digit percentage increases of revenue. But for a microcap company -- I mean that's nothing particularly remarkable. Would you agree with that?

I think -- I think we're -- yes. We are looking at improving on where we are.

Right. My Chung had a tenure of a number of years with you guys, and he took over, and I think -- and I appreciate that lengthy history lesson/bibliography you gave at the top of the presentation, but I think My essentially took over and I think the shareholder price -- the stock price is about the same tonight as it was when he took over. Would that that be a fairly accurate assessment? I'm pretty close either way.

I think you're pretty close either way. I think six and a half years ago it was probably similar, you're right.

So, somebody have bought the stock six and half years ago and listen to his -- and again I'm trying to be measured and respectful, but I'm a long-term shareholder and I listen to him a number of years ago to lay out a strategy and it sort of reminds me of Chinese water torture, no pun intended. It's like -- it's like I'm watching somebody at the blackjack table who is not a very good card player and they occasionally -- he had a great blackjack and maybe make $5000.

And then instead of getting up and walking away, they slowly lose it back bit by bit by bit because they're not -- at the end of the day they're not that good to card player. And again, I say this respectfully, but as a shareholder who is really gotten tired of seeing -- you guys have got $35 million or $40 million in the bank now ostensibly in your token buyback and that's what it was it was a token buyback.

You haven't demonstrated any ability to take this money -- and make more from it. So why not buy back more? Then again, it was -- it was just a token buyback. And if I may remind you guys and I don't need to do this, but you -- Scott, you work for the board and the board functions as a fiduciary officer for the shareholders and the company has been essentially a disappointment since it came out of bankruptcy. Now, it was -- whoever pulled that out of bankruptcy that was a wonderful job. That's been a long, long time ago.

And I'm just -- I'm just trying to understand how anybody who would admit that their company is essentially been flat could have $40 million in a microcap company and not do any sort of special dividend, shareholder buy -- stock buyback, anything more than just a small amount.

I'm just -- I'm just trying to understand because what it looks like from a small term investor -- small time investor, frankly, it looks like you guys are saying - okay. Hey, we got all this money. We're set again. We can pay big salaries. We pay our R&D department, these scientists fairly large salaries - and you guys get paid very very well for what you do, but that's our money you're spending.

And I don't like to see it get washed away when at the end of the day we own that company, just like you guys have shares in the company. It just seems like the company has more self-interest in just sort of keep in itself going than it does trying to bring money back to the ownership that the way they should. And I'll drop off and listen to your response. Thanks for taking my call.

Yes. Thanks, Mark. Well, I think if you don't -- if you don't sense the excitement that this group has -- Dale and I've been together for 11 years and I've been doing this 15. Brian started back in 2002, 2001. This group has been talking about things that needed to be done and the direction we want to go. And I think the board is now said -- Okay, guys. It's yours to do this.

So, I think you're going to see a little bit of a different approach to these things. And I sure would hope that you'll see that being paid out in an increase in the stock price. And so, I can only say you have the full attention and devotion. There is no one threading water at this company right now from a leadership perspective. And time will tell is all I can say.

And I hear you lot and clear, Mark, and there maybe others out there that have thought that and didn't say it. But I can you your messages are heard loud and clear and you have the full attention of this leadership team, and hopefully, you'll see a little bit of a different approach and hopefully a different result.

[Michael Cooper]. Your line is open.

Hi, guys. Congratulations on your recent results. I was taking a look at one of your latest investor presentations. And in that presentation you compare the cost basis of your test measurement equipment. I think it's compared to a gauge process. And in that you break out some costs of the time that it takes to perform the test and yours is much quicker than the alternative and then the cost, which yours is cheaper. And then you got a data line in there and you compare your data cost for the client versus the alternative for the half and I think it was $188,000 or so.

My question is, who get that data fee? Is it Luna or is it an internal cost? How does that work? And if it's not Luna today, is there an opportunity for that kind of data to start providing cash to Luna?

That's a good -- that's a good question, Michael. This is Brian. The -- I think I know the chart you're referring to. And what that line -- it doesn't say, it's a two-phased data ACQ or data acquisitions. And what we're referring to there is actual electronic system we saw, the ODiSI. So it's not data -- proprietary data rights per se that we manage digital data. That's the cost of the hardware that the customer pays, whether it would be for our competitors in the case of that column or the ODiSI in the case of Luna.

Okay. Excellent. Is there an opportunity to be selling data on a recurring basis to some of these clients in the future?

Yes. So, that's why -- as I've said, it's actually -- it's an interesting and good question. We believe that there is -- we haven't fully based a strategy into our process yet to lead them to take advantage of that. But as the system grows and the usage grows, we believe that there will be recurring revenue element having to do with replacement of our sensors and management of the associated data.

Excellent. Thanks.

Thanks, Michael.

Thank you.

[Randy Knudson]. Your line is open.

Good afternoon. I wanted to congratulate you as well and tell you I certainly sensed your excitement today and I got excited listening to you. So thank you.

Yes. Thank you, Randy. I appreciate that.

I want to ask you about your terahertz. One of my concerns or thoughts when you spun off the HSOR was that you were perhaps planning to spin-off your terahertz there in Ann Arbor, but it doesn't sound like that?

Yes. Last -- I will say, Randy, last week -- last week, we spent quite a long time going through with Steve -- and Steve Williamson and his team out there, you know, [Earl] with BD and [John] with sales and really got into it and even had one of our board members participate as well in one of the meetings, he was in the area, and I think we all left with pretty exciting technology.

Now, what's the timeline and what can we do with that and what needs to be invested in that to get it where it needs to get to, but there are certainly some opportunities. And when you talk to customers that have this system and it's working in their -- in their long [line], they're excited and they say - couldn't live without it.

So, we need -- we need to fully evaluate that and say - what is the next step for this? - but I can tell you everyone left at room independently pretty excited about what that technology could do and where it is, is it -- is it finally the day of terahertz? People have been saying it for years. Is it really the time that that's been turned into a product that could be used in the manufacturing space.

And so, you mentioned that you're -- the goal with terahertz is to make it smaller and cheaper. And does that being done that being done in Ann Arbor? Is there some help coming from the Virginia side at all or is that all being done in Ann Arbor?

Well, that -- it's being done in Ann Arbor right now, but we are actually having Brian visit and getting involved a little bit. We're having James, our Vice President of TDD, the contract group, look at that and providing help where we need. We probably will need to probably beef up the team in Ann Arbor if that's direction we go, but we are -- we are definitely deploying some help to get Steve what he needs to try to reduce the cost on the sensor and on the system itself.

And you mentioned that you had an opportunity if you were able to accomplish those goals of multi-sale contract. And I'm just wondering if you can tell us, have they moved out of paper, plastics, roofing, aerospace. Is there some new niche that maybe is going to be in automotive? Can you speak to that issue at all?

Well, I think we continue to look at a bunch of different markets, certainly the ones that you mentioned as well as others. But we have -- we've talked and got some customers excited if the price points was X and I think we need to get the cost of the system to why that allows that delta to be manageable. So, -- but it's not far out of reach. So I think it's something that could be done and that is really the goal right now of Steve and his team to drive that cost down.

And my last question just relates to the work on the F-35 once again with terahertz and --

Right.

-- paint application, the radar reducing stealth paint. I've never heard anything on Luna ever mentioned about that. And I look in your investor guides that come out and that always seems to me to be something that would gain the investing public's attention. That's what got me hooked with API way back when is their initial work with NASA and just the quality of work and the customer base that they were developing it.

Terahertz is a difficult technology to work with as you know, but it seems to me that group of Picometrix really was at the cutting edge and could continue to be at the very cutting edge and has all these client bases that we could move into. So, I hope you will fund that and consider that to be a product for the future and for the company.

Yes. And I'll tell you I wish we could talk about a lot more, but the restrictions that kind of the Lockheed put on us and other folks out there. I think Brian wishes he could ramble off the top five aerospace and automotive that he's working with and some of these things are just you know these bigger companies or especially if its comes from the government side they just really restrict us on what they can say -- what we can say. But yes, it's absolutely out there and it's exciting work.

Well, Great. Well, congratulations again and I thought your presentation was excellent and thank you again.

Thanks, Randy. Yes.

(Operator Instructions)

I'm not showing any further questions.

I'd like to turn the conference back over to Mr. Graeff for closing remarks.

Great. Thanks, James. Thanks everyone for joining us today. As you heard on the call, we have an exciting opportunity ahead of us and I'm anxious to deliver on that. I'd like to also mention, as I did earlier here because the question was asked that we will be attending the LD Micro Investor Conference the first week in December and I hope I have the opportunity to meet some of you face to face there. And I look forward to updating you on the progress we make going forward here at the end of the year.

So, with that James, this completes today's call.

Thank you very much, sir. Once again, ladies and gentlemen, this concludes today's call. Thank you very much for your participation. You may all disconnect. Have a wonderful day.

Thanks.