Luna Innovations Incorporated Q2 2010 Earnings Call Transcript

Aug.10.10 | About: Luna Innovations (LUNA)

Luna Innovations Incorporated (NASDAQ:LUNA)

Q2 2010 Earnings Call Transcript

August 10, 2010 5:00 pm ET

Executives

Dale Messick – Interim President and COO

Mark Froggatt – Chief Technology Officer

Analysts

John Moses [ph]

Operator

Good day, ladies and gentlemen, and welcome to the 2010 second quarter Luna Innovations Incorporated earnings conference call. My name is Modesta and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Dale Messick, Interim President and Chief Operating Officer. Please proceed.

Dale Messick

Thank you very much, Modesta. Good afternoon, everyone and thank you for taking the time today to join us as we review our progress and results for the second quarter of 2010.

Before I go further, let me remind each of you that statements made in this conference call and our public filings, releases, and websites, which are not historical facts, maybe forward-looking statements that involve risks and uncertainties, and are subject to changes at anytime including, but not limited to, statements about future financial or operating performance or management transition and future research contract awards.

We caution investors that any forward-looking statements made by us are management’s beliefs based on currently available information and should not be taken as a guarantee of future results or performance, which may differ materially as a result of a variety of factors discussed in our earnings release and our latest Form 10-Q 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. There is more complete information regarding forward-looking statements, risks, and uncertainties in the company’s filings with the SEC available on our website.

Earlier today, we announced that the company has begun an executive search process for a new Chief Executive Officer at Luna and engaged an executive recruiting firm to assist us in that process. Furthering the transition plans – plan that we announced back in May of this year, Kent Murphy, Luna's Founder and previous Chief Executive Officer, has resigned from the CEO position. As many of you know, Kent founded the company 20 years ago and has overseen its growth and successes to this point in time.

Kent will remain a member of our Board of Directors with appointment to the position of Vice Chairman of the Board and is expected to provide ongoing consulting services with a focus on the continued evolution of our business strategy and scientific vision in the future. The company and its employees thank Kent for his leadership over these many years and look forward to the continued benefit of his guidance in our future successes.

In addition, Jonathan Cool will return to the role of Board member. Jonathan came into Luna in May as the Interim President and Chief Operating Officer as the initial step in the announced CEO transition plan. During that time, Jonathan has focused his attentions on evaluating our commercialization strategy, our practices and procedures, our structure and capabilities, and the leadership team overall in preparation for initiating the formal CEO search.

Having executed on those matters and communicating with the Board members, the Board concluded that we have reached the appropriate time to initiate the second stage of the transition plan with the commencement of the search for a new permanent CEO.

Jonathan will also remain a highly valued member of our Board of Directors and will continue to provide the company with viable leadership as Chairman of our Strategy Committee with the first-hand knowledge of our business that he has gained over the past few months. We thank Jonathan for the insights into our business and the improvements that he was able to implement in a short period of time, as well as the continued benefit of his knowledge and ideas in executing our business plans.

During the period of the CEO search, I will assume the role of Interim President and Chief Operating Officer and Scott Graeff will assume the additional role of interim Chief Financial Officer. For those of you who may be new to Luna, Scott has a long history of leadership at the company, including the position of Chief Financial Officer during the period leading up to and through the completion of the company's IPO. Scott and I continue to be surrounded the same leadership team at Luna, dedicated to providing outstanding products and services to our customers with industry-leading technologies and capabilities.

With that, let me now turn our focus to the business results for the second quarter.

Overall, our results of operations continued their positive trend with increased revenues compared to the second quarter of last year, lower operating expenses, and improvements in the bottom line, in adjusted EBITDA, and in our cash flows. Specifically, for the second quarter of 2009 [ph], we recorded revenues of $9 million, an increase of 4% compared to $8.7 million for the second quarter of 2009.

Revenues in our product and license segment increased 31% to $2.9 million for the second quarter of 2010 compared to $2.2 million in the second quarter of 2009, primarily due to increased sales in our OVA product line, with the introduction of the OVA 5000 back in the first quarter of the year.

During the second quarter, we also launched our new portable version of the Optical Backscatter Reflectometer or OBR 4200 and have shipped the first two units to major defense contractors for their use on an evaluation basis. The growth in our product and license revenues offset a decline in revenues within our Technology Development segment, where revenues decreased by approximately 6% from $6.4 million in the second quarter of 2009 to $6.1 million in our most recent quarter.

As we mentioned on our earnings call last quarter, our win rate for new research contract awards declined significantly during the period of our reorganization in 2009 and early 2010. As such, we may continue to experience year-over-year declines in revenue for this segment of our business, unless and until we are able to increase the win rate and restore our backlog to its prior levels.

Operating expenses for the quarter continued to decline compared to last year with a decrease of $1.8 million, largely driven by a $1.4 million decline in the expenses incurred related to litigation and reorganization activities. Excluding those costs of approximately $40,000 last quarter compared to approximately $1.5 million in the second quarter of 2009, operating expenses represented 42% of revenue this past quarter compared to 48% of revenues for the second quarter of last year.

With those improvements in operating expenses, our net loss for the quarter also improved by $1.8 million for a net loss of $618,000 in the second quarter 2010 compared to a loss of $2.4 million in the second quarter of last year.

After considering the cost of the common stock dividend related to our outstanding class of preferred stock, the net loss to common shareholders was $711,000, again compared to $2.4 million for the second quarter of last year.

Our net loss for the first half of the year has improved to $2 million compared to a net loss of $43 million for the first half of 2009. Keep in mind that the first half of 2009 was also adversely affected by the significant reserves and other charges we recorded associated with the Hansen litigation.

To normalize for that and other factors, in our release today, we have provided a reconciliation of GAAP net loss to our adjusted EBITDA, excluding the costs associated with the Hansen litigation and related organization. Excluding those items, our adjusted EBITDA improved to $0.8 million for the second quarter of this year compared to $0.5 million for the second quarter of 2009 and to $1.4 million for the first half of the year compared to approximately $148,000 for the first half of last year.

Turning to our balance sheet and cash flows, we ended the quarter with $6.3 million of cash, including the $2.5 million we borrowed under our revolver back in the first quarter compared to cash of $5.2 million at the end of 2009 and $6.5 million at the end of the first quarter of this year.

Our net change in cash was only $200,000 for the quarter. Included in that change in cash was more than $700,000 of legal fees that had accumulated during the reorganization, but they were paid out in the second quarter of 2010. So excluding that one-time impact, we would have realized a positive cash flow of $0.5 million during the quarter.

Liabilities are a little challenging to compare line-by-line against the audited balance sheet of December 31st due to the reporting format of the time we were in reorganization. Instead, I will highlight for you the current liabilities of $10.7 million at June 30th compared to $10.8 million of current liabilities at the end of the first quarter of this year, while total liabilities of $14 million at the end of June 30th compares to $14.7 million at the end of the first quarter.

Working capital improved to approximately $7.2 million at the end of the second quarter compared to an even $7 million at the end of the first quarter of the year. So you can see that along with our improved cash flow for the quarter, our balance sheet has continued to strengthen overall as well.

Looking ahead to the rest of the year, we did reduce our guidance slightly, which primarily reflects the continuation of the pattern we have seen through the first half of the year in lower Technology Development revenues. Based on that, we are currently expecting revenues for the year in the range of $23 million to $24 million in – and a – in TDD and overall, a net loss for the year in the range of $3 million to $4 million, which is a decline of approximately $200,000 to $500,000 in our bottom line expectations for the year.

For the quarter, we are expecting revenues in the range of $8.5 million to $9.5 million and a net loss of $0.5 million to $1 million.

With that, I would like to open the call to any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of John Moses [ph]. Please proceed.

John Moses

Dale, congratulations on the fact that you really improved the cash flow.

Dale Messick

Thanks, John.

John Moses

Will you be cash flow positive in the third quarter?

Dale Messick

We currently think we will be cash flow positive for the third quarter, John. Yes.

John Moses

Okay. How many of the mobile sensors can be produced for a month if you were to get a significant order?

Dale Messick

Let me get a little assistance on that particular question, John. Here with me on the call today are Scott Graeff; as well as Mark Froggatt, who is our Chief Technology Officer, inventor of the platform that we use for those sensors and hopefully, can give us some insight on that.

Mark Froggatt

Well, we would have the scale [ph] of our suppliers online if this was recurring. But I would think five to 10 per month.

John Moses

Five to 10? And that's at a selling price of $70,000 each?

Mark Froggatt

Around that, yes.

John Moses

Okay. When might you expect to get some type of decision from the two that have been put out for evaluation?

Mark Froggatt

I think we would get at least one decision by the end of the year.

John Moses

Okay. That's all I have. Thank you very much.

Dale Messick

Thank you, John. Good to hear from you.

John Moses

Nice to have talked to you.

Dale Messick

Thanks.

Operator

It appears that was our only question for today's event. I would now like to turn the call back over to Dale Messick for concluding remarks.

Dale Messick

Thank you very much, Modesta. Let me conclude with one thing; I did leave out from my previous comments, our total revenue guidance for the year. We are currently expecting that to be in a range of $33 million to $35.5 million, again with $23 million to $24 million coming from the Technology Development side of the business and the remainder from our product and license side.

So thank you all for participating on today's call. We look forward to speaking with you again and updating you on our continued progress.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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