Kent Murphy - Chairman & Chief Executive Officer Dale Messick - Chief Financial Officer

Good day ladies and gentlemen, and welcome to the Q1 2010, Luna Innovations Incorporated earnings conference call. My name is Keith, and I’ll be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Dale Messick, CFO. Please proceed sir.

Thank you, Keith. Now before we begin, let me remind you that statements made in this conference call, and our public filings releases and website, which are not historical facts maybe forward-looking statements that involve risks and uncertainties, and are subject to changes anytime. 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 filings on Form 10-K and 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. With that, I’d like to turn the call over to Kent Murphy, Chief Executive Officer of Luna Innovations.

Thank you very much Dale. Good afternoon everyone. We appreciate you taking the time to join us this afternoon as we review our progress and results for the first quarter of 2010. As I said before, I am pleased that our business was able to weather the Chapter 11 and reorganization process, and I believe that our first quarter of 2010 results now demonstrate a strong base from which we can continue to grow this business and continue to run full of our bottom line results. I’ve been telling you on these calls for sometime now about the progress we’ve been making on baseline operating expenses, that we’ve become more transparent as we’ve got the litigation and reorganization behind us. During the first quarter of 2010, I think you can finally see for yourself the progress that we have made. Our operating expenses for the quarter were $3.9 million, which still included some cost for wrapping up the reorganization. If you go back two years to the first quarter of 2008, our operating expenses were $5.3 million. Now back in 2008, the litigation had just begun, but it was still very early on and our cost associated with the litigation back in Q1 of 2008 were less than $300,000. So over the past two years, we’ve taken our quarterly operating expenses from more that $5 million to less that $4 million, or more than a 20% reduction. During the first quarter of 2010 we were adjusted EBITDA positive, including the litigation feels. In addition this is the first consecutive quarter that we were adjusted EBITDA positive, excluding litigation fees, and marks the sixth out of the last seven quarters in achieving this milestone. With the opportunities we have for growth in the company and the lower expense base that we have achieved, hope you share our enthusiasm for our future. As we look at Q1 results, we can see some recovery in the demand of fiber optic test and measurement equipment, where we experienced 29% in our product and licensing segment. We began customer shipping of our newest Optical Vector Analyzer product, the OVA 5000 launched late last year. During the quarter we also kicked off our new development program with Hansen Medical, and are off to an excellent start in meeting our expectations and the delivery requirements of that new relationship. We also kicked-off the new phase of our development agreement with Intuitive Surgicals during the first quarter. Its been a busy quarter for this group, and we are all very excited about the breakthroughs they’ve made in increasing speed, length and improving accuracy on our sensing system platform. We did experience a decline in revenues of our technology development segment compared to the first quarter of last year. As you will hear from Dale in a few minutes, the majority of that decline related to some pass-though type cost on one particular contract, which didn’t have a meaningful net impact on the gross profit for the group. Also while not dramatic, the Chapter 11 filing did slow down the timing for awards of some new projects for us, which we continue to see the impact on the revenue in this segment. With the reorganization now behind us, I expect this segment of our business will start to recover, although we may still see some year-over-year declines for a couple of quarters as the recovery takes hold, and the revenue base reveals. Our funded backlog of development contracts for future revenues at the end of March was approximately $2 million higher, than was the backlog at the end of Q1 in 2009. So I’m optimistic we will again start to see growth in this area. While on the topic of our future, let me touch on our announcement yesterday of additions to the leadership time at LUNA. We’ve asked Jonathan Cool; he may also be recognized as one of our new board members to join our company as acting President and COO, taking most responsibility for the daily operations of LUNA. Adding Jonathan to the team allows me to focus on driving innovation, and continue to develop in managed relationships with existing and new commercial and government partners. We welcome Jonathan to the company and look forward to accelerating our business model and commercializing technology. With that, let me turn the call over the Dale Messick, to cover the first quarter financial results, and then we’ll be happy to try to answer any questions you may have.

Thanks Kent. For the first quarter of 2010, we recognized revenue of $7.9 million compared to $8.5 million in the first quarter of 2009, an overall decrease of 7% compared to last year. Our products and license revenue increased 29% to $2.1 million, offset by a decline in technology development revenue of 16% or $1.1 million. Of that $1.1 decreases, approximately $600,000 can be attributed to the revenue impact of higher pass-through cost on one large development project in the first quarter of 2009. So you can see that while technology development revenue decreased by $1.1 million, there is also an offsetting decrease in technology development cost of sales of over a $1 million, so the gross profit for this segment of the business was actually only $6000 different, despite the revenue decline. We continue to carry a strong backlog of work to be done in the area as Kent mentioned, with approximately $28.4 million in backlog as of March 31 2010, compared to approximately $26.4 at the end of first quarter in 2009. Growth in our product and license segment resulted primarily from increased sales of our Optical Backscatter Reflectometer product, the OBR 4400. Higher revenues in the product and license segment of the business overall, and representing a higher proportion of our total revenues, resulted in an improvement in our gross margin from 32% in the first quarter of 2009, to 36% in the first quarter of 2010. Operating expenses of course are a little difficult to compare against the first quarter of ’09, because of the various cost encored and charges recorded with respect to the Hansen litigation. In the first quarter of 2010, our operating expenses included $0.4 million in costs directly associated with the litigating or reorganization, while there were approximately $38.4 million in such expenses included in our operating expenses for the first quarter of 2009. If we back those costs out, comparable operating expenses would be $3.5 million in the first quarter of 2010, compared to $4.4 million in the first quarter of 2009, and we provide a reconciliation to show that in the tables attached to our press release this afternoon. On our earnings calls for the last several quarters we’ve been talking about our efforts of expense reduction, which will become more evident once we get the litigation behind us, and you can see that now here in the Q1 numbers. With that improvement operating expenses, we reported a pretax loss of $1.2 million comported to a pretax loss of $40.3 million in the first quarter of ’09. In 2009 we also recorded an additional valuation allowance on our differed tax asset in the amount of $0.06 million, and so our total net loss for the first quarter of 2009 was $40.9 million, compared to a loss of $1.2 million for the first quarter this year. After considering the impact of the 6% dividend on our newly issued preferred stock, the net loss to common share holders was $1.3 million or $0.10 per share for the quarter, compared to a net loss per share of $3.66 in the first quarter of 2009. Our adjusted EBITDA was a positive $0.2 million for the first quarter of 2010, and when we exclude the litigation and reorganization impact on expenses, adjusted EBITDA excluding litigation improved to a positive $0.5 million for the most recent quarter, compared to a negative $0.3 million for the first quarter of last year, an improvement in excess of $800,000. Again a reconciliation on these adjusted EBITDA calculations can be found in the back of today’s press release. For our balance sheet perspective, we ended March with $6.5 million of cash on hand, compared to $5.2 million at the end of the 2009. Most of the significant changes in our balance sheet since year-end are down in the liability section, where our liability is subject to compromise at December 31, 2009 as a result of our Chapter 11 reorganization that was in process at the time. It’s now been resolved, including the exchange of $6.2 million of debt at December 31 for preferred stock, $4.6 million in additional common stock issued to settle the Hansen litigating, and the issuance of a $5 million note in the first quarter as part of the Hansen settlement. We also paid the majority of or remaining pre-petition accounts payable during the first quarter of 2010, and drew $2.5 million on our revolving credit facility. Turning to expectations for future periods, on our last call we indicated an expectation for 2010 revenues of $35.5 million to $38 million for the year, and a net loss for the year in the range of $2.8 million to $3.5 million. We continue to expect our performance to be in those ranges, as well as adjusted EBITDA in the range of a positive $2.5 million to $3.9 million. For the second quarter, we currently expect that we will realize revenues in the range of $8.5 million to $9.5 million, which we anticipate will result in a net loss of $0.5 million to $1 million. With that, I’d like to turn the call back over to Kent.

Thank you very much Dale. Now we’ll be happy to try to answer any questions you may have.

(Operator Instructions) Gentleman, it appears there are no questions for you today.

All right. Thank you Keith, and thank you all again for your participation on the call today. Hope to see you at our shareholders meeting this coming Friday here on Roanoke, and look forward to speaking with you again next quarter. Thank you.

Ladies and gentleman, that concludes today’s conference. Thank you for participating. You may now disconnect. Have a great day.