My Chung - President and CEO Dale Messick - CFO

Good day, ladies and gentlemen and welcome to the Third Quarter 2013 Luna Innovations Incorporated Earnings Conference Call. My name is Jackie and I'll be your coordinator today. At this time, all participants are in a listen-only mode. Following the prepared remarks there will be a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I will now like to turn the presentation over to Mr. Dale Messick, Chief Financial Officer at Luna Innovations Incorporated. Mr. Messick, you may proceed.

Thanks very much, Jackie. Good afternoon everyone and thank you for joining us today as we review Luna’s results for the third quarter of 2013. Before proceeding with our presentation today, let me remind to you that statements made in this conference call as well as in 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 future financial and operating performance. 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. Actual results may differ materially as a result of a variety of factors discussed in our earnings release and our latest Forms 10-Q and 10-K filed with the Securities and Exchange Commission. We disclaim any obligations 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. At this time, I’d like to turn the call over to My Chung, President and CEO of Luna Innovations.

Thank you, Dale. On today’s call we will begin by updating you on our progress with our key strategic initiatives as well as our most recent commercialization activity. Following my remarks, Dale will go through the Q3 financial results and then we will be happy to take any questions you might have. Beginning with our key growth initiatives, we continue to enhance our ODiSI platform for fiber optic sensing to expand the potential markets for this product. The ODiSI products utilize optical fibers to sensor rather than individual strain gauges or thermocouples to provide high density strain and temperature measurements even in harsh environments. We are continuing to develop the platform in order to address the specific application needs of our customers, providing optional upgrades for higher speeds, higher resolution, reference generation and analogue outputs. These options have allowed us to satisfy the needs of a diverse group of users. We are primarily targeted our marketing efforts for ODiSI towards automotive, aerospace and energy applications. With the specific focus on those related to composite materials, complex shapes or environments where conventional electrical strain gauges or thermocouples cannot effectively operate. Currently our ongoing development efforts include enhancing the platform to be capable of performing static or dynamic tests, such as in-flight monitoring of an aircraft or automotive racing, with the goal of further penetrating the markets where we’ve been most successful namely to the aerospace and automotive industries. At the same time, we have and we will continue to expand our sensing sales force and increase our marketing efforts. Our second strategic initiative relates to our development of the shape sensing platform for minimally invasive medical applications. Development programs continue to progress this plan for both intuitive surgical and Philips Medical. The teams remain focused on delivering the specifications anticipated in our agreements and we continue to be pleased with the progress we made. Earlier this week, we announced a new licensing agreement for the commercialization of our self-cleaning textile treatment. This is a technology that you may refer to us talk about before or seen on our website, that can protect first responders from pathogens and industrial workers from contaminants as well as address the common problem of simply keeping the fabric clean. This technology was initiated under the research contract with the U.S army to develop self-cleaning uniforms. Through the announced agreement we’re licensing the rights to UltraTech to bring the technology to production and market it through their global channels. We and UltraTech believe there are many applications for this break-through technology and we are excited now to have the lead in the commercialization and manufacturing efforts. With that, I will now turn the call back over to Dale to further discuss the financial results for the quarter.

Thank you, My. For the third quarter of 2013, we recognized revenues of $5.7 million compared to $6.8 million in the third quarter of 2012. Technology development revenues of $3.1 million compared to $3.7 million in the second quarter last year continue to reflect the decrease in contract research activities, specifically within our optical systems group as we discussed in each of the previous quarters of this year. Excluding the optical systems group, the remaining groups within our technology development segment grew in aggregate 6% compared to Q3 of last year. Comparing to earlier quarters of this year, our Q3 technology development revenues of $3.1 million were approximately 12% higher than Q2 of this year, a 19% above revenues for Q1 of this year. Product and license revenues were $2.6 million for the third quarter of 2013 compared to $3.2 million in the third quarter of last year. Revenues in Q3 of last year did include $0.5 million in sales of prototype shape sensing units that did not recur in the most recent quarter. So if we normalize that activity out of comparison, product and license revenues would have been essentially flat decreasing less than a $100,000. Our product sales in Q3 of this year were also somewhat impacted by the government shutdown with some orders that we were expecting to receive from other government contractors in September being pushed into October. Operating expenses were $0.4 million or 14% lower in Q3 of this year compared to last year, largely offsetting the impact of lower revenues. With the lower operating expenses, our operating loss was approximately $572,000 for the quarter compared to an operating loss of $329,000 in the third quarter of last year. Discontinued operations representing the Secure Computing and Communications group that we sold in Q1 of this year have a positive contribution of $155,000 in Q3 of last year. After considering the results of discontinued operations, our net loss for Q3 of this year was $0.6 million compared to $0.2 million for the third quarter of last year. Year-to-date we’ve recognized revenues of $16.2 million compared to $20.2 million for the first nine months of last year. The decline in revenues is primarily driven by lower technology development revenues of $3 million were for the first three quarters of the year the contract research revenues from our optical systems group declined by $2.6 million. Operating expenses improved 3% for the first nine months of 2013 compared to 2012 largely reflecting lower share-based compensation costs in our SG&A expenses. Our operating loss for the first nine months of the year was $3.4 million compared to an operating loss of $1.4 million for the first three quarters of last year. After concerning the impact of our sale of Secure Computing and Communications group in March of 2013, we had a net income for the first nine months of the year of $1.2 million compared to a net loss of $0.8 million for the first nine months of last year. We ended the third quarter with $8.2 million of cash on hand compared to $6.3 million at the end of last year and $8.7 million at the end of the second quarter of this year. Our cash usage of $0.5 million during the third quarter was impacted by the timing of the accounts payable with a decline of nearly $1 million in our outstanding accounts payable balance at the end of the third quarter compared to the end of Q2 of this year. We also repaid a $0.5 million in the outstanding principal on our bank loan during the third quarter and have only $2.5 million remaining balance on the term loan as of the end of Q3. And with that, I’ll now turn the call back to My.

Thank you, Dale. And at this point, we’ll open-up the call for any questions if you might have.

Ladies and gentlemen, we’re ready to open-up the lines for your questions. (Operator Instructions) At this time, we have no questions.

With that, I’d like to thank everyone for joining us again today. We look forward to keeping you posted on how we’re doing in for the next quarterly earnings call. Thank you.

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