LUNA

Luna Innovations Incorporated (LUNA)

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Luna Innovations Incorporated (LUNA)

Q1 2009 Earnings Call

May 13, 2009 11:00 am ET

Executives

Dr. Ken Murphy – Chief Executive Officer

Dale Messick – Chief Financial Officer

Analysts

[Collin Bullock – Bank Equity]

Presentation

Operator

Good morning. My name is Landon Barretto and I'll be the moderator for today's presentation which is being recorded and will 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 Dr. Kent Murphy, the CEO of the company, Dale Messick, the Chief Financial Officer and Scott Graeff, Chief Operating Officer. Dr. Murphy, Mr. Messick and Mr. Graeff are going to discuss the company's financial results for the first quarter ended March 31, 2009. 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.

Gentlemen, please proceed.

Dr. Ken Murphy

Thanks to all of you for joining us today for a review of our first quarter 2009. As on our previous calls, I will use this opportunity to put our results in the context of where we are in the execution of our growth strategy, and I will also talk about a recent development surrounding our litigation.

Dale will review our results in more quantitative terms after which we'll welcome any questions you may have.

To begin, I first need to update you as to where we are with our legal proceedings in the Hansen case. Results from the trial had a very significant impact on our financial statements for the quarter as you have probably seen by now, and Dale will walk through that in just a moment.

We are highly disappointed with the decision of the jury, and now we are directing all efforts towards opportunities to reduce the loss exposure while continuing to move the company forward.

To give you a brief background on the matter, a law suite with Hansen was filed against Luna approximately two years ago related to an $84,000 feasibility study we did with Hansen in 2006 and early 2007. In June 2007, we announced that we had entered into an intellectual property licensing development and supply agreement with Intuitive Surgical, the global technology leader in robotic assistant minimally invasive surgery.

Under the terms of the multi-year agreement, Luna was to develop and supply its fiber optic shape sensing and position tracking system for integration into Intuitive Surgical products. About a week later, Hansen sued Luna, alleging breach of contract and misappropriation of trade secrets and fraud.

The trial which occurred in the Supreme Court of the State of California County of Santa Clara was long and technically complicated. After four weeks worth of testimony from both parties, the jury found in favor of Hansen, alleging we breached our contract by not providing Hansen the right of first opportunity to our technology and that we had misappropriated trade secrets belonging to Hansen.

The jury award is approximately $36 million in damages to Hansen. That includes $26 million of lost profits based on Hansen's estimates of additional sales they would have realized in a deal with us. It also includes $10 million in unjust enrichment to Luna which represents our potential profits from our agreement with Intuitive.

In our industry, confidential, technical information is our lifeblood and we strive to preserve the integrity of that information whether it's ours or someone else's. Over the years we've worked with highly confidential information for military, government, industrial and university clients.

I do not believe that there is anything in our work related to Hansen that we learned and then applied to other work we are doing for intuitive or any other partner, and I believe that we did offer Hansen the first opportunity in accordance with our 2006 contract.

However, as you know, the jury decided otherwise. The verdict and recovery of damages is subject to customary post trial motions and potential appeals and Hansen will likely seek further equitable relief. We will continue to pursue the avenues available to us to reduce damages awarded.

The damages amount as it stands is obviously significant to Luna. We are working aggressively on post trial motions and the potential to appeal the verdict so we can reach a resolution that allows us to continue to do the great work we've been doing.

The next steps in this process are, in the immediate future there will be several motions filed by both Hansen and Luna. Hansen is seeking to increase the award and Luna is seeking to decrease it. Depending upon how these motions pay out and depending upon the ultimate verdict that is entered by the judge, we may decide to appeal the courts decision.

Again, Hansen may seek further equitable relief. The motions of both parties are expected to be decided over the coming weeks. If we are to appeal, it could be 18 months before that is decided.

Read the rest of this transcript for free on seekingalpha.com