Dale Messick - CFO My Chung - President & CEO.

Tim Savageaux - Northland Securities Gregg Hillman - First Wilshire Securities Neil Cataldi - Blueprint Capital J.D. Padgett - Almak Capital Edward Perry - Pride Investor.

Welcome to the Luna Innovations Third Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's conference Mr. Dale Messick, Chief Financial Officer for Luna. Sir, you may begin..

Thank you, Bridget. Good afternoon everyone and thank you for joining us today as we review our operations and for the third quarter and first nine months of 2015. Recording of this conference call will subsequently be posted on our website.

Before we proceed with your presentation today, let me remind each of 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 our expectations regarding future operating results or an ongoing prospects of the company.

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 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 expect as required by law.

There is more complete information regarding forward-looking statements, risks and uncertainties in the company’s filings with the SEC available on the SECs website and our website. And at this time I’d like to turn the call over to My Chung, President and CEO of Luna Innovations..

Thank you. Dale. And thank you all for joining us today. We are pleased to share with you the results of our first full quarter of combined operations following the merger of Luna and Advanced Photonix, the integration of the two entities has gone smoothly and we are excited to bring you up to date on the progress we have made.

The merger thus far has provided the benefits we had expected that's a two teams that are working well together. On today's call we will review some key operational and financial highlights for the quarter as well as provide additional color around the benefits from our merger with API. For those that have followed a API prior to the merger.

You will recall that they had two strong quarters last year in the April to September timeframe then dropped significantly in the December quarter.

Despite this we chose to continue with the merger as we assess that they had a strong pipeline of products and opportunities which it best computed properly would enable the company to quickly rebound to those prior revenue levels. Our results for the third quarter confirm that assessment.

As revenues from the operations of API in particular the Picometrix branded products did in fact return to those higher levels that were seen last year. As a result of that revenue growth and the savings from our operating expense synergies we again pleased to report a positive adjusted EBITDA for the quarter.

Last week we announced a receipt for purchase order for $7 million of our industry leading 100G coherent receivers, critical to enabling high speed communications over long haul network.

The deployment of 100G networks has been widely reported as a significant growth opportunity for the telecom industry and we believe that this order represents a significant validation of our expectation to participate in and benefit from this industry trend.

Revenue from the legacy Luna tests and measurement products increased 12% over the third quarter of last year we continue to make inroads in promoting our distributed fiber optic sensing solution as a better, faster and cheaper way to test composite structures in both the aerospace and automotive industries, by making good progress in the aerospace market as they've made the big leap towards composites.

You may recall that on our second quarter call. I mentioned a multi-unit obviously sale of the one of leading aircraft manufacturers. We will follow that up in the third quarter with multiple unit sales to another one of the world's leading aircraft manufacturers.

Year to date we have seen our bookings for Odyssey units increase by approximately 35% over the first nine months of 2015 further reinforcing our position as a leader in high definition fiber optic sensing.

Within the automotive industry we've been very successful in Japan, we sold early units into the research side in Germany and we're starting to see good activity in North America. What's interesting is that two of the composite manufacturers were targeted in North American automotive industry have purchased an RC unit this past quarter.

Their challenge as we all know is to get the material cost down without affecting the structural performance. At the recent Automotive Test Expo in Detroit we received over 190 leads the best turnout we've had since introducing the Odyssey system. For those that were previous API shareholders tracking the progress in Terahertz.

We’re also pleased today to share with you that that business is up near 10% compared to the same period last year. And as I mentioned earlier we again report positive adjusted EBITDA for this past quarter demonstrating not only the revenue growth that we have been discussing.

But also the capturing of synergies from the combination with API, operationally we’re seeing more sharing of resources and leveraging of expertise among the various groups. As we continue to look for ways to improve our operations, conduct our business more efficiently and operate as a single entity.

I'm proud of our accomplishments thus far and remain excited about our future. With that I'll turn the call back over to Dale..

Thank, My. So for the third quarter of 2015 we’ve recognized revenues of $13.2 million compared to $5.4 million in the third quarter of last year. As My, mentioned previously the third quarter of 2015 represents our first full quarter of combined operations following our merger with Advanced Photonix.

Our third quarter 2015 revenues included approximately $7.8 million associated with the operations of API. Revenues in our technology development segment increased 7% to $3.3 million in the current quarter compared to $3.1 million in the third quarter of 2014.

The year over year growth in this segment resulted from $0.4 million of research revenue in the Terahertz platform. We ended the third quarter with approximately $17.1 million of contract backlog for future research revenue compared to $15.6 million at the end of September 2014.

Product and licensing revenue grew to $9.9 million up 7.6 million compared to third quarter of last year, an increase of 331% driven primarily by our merger with API along with a 12% increase in sales of our fiber optic test and measurement equipment products and a 9% increase in overall historical Luna products and licensing revenue.

The products and licensing revenue associated with API operations was $7.4 million for the quarter. Our overall gross margin was essentially flat at 38% for the third quarter of 2015 versus 39% for the third quarter of 2014.

With our revenue growth those margins resulted in a gross profit of $5 million in gross profit for September 2015 quarter compared to a gross profit of $2.1 million in the third quarter of 2014.

Operating expenses for the third quarter of this year were $5.7 million compared to 2.8 million in the third quarter of last year with the increase being principally driven by the merger with API, within operating expenses. SG&A expenses in the third quarter of 2015 were $4.2 mi compared to 2.3 million for the third quarter of last year.

SG&A expenses in the third quarter 2015 included 1.5 million expenses associated with API of which 0.4 million was depreciation and amortization from the purchase accounting and SG&A also included 0.1 million of transaction related costs associated with the merger.

Year-over-year research development and engineering expenses increased to $1.5 million from the third quarter of 2015 up from approximately $0.5 million in the third quarter of 2014. Third quarter 2015 R&D expense included $1 million of R&D expense from API accounting for our total year over year increase.

Increased revenues and margins offset by increased operating expenses resulted in operating loss of $720,000 in the third quarter of 2015 flat compared to the operating loss in the third quarter of last year.

Excluding the approximately $0.5 million combined expenses of the incremental depreciation amortization resulting from the purchase accounting along with the non-recurring transaction expenses related with the merger with API, our comparable net loss would have been $0.2 million for the third quarter of 2015 or an improvement of approximately $0.5 million compared to the $720,000 loss in the year ago quarter.

The net loss after taxes attributable to common shareholders were approximately $820,000 or $0.03 per basic and diluted share as compared to a net loss from continuing operations of $493,000 or again $0.03 per basic and diluted share in the year ago quarter.

Adjusted EBITDA was $0.4 million in the third quarter of 2015 compared to an adjusted EBITDA loss for the third quarter of last year.

For the nine months ended September 30, 2015 total revenues were $28.6 million an increase of 90% over 2014 nine months revenues of 15.1 million, year-to-date 2015 revenues included approximately 11.8 million in revenues from our merger with API from the day of the merger May 8, 2015 to the end of the current period.

Technology Development revenues increased approximately $919,000 or 10% for the nine months ended September 30, 2015, to $9.9 million compared to 9.0 million for the nine months ended September 30, 2014.

Technology Development revenues from API in the 2015 nine month period were approximately 0.8 million, with remaining increase in technology development revenues driven primarily by growth within our nano-materials group.

Product and licensing revenues increased to $18.7 million for the first nine months of 2015 compared to $6.1 million for the first nine months of 2014 representing a growth of $12.6 million or 206%.

Products and licensing revenues associated with the operations of API were $11 million for the period from the closing of the merger through the end of September.

Products and licensing and revenues associated with our historical operations increased $1.6 million or 26% due to increased sales of our Odyssey and optical back scallary flictometer products. Our gross margin was 40% of total revenue for the first nine months of 2015 compared to 37% of revenue in the first nine months of last year.

Improvement in our gross margin is a result of the shift in our mix of revenues to a greater concentration of revenues from our product and licensing segment.

The growth in revenues coupled with improved gross margins drove a growth profit increase to $11.5 million for the first nine months of the year compared to $5.6 million dollars for first nine months of 2014. Operating expenses increased to 16.9 million for the first nine months of 2015.

Compared to 9.3 million for the year ago period driven primarily by increased costs associated with our merger from API. Within operating expenses the activities of API added approximately $3.9 million of which the incremental depreciation amortization associated with purchase accounting was 0.8 million year-to-date.

Transaction expenses associated with the merger were $3.6 million year to date.

The resulting pre-tax loss from containing operations was $5.6 million for the first nine months of 2015 compared to a loss of $3.6 million for the first nine months of last year, an increase of $2 million in loss including the transaction and first accounting charges of 4.4 million as I just mentioned.

For the nine months ended September 30, 2014 we recognized net income from discontinued operations of 9.1 million resulting from the sale of our medical shape-sensing business that occurred during the first quarter of 2014.

After considering income taxes and discontinued operations we recorded a net loss of $5.7 million or $0.26 per basic and diluted share for the first nine months of 2015 compared to net income of $6.8 million or $0.46 for basic and diluted share for the first nine months of 2014.

Year-to-date our adjusted EBITDA was $0.6 million compared to an adjusted EBITDA loss of $2.3 million for the first nine months of 2014. Turning to the balance sheet, our cash balance was $7.1 million as of September 30, 2015 a decrease of approximately 0.4 million during the third quarter of 2015.

The net cash usage was driven by $375,000 of principal payments on our term loan during the quarter and accordingly our balance under our term loan decreased from 5.9 million at the end of June 2015 to 5.5 million at the end of September.

During the third quarter we also amended our term loan agreement with Silicon Valley Bank to provide up to an additional $1 million in financing for equipment purchase, this additional million dollars is available to be drawn by us through the end of the year and we've not yet drawn any of that additional availability.

And I'll turn the call back over to My..

Thank you, Dale. At this time I would be happy to take any questions that you might have..

[Operator Instructions]. Our first question is from Tim Savageaux with Northland Securities. Your line is open..

Just wanted to ask a few questions and looks like you're seeing some stronger than expected demand. Perhaps in general and likely on the optical components side of the business and I know you're not pretty significant order here heading into the quarter.

I wonder if you can talk about from an application or geographic perspective what you see driving that demand on the optical component side and how you see that playing out here over the next few quarters. Thanks..

The application striving the activity here that we announced was the movement with 100G a lot driven by long haul in the short term activity not too far in the future.

This order was placed out of Asia jail as you know there's a lot of expansion going on, a lot of pent up demand due to the slowdown that they had with the disruption with the carriers that’s come back, really picked up for us..

Okay, so let's say most of the activity in the business is sort of centered around that recovery or maybe you could talk a little more broadly about what you're seeing in terms of demand in North America or globally on the 100G long haul market which I gather is that your primary area of focus..

We continue to see good activity in North America driven a lot by the test and measurement companies, right. But where people metrics they really had a strong presence is in the Asia side. That's what came through in this past quarter..

Our next question us from Gregg Hillman with First Wilshire Securities. Your line is open..

Dale can you talk about the inventory build, you know where is that coming from or what's the composition of the inventory and particularly the increase the way it affects the cash flow statement?.

So the inventory actually we didn't have much of a build in the third quarter, we did have a good bit of growth during the second quarter. And again most of that came out of the Picometrix area where we had forecast some of this growth and started building up in anticipation of it.

So as I said not much of a change in inventory from Q2 to Q3 and so we think we're in pretty good shape and not seen a lot of impact on working capital due to that for a while now..

Okay.

And then how much -- were you about talking about -- was it a $1 million worth for Picometrix or how much of that was Picometrix?.

Going back to Q2, it wasn't quite the full million but it was 700,000 of it..

And then turning to the adjusted EBITDA statement for the stock comp, is that a good level on a go forward basis, you know share based compensation, 275,000..

It's been fairly consistent over the last several quarters so I think it's probably a good expectation because we are amortizing share based comp over investing period. It tends to be a little bit stickier in terms of its duration..

Okay.

When was the last time one of guys has been up to that [indiscernible]?.

My, was up there last week and I was up here the week before..

And I'm back there next week..

What's going on there in terms of utilization and that $1 million you have set aside with Silicon Valley bank of your equipment purchases presumably up there, do you think you’re going to use that his year or do you think that might get pushed in the next year?.

It's something that we’re going through, we certainly want to make sure that we do it in the most planned and efficient manner so we are going through several iterations of capital plan with them, as My, said we still are very optimistic about the forecast potential for that group and so we want to make sure that we do it right but we're not going to rush it ahead of time.

So the line is available to us as I said through the end of the year..

What's the capacity or how many lines are they running per day or how many shifts they running per day? Are they running on the weekend? So they are just working five days a week?.

They are running and depending on the product line they're running multiple shifts, day and night. They haven't gone to weekends yet.

They've been able to achieve it with just two shifts we’re in a situation looking at expanding that in order to meet some of the delivery requirements for the $7 million purchase order that we just received, we [indiscernible] which is not too bad to be in..

Was the $7 million just kind of an initial order or that was just like -- more -- what was your sense of that 7 million?.

I think the relationships that Picometrix is creating with customers is one that's more long term. I think this order was okay, I like what we see. Here's an initial order. Go and deliver on it and I think that's what Picometrix has to prove out. I think that there's multiple orders following it but I think we have to deliver on this one first..

And in Terahertz first of all, [indiscernible] what's the rivalries between like technologically technology development and product and licensing, you said Terahertz is in technology development, what else is in there?.

So the technology development, Terahertz is split and if you look at a total split between the two, there is part of Terahertz that relates to research that we're doing funded by third parties often times the U.S.

government that's what our technology development line is and then in the park in the licensing line are the actual sales of the Terahertz units along with our other products..

And you have -- I take Luna has a similar split for some of your test equipment too, like the Odyssey is that split between those two things?.

No the Odyssey is a pure product sale, right. We do have a long history of contract research work and that is what's in that technology development line on the income statement the work that we do for the large -- again largely the U.S.

government in various areas whether it's optical areas or advanced materials or intelligent systems design, other types of sensors, carbon nano-materials a wealth of things that we work in on a contract research side. And then the products and licensing is where those actual equipment sales come in..

Well then you mentioned that Terahertz was for the quarter and it tends to be lumpy, was that just a result of one order that’s going to dissipate and then maybe have that go to a really low level or do you think that whole division might get some traction and continue to put new orders on quarter after quarter or half year after half year..

So the point four that I mentioned in my remarks was the part of the Terahertz operation that was the contract research side. So I think what you're referring to is a little more lumpy the product side the contract research, they have had a contract in place for most of the year and they've been working against.

So we have seen some pretty steady revenue on that side and then they've got on the product side in particular one contract for multiple units over several periods and we’re still shipping against that..

And then finally on the fiber optic to the home, in China. How do we know you like how can you tell whether that's going to take off before like before -- how could you tell before the results in orders that something's happening there.

What your sense there?.

So we've been working that contract now for a lot trying to solidify that. I think we're pretty darn close. We have delivered units to that customer, but what we've been waiting for is the larger contract and I think again we're pretty darn close to that. I think the results that we're producing the price or producing is on track.

And hopefully we will be able to share that with you sometime soon..

But are there peers of yours in delivering product to other media companies or equipment providers in that the space? Is the whole space -- you’ve a sense of the whole space is growing or is the whole space hasn’t taken off yet?.

I'm not sure how to answer that at this point..

What was the question again Greg?.

The question was, whether some of your peers are getting orders -- order for you know for fiber optic home they are selling chips in that space maybe to competitor the company that your aligned to is the whole space, you get a sense or have you seen actual indication that the space is wrapping up and then orders are occurring in the whole space..

I think we’re at a comparable level at this point I think that vendors are looking to make the selections. It was slowed down somewhat in Asia due to again what was happening with the carriers.

I see that picking back up, seeing contracts being awarded along with what we're getting as well I think performance of the devices that we end up shipping will determine what market share we get. You know that's really kind of the CapEx that we talked about that we're looking to expand within Picometrix..

Our next question is from Neil Cataldi with Blueprint Capital..

Just a quick follow up on the China order I don't think anyone asked the fulfillment timeline.

Can you shed some light on that?.

Yes. So it's going to be over the next three quarters. It's a 6 to 9 months kind of delivery schedule that we're on with it..

And further off topic, the Intuitive Surgical milestone has there been any update I think past calls you’ve referenced that they were updating their process.

Have you had a chance to get any transparency on how that's going?.

No real update at this time. I think we continue to monitor their progress once a quarter. We continue to see improvements in their ability to meet the specifications that they're working towards but no real updates for this quarter in terms of whether they're ahead or behind..

[Operator Instructions]. Our next question is from J.D. Padgett with Almak Capital. Your line is open..

Just a couple of follow ups on the big Picometrix, was that for one particular equipment provider?.

Yes it was from a single equipment provider, the only other color we can provide you with it was in Asia..

And are you working with multiple vendors there?.

Yes we’re..

Okay, so you don’t necessarily who ultimately wins there, you can get pulled along through multiple channels?.

We're not picky..

So this, you would kind of characterize as an initial order and to the extent you hit some quality hurdles you can get much larger orders over the next intermediate term is that a fair way to think about it?.

That's the way to think about it, that’s the way we have challenged the organization, that's the way we hear it from our customers. Basically they're saying, okay here is the initial order, prove it us that you can deliver -- scrambling back in Ann Arbor [ph]..

You're beyond the technical spec now, you're just kind of trying to deliver more from a manufacturing standpoint?.

Exactly..

And do you think other equipment providers will follow the same path and just give you a small initial order to see how you can perform?.

I think if you look back historically, people metrics you'll see that they've been put into this situation a number of times.

The demand for the these receivers -- these high speed receivers are fairly high and so they will get orders from the equipment manufacturers trying to stay ahead of the game and I think what Picometrix asked to demonstrate is not only can they meet the initial demands and stay ahead of technology but continued to build the infrastructure to be able to deliver in the quantities in the time frame as required.

And that’s the real change that we're trying to drive in the organization. Say when you’re given this opportunity, go for it, make it happen and you know build from it..

What would be like your other competitor selling components to the equipment guys? Is it all the typical names we would be aware of or is it a more select list?.

Yes typical guys..

Okay, so all the big guys are in there as well?.

Right..

And I guess you talked about the timeline for this order shipping out.

How do you kind of look at the next quarter or two, does this allow you to sort of allow you to kind of stay at this high revenue level that you just produced in September quarter or does it potentially step up based on the delivery timelines and then seasonally is down in March or how do you kind of think about the shape of that?.

We did safely, when you look at the size of that order and what we delivered in Q3, I did at least expect a flat, right and with some upside..

And then Q1 which I would guess seasonally at least for the hardware side of the business is probably low, does this sort of give the ability to kind of maybe navigate through that a little bit better as well?.

That's where we're putting the plants on now, right. We won't be able to ship all of that $7 million. Those drift into Q1 and should hopefully again give us a nice pick up there..

And then I guess the other question I had just around this product I would suspect is probably somewhat lower gross margin the rest the products in the portfolio.

Did we see the impact from that kind of in the September quarter here? And should we expect to see more of that going forward as this maybe grows in the mix?.

Yes you're correct that these products do typically have a lower margin than some of the other products that we're selling there, but as far as the margin goes I don't think you really saw that impact in Q3. You know the margin was down a point on our combined basis or a little bit less than a point.

But it's really a mix of API as a whole versus Luna as a whole if I look at our historical operations and Q3 three of last year versus Q3 of this year, on the product side the Luna margins were very slightly up versus last year and the API margins were very up slightly versus last year. So we haven't seen any depression in the margin.

It's just an overall mix where as a whole the operations from API tended to have margins that were more in the upper thirty's kind of stuff and the Luna product margins more in the upper fifty's, but when you blend those together that it had a slight decline on our combined margin..

Okay so if Picometrix grows in the revenue mix in Q4 for instance that we need to just keep that in mind as we follow our gross margins?.

That's exactly right..

And I guess one final question on the legacy Luna business for the tech development stuff. I know that can be somewhat lumpy and if I'm modeling it right it looks like you kind of lumped down at least sequentially and you talked a little bit about your backlog of projects there.

Is that backlog up sequentially or how should we be looking at that?.

Yes the backlog is up a little bit sequentially. You know it's more insightful usually to look at it on a year over year basis than is sequentially just because there are a specific couple of times per year when there are big proposal rounds that come through and so you tend to get award notifications, a little bit lumpier.

So that's why I've made the comparison versus September of last year. It was up a little bit sequentially as well though, so we still feel good about opportunity there. But there can be some lumpiness and I just as especially get around times of vacations or holidays and whatnot in a DL driven business which is what the contract research site is..

Our next question is a follow-up from Tim Savageaux with Northland Securities. Your line is open..

I was going to ask whether you started shipping the order in the quarter but it sounds like you said you did [Technical Difficulty] can provide any color on maybe the kind of magnitude of the shipments on the order in the quarter and that was one question and then the other on kind of what imagine sort of the 2.5G [indiscernible] type laser into Asia, obviously that’s the market that’s growing very rapidly right now and so my assumption is that you're kind of in line to maybe meet some overflow capacity with regard to suppliers, device suppliers who are just kind of unable to keep up with the extent of demand but it's something other than that kind of a more traditional kind of market share type situation I appreciate any more color you can give me on that as well.

Thank you..

As far as the shipments go, it's really that particular order is really starting to ship in Q4, really didn't have an impact on Q3. We did have some good order from that same customer in Q3 but not the one that we did the release on..

And [indiscernible] question on the fiber to the home it's still at the early stage. You know we're trying to finalize an agreement with a big player and you know hopefully sometime soon we'll be able to share some more insight with you on that..

I guess the point of that question started to -- this is a spec thing, right? I mean there is demand there is lines going in by the millions in China right now.

So I imagine it's not a matter -- you need to win this business and then hope it gets deployed this is -- there's a lot of activity there right now and so that's a kind of point I was trying to explore in terms of kind of the net new competitive situation versus one that's established where there's a need for additional capacity that you're almost being called in to sell necessarily as we've seen with a couple of other American suppliers in the space..

I think you’ve assessed it correctly. I think it is a very competitive marketplace, we’re working with one player that has some really good connections in that area that brings us in and it's right now a race and we’re seeing that, part of the CapEx spend that's being requested is to build out capacity.

Customers are looking for organizations that can deliver in the volume and equality that they are expecting that is again the follow up discussions that I'm having with the people in Ann Arbor next week. We continue to look at the request and trying to map this thing out in a logical fashion, so we don't get ahead of ourselves.

But clearly we are in the midst of that, they're fairly confident in terms of winning that business and hopefully we will be able to share some news fairly soon..

Our next question is from Randy Knudson [ph]. Your line is open. .

Let me just follow up on the Terahertz portion, you indicated you were up 10% in revenue, was that Ann Arbor or was that from your Luna technology development or is it a combination of the two?.

That was predominately Ann Arbor. All right, they've had some early wins that is very encouraging whereby they have had a value added reseller that has purchased multiple units and has really made good year for them and right now they're building off of that model.

Previously they were going directly after manufacturing and now they've kind of pulled back and decided that a more effective strategy goal after value added resellers something into manufacturers, into new lines for manufacturing that as opposed to getting current manufacturing processes change. So again that model seems to work very well.

They had a big win here in 2015 and they're actively involved with a number of other applications as well as other companies to duplicate that model. .

And one of the questions I'm an old API investor and so one of the perennial questions that I've asked is relates to the contract with TSA and safety check device or what was originally known as anomaly detection device and I'm hoping with your connections to the U.S.

government and all the interest in airport security that there's still something going on in that arena..

Unfortunately not within the U.S.A, TSA has yet to implement the technology but we recently signed up new distributor for us on the test and measurement side within Asia. They're very excited about the technology, there's a lot of opportunities that they believe exists in the China market.

So we've given them the information to go and start pushing it there. Hopefully they'll get more traction there, than we've gotten in the United States..

And I guess my last question or actually a two follow up questions, I've never seen a the word Terahertz used in connection with Luna until I saw your recent investor presentation and so is this something new and your technology development or is this been -- have you been working in Terahertz for a number of years?.

No that’s really coming from the API merger..

And I wondered you know I know you do a lot in terms of meta-materials, nanotechnology, is there any interface or synergy that's between your technology development side in Ann Arbor in terms of Terahertz?.

I think there is a lot of opportunities for that, currently what we've reported is only the activity that they've had in Ann Arbor.

You know our people who are on the Luna side when we started to talk about API and then talking about Terahertz they saw as they were going out looking for proposals that there was primarily number of still requests for proposals for Terahertz. They're very anxious.

They have a limited crew in Ann Arbor, if they ever get to the point where they need additional manpower to go after some of these contracts I think that’s the opportunity for our technology..

And then last question for you, I haven't heard anything mentioned in any of the recent conference calls relating to API Canada, is it still there and we if so are they still doing anything?.

Yes they are still up there, we have a team of roughly about four or so people up there. A Chief Technology Officer, and a number of engineers. They are actively engaged with moving some of the manufacturing into China and dealing with the issues of doing that sort of movement. Very much engaged with the company, very busy..

Our next question is from John Daly [ph]. Your line is open..

Now one another question here that you might not be able to answer, when are you going to be profitable? I don't mean today, how about the month or the quarter or the year?.

Well first John, as you know we have not been in a position where we're giving yet. I think that we are -- I think we're doing the right things and trending in the right direction. I don't know that I'm in a position to start giving guidance on this call without getting kicked under the-.

But that’s okay, I will never find out just asked..

But I may not be able to tell you..

That’s all right, everything you all been saying here is all up beat and it really sounds good and all I can say is just you know keep it going on and then one other thing that I would love to see do that API didn't do too graciously is if you have something that's newsworthy, go ahead and put it there.

You know the stockholders they don't know what the heck's going on like we wait every quarter and I'm sitting here at desk, but you did send out news on the $7 million contract.

But anyway anytime you have something that you think that might interest people like myself and there's probably 200 or 300 other people just like myself, it would be nice to hear from you and so I come back again and I say to you congratulations. Good on you..

I think the way that works -- we’re trying to address that need is prior, we have been waiting for the company to give us the nod and go ahead because it adds more value if we can actually name the company that's awarding us this.

But I think we've gotten to the point where the markets waiting for news and we should just go out there anonymously in terms of who end customer really is. So we do have our marketing guy sitting here. So he has heard every word you said..

And our next question is from Edward Perry. Your line is open. .

Just a few things here, it looks like Picometrix is going to be the wild card driving a lot of exciting things over the next year and a half, is there any chance of having [indiscernible] come on with a script at these conference calls? He was always very capable in doing cautious but yet very detailed explanations. I'd love to hear from him again..

Sure we'll take you up on that and hopefully in the next quarter, he wasn't available for today. We had gotten that request previously, unfortunately he was tied up and wasn’t able to join us [multiple speakers]..

Just one another point, it looks like just going back of the envelope calculations you're going to look about $42 million in revenues for the 12 months this year and estimating just very roughly about 52 million, Is that fitting in with your S3 calculations and are you even expecting more?.

It's a little bit below the S4 four ramp up that we had. I think we mentioned that on the call last quarter that we still felt like the right kind of trajectory was there but we are starting on that path a little bit later than what we had anticipated.

So I don't recall off the top of my head to how far below the S4 four will rank, but I know that it is a little bit below. But again I think that -- we've had some good developments, the merger seems to be progressing well, the opportunity seem to be lining up and so we still feel very good about the kind of trajectory that was put forth in the S4..

Yes, it does look great. I'm estimating here your currently revenues -- projections would be roughly $1.50 a share or upto $2 a share based on the S3, and that's pretty good. I mean that's certainly the share price will be driven by that and that's looking forward again great merger, great quarter. Thanks..

Thank you, Ed..

And our last question is from Gregg Hillman with First Wilshire Securities. Your line is open. .

Dale, can you talk about SG&A for the September quarter what was non-reoccurring or what's a good run rate on a go forward basis for that?.

I think that what we'll see in Q4 and beyond is probably pretty consistent, there was a $100,000, a $106,000 of transaction related expense that was in there for Q4, that should as you might imagine that should start -- Q3, that should to dribble down of course as it came down dramatically since Q2, even but, there is not a lot of other non-recurring stuff that's baked in there.

Of course you know we talked about the purchase accounting impact on depreciation and amortization in the quarter and that's one of the big drivers of the expense growth. And so that's going to continue with us for a while as we advertise those intangibles out..

And does that occur under the selling, general and administrative or higher up on the income statement?.

It's in SG&A..

And then in terms of variable portion, I think in the past you said that SG&A is fairly highly the lion's share is fixed, but how much is selling or expense that varies with revenue like for commissions or something like that?.

It's only going to be a couple of percent of revenue, it's not going--.

It's not significant..

Yes, you’re not going to see that driving it a lot..

A lot of that is because we use third party channels for the most part, what you'll see more in the cost of goods than you will see in the SG&A line..

Okay, I got you there, so SG&A will be pretty much like 90% fixed at this point?.

Yes we will model that..

And how about R&D? Is that going to continue at that level? For the quarter the 1.5 million?.

That’s been pretty flat for the past few quarters, so I think I would say it's a pretty comfortable level. Again even that is largely headcount driven. So it should be fairly consistent..

And then finally what would be a good tax rate to use on a go forward basis, I know you’ve big NOL, but still -- what tax rate would you use on a go forward basis?.

I’ve got $28 million of Luna NOLs and then there are some API NOLs to utilize also. So I’ve not been modeling an effective tax rate or anything yet..

Okay, do you know what the NOLs are at API?.

Yes. So at the time of the merger there's were also up just below 30 million but we’re going to have the 382 limitation on those. So we've got our tax person looking at how can we most effectively utilize those given the limitation and what do we need to do from a transfer pricing kind of perspective between us and API to most effectively utilize it..

Thank you. And I'm not showing any further questions. I will now turn the call back over to management for closing remarks..

Well thank you everyone for joining us today. As you can see we remain optimistic about our future opportunities with the combined business and we look forward to speaking with you again next quarter. Operator we can now conclude today's call..

Ladies and Gentlemen thanks for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a great day..