Dale Messick - CFO My Chung - President and CEO Rob Risser - COO, Picometrix Division.

Joshua Horowitz - Palm Global Gregg Hillman - First Wilshire Securities Jason Revland - Blueprint Capital Edward Perry - Private Investor Mark Dalton - Private Investor Randy Knudson - Private Investor.

Good day ladies and gentlemen, and welcome to the Luna Innovations Incorporated Q4 2015 Earnings Conference Call. [Operator Instructions] Now, I would like to hand the call over to Dale Messick, Chief Financial Officer. Sir, you have the floor..

Thanks, Brian. Good afternoon and thank you for joining us today as we review our operations and results for the fourth quarter and the full year of 2015. A recording of this conference call will subsequently be posted on our website.

Before we proceed with our 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 change at any time, including but not limited to statements about our expectations regarding future operating results or the 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. With Dale and I today is also Rob Risser, the COO of our Picometrix division. He will be available later to address any questions you might have concerning our high-speed optical receiver activity. We are happy to have him join us today.

We had a strong finish to 2015 with our revenues in the fourth quarter growing 29% over the combined revenues of Luna and API for the December quarter in 2014, and up 17% sequentially over our third quarter of 2015.

This growth was led by our products and licensing segment, where revenues increased 34% over the combined revenues of Luna and API for the fourth quarter of 2014 and 18% over Q3 of 2015. We had strong growth in sales of our 100G coherent optical receivers as we began shipping the $7 million order we had announced in October.

On the light wave side, our Q4 product revenues were up 13% sequentially from the third quarter. In addition to this growth in our product revenues, we also significantly enhanced our balance sheet.

In December, we negotiated with Intuitive Surgical to accelerate the remaining contingent payments to us from the sale of our medical shape sensing business to them. This resulted in $9 million being added to our cash position. We ended the year with $17.5 million of cash on our balance sheet.

A question we have been asked frequently is what are our plans for this cash, are we considering perhaps a share buyback? We don’t have a definitive answer to provide you at this time other than this is something that is being discussed.

Our Q4 revenue momentum, our positive adjusted EBITDA and strong balance sheet puts us on solid footing as we move forward into 2016. Our priorities for 2016 center around two themes. First is continuing to improve our bottom line.

With the size of the company today, the synergies we can realize and the opportunities presented by our growth initiatives, we believe we will get there.

It will take us a few quarters, especially given the level of amortization expense that was added as a result of purchase accounting that as you can see from our improving adjusted EBITDA, we are on the right path, and we are focused on that goal. Our planning activities for 2016 have been squarely centered around that objective.

Our second priority is to deliver on our two strategic growth initiatives. This means driving hard on growth in the area of high-speed optical receivers and in the adoption of our ODiSI platform for distributed strain and temperature testing.

We continue to make good progress in ODiSI sales into the composite market as it provides a compelling value proposition with a significantly better resolution and lower cost. In 2015, we were successful in penetrating key players in the aerospace and automotive industries.

Our high-speed optical receiver initiative centers around capitalizing on the growing 2.5G fiber to the premise market, especially in Asia and the emerging 100G data center communication opportunity. For the fiber to the premise market, we announced in February our first large supply agreement for our new 2.5G avalanche photodiode.

This is a product and opportunity that we have been excited about for some time now, having mentioned last year that we would be building out our manufacturing capacity in Picometrix to meet the demand we expect from this market. We launched this product in the second half of last year and have been getting good customer acceptance.

It’s a great sign to now be receiving large quantity orders. Our capacity expansion is well underway and we believe we are well positioned for this market opportunity. On the data center opportunity, we are tracking standards activity while continuing to service the current 100G transport market with our 100G coherent optical receivers.

For 2016, success will be measured by the number of new 2.5G APD design wins and the introduction of a 10G APD. Of course, in addition to these two strategic growth initiatives, our success will come from continued performance from our other products and technologies.

As a result of the merger, we have a higher revenue base, a stronger portfolio and an excellent team to get us to the next milestone for a public company. With that, I will turn the call back over to Dale. .

Thanks, My. As My mentioned, we did have a strong finish to 2015 with improving adjusted EBITDA, cash flow and I will touch on some of the more significant drivers of these results. Revenues for the fourth quarter 2015 increased $9.3 million to $15.5 million compared to $6.2 million for the fourth quarter of 2014.

Revenues from the operations of API were $8.8 million for the fourth quarter of 2015.

The increase in our total revenues were driven primarily by growth in products and licensing revenues, which grew to $11.7 million for the fourth quarter of 2015 compared to $2.9 million for the fourth quarter of the prior year, while technology development revenues increased to $3.7 million for the fourth quarter 2015 versus $3.2 million in Q4 2014.

On a pro forma basis, API as a standalone company reported revenues for the December quarter of 2014 totaling $5.8 million.

So combined revenues of the two companies for the fourth quarter of 2014 were $12 million compared to the $15.5 million we recognized in the fourth quarter of 2015 for pro forma growth of 29% in total revenues and 34% growth in the product and licensing segment of our business.

Gross profit increased to $5 million or 33% of total revenues for the fourth quarter of 2015 compared to $2.2 million or 36% of revenues for the fourth quarter of 2014.

The decline in margin was a function of product mix with a high proportion of the revenues in 2015 coming from sales of 100G coherent receivers, which typically carry a lower margin than sales of our historical test and measurement instruments.

Operating expenses were $5.8 million or 38% of revenue for the fourth quarter of 2015 compared to operating expenses of $3.1 million or 50% of revenue for the fourth quarter of the preceding year.

Operating expenses associated with API were $2.7 million for the fourth quarter of 2015 accounting for substantially all of our reported year-over-year increase in OpEx. Within that, the incremental amortization expense associated with our purchase accounting for the merger were $0.5 million.

With that incremental $0.5 million of amortization expense, our operating loss was $0.8 million, roughly flat with our operating loss for the fourth quarter of 2014.

Against the operating loss, we recognized an income tax benefit of $0.5 million for the fourth quarter of 2015 compared to income tax expense of $0.3 million for the fourth quarter of 2014.

Accordingly, our loss from continuing operations was $0.4 million for the fourth quarter of 2015 compared to a loss from continuing operations of $1.2 million for the fourth quarter of 2014.

As My mentioned in his remarks, in December 2015, we received $9 million payment from Intuitive Surgical related to our 2014 sale of our medical shape sensing business. As a result, we recognized an after-tax gain on discontinued operations of $8.3 million in the fourth quarter of 2015.

With that gain on discontinued operations, our net income attributable to common stockholders was $7.9 million for the fourth quarter of 2015 compared to a net loss attributable to common stockholders of $0.9 million for the fourth quarter of 2014.

Normalizing out the impacts of significant items such as the Intuitive gain and the incremental purchase accounting expense, our adjusted EBITDA improved $0.6 million with adjusted EBITDA of $0.4 million in the fourth quarter of 2015 compared to negative adjusted EBITDA of $0.2 million for the fourth quarter of 2014.

Turning to our full year financial highlights, total revenues for 2015 were $44 million compared to total revenues of $21.3 million for 2014. Included in our 2015 total revenues, the revenues from the operations of API for the period from the closing of our merger through December 31 were $20.6 million.

Within our product and licensing revenue for the year, the revenue associated with the historical Luna operations grew 23% to $11.1 million in 2015 compared to $9.1 million for the full year 2014. Gross profit grew to $16.5 million or 37% of revenue for 2015 compared to $7.8 million, also 37% of revenue for 2014.

Operating expenses were $22.8 million in 2015 compared to $12.3 million of operating expense in 2014.

Of this $10.5 million increase in operating expenses, $3.5 million is attributable to higher transactional related expenses year-over-year, $1.1 million relates to the amortization of intangible assets for the purchase accounting associated with the merger and $5.6 million relates to the expenses of the API operations for the period from the closing of our merger through December 31, 2015.

Including the impacts of the increased transaction related expenses on the purchase accounting amortization, our operating loss for 2015 increased to $6.2 million versus $4.5 million for 2014. I mentioned previously the discontinued operations gain of $8.3 million that we realized in 2015.

Similarly in 2014 we realized an after-tax gain on discontinued operations of $9.3 million, also related to the sale of our medical shape sensing business to Intuitive Surgical.

Including those gains, we recognized a net income attributable to common stockholders of $2.2 million for the full year 2015 compared to a net income attributable to common stockholders of $5.9 million in 2014.

From an adjusted EBITDA perspective, when we normalize of this discontinue operations gains and the associated transaction cost, we had positive adjusted EBITDA of $1.1 million for the full year of 2015 compared to a negative adjusted EBITDA of $2.5 million in 2014.

Looking at our balance sheet and cash flow, we ended 2015 with $17.5 million of cash compared to $14.1 million at the end of 2014 and $7.1 million at September 30 of 2015.

The $10.4 million increase in our cash balance during the fourth quarter of 2015 resulted from the $9 million received from Intuitive, drawing the additional $1 million term debt that we described as being available last quarter to partially fund the expansion of manufacturing capacity in Ann Arbor and approximately $374,000 of positive cash flow from the quarter’s ongoing activities.

With that I will hand the call back to My..

Thank you, Dale. At this time, Rob, Dale and myself are open for any questions that you might have. .

[Operator Instructions] Our first question comes from the line of Joshua Horowitz with Palm Global. Your line is now open. Please go ahead. .

Thanks, gentlemen and congrats on a very good quarter. Couple of questions for you. I assume that the company has had some presence at the OFC, the Optical Fiber Conference.

If so what’s sort of the reception then to your products, to activity, any feedback you can give us about that event in general?.

Okay. We actually are conducting the call out here at overseas.

Bob, do you want?.

So just to remind you – this is Rob Risser. We sponsor Luna and Picometrix sponsor the executive forum, which has held the day before the exhibitions at OFC, so that was held yesterday, and we had good receptions there. Today was the opening day of the exhibits.

It’s early, but our schedule has been stacked with meetings for all day, Tuesday, Wednesday and Thursday, which is the end of the exhibits, and given our strategic direction and products for the fiber-to-the-home market, for the 100G coherent market, and for the test and measurement side of the 100G data center market, those have all been very positively received, but it’s early.

We are only in the first half a day of the three day exhibits..

Excellent, I appreciate that.

And on the core Luna non-API business, what can you tell us about customers there? I know sometimes it’s hard to mention specific names because of confidentiality and what not, but what kind of customers are you gaining traction with there and what are they excited about as far as your products pipeline?.

So the customers that are fairly common would be the network equipment manufacturers, people like Cisco or Alcatel-Lucent, we will sell test equipment to them as well as Picometrix will sell either APDs or the 100G receivers. So we’re very common for that, and of course we deal with different people within it, but a lot of commonality.

The other focus area that we have launched here at OFC on the test side is this movement towards silicon photonics, right. When you talk about the data center and where they need to get to on speed, we actually have a very strong play of enabling people to test those devices. Did I answer your –.

Absolutely. I appreciate that. It’s just more of a comment than a question, I find it remarkable how company with this clean a balance sheet, certainly all the good work you guys have done to integrate the acquisition and the level of sales that you’ve achieved, we are trading at close to book value here, tangible book, I guess.

So keep up the great work and I guess value will act as its own catalyst. .

Thank you, Joshua..

Thank you..

Thank you. Our next question comes from the line of Gregg Hillman with First Wilshire Securities. Your line is now open. Please go ahead. .

Rob, maybe start by fiber-to-the-home in the United States, whether you think you’re getting any contracts, and can you comment on that the universal service fund, the thing where they put taxes on, I think telephone lines to subsidize broadband for the [indiscernible] and that's supposed to be more oriented to CapEx over the next couple of years, can you talk about that too and how that -- whether that might impact you?.

Hi Gregg, nice to hear your voice. Well the Fiber-to-the-home market is very big and growing obviously in Asia. The US is a little behind in deployment of Fiber-to-the-home, Verizon deployed FiOS but those speeds were 1.25 gigabits per second and that decision was made some time ago.

There aren’t a lot of Greenfield applications domestically, so they tend to be upgrades which have a little more difficult hill to climb for justification. So domestically, while our customers have some traction there, it pales in comparison to the size of the Asian and Chinese market.

We’re talking about tens of millions of units deployed a year to probably hundreds of thousands units here. Now, if you look at it in a little further out, what will the demand be for Fiber-to-the-home, with 1K TV and 4K TV coming out, the bandwidth requirements are astounding.

So at some point in time, the upgrade is going to have to be -- is going to have to have some traction domestically here. But they’re a little bit behind, so what's driving the initial adoption is Asia.

As far as the tax that’s gone on in order to basically get more bandwidth into the rural communities that has a little bit of impact but that hasn't been a big driver of the CapEx domestically for Fiber-to-the-home in North America..

And then Robin, you're speaking of China, what gives you confidence to be more follow-on orders to Fiber-to-the-home other than the one the press release you did in February?.

Well that was what we announced was our first design win and we have multiple design wins in process that we are unable to talk about until we’ve got those but we’ve been well received on, as my head mentioned on both the 2.5 gigabit which is the volume application there but as well as the 10 gigabit which is growing and growing market that’s in the very early stages for both fiber to I would say the complex or fiber to the building as well as for front haul and back haul fiber connecting the cell phone towers for 4G wireless and the coming 5G wireless that’s about a few years out.

So, we have a lot of design wins in process and our agreement I think that we announced on our first design win is a two-year agreement with a usually an unprecedented guarantee for minimum purchase amounts for the first year that's something they usually is -- it’s pretty abnormal in the telecom space..

Do you think it's reasonable to close other customers in China for Fiber-to-the-home in this year, later this year or one -- other one you just have one right now, right?.

Well, that’s certainly is what we believe our plans are and we’re at various different stages so that would be what we are driving towards..

Thank you. Our next question comes from the line of Jason Revland with Blueprint Capital. Your line is now open, please go ahead..

With the intuitive surgical payment, your cash position is now I'd say even abnormally high relative to your working capital needs. And the stock now essentially trades at book value.

So what is the timeline on deciding on a buyback and what would your rationale be for not doing the buyback?.

We are as I mentioned, we are debating it internally. The thing that we weighted against at any point in time is what are the usage we could have with that cash whether to look at some other investments, which is not a lot going on right now from that vantage point.

We're really focused on integrating API into Luna making what we have successful, but again we’ll be discussing this over the next quarter too as we look at the performance of the units and if we do decide on that which as I said we are discussing it, we’ll try to do it sometime in 2016..

Yes Jason, the other thing to keep in mind is of course we have to be cognizant of trading window kind of consideration, so we can’t be looking at doing something like that when we’re in a closed trading period.

And for us that goes from the time that we announce our earnings for the prior quarter up through the middle part of the last month of the quarter. So obviously right now, we‘re in a closed period now for some time..

Any comments on the Terahertz Division, whether that was contributor in the quarter, meaningful contributor?.

Yeah, it was a decent contribution from the Terahertz, they are expanding both internationally as well as domestically. That team remains focused, we’ve got a dedicated sales guy promoting it, we've got a marketing manager running it and so it continues to progress..

Thank you. Our next question comes from the line of Edward Perry private investor. Your line is now open, please go ahead..

Great operational performance and good execution, thank you very much. Questions on share price, I noticed that the institutional participation is only about maybe 6% to 7% where API used to be and highest 20% something.

Any idea about utilizing an investment to relations firm to get the word about the performance of your foreign company?.

Actually Dale and I when we were at the Northland Capital Conference in New York, March 9, the second day we were in Manhattan was actually to visit a number of IR firms. And so we will be going out for a quotation to each of them and hopefully make a decision on which firm would be the best for us..

That's good that would be a positive step. I do believe you should get the holdings up much higher than they are currently.

The other question I had was both the contracts for the Asian market were like initial trial orders, evaluations to be followed on with additional orders, what’s the standing on those two situations?.

Well the orders that we received in February was actually deployment orders. The orders that we received back in Q4 of last year they were trials.

And we continue to have a number of companies evaluate the technology but Rob just correctly me, actually the orders in December from this one company was for deployment not for evaluation, they had done it previously..

Now you are running on deployment orders, there is no more evaluations in the product line?.

No, there are still a number of companies evaluating the product and we hope to have design wins in the near future, but the one order that we placed they had looked at it early on and they’re in full deployment at this stage..

The evaluation orders that are in the pipeline currently is that fiber-to-the-home or is it HSOR?.

They are fiber-to-the-home 2.5 gig APD..

And they are also Asian vendors?.

Mostly is in Asia, a lot of it in Asia. That's where a lot of the deployment is going on right now..

Is your manufacturing done in Asia to support these initiatives?.

So, this is Rob, we are selling for those highline markets, we are selling the semiconductor and so what we've done is invested heavily in the capital equipment as My had mentioned earlier so that we really have the state-of-the-art fab for indium phosphide in the world.

So we’ve produced all those products in our Ann Arbor and we ship dye into Asia, they do the packaging, our customers to their own packaging so that's really where the Asian cost advantage occurs is in the packaging of products versus the semiconductors.

Semiconductors more of a capital intensive side, the packaging is more of a labor intensive side..

This is a good thing you have big buildings there.

How many shifts are you running now in Ann Arbor?.

We have been running two shifts six days a week on the 100 gig coherent side for the long haul market. And we've been running a shift and half on part of the micro fab and material growth side at Ann Arbor..

And I think one last question.

You mentioned capital expenditures in Ann Arbor to bring you to like a global state-of-the-art and then some - is this equipment as well as personnel?.

Yeah, we have most of the personnel there but we've done a little bit of the personnel side but its equipment, its scaling up from 3 inch to 4 inch wafers and automated testing of those which is a very important element of it..

Thank you. We have follow-up questions from the line of Gregg Hillman with First Wilshire Securities. Your line is now open, please go ahead..

For the manufacturers of the wafers, are you contracting a lot of stuff out that you’re going to bring in house like in later in Q2 or Q3?.

Gregg, here is you know as we upgrade it, we've done -- as the equipments coming in we've done some outsourcing that’s more expensive proposition. And as the equipment has been coming in and getting qualified, we’re insourcing that.

So just to refresh you, we are vertically integrated on that so we do our own material growth which is important element and then we do our micro fabrication and all the post testing of the optoelectronics we’ve fabricated to do all the optical testing automatically, to do the electrical testing automatically, to automatically to run that wafer into a bunch of discrete devices that’s called scribe and break.

So all of those kind of post micro fab processing steps are -- some are being outsourced now and those are gradually being integrated internally as the equipment comes in..

So for that division, are the margins to migrate upwards throughout the year as you bring more things in house and maybe --?.

That’s correct..

Probably go above your company average margin? And in my – thanks Rob. And then my, this is a question about Odyssey, you mentioned I think eventually it being integrated into the design of like an aircraft or something like that.

When do you think that might happen and can you just talk about what are the key milestones you’re looking for in Odyssey probably next 18 months?.

So for the next 18 months it would be more on the development side rather than looking at embedding the fiber into the structure itself. We don’t anticipate the embedded fiber market to happen for probably almost probably another decade before they get to the point of confidence and the information that they’re gathering to do something with.

As a result, our instrument today is not fly, meaning that you can’t put our system on a plane and take it off but they're doing all the evaluation today on that technology embedding it on the ground seeing what sort of data they can get. So short term, we are very much focused on the development side of new aircraft or new automobiles.

And that market we anticipate that to be anywhere from $400 million to $500 million for us..

Over what time frame?.

We would anticipate that we would continue to ramp into that, it’s a little big ecosystem today that's married up with strain gauged data acquisition systems, our process is to convert that methods and procedures to using our fiber as opposed to individual electrical strain gauges and that just takes a little bit of time to turn that process around.

But clearly the responses and the feedback we're getting from customers is, yes we are able to test their devices in a far better way than they can today..

Then when do you think Odyssey might be material into the company?.

I think over the next five years. I honestly believe that aerospace is gone, the religion automotive the gating item there is their movement towards composites. As you know composites is still fairly expensive unless you’re a Tesla.

You’re depended upon the big manufacturers to get the cost down but they have to get there because in order to achieve the fuel economy that they’re tasked with achieving, I'm not sure they can get there any other way than moving towards composites..

So you in the median term, the important materiality for contribution of the company is going to be Picometrix and just regular optical test equipment?.

I believe so, yeah..

Thank you. Our next question comes from the line of Mark Dalton, private investor. Your line is now open, please go ahead..

I must say I don't understand a couple of the callers that said that this was a remarkable year for 2015 and I don't really understand, I guess I probably owned the stock a lot longer than they have.

I wonder if you could shed some light on what the debate is as far as the one-time stock dividend or buy back, I realize you can't announce on a conference call when it's going to be done or how long but I mean surely you guys aren’t planning on holding that much cash.

I am not giving you a history lesson, My, but you took over in spring of 2011, the stock is down about 60% by my calculation from the time you took over until now.

Now, you folks are trying hard but still haven't demonstrated an ability to make money and I just wondered how long we should wait before we got any absolutely news either way what you are going to do with our money that you are holding there and a huge amount..

As Dale mentioned, in this current state that we are in terms of a closed window it is very difficult for us to be explicit on that..

I guess my question, I am sorry. What's the debate? I understand you are in a closed window, but what's the debate you’ve got $17 million, the stock is down half from when you've taken over. You sold off about two-thirds of Luna Innovations, again by my calculations that you did merge with a company that was perennial money loser for ostensibly.

I think you’ve said the biggest thing you had was accounting that you guys could combine some synergies from accounting. So I just I literally want to urge you as a long time shareholder to think long and hard, we've got a lot of people.

I've got about 100,000 shares and you've got people that's on a lot more than me, but really like to see the stock get off of a $1 a share and I will drop off unless you comment. Thanks for taking my call..

Thank you, Mark..

[Operator Instructions] Our next question comes from the line of Randy Knudson, private investor. Your line is now open. Please go ahead..

I thought it was a good quarter, so thank you gentlemen. I am excited for the future. I wanted to see if you could provide me with a little more color in regard to Terahertz which is my main interest as Rob is aware and I guess I come at this from a couple of directions. Is Terahertz, we don't hear anything at all about Terahertz.

I assume that it's primarily being moved by your VARs, your value added resellers?.

Yeah. Hi, Randy, this is Rob. So that VAR channel is continuing to mature. Terahertz is still crossing the chasm, but there is more traction today than it was the same time last year. There's more product revenue coming out of it, but it's still - and there is less contract revenue that is going in.

So Terahertz is still not contributing to profits or positive EBITDA yet, but it is gaining traction in the market and marching ahead, those VARs they take some time to really get up to speed and to get the product adapted out of the pilot play ups and into the production facilities, so that is moving ahead and progressing well.

It's just - it's a slow and steady pace. So it's not really a big contributor to the top line yet and it's not a contributor at all to the bottom line right now..

And I assume that there are some kind of confidentiality agreements in place with the VARs because I have reason to believe and I won't mention names, but there must be some confidentiality because I see some products that appear or that maybe I understand have API technology now Luna Technology, Picometrix technology embedded into them especially in the plastic extrusion..

That's right. Yeah, you are right. We do have confidentiality and they protect that, their processes and their adoptions of things so tightly that you are probably doing some [indiscernible] that gives you information that we wouldn't be able to provide publicly..

Well, and it's just a shame because the investing public doesn't have any real way of determining what the footprint is of Picometrix, Luna and Terahertz and I think it's one of the more exciting things going forward that you have.

So I wanted to also ask about the anomaly detection device that I know in the last conference call I asked about and I think My mentioned that there might be some opportunities overseas where people were actively looking at that in the security market and I'm wondering if you can comment any further on that?.

Not really. The new distributor that we put in place in China was getting a lot of interest in homeland security in that technology. We have now brought them in in terms of what we can offer but as of date no real progress in that other than they are obviously investing there a little bit differently than the US market is today..

Understand. And then last thing is also related to Terahertz and it’s Luna side of Terahertz.

I know that you mentioned on the last conference call that you are – once your engineers there in Virginia found out about or got involved in Terahertz that you are actually doing some other design wins maybe for the government on some Terahertz issues, I'm just wondering we don't see anything about maybe it's once again proprietary confidentiality, but it is a shame there is no mention on your webpage when you click on Terahertz, you just go back to the Picometrix page.

And I am wondering in the future if could give us something about what you are doing there because I know in your skunk works or whatever you call your advanced technology working in nano materials and those kinds of things, so I find that real interesting and I think the public would be - investing public would find that interesting as well..

Actually, we're also in the process of trying to merge the two websites together. It turns out that the code that API website was written in is different than ours, so it will take us still little of bit of time.

We're also trying to upgrade the information as of currently on the site so that our investors as well as customers have a complete view on Luna. But as I said, it's taken us a little bit longer because of the way each of the sites were created.

With regards to the technology development side, indeed the two entities, the Group in Ann Arbor or our group in Virginia here has worked fairly closely together especially in the last couple of months trying to leverage off of the capabilities of each and going after some of these government contracts.

Clearly our team when we announced it internally was really excited about Terahertz, they see it. They haven't gone after it, and they say, hey, there are activities out there..

Good. And going forward you see that just progressing? We should see continued improvement in the Terahertz division I guess on both sides..

I would hope so. When we've done internally at the traditional Luna is we put a process in place as far as how we scour what proposal is being requested, what contributions we can make, what our likelihood is winning the follow-on contracts, right, outside of the initial study. Those processes we're trying to transfer over to Rob's group in Ann Arbor.

I think there's been a lot of cooperation and receptivity to that..

Yeah, good collaboration..

I think last thing I just wanted to applaud you for having Rob on the telephone. I know for a lot of us old, API investors it's nice to hear Rob on the conference..

We had a drag and screaming and yelling. .

It's good to hear you, Randy. It's good to talk to you..

Good. Thank you all..

Thank you..

Thank you. Our next question comes from the line of Robin - Brian Robson, private investor. Your line is now open. Please go ahead..

Hi, guys. You had a good or nice sequential increase on the top line and I guess I'm hoping to force your hand in giving us some directional guidance for the top line as we look at 2016 and I will guess I will anchor your by saying you effectively have some guidance out there by virtue of the S4 which suggests about a 25% top line growth.

So can you give me your thoughts on top line into 2016?.

The comments we made today should help guide that somewhat. We are very much focused on getting to positive operating income, so we will continue to manage the synergies between the two groups to leverage the capabilities that we have to continue to manage our expenses relative to the top line growth. That's number one.

Number two is the growth engines that we have both on the Picometrix side with the win recently with 2.5 gig APD is a very positive signal towards them executing on their strategic initiative. The gains that we've made in 2015 especially within the aerospace marketplace we think positions us for growth in 2016.

So growth on top line, profitably on the bottom, that's where we are driving..

All right, so you are not going to take me any closer than that? And then looking at the margin line, so understanding that your mix brought you down a bit in the fourth quarter, for modeling purposes, what should one look at in 2016 on gross margins?.

Yeah, so, Brian, I think that in the early part of the year you're going to continue to see the higher proportion of coherent receiver sales coming through.

So I think that once we get into the later part of the year when you get more volume out of 2.5 gig APD and we get some of the benefits that Rob was talking about from in-souring versus outsourcing even that volume that we will see margins pick up towards the back half of the year..

Okay.

And then I guess while I am on the modeling side of things, are you looking at OpEx to be fairly flat through 2016?.

Yes, we don’t have –.

Yeah, if we are going to see the full year impact of the amortization expense, but so there will be a little bit of an uptick in that as some of the intangibles related to in-process R&D and as that starts to come online and get amortized we will see a little bit of tick up in that.

As far as the cash expenses, we are going to continue to manage those very closely..

Okay, that’s it for me. Thanks guys..

Great, thank you..

Thank you. We have follow-up questions from the line of Gregg Hillman with First Wilshire Securities. Your line is now open. Please go ahead..

Did you give CapEx for next year, what kind of CapEx is going to be similar to the past year?.

Yeah, so it’s going to be a larger year for CapEx.

We mentioned that in December we drew $1 million from SBB that was intended to fund the equipment, part of the equipment expansion for the whole equipment expansion, but as part of the expansion in Ann Arbor and we drew that money in December, but most of that CapEx is actually going to happen in 2016.

So you are going to see a tick up from that mostly in the first half of the year. .

Okay. And did you give a backlog number anywhere in the press release? I didn’t see it..

No, it’s not in the press release. It will certainly be in the K which we are going to be filing within next week or so..

You will give backlog figure as of December 31?.

Yes..

Okay, I will look for that. And then finally, My, when you said that [indiscernible] for gains, you said gains in the aerospace market, what did you mean by that.

Were you talking about RSE [ph] or were you talking about something else?.

Yeah, so we had sold a number of units early in the year and what they have been doing with the units that they purchased was to validate that they could see problems that they were not able to see with the strain gage measurements. In fact in one test they had four RSEs connected. And they did indeed validate that.

We were able to again see things that they missed. So that just gave us all the encouragement that we were on the right track and it gave us an internal champion..

Okay, Gregg, since you took My to another question, we try to go back and look at direct to the guidance to find our backlog number. So it was 16.7 million at December 31, ’15 versus 12.8 million December 31 of last year or 2014 I should say..

Okay.

And that was due to some of these most recent [indiscernible] for HSOR and fiber to the home stuff?.

Yes, correct..

And then, My, getting back to the aerospace thing, so do you think obviously you can get it to be like breakeven, is that the goal for this year, by the end of the year kind of getting it to breakeven level so it’s not losing money?.

No quite. I think we continue to invest in it. We’ve got a lot of engineering still going on. We also continue to add sales people, dedicated sales people globally to promote that product.

We attempted early on try to see if a strain gage manufacturer would represent our products and if you think about the cost differential, they are not the ones to go bring this new technology in because they would take a big drop in revenue to promote our technology.

That’s when we bit the bullet and we said, hey, if we are going to our money, we are going to hire dedicated Luna sales people pushing this technology and that’s worked out well for us..

As opposed to VARs..

Correct..

Okay, good. Thanks. I appreciate all your comments..

Thank you. Ladies and gentlemen, this does conclude our question-and-answer session for today. I would now hand the call back My Chung, President and CEO for closing comments..

Well, I’d like to thank everyone for joining us today and I would like to also thank Rob for taking the time here at OFC [ph] to break from all of his customer meetings to join with us and I know a lot of the API shareholders respect that. As you can see, we do believe we are heading in the right direction.

We do believe that we do have shareholders in mind in everything that we do. Things that are somewhat outside of our control to some degree, we are trying to deal with, but have confidence that we are trying to take this company to the next level. It’s for everybody, it’s both for our employees and our shareholders best interest.

So thank you again for joining us and we look forward to talking to you next quarter..

Ladies and gentlemen, this does conclude today’s program and you may all disconnect. Everybody have a wonderful day..