Lightpath Technologies Inc Q1 FY2021 Earnings Call

Good afternoon and welcome to the LightPath Technologies Fiscal 2021 First Quarter Financial Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I will now pass the call off to Don Retreage, Chief Financial Officer, LightPath Technologies.

Thank you. Good afternoon. Before we get started, I would like to remind you that during the course of this conference call, the company will be making a number of forward-looking statements that are based on current expectations and involve various risks and uncertainties, including the impact of the COVID-19 pandemic that are discussed in the periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can prove to be inaccurate, and therefore, there can be no assurance that the results would be realized. In addition, references may be made to certain non-generally accepted accounting principles or non-GAAP measures, for which you should refer to the appropriate disclaimers and reconciliations in the company's SEC filings and press releases. Following management's discussion, there will be a formal Q&A session open to participants on the call. I would now like to turn the conference call over to Sam Rubin, LightPath's President and Chief Executive Officer. Please go ahead.

Thank you and good afternoon. Welcome to LightPath Technologies fiscal 2021 first quarter financial results conference call. Our financial results press release was issued after the market closed today and posted to our corporate website. Following my remarks, our CFO Donald Retreage will further review our financial results and provide more perspective on key areas. We will then conduct a Q&A session. Now, on to my remarks. Strong sales performance in the first quarter of fiscal 2021 reflects our continued trajectory of growth and performance improvements as well as the initial impact of the strategic review we presented when addressing our yearend financial results. Our growth and strong performance can be seen both sequentially compared to the fourth quarter of fiscal 2020 as well as compared to the first quarter of last fiscal year, a quarter in which we suffered from significant operational challenges which impacted results in that quarter. Despite the coronavirus pandemic, which has disrupted supply chains and caused economic upheaval, as an essential manufacturer, we have been able to deliver strong results and have positioned the company for more profitable and long-term growth. Against the backdrop of the pandemic and other socio-economical issues, there have been many challenges. I would like to commend our global staff for their resilience, commitment, and continued effort to support our customers while adhering to the health and safety protocols to protect our coworkers and their families. Sales of all major product groups increased in the first quarter 2021 compared to the prior-year period. Most notable has been the demand for our PMO lenses for the 5G infrastructure buildout and from our vertically integrated manufacturing platform for optics and optical assemblies made with our own BD6 material. We shipped approximately 1.3 million lenses in the first quarter, another record for the company, which is an increase of 105% from 600,000 lenses in the first quarter of last year and a 9% increase from 1.2 million lenses in the previous quarter. To meet the increasing demand for optics, we have been adding capacity through investments in equipment and process improvements in different areas. Demand-based capacity constraints began to be revealed in the third quarter and continued in the fourth and first quarter, which is why we had front-loaded investments in our manufacturing for this year. Capital expenditures in the first quarter of 2021 were $1.2 million, nearly four times the amount spent in the prior-year period and more than 25% greater than in the fourth quarter. It's important to note, however, that reporting on capital expenditure is based on dates of invoices, and often there is a delay between the timing of the decision and order, and the actual expenditure as booked. The additional investments in machinery and related operating personnel typically take several months until achieving full scale output, where we see more meaningful margin contribution. As such, some of the growth in capacity and some of the expenditures are still related to investments initiated in fiscal 2020. For the time being, although we have added production capacity into fiscal year-to-date, we remain constrained on certain product lines amid the growth in both revenue and total backlog. We intend to continue to invest in areas we believe we can get suitable returns. Both revenue and total backlog increased 26% as of September 30, 2020 compared to the same time last year. While our capital expenditures in recent quarters have been focused on capacity increases, as we roll out our new strategic direction and as we continue to evaluate opportunities for improvements in the organization, we are likely to identify areas for investments that will yield improvements to our operations and hence to our margins, as well as allow us to attract new business that will help shape our future and yield higher returns. As we are still experiencing growth in demand for our core products, such as molded optics, as well as the desire to address the future direction and operational improvements, we might choose to invest at a somewhat higher rate than we had in previous years. This is also aligned to the improvement in our capital management, and hence, the growth in our cash position, which we have focused on and will continue to focus on. I would like to now pivot and provide an update on our new strategic direction and company transformation. In this call and in subsequent quarterly calls, I plan to provide updates on activities we are taking and outcomes of aligning the organization to our new direction and executing on this strategic direction. As mentioned on our previous call and in our latest 10-K, we had identified that while we have served our customers exceptionally well as a component company, the world around us is changing, and photonics as a technology is being integrated into more and more industries and applications. This leads to the change in the typical customer profile with an opportunity to create and capture more value if we focus on solving the customers' optical problems and the needs rather than being a supplier of components. This is made possible not only because of the changes unfolding in our markets, but also because of LightPath's unique positioning as an innovative optics company with strong capabilities in both design and manufacturing of optics. To deliver on this, there are some activities and changes we are implementing. First, the sales process. Along the lines of what I had just discussed and for the purpose of context, in the components business, we engage with the customers once they have a complete optical system design such that the customers engage with us at the point in which they need to procure the component. In the solutions-oriented business, which we are moving towards, the process is different. We would ideally engage with the customers at an earlier stage, so that we are part of the design process. In other words, instead of receiving an optical design from the customer and fabricating the individual components for them, we are going to design the optical systems for the customer's systems and produce the entire optical assembly. To achieve this, we are implementing some changes in our sales process and structure, although we will continue to work with and pursue business through our traditional processes that have been successful to date. We have created a new role of business development, whose responsibility is to engage with customers early on and begin our interaction with the system specification stage. We have also established an internal rapid response team that is able to work with customers on their needs and turnaround designs for solutions quickly. Lastly, our sales team is switching from a product-based focus to an account-based focus, thus making the customers' needs the center of attention as opposed to the product or technology. Secondly, to be able to offer unique capabilities to our customers and to be able to design and deliver great solutions, our product development is now focusing on adding products and capabilities that will allow us to enhance the performance of the customers' systems. One such recent example is the addition of a new high-index multiple glass in our product offering. Such a glass allows achieving higher numerical aperture, which in turn translates to better light collection efficiencies for phyto-optical focus, all of which are very important specs in optical design. Third, as we focus on solutions, that naturally means focusing on higher value contracts with longer durations, as seen in the nearly $2.7 million contract we announced last February, which we will soon commence delivery against. Often these contracts are multiyear contracts. In the past, we have disclosed at the end of each quarter our backlog for the forward 12-month period. This view did not include any longer-term supply agreements that extended beyond a one-year period and that we expect now to see more of. As such, to be able to provide a more complete picture of the outcomes of those efforts, we will now be reporting our complete backlog and not a 12-month backlog we previously reported. It is our belief that this will allow investors to have a better picture of our progress with the new strategic direction. Additionally, as expected, we are also engaging in more solution-based opportunities with customers that have a higher unit value and longer-term engagement. Though we are early on in this new strategic path, we currently have in our pipeline a number of early-stage opportunities. Each has the potential of being a multiyear engagement with over $1 million of annual spend for each of them, which we see as a positive sign for the potential of this strategy. Finally, I would like to address the recent global developments related to COVID-19. While we have been fortunate enough to not be significantly impacted by the situation, as I mentioned in previous calls, the dynamic nature of the situation leads to changing conditions and significant uncertainty. In the previous wave, we have seen some customers defer taking delivery of products, whether due to a change in demand or due to physical closure of their facilities. In this time around, we have not yet experienced such situations. However, we are seeing signs from some of our customers in Europe with potential reductions or order postponements pertaining to some demand during this wave, which may impact future quarters. At the same time, sales to academic customers, which were significantly impacted in the previous wave are now not showing the same pattern. Additionally, as we did six months ago, our teams are evaluating potential impact to our supply chain and will be adjusting our inventory levels for raw materials to ensure business continuity in our manufacturing. The results announced today reflect continued sales growth, improving manufacturing efficiencies, and ongoing management of expenses. Our disciplined cash management has allowed us to hold a consistent cash balance at the end of the quarter from the beginning of the fiscal year at $5.4 million despite the substantial increase in capital expenditures, while further reducing our total debt. Don will review our cash flow and investment in greater detail during his remarks. We are very pleased with the progress made in the first quarter of fiscal 2021 and are upbeat about future results and the implementation of our strategy based on our strengths and our core capabilities to address the largest and fastest-growing trends in our industry for visible and infrared solutions. Now, I will pass the call over to our CFO, Donald Retreage, to provide more details on our first quarter of fiscal 2021.

Thank you, Sam. First, I'd like to mention that much of the information we are discussing during this call is also included in the press release issued earlier today and in our 10-Q filed with the SEC. I encourage you to visit our website at lightpath.com and specifically the section titled Investor Relations. Now onto my remarks pertaining to the fiscal 2021 first quarter ended September 30, 2020. Sam's remarks covered a lot of our financial performance, so I will be specifically discussing some of the key performance areas. Revenue for the first quarter of fiscal 2021 was approximately $9.5 million, up from $7.6 million in the first quarter of fiscal 2020 and $9.1 million in the fourth quarter of fiscal 2020. This marks the highest level of first quarter revenue in the company's history. IR product revenue was $4.7 million in the first quarter of fiscal 2021 or 50% of the total revenue, up from $4 million or 52% in the first quarter of fiscal 2020. Visible precision molded optics or PMO products' revenue in first quarter of fiscal 2021 was $4.3 million or 45% of the total, up from $3.2 million or 42% of the total in the first quarter of fiscal 2020. The balance of our revenues for the first quarter was $491,000 from specialty products and nonrecurring engineering projects, which vary greatly from quarter-to-quarter but are substantially smaller contributors to the consolidated revenue. Revenues from this group in the prior year period was $408,000, so we realized a 20% improvement. With respect to our margin profile, generally speaking, PMO products is smaller and almost entirely molded. So we have faster turnaround time, higher volume applications, and more automated processing. These products also are generally lower in price. We historically have had a margin averaging in the 40% to 50% range. Of our two primary revenue reporting segments, PMO is the smaller group with a higher margin. The IR product group represents a larger and faster-growing market opportunity. IR margins have historically been in the 20% to 30% range. Our molded IR lens, which uses our proprietary internally developed BD6 material, will come in on the higher end of the margin range, and we foresee further increases to our margins within this category as volumes grow and efficiencies improve. As part of our gross margin improvement strategies, we have been more aggressively working at marketing new products and targeting new customers using our line of innovative BD6 lenses while attempting to convert existing customers to the extent possible from using our germanium lenses for our BD6 lenses. As Sam discussed, we have been making strides with new and differential products, such as K-PSFn202, which offers a high index rating for a visible to near infrared spectrum that is very hard to achieve at a scale. So this will be a premium product group. For first quarter of fiscal 2021, gross margins were $3.9 million, an increase of 61% compared to approximately $2.4 million in the same quarter of the prior fiscal year. Total cost of sales was $5.7 million for the first quarter of 2021, up from $5.2 million in the prior year. So, as the cost of sales were up 10% on a 25% improvement in sales, this is the result of our operating leveraging strength. While impressive, we did benefit from certain operational challenges that impacted results in the prior year period, which we estimate at approximately a 2.5% increase in cost of sales and a 1.6% decrease in gross margin. Gross margin as a percentage of revenue was 40% for the first quarter of fiscal 2021 compared to 32% in the first quarter of fiscal 2020. On the fourth quarter, we improved by one point. The increase in gross margin from the prior year period was primarily driven due to higher revenue and volumes across all product groups. In addition, there were several factors that negatively impacted the first quarter of fiscal 2020, such as an increase in tariffs, the impact of which have since been mitigated. From the first quarter of last fiscal year and the fourth quarter, we are experiencing benefits from yield improvements and efficiency measures, which are all further magnified as the volume of lenses produced continues to increase. In fiscal 2021, we shipped 1.3 million lenses, up from 1.2 million lenses in the fourth quarter of fiscal 2021, and 905,000 total lenses in the third quarter compared to 643,000 lenses in the first quarter of fiscal 2020. During the first quarter of fiscal 2021, total operating expenses were approximately $3.2 million, an increase of about $168,000 or 6% compared to the $3 million in the same period of the prior fiscal year. Selling, general, and administrative costs increased by approximately 4% as compared to the same period of the prior fiscal year due to personnel-related costs associated with a moderate increase in headcount, particularly in filling positions that have been outstanding, as well as additional outside consulting services for projects related to operational improvements. Research and development related to new product development costs increased by 5%, which was needed to address the demand for advanced optical designs. Partially offsetting these increases were limited travel and marketing expenses from the COVID-19 restrictions, net of pandemic-related increased cleaning and safety expenses. Our consolidated corporate income tax in the U.S. is shielded by our net operating loss carryforward benefits of approximately $74 million at September 30, 2020. But we have to pay income tax to the countries of certain foreign subsidiaries. Income tax expense for the first quarter of fiscal 2021 was $435,000 compared to $148,000 in the same period of the prior fiscal year. Taxes in both periods are primarily related to income generated by one of the company's Chinese subsidiaries. First quarter 2021 income tax also included Chinese withholding taxes of $300,000 associated with the intercompany dividend declared through the repatriation of cash from China into the U.S. Only $100,000 of this tax has been paid as of September 30, 2020, with the remainder accrued. It should also be noted that while intercompany dividends are subject to withholding tax, the total income tax on the earnings of this subsidiary was still lower than it would have been using the normal income tax rate since this subsidiary currently qualifies for a lower Chinese income tax rate. Net foreign currency transaction losses due to changes in the value of the Chinese Yuan and the Euro against the U.S. dollar was $98,000 in the first quarter of fiscal 2021, with no impact on the earnings per share compared to net foreign currency transaction losses of $497,000 in the first quarter of fiscal 2020 for a reduction of $0.02 to the earnings per share. Net income for fiscal 2021 was $97,000, which was breakeven on a per share basis, compared to a net loss of $1.4 million or $0.05 per share for the first quarter of fiscal 2020. For the second consecutive sequential quarter, we had higher revenues, stronger margins, and controlled management of expenses. Income tax expense from the repatriation of cash from China resulted in a meaningful nonrecurring impact on earnings in the first quarter of fiscal 2021. This was not experienced earlier. For better comparability, we look at EBITDA to provide important insight into our performance and progress. EBITDA of $1.4 million set a company record for the first quarter compared to a loss of $236,000 in the same period of fiscal 2020. In addition to the operational progress that drove the improvement in EBITDA for the first quarter, there was also a favorable difference of approximately $400,000 in foreign currency transaction losses. Moving to the balance sheet and cash flow related items, capital expenditures were $1.2 million in the first quarter of fiscal 2021, up from $257,000 in the prior year period. Given that we have been running at near capacity, we intend to continue to invest, and we project capital expenditures for the year to be in the vicinity of $2.5 million. Meanwhile, net cash provided by operations was $662,000 for the first quarter of fiscal 2021, up from $450,000 in the prior year period. Total debt, including finance leases, was $5.7 million, which was reduced approximately by $308,000 in the first quarter of fiscal 2021 from $6 million at the beginning of the fiscal year. This represents a 5% reduction since June 30, 2020, and it's nearly half the amount of the debt reduction from all of last fiscal year. Our cash balance at September 30 was $5.4 million, consistent with the June 30, 2020 balance, even though we reduced debt and made significant investments to increase our production capacity to deliver future revenue growth and increased cash flow. Finally, on to our backlog. As Sam mentioned, in accordance with our new strategic directives, we have taken a refreshed view of our key performance indicators. For backlog, we have modified our disclosure from providing a 12-month order outlook to one that emphasizes our focus on long-term customer orders, such we now provide total backlog for all firm orders. As of September 30, 2020, LightPath's total backlog was $20.9 million, an increase of 26% from $16.6 million as of September 30, 2019. It should be noted that it is natural for our backlog to fluctuate during the year as a result of the timing of such bookings of large orders and annual renewals. With this review of our financial highlights and recent developments concluded, I will now turn the call over to the operator so that we may begin with our question-and-answer session.

Thank you. We will now begin the question-and-answer session. Today's first question comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Hi, good evening. Great results.

Thank you.

Can you talk about - I think last quarter you gave a manufacturing capacity number? Can you talk about where you are today? And with the investments you're talking about for the rest of the year, where will that be, say mid-2021 or at the end of 2021? What's your goal to get to?

Well, our goal for the entire year, as I mentioned, is $2.5 million as a firm number. However, we will adjust accordingly based on the continuous flexibility of where logistically we need to adjust, number one, to choose for COVID-19; and number two, how we can better collaborate with our manufacturing processes.

$2.5 million was a CapEx number, right?

Correct.

Yeah, what about in terms of units? Sorry, I should have stated that more clearly. Where are you today in terms of capacity, your ability to - the number of units you can manufacture? And where do you hope to get to a year from now?

A year from now, I mean, our speculation is that it will probably be closer to double, okay, with our capacity unit based on our PMO. And again, on the IR, it's not going to be as much even though we are increasing.

Got it. That's helpful. And then in terms of the DLC coating on BDC, as I understand, it's important for exterior facing IR lenses. Do you know roughly what percentage of IR lens sales maybe that you have or in general are exterior facing lenses that need that DLC coating?

Yeah, typically a minimum design of an optical system would be two lenses. So in the most basic optical system, one lens would be facing outside, one lens internally, then all internal surfaces are coated with a different coating, a much more standard thin film coating called AR, anti-reflective. In more complex systems, if you're talking about static systems without the dynamic zoom or change, it could be three or four lenses. In much more complex systems, it can be up to seven lenses or eight lenses.

Got it. That's great. So as competitors, I take it that are going through the process of selling a similar version of what you're selling in terms of a generic germanium. Are customers generally being as successful as you? Are you taking much more market share given this DLC, I would think, considering how they would handle those exterior facing issues that the generic has?

The DLC is definitely an advantage. To my knowledge, in the U.S., there are two other companies that can do DLC on chalcogenide, some material like our BD6, probably another couple outside the U.S., so there's definitely an advantage there. What is really unique in terms of LightPath and our advantage is, when this comes from the integration of ISP and LightPath is our ability to combine the molding technology with standard fabrication technology for large lenses. Typically, one can mold lenses up to a diameter of one inch about. Above that is difficult to mold the lens and get consistent results. So above that, usually what one would need to do is to fabricate the lens using other techniques which are far less cost-effective than molding. What we have developed and patented, and I think we issued a press release on that patent about half a year ago, is a technology that allows us to mold the lens into near shape, so very, very close to the final lens, and then on the cutoff, where our fabrication equipment at the very end just to get the final result to be a perfect optical surface. So it's really combining the best of both worlds. And as far as I know, that is one of our biggest advantages and allows us to offer cost-effective, large diameter chalcogenide lenses.

Great. Two more questions I have. The first is within the current situation of where we are with the pandemic coupled with the U.S./China tensions, has there been any change to the pace or expected pace of the 5G rollout in China?

We have not seen any change in that. We monitor it regularly and we also raise the question every time we hear about any updates from other companies. As far as we know, any changes that other companies have seen are mostly related to other elements of the 5G and not the optical infrastructure. We have not seen any change in the demand. Now, it could be that there is a change in the demand and it hasn't yet reached us or that it is impacting more of our competitors because there are multiple vendors often providing to the same customer. As of now, we have not seen a change for the demand, and we keep receiving orders from 5G related customers in China on a very regular basis.

Great. That's helpful. Last question I have, which is related to the 5G rollout in China. Well, during the Chinese New Year, as I think about seasonality, will that be impacted? Will you see lower volumes? Or will you be able to replace that demand with other customers?

Yeah, well, what happens there and I reflect back on the six years I lived in China and have been through that is in preparation of the Chinese New Year holiday, typically, companies or employees work weekends and companies operate over the weekends and far more than usual in order to build up the inventory and whatever is needed in anticipation of the downtime during the Chinese New Year. The Chinese government even mandates that while the holiday formally is only four days, if companies want to give a seven-day holiday, they have to substitute those additional days with days over weekends, and that's how output isn't impacted. So I've lived through that and seen it, and our operations have and other operations both foreign and domestic live by that and have really built, I think, a very stable flow during that time.

Great. Thanks for answering my questions.

Our next question today comes from Gene Inger with IngerLetter.com. Please go ahead.

Hi, Sam and Don. It's The Inger Letter, not injure, and we hope to not injure investors. But guys, it was an interesting quarter, interesting comments that have been made. So let's with China. So Sam, you were talking about China. And when I look through the report and listen to what you said, it looks like you had the majority of the increase that's 4% sequential, which is not that impressive. The year-over-year it's another world we're in right now, I understand. But it looks like business perked up in China from 5G and contracted with infrared or contracted other than in China. Is that correct basically?

So, Gene, in our record and our track that we have right here for the past one, two, three, four quarters including this one, the telecom increased for us from 12% to 21% of our income. Sequentially, 12% to 19% to 22%, and this quarter was down just a little bit, because of capacity constraints. It has been increasing ever since as far as telecom is concerned and China is concerned.

And as far as Europe, I know it's on the side. But just today, the United Kingdom talked about starting to vaccinate probably the Oxford vaccine everybody in England starting next month. So if you're envisioning a slowdown in Europe, I guess you're also envisioning that that would pick up and give you sort of compounded growth from both areas, Europe and China, not just North America, if we get through COVID, which ultimately, we must?

Well, we're not envisioning a slowdown in Europe as much as we are relaying information we've received from customers about possible impacts from the stay-at-home orders or closures that they see in Europe. And hopefully, everything gets resolved quickly everywhere, and we can all go back to normal.

Well, from the standpoint of investors, I think - because I heard somebody, unless I misunderstood, maybe Don have kiddingly suggested top PMO business might double in a year. So I could see, and I've referred to - for the LightPath's stock as a speculative long-term investment with not too much risk as a growth stock, but what would you say to traders are shorter-term oriented people that really have a three to six-month visibility, because the volume has been low? It ran up at one point in the summer. Is there a short-term reason for a player in the market to be interested in this company or only for long-term growth?

First, let me clarify, Gene. The question I understood it was to ask about the units. And based on our run rate, we see we're increasing, I mean, 25%, 30% every quarter. So my answer to that was that the PMO could easily double within a year unit-wise. Remember, these are billion lenses. It could based on our capacity constraints, but the run rate that we're using, that would be that, providing nothing else happens and telecom continues.

Okay. This may all be fine, but I see by the relatively steady growth since the company really turned around more than a year ago, digested the cost of ISP, divesting New York and so on, and that's all great. But I think the new direction that Sam refers to, I don't know if it involves autonomous driving modules for different companies or devices for companies like SpaceX or Velodyne or others you might be working with. But I would hope that you're not concentrating on only for your core customers that make up a big portion of the business as I think was the case in the past. Could you guys reflect on that perhaps?

Absolutely, right. We're diversifying both in customers and industry, which is something we see as important. And something that really almost comes naturally from the fact that the optics get integrated into many different technologies and industries. So I don't think we have any specific industry today that accounts for more than 20% of our revenue. That third - to answer your earlier question about timing, I think it's important to note that we are in here for the long game. Investments we're making, decisions we're making, the path we're taking are all because we believe there is tremendous value for us to create in the long-term for shareholders and have - while we always try to improve everything as quickly as possible as we can, we are not doing this to achieve quarter-to-quarter big bangs necessarily as much as we're focusing on building something stable and strong that can grow further.

Okay. Sam, if I might ask one more thought. Is this a little bit as you're transitioning even further and your business looks promising, especially as we get through COVID, it's infrared and so on. Does this give you this integration and devices almost like a little - it's not Taiwan Semiconductor or a little Foxconn, where you have a core business, but they expand that in doing work for others. So you end up perhaps assembling devices? I don't mean to put words in your mouth, I'm just asking. And you're actually bringing in components from other vendors in order to do assembly works, not just design?

Yeah. So that's a very interesting point, because very often in our world, the optics are one of the most sensitive parts of assembly, given the sensitivity to dust and such. So it would not be completely unheard of a customer wanting us to do more than just the optical assembly, since people do not want to touch such part of the system too many times. So it could be in the long-term, but it wouldn't be out of an attempt to be a contract manufacturer as much as it would be a service to the customer that can just enhance our offering and services in optics.

Well, I sort of asked this because what you're talking about with design goes beyond even a Foxconn because what - and you know them from China, because what I sense is you're talking about being more - almost an integrated manufacturer, which would really elevate the perception of the company, if you're doing that because you're not just talking about design. Let's say, well, we use Apple. They design something and they give it to Foxconn or they design an arms chip and they give it to TSC in Taiwan. But they are the designers. You're talking about doing the design to meet the customer design. I think it's a really good idea and obviously creates residual or annuity style income, which I'm guessing is what you're shooting for.

Yeah. That would definitely be a nice outcome. I'd say that also optics had someone different - well, has many, but one very important difference compared to say electronics and PCB, and that is the uniqueness of the knowledge and that the transfer from the design to the manufacturing is not as straightforward as sending prints or feeding into an SMT machine's program and just letting it to run. I think that uniqueness and that very particular expertise needed in optics is the reason why our customers entrust us with such parts of their business, and why they also believe and sort of do that we can create a unique value compared to them doing it in-house or giving it to their contract manufacturer to do.

That's helpful. First of all, I like the vision, Sam. And I think if the performance is delivered, I suspect that the market cap of the stock will reflect that eventually. But basically, I'll let you go with a last thought and congratulate you on the work you guys are doing. But the last thought might be a question, if you could expand a little bit more on how your linkage comes into some of the new technologies, AI, AR, autonomous driving, even the SAFE program, which you're somewhat connected with?

Sure. I mean, that's something probably I can talk quite a bit at length about and bore everyone. But photonics is an incredible technology. It's something that's enabling so many places. And 20, 30 years ago, photonics had some applications. Today, the number of applications and uses for photonics have grown exponentially and continue to grow. And that's part of the beauty of what we do. We are enabling other technologies, other industries to make use of this technology by providing this expertise. I've seen that throughout my career how this is growing, and I continue to see it. To me, it's an exciting thing because it's living up to the potential of a life-changing technology.

Thank you, Sam. I appreciate it. I'll let somebody else ask questions.

Thank you, Gene.

[Operator Instructions] Our next question comes from Jeff Peterson with Ridge Furrow Capital. Please go ahead.

Thanks, guys, for taking my question. Can you talk about the gross margins of the BD6 molded lenses versus diamond-turned infrared lenses? And what are the differences between the manufacturing processes?

The difference between the BD6 lenses, which is still a new product for us is that the range could be from 17% to 23% on the gross margin range. That's getting better as our yield comes up and as raw material goes up. On the IRDT, it could be a bit higher because they're bigger and the average selling price is also higher.

So maybe just to add to that for me. From a technical point of view in the IRDT, the material is one of the main drivers of the price, and it's outside of our control. The material is naturally occurring material. It's not synthetic, cannot be produced. So the price of it really depends on the availability of the material from mines in Russia and China. Any fluctuations there greatly impact gross margin. In our molded BD6, really what our technology and our innovation, similar to what PMO was in the earlier years is something that scales with volume. So fairly a high investment at the beginning, if you are only making very low volumes but really grows to substantially better margins over time when volumes increase. We are early on in the adaptation of molded BD6 into customers' designs. It's naturally going to happen this way because many of the designs have a long life cycle, and you cannot replace existing designs in aerospace and defense. So we work today on designs that will become production maybe two years from now. We're not really fully absorbing the costs of the BD6 molding and the production of the BD6 glass until we reach certain volumes. But when we do, there's no reason why the margin and the long-term of molded BD6 would not be similar to PMO.

That's very helpful. Thanks. Who is your largest infrared customer? And can you discuss the various products they buy from you and the size of these contracts or expected renewals?

Our largest infrared customer is - you're not going to look at our vertical. First of all, for most of our customers in this area, we have NDAs where we cannot disclose their name. But in our verticals, I mean, we're covering defense, industrial, medical. And in those areas, I mean, for example, in the defense industry, we have grown with average of our total revenue between 39% and - 34% and 39% in our industrial area - in the defense, sorry, between 4% to 10% of our revenue. I mean, industrial is about 34% to 43%. I mean those mixtures of infrared and the commercial is also a mixture because of the lens, the riflescopes are used both in defense. They are used both in some industrial and qualify also in commercial.

Annual contract?

And we have an annual contract with one of our biggest customers, which is between $5 million to $6 million a year, and that is mostly the telescopic lens that they use for rifles, I mean hunting and also some of it, I think is defense.

That comes up for renewal in the current quarter with it.

Yes, that's every November/December.

Okay, thanks. That is all my questions at this time.

Hey, thank you.

And our next question today comes from Brian Perganin, a private investor. Please go ahead.

Hi, guys. I appreciate you taking my call.

Absolutely.

I have a question with regards to, with you being an essential business and being able to have operations up and running in China, basically saying, giving you the go-ahead to run your operations. Considering you're running at full capacity and basically 24/7, I'm a little perplexed with that as to how earnings weren't better than what they were. I understand the 26% year-over-year. Gene touched on the 4% sequential. It's perplexing how earnings aren't better, revenues aren't better when you've expanded operations. So I guess my question is, had you not expanded operations and you weren't running at full capacity as you are, would we be looking at a significant loss or a loss at least we could say in earnings?

No, I don't think we'd be looking at the loss. I think we have a stable, consistent operation now. We've done quite a bit in the last half a year to achieve that. I think what you're seeing is two different things, like I break it out into two different things. One is we have in our molded optics, in our PMO, we have really what I'd call two very different price ranges. And one the telecom, which is the lowest price range and single dollars, but fairly good margin. The other is the medical and others, which are higher unit plays and a different type of margins to them. When we added capacity, we added it because at that time, we had large telecom orders, which again are the lower unit size. And so, it is not as visible in the dollar of revenue. But you can see it very clearly in the number of units we produce, and the very nice consistent growth in that. This is not to say that it would remain forever like this. Our product mix changes and orders from different industries change. We also navigate that knowing what capacity we have and what orders we want to win. It's very possible and expected that some of that capacity that we added at some point down the road, and again, telecom usually a rollout like this 5G lasts for three, four years. So at some point down the road, some of that capacity that we added is going to switch over to products with higher average sale prices, and we'll see the impact from the revenue. On the bottom line, I think this quarter specifically, we had a few expenses. One of them is the $300,000 tax to China for the dividend, which really impacted our earnings per share. Otherwise, we would have expected our earnings per share without that expense and the couple of other one-time expenses that are important for us for the long run, but really, we don't expect them to occur every quarter. Then we expect our results, our bottom-line results continue to be as strong as we've had in the last couple of quarters.

Okay. So without those couple of expenses you referenced, you would have seen several cents per share in earnings?

Yeah, yeah, $0.02, $0.03 probably.

Okay, what would you say to investors from the standpoint of the lack of insider buying, because I know you guys have this vision, and we saw, as Gene had mentioned, your run-up in the summer in the stock and it - you basically pulled back some 50% to 60% in price? And I know if there has been a - you had a recent insider purchase of - I forget what it was, 3,000 or 4,000 shares. But what would you say to investors to the point where there is very little insider buying? And I know there is some option based on - incentive options based on the price of the stock. But nothing gives investors more confidence than seeing true meaningful insider buying as opposed to a token several thousand shares.

Yeah, I think we do - I cannot speak for others, I can speak for myself that I buy if possible and when possible depending obviously on our blackout and different personal cash flows. But I would also remind that we just - that our fiscal year ends on June 30. And from that period until early recently, we were in a very extended long blackout period, in which we obviously could not trade anything as much as we would have loved to because we all felt the share prices be low and a very good buy.

Okay.

That's all the questions we have. We will now pass the call back to management for closing remarks.

Thank you for participating in today's conference call. We look forward to speaking with you next quarter. But until then, we encourage our shareholders to join us as we conduct our virtual annual meeting on November 12. We also will be participating in the Diamond Equity Research Virtual Conference on December 1 and the 23rd Annual Needham Conference in January. We hope you join us to continue to follow our progress. Thank you again, and goodbye.

Thank you. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.