Lightpath Technologies Inc (LPTH) Q3 2022 Earnings Call Transcript

Good afternoon and welcome to the LightPath Technologies Fiscal 2022 Third 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 this event is being recorded. I would now like to turn the conference over to Albert Miranda, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon, everyone. Before we get started, I'd 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, involve various risks and uncertainties, including the impact of the COVID-19 pandemic and those discussed in this periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them could be proven to be inaccurate and there can be no assurances that the results will 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 the management's discussion, there will be a formal question-and-answer session open to participants on the call. I would now like to turn the conference over to Sam, LightPath’s President and Chief Executive Officer.

Thank you, Al. Good afternoon to everyone, and welcome to LightPath Technologies fiscal 2022 third quarter financial results conference call. Our financial results press release was issued after the market closed today and posted on our corporate website. I want to start today's call by providing you a brief update on our company and the vision we have for the future of the business. The area of optics and photonics is at a truly exciting inflection point. Technological advances have made solutions in optics and photonics available and applicable to products and services in a wide variety of industries. Optical solutions are now applicable to products in LIDAR, drones, augmented and virtual reality, the medical field, sporting and consumer goods, to name a few. An example of one such application is LIDAR for autonomous drones, for which we recently announced a collaboration with Attollo Engineering. We believe that when a technology like photonics moves from being a specialty technology to being integrated into mainstream industries and applications, our advantages and expertise make us an ideal partner for providing the optical engine of our customers' systems. Owning critical differentiating technologies such as unique materials, high volume molding technology, freeform optics, and others positions us to both create unique value for those customers and capture that value in the form of stronger profit margins and long-term agreements and engagements with our customers. Photonics can be embedded in products across many industries and it is estimated to represent as much as 11% of the global economy. The integration of photonics into mainstream products provides us with built-in product and customer diversification opportunities. In the past, LightPath was primarily focused on components within the manufacturing supply chain. That strategy was designed around the premise that photonics is not widely adopted, and therefore the supply chain was highly fragmented and specialized. To date, we are accelerating the adoption of photonics into many applications and industries. Our strategy is moving away from being simply a component provider to a company focused on providing optical engineered solutions. This means designing and integrating optics, mechanics, electronics, and software to provide the complete optical engine to the customer. We are positioning LightPath to be the partner of choice in this exponentially growing field of optics and photonics. By focusing on our key differentiators, including our design and manufacturing expertise enabled by key optical technologies, low cost, and vertically integrated global manufacturing, we believe we can be a leading OEM to customers across the globe. One area where the adoption of photonics is accelerating is the growing need and benefit of infrared imaging. The improvement in infrared imaging is opening up new applications for an existing technology across short-wave, mid-wave, and long-wave infrared imaging. Further applications are being applied in border surveillance, drones, maritime and coastal surveillance, and critical infrastructure projects. Infrared imaging has, for the most part, been based on the use of germanium as the optical material. However, germanium comes primarily from China and Russia, with the U.S. importing as much as 95% of the germanium it uses. An alternative to germanium is chalcogenide glass, which we named Black Diamond glass. Through our ongoing production of our Black Diamond 6 Glass (BD6), we have gained significant experience in making and using those materials, positioning us as the leading manufacturer for this kind of material in the U.S. Furthermore, receiving an exclusive license to commercialize further chalcogenide glasses developed by the Navy Research Lab positions us as the only true source for a portfolio of materials that provide an alternative to germanium. To that end, I recently traveled to Washington, D.C., to give a talk about the subject, followed by meetings with DLP and government officials. We are beginning to see that owning the ski technology is well aligned with the growth of infrared imaging and the efforts to build a resilient and robust supply chain in the U.S. An important effort emphasized by the recent geopolitical events, all of which reinforces our strategy and indicates that we are in the right place, at the right time, and most importantly heading in the right direction. To reiterate, it is owning critical technologies that positions us to capture much of the value in those growing markets. The essence of our strategy revolves around technologies that are critical to the implementation of optical systems in those areas and leveraging those to develop and deliver optical systems and subsystems that produce better infrared images with an overall lower cost of ownership to the customer. Even as commercialization is happening more broadly, there remains a large addressable market for government and military applications. Our unique technology and expertise in producing and processing infrared materials, including the fabrication of components and assemblies, lower cost manufacturing in our ITAR approved facility in Latvia, and technological advancements like our diamond-like carbon (DLC) coating process, are qualified for all U.S. military applications, placing us in a leading position in this market. We believe our value proposition makes us an increasingly important partner to the commercial development of engineered solutions for Department of Defense Agencies, Defense Industrial Base (DIB), point contractors, and other infrared optical imaging businesses. In October 2021, we announced our entry into the freeform optics arena. Freeform optics involves lenses with surface shapes that lack certain symmetrical attributes, which makes them more challenging to mass produce but provides improved aperture field of view and miniaturization. Freeform optics are becoming a key element in applications such as augmented and virtual reality (AR and VR), infrared and military optical systems, and 3D imaging and visualization. Many of these systems require higher performance and a more compact form factor, which freeform optics can provide, allowing increased flexibility and overall size, weight, and power optimization. The quality of the materials used enables the production of smaller and lighter augmented and virtual reality glasses that look more like conventional eyeglasses and less like the bulky AR/VR goggles of today. Additionally, with freeform optics, LIDAR systems can achieve larger fields of view and lower losses, which in turn translates to higher resolution images and the ability to expand the detection distances. The adoption of freeform optics in such applications has been limited due to the manufacturing technologies that previously made mass commercialization cost-prohibitive. We believe that our technology solves for that. In January of this year, we announced that our freeform optics won the 2022 Prism Award for manufacturing, which is the annual international competition that honors the best optics and photonics product on the market. In March, we announced that Attollo Engineering chose our freeform optics for use in its LIDAR product. Attollo’s line of laser range finders and LIDAR products provides fast measurement with high accuracy and precision in an ultra-compact package. We integrate our molded freeform optics in their systems, which allows them to achieve optimum performance while minimizing the number of optical components. Our freeform optics reduce the cost and weight through their system. At the same time, we continue working with more customers and developing freeform optics with their applications and continue working on eight large high opportunity applications, which are in different stages of development and qualification. This is truly an exciting time to be working in photonics and optical solutions. We believe the application of the technologies we use will continue to grow as costs are reduced and product acceptance increases. We are really excited about the progress the company has made and the direction we're moving in. We have endured several hurdles over the past year or two but believe that we are on firmer footing now, and we are at the point where applications for our technology solutions are beginning to be more mainstream. I will also provide a brief update on the ongoing situation in China before making concluding remarks. As we have mentioned before, although we have taken steps to minimize the business impact from the termination of the previous management, employees, and transition to new management personnel in our China subsidiary, we have experienced some short-term adverse impacts on domestic sales in China and the results of operations in the three month period ending June 30th, 2021, and the nine-month period ending March 31st, 2022. These adverse impacts have significantly declined, yet management anticipates they may still have some effect in the next quarters. Domestic sales in China are also being impacted by COVID-19-related shutdowns, which have not directly impacted our factory but have affected the operations of some of our Chinese customers. Lastly, I would like to thank all LightPath employees and stakeholders who are working every day to grow the business and achieve breakthrough products and technologies. This concludes my prepared remarks. Now, I will pass the call over to Al Miranda, our CFO, to review financial results for the third quarter.

Thank you, Sam. I'd like to remind everyone that much of the information we're discussing during this call is also included in our press release issued earlier today and will be included in the 10-Q for the period. I encourage you to visit our website at lightPath.com. I will discuss some of the primary financial performance metrics and provide additional color on them to better assist investors in analyzing the company. As a reminder, we had been significantly impacted by the transition of business conditions in China during the fourth quarter of fiscal 2021 and into the fiscal year. LightPath’s third quarter financial results were also negatively impacted by expenses associated with the management employee transition and our Chinese subsidiaries, although to a lesser extent than in recent quarters. On a consolidated basis, revenue for the third quarter of fiscal 2022 was $8.3 million, compared to $10.7 million in the year ago period. Sales of infrared products were $3.7 million or 45% of the company's consolidated revenue in the third quarter of fiscal 2022. Revenue from the PMO products was $4 million or 48% of consolidated revenue and revenue from specialty products was $547,000 or 7% of total company revenue. The decrease in revenue from sales of infrared products is primarily due to a decrease in sales to customers in the industrial market and for temperature sensing applications, which peaked in demand during the third quarter of fiscal 2021. PMO sales increased 3% in the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021, since the drop-off of PMO sales in the fourth quarter of 2021. Sales of PMO products in China have improved sequentially each quarter of fiscal 2022, driven in part by other telecommunication customers, as well as an increased sales to customers in the industrial and commercial industries. The decrease in specialty products was primarily due to NRE projects for customers in the industrial and defense industries during the third quarter of fiscal 2022. I want to take a moment to expand on the revenue topic as Sam alluded to earlier. Revenues from China for the first three quarters have been recovering. However, our lack of sales growth is still related to disruptions in China. Revenue was down fiscal year-to-date versus last year by $5.1 million in China. Outside of China, primarily in the U.S. and Europe, our sales are up by 8% or $1.6 million. We do see a China recovery on the horizon as bookings are coming back to pre-transition levels. However, with the recent wave of COVID shutdowns, it's difficult to determine precise shipping dates as Sam mentioned earlier. Further to the revenue discussion, we've taken a strategic approach regarding the quality of revenues. First, we started the process of sunsetting certain specialty products that are no longer part of our growth plans. Second, we've taken a more targeted approach to annual volume contracts regarding pricing, which has had the anticipated effect of reducing volume but increasing the average selling price on the contracts and hence our margins. Moving on to margins, I'd like to remind listeners that PMO margins are typically higher due to our molding technology and capabilities, which enable mass production and a more automated manufacturing process. Infrared diamond-turned lenses have historically lower margins due to the extra manual production step. However, with the growth in our molding technology applied to infrared products made from our proprietary BD6 material, the margins will increase over time from both the advantages of the material cost and using the automated molding process. Gross margin in the third quarter of fiscal 2022 was approximately $3 million, compared to approximately $3.9 million in the same period of the prior fiscal year. Gross margin as a percentage of revenue was 37% for the third quarter of fiscal 2022, compared to 36% for the same period of the prior fiscal year. The increase in gross margin as a percentage of revenue was primarily due to a favorable product mix resulting in a slightly higher gross margin as a percentage of revenue, despite the lower revenue level in the third quarter of fiscal 2022. As we transition the business to Engineered Solutions, we would expect margins to increase over time. This is due to several factors, including multiple lenses required for an assembly, as Sam just described. Selling, general, and administrative costs were approximately $2.6 million for the third quarter of fiscal 2022, a decrease of approximately 187,000 or 7%, compared to the same period of the prior fiscal year. The decrease in SG&A costs is primarily due to a decrease of approximately 149,000 of expenses associated with the previously described events that occurred in our Chinese subsidiary, including legal and consulting fees. Although certain legal activities are ongoing, related costs have leveled off and should cease by the end of this calendar year. New product development costs were approximately $590,000 in the third quarter of fiscal 2022, a decrease of approximately 50,000 or 8% compared to the prior fiscal year. Net loss for the third quarter of fiscal 2022 was approximately 495,000 or $0.02 basic and diluted loss per share, compared to 223,000 or $0.01 basic and diluted loss per share for the third quarter of fiscal 2021. The decrease in net income for the third quarter of fiscal 2022, as compared to the same period of the prior fiscal year, was primarily attributed to our revenue and gross margin, partially offset by lower operating expenses. Additionally, we recognized $210,000 of other income in the fiscal third quarter related to the reversal of accruals following the China investigation and we determined that the Chinese subsidiary would not be responsible for those expenses, with the reversal recognized as a gain. We believe EBITDA is helpful for investors to better understand our underlying business operations. Our EBITDA for the three months ended March 31, 2022, was approximately $647,000, compared to $1.1 million for the same period of the prior fiscal year. The decrease in EBITDA in the third quarter of fiscal 2022 was primarily attributable to lower revenue and gross margin, again partially offset by the aforementioned $210,000. As of March 31, 2022, we had working capital of approximately $11 million, with total cash and cash equivalents of approximately $5.2 million, more than 50% of our cash and cash equivalents was held by our foreign subsidiaries. Cash provided by operations was approximately $352,000 for the first nine months of fiscal 2022, compared to approximately $3.1 million for the same period of the prior fiscal year. The decrease in cash flow from operations in the first nine months of fiscal 2022 is due to the decrease in net income and a decrease in accounts payable and accrued liabilities, partially offset by a reduction in inventory. We also renegotiated an amendment with Bank United extending our term loan until April 2024. The extension further strengthens our intermediary refinancing abilities and enables us to continue along our strategic path. Our total backlog at March 31, 2022, was approximately $19.7 million, an increase of 1% as compared to $19.5 million as of March 31, 2021. Compared to the end of fiscal 2021, our total backlog decreased by 8% during the first nine months of fiscal 2022. The decrease in backlog during the first nine months of fiscal 2022 is largely due to the timing of the renewal of a large annual contract for infrared products. Consistent with prior years, we received the renewal of this contract in the fiscal second quarter and began shipping against that contract in the fiscal third quarter. As a reminder, it is customary for our backlog to fluctuate during the year because of the timing of bookings of orders and annual renewals from our customers. With this review, our financial highlights discussion has concluded. I'll now turn the call over to the operator to begin the question-and-answer period.

We will now begin the question-and-answer session. And our first question will come from Gene Inger with ingerletter.com. Please go ahead.

Hi, Sam and Al, it sounds like an interesting quarter, obviously still in the turnaround mode. Excuse me, and I think it looks like SG&A were actually lower, but it also looks like unit profits dropped. Did they for both PMO and infrared?

Yes, so the units fluctuate all the time and are really dependent on the mix. We began to see some of the larger customers in China, especially in telecom, come back to some degree, as we discussed last quarter. Those tend to be lower unit prices on them. In infrared, this varied significantly. Engineered Solutions and assemblies can be in the hundreds of dollars sometimes, where individual components can be in the tens of dollars or less. So we tend to stay away from giving too much importance to the average sale prices' fluctuations since the mix of product and what we do has been varying considerably more. But yes, thanks for noticing the SG&A and the effects. I think the $8.3 million topline results are pretty good, and the continued improvement in gross margins even when topline hasn't grown really in that specific quarter is very encouraging.

Right, that causes me Sam to ask this. The market cap is so low. Of course, there are hundreds of companies that are far more moved into almost oblivion at this point. A, it looks like you're making it through this. B, you've been pointing in the right direction, but you're trading at around 1 times sales and you would think from an investor standpoint that's very cheap. And then, maybe I'm just giving an opinion, but I don't know whether you eventually want to shop the company for sale or some sort of a merger, but is it essentially undervalued based on even a reasonable growth?

Yes, I think first of all, I agree with you that, in my independent opinion, it's undervalued and an attractive investment. As a public company, we are always open to all options and we wouldn't rule out anything. We're not actively shopping the company around. We think that we are, as you said, heading in the right direction, with a lot of the indications that we're doing the right thing. Sometimes it's a matter of timing and you know it happened to be that our discovery of the multi-year effect in China happens at the time when the market was valuing us less, so we've been enjoying less of that rally. And now, while recovery is happening, at a time when the market is down, in a bear market. So sometimes it's just as simple as that.

So I guess my last question for the moment, so others can come on, would might be, if you have a lot of experience in China you turned around and built a big company there in an earlier life. I wonder whether you envision growing China or eventually, with this new focus with the Navy and so on, with freeform optics. I enjoyed your discussion, which is on YouTube in Washington. I wonder whether you would eventually drop off China, spend it off somehow and concentrate on the domestic scene, which seems to be doing better for the company?

Yes, definitely our investment approach has changed considerably in the last two years since I joined. We stopped investing in China even before all of those events. We rerouted really all of our investments to the Latvia operation, which serves the U.S. by being a vital facility. Now we are essentially doubling our manufacturing space and bringing manufacturing back. That said, the operation we have in China is still very important. It’s a good cash generator for us and it's our core technology, which we wouldn't spin off; that would essentially include giving away that technology. But we still see it as a valuable piece of the company, just not our strategic long-term focus as much.

Do you have a timeline and I’ll let you go? Do you have a timeline on when you envision the new licenses with the Navy and so on? AI and VR actually, and you talked about some of that. Give a timeline when you think this will crystallize in the bookable business?

Yes, so two separate things. The Navy -- the licensing of the Navy materials as I mentioned, they really, one thing we've seen from the discussions I've had in Washington and with different government officials, is that we are really at a perfect timing for that. The U.S. through the Defense Production Act and through the executive order of the Biden administration on resilient supply chain is heavily investing in developing a manufacturing base in the U.S. and accelerating the readiness of new technologies, increasing local capacity and such. The U.S. currently imports, as I mentioned, 90% of its germanium, which amounts to roughly $2.7 billion a year. A quarter of that goes into optics, around $600 million to $700 million of germanium goes into optics in the U.S. Chalcogenide is, I think, perfectly positioned to substitute that. Now, we cannot -- it’s not a one-to-one substitution and we will not completely eliminate germanium. But we are definitely the best option at this point for the U.S. in terms of reducing dependence on China and Russia. So, I think accelerating that is a key element for many stakeholders, including some of our key customers who are seeking to be involved in helping us accelerate that and bring those materials to market. We anticipate that in the next few months, the first materials might already be released. We're currently already working on copper pipes, and we're working with some of the primes on designing the material and seeing the encouraging results that we have. But it's really a key element here, I think in much of what the U.S. is looking at. In terms of the freeform optics, that's a bit of a different play in the sense that this is a technology that we've already developed and matured enough. Now is the time for the customers to take that in and utilize it. We've mentioned in the last months that Attollo Engineering, for example, has already adopted freeform optics into their LIDAR products, which looks very promising and successful. They have some very unique products in the sense of being able to monitor the location of fully autonomous drones quickly, making sure they don't collide with others. The freeform optics are really a key element there. In other places, we've shipped prototypes already to allied countries, for example, having our freeform optics in prototypes, while others are at different stages. LIDAR is becoming a bigger piece there, but that will take longer because most of the freeform optics is enabling cutting-edge applications to such a degree that those applications need to first be adopted, and when its commercial success is owned, the freeform can then scale up with. And it looks very encouraging.

I don't want to – well to say, if you have time for one quick question. You didn't give any color on two areas that I would be interested in, in the past. One was low orbiting satellites such as the SpaceX system. What would -- there is even talk about China wanting to intercept that and so on. And I'm wondering, speaking of intercepting, whether you're involved in that and whether you're involved with the new laser interception systems in Israel, which is infrared and laser technology to intercept enemy rockets?

Yes, yes. Obviously, as someone who grew up in Israel, I'm very proud of that system and seeing it. I can't comment on specific systems and technologies, of course, but I can say our business with Israel has grown exponentially in the last half-year or so. I feel very good about that, to a great part, due to the investments we made in the Latvia operation, enabling us to service customers from there far better than we could before. We have been involved in multiple low orbiting and space projects, all the way from optical communication projects to thermal cameras and detection cameras. Definitely, mid-wave cameras are playing a major role today in detecting supersonic missiles via low orbiting applications. The government and the Pentagon has decided to vault funding, just recently in the news, to deploy a whole satellite network related to that. That’s a very exciting application that we see for mid-wave and another place where chalcogenide glass plays a major role. It's really being thermal and lightweight compared to alternatives, making it a great material for any space applications, especially lower orbiting camera systems.

Thank you. I appreciate the enlightenment. I haven't heard anything lately from you about that.

Absolutely, yes. We also just closed the loop on that. We have announced previously that we have grants from Space Florida, the European Space Agency, and a couple of other projects all related to accelerating our technologies for use in space, especially all the chalcogenide materials to replace germanium and to be used in very specific low orbiting satellite applications.

As opposed to that footnote to that, you could mention whether ISP optics, your Latvia operation is involved with the drones that are going to Ukraine now or coming from Turkey, and whether or not you see a surge in business in Europe as a result of this.

I’d say that we don't know where our product ends up always. I can definitely say that we proudly deliver products to multiple UAV and drone companies that hopefully make good use of it. I can say that our expansion in Latvia, adding optical coating there, making it vertically integrated and independent of U.S. manufacturing for that sense, aligns perfectly in timing with the increases in defense budgets in Europe now and to an increase in demand that we are seeing already in terms of designing our products into defense applications. The Latvia operation, being a night operation, can also serve European defense companies now by being completely vertically integrated, having coating and assembly capability there, which is something that we are confident will deliver significant growth in Europe for us in the infrared imaging sector.

Thank you, sir.

Absolutely. Good to hear from you, Gene.

This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation and you may now disconnect.