Lightpath Technologies Inc (LPTH) Q2 2023 Earnings Call Transcript

Good afternoon, and welcome to the LightPath Technologies Fiscal 2023 Second Quarter Financial Results Conference Call. 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 that is discussed in our periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can be proven to be inaccurate and there could be no assurances 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 reconciliation in the company's SEC filings and press releases. Sam will begin today's call with an overview of the business and recent developments for the company. I will then review financial results for the fiscal year. Following our prepared remarks, there will be a formal question-and-answer session. I would now like to turn the conference over to Sam Rubin, LightPath's President and Chief Executive Officer.

Thank you, Al. So good afternoon to everyone and welcome to LightPath Technologies’ fiscal 2023 second quarter financial results conference call. Our financial results press release was issued after the market close today and posted on our corporate website. The second fiscal quarter of 2023 proved to be eventful for LightPath Technologies. In prior quarterly calls, we have touched on the fact that LightPath is evolving from a component manufacturer to a complete solutions provider. Evidence of this evolution surfaced throughout the quarter and I will spend a large part of our time today discussing these important events. Additionally, I will discuss what we see as our three pillars of growth going forward; the solutions business, defense business, and the new high-volume applications for infrared imaging. Starting with the first pillar of growth, the Solutions business. The most important item I'd like to discuss here is our company's first-ever new system-level product: Mantis. Mantis is an advanced infrared camera that allows users to record images across both the midwave and longwave infrared spectrum without the need for cryogenic cooling. This camera is significant for LightPath in that it is the first standalone finished product LightPath has produced in many years, and it serves as a proof statement for our capabilities. I want to delve deeper into the significance of Mantis. Our plan to evolve into a solutions provider depends on LightPath displaying two key capabilities; value-added system development and proprietary differentiators such as, in this case, our Black Diamond glass. With proprietary differentiators, we can design and deliver solutions that are better than otherwise available, while at the same time capture more of the value created versus only producing the components. Developing Mantis puts our capabilities on display. The production of this unique camera represents a leap forward from manufacturing individual components to producing standalone systems. Design-wise, our Black Diamond glass enabled the ability of the camera to image across the entire range of two to 12 micrometers, or midwave and longwave bands, without the need to refocus the camera when imaging different bands. For the user, this means that instead of having two separate cameras and focusing and pointing each camera separately, they can now do this with one camera, not only reducing their upfront costs substantially but also significantly improving the operation and total cost of ownership. This also means we can now use existing technology, that of an uncooled microbiometer, and deliver a camera system that can also image in the midwave without the expensive cooling mechanisms that are currently needed for the existing midwave camera technology. We expect this, in turn, to open up new markets and applications which until now found midwave imaging to be cost-prohibitive. We are already working with customers on specific opportunities in defense, industrial, and safety applications. The optical performance of this camera, because of such a wide range of wavelengths, cannot be achieved with traditional crystalline optics; it is really enabled by the unique properties of our materials, chief among them the ones licensed exclusively from the Naval Research Laboratory. Besides the technical advancements visible in the camera, it also provides customers with a vision of the value LightPath can bring to any partnership by providing complete solutions. Additionally, during the last quarter, we also announced other exciting developments on the product front related to our second pillar of growth, which is the defense business. Our BD Six glass was qualified by the European Space Agency for use in space, placing BD Six and LightPath at the forefront of optics in extreme conditions. This project was specifically initiated by the European Space Agency to develop and qualify an alternative specifically to germanium for use in space. Our BD Six glass was tested side by side with germanium to show and prove that it withstands the exact same conditions and performs at least as well as germanium. Having been an advocate for the need and potential to replace germanium with materials like ours, we are happy to see customers not only driving toward that direction but also willing to finance the effort needed for their applications. Substituting BD Six for germanium continues to be a primary focus of LightPath and other stakeholders in the industry, particularly in the defense and aerospace industries. The growing awareness among the DoD and other government agencies of germanium's potential supply chain issues or liabilities is beginning to fuel demand to get more of our BD Six materials qualified and designed into systems. In this case, last quarter we announced that LightPath reached a backlog of $31 million in mid-December, our highest recorded backlog in many years, which beats our previous high watermark of $24 million set last August. Much of the growth of this backlog is driven by new defense contracts for which our products have been qualified, and for which we received associated orders. With those contracts, we are beginning to see BD Six take center stage, while germanium is, in some cases, being phased out completely or avoided. One of those recent awards represents a new program that is one of several new products we have been discussing in recent quarterly calls. This program is anticipated to become a new 10% customer for us over the next few years, and while backlog fluctuates over time, we do believe that they are a reliable indicator of future revenue. At the end of the quarter, our backlog remained at historically high levels for quarter-end at $29 million. As mentioned on several recent occasions, the backlog is skewed more towards defense and commercial customers in the US and Europe than it has ever been. Additionally, around 20% of the backlog remains comprised of solutions-oriented audits, which is significant. We see both those developments — the solution mix in the backlog and the European and US dominance of the backlog — as positive indicators that our strategy is working. This strategy focusing more on value-added solutions as opposed to components also naturally leads us further away from the commoditized components that had historically driven our sales in Asia. Regarding our third pillar of growth, new high-volume applications for infrared imaging, we're beginning to see the potential of new significant implementations for thermal imaging in the commercial world. More specifically, we're working with several companies in the automotive space to explore adding thermal imaging to the automatic braking systems in new cars. The Institute for Highway Safety published a report that concludes that automatic braking systems are four times less effective at night compared to daytime. One solution for this problem, which we're seeing as potentially being implemented, is adding a thermal camera as another sensor input to the automatic braking system. This implementation, while far less sophisticated than some of the LiDAR solutions out there, is also far less risky and much simpler and lower cost for the automotive companies to implement. To date, we have been in various phases with four different automotive customers, with one of the assemblies having passed field qualification with one customer. The potential average sale price we are seeing for those assemblies varies between $20 to $50 a unit, depending on how much of the camera solution we offer. Though automotive implementations take time and there is always some inherent uncertainty, we believe that such new implementations and applications could act as our third pillar of growth for the next few years. Lastly, after the quarter-end, to support this growth that we're beginning to experience, we raised $10 million in a secondary common stock offering. Among other things, this additional capital will be used to expand our manufacturing capabilities and significantly increase production capacity, particularly in the US and Latvia. One of the largest impediments to our ability to fulfill larger orders has been limited production capacity, particularly in the defense business. We believe that the investment in our Orlando facility and our facility in Latvia will drive higher order volumes. We also intend to use a portion of the funds to pay down and restructure our debt, further strengthening our financial standing and reducing our quarterly debt repayments and interest expense. Before ending, I'd like to thank our employees and stakeholders who have continued to work diligently through the various transitions and hurdles we have endured. We see a bright future and a growing company because of their dedication and hard work. I will now turn the call back over to our CFO, Albert Miranda, to review our first-quarter financial results.

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 in the 10-Q. I encourage you to visit our website at lightpath.com to access these documents. I will discuss some of the primary financial performance metrics and provide additional color on them to better assist investors. On a consolidated basis, revenues for the fiscal second quarter were $8.5 million, compared to $9.2 million in the year-ago period. Sales of infrared products were $4 million, or 47% of the company's consolidated revenue for the second quarter. Revenue from precision molded optics (PMO) products were $3.9 million, or 46% of consolidated revenue, and revenue from specialty products was $0.6 million, or 7% of total company revenue. Revenue generated by infrared products was approximately $4 million in the second quarter of fiscal 2023, compared to approximately $5.1 million in the same period of the prior fiscal year. The decrease in infrared product sales is due largely to timing issues related to a renewed large annual contract. Sales from PMO products were $3.9 million, compared to $3.8 million in the same period of the prior fiscal year. The increase in revenue is primarily attributed to increased sales in defense, industrial, and medical customers, somewhat offset by decreased sales to telecommunication customers. Sales in specialty products were $0.6 million, compared to $0.5 million in the same period of the prior fiscal year. The increase was primarily driven by increased demand for pollinator assemblies. Gross margin in the second quarter of fiscal 2023 was approximately $3.2 million, an increase of 15% as compared to approximately $2.8 million in the same period of the prior fiscal year. Total cost of sales was approximately $5.2 million for the second quarter of fiscal 2023, compared to approximately $6.4 million in the same period of the prior fiscal year. Gross margin as a percentage of revenue was 38% for the second quarter of fiscal 2023, compared to 30% for the same period of the prior fiscal year. The increase in gross margin as a percentage of revenue is partially due to the mix of products sold in each respective period. PMO products, which typically have higher margins than infrared, comprised 46% of revenue for the second quarter of fiscal 2023 as compared to 41% of the revenue for the second quarter of fiscal 2022. In addition, within our infrared product group, sales for the second quarter of fiscal 2023 were more heavily weighted toward molded infrared products than in the same quarter of the prior fiscal year. Molded infrared products typically have higher margins than non-molded infrared products. SG&A costs were approximately $3 million for the second quarter of fiscal 2023, an increase of approximately $84,000, or 3%, as compared to approximately $2.9 million in the same period of the prior fiscal year. The increase in SG&A cost is primarily due to an increase in stock compensation, partially due to direct retirements that occurred during the quarter, as well as increases in other personnel-related costs. SG&A costs for the second quarter of fiscal 2023 also included approximately $45,000 in fees paid to Bank United associated with our term loan. These increases are partially offset by decreased fees and taxes associated with our Chinese subsidiaries. Net loss for the second quarter of fiscal 2023 was approximately $694,000, or $0.03 basic and diluted loss per share, compared to $1.1 million, or $0.04 basic and diluted loss per share, for the same quarter of the prior fiscal year. The decrease in net loss for the second quarter of fiscal 2023 compared to the same period of the prior fiscal year was primarily attributable to higher gross margin despite the decrease in revenue. We believe EBITDA, a non-GAAP financial measure, is helpful for investors to better understand our underlying business operations. Our EBITDA for the quarter ended December 31, 2022 was approximately $207,000, compared to a loss of $41,000 in the same period of the prior fiscal year. The increase in EBITDA in the second quarter of fiscal 2023 was again primarily attributable to higher gross margin. As of December 31, 2022, we had working capital of approximately $9.6 million and total cash and cash equivalents of approximately $3.8 million, of which greater than 50% of our cash and cash equivalents was held by our foreign subsidiaries. Cash used in operations was approximately $752,000 for the second quarter of fiscal 2023 compared to approximately $157,000 for the same period of the prior fiscal year. Cash used in operations for the first half of fiscal 2023 was largely driven by a decrease in accounts payable and accrued liabilities, including the payment of severance related to the previously disclosed employee terminations that occurred at our Chinese subsidiaries for which that liability had been accrued in June of 2021. The increase in backlog during the first half of fiscal 2023 was primarily due to several large orders, the majority of which were received from customers in Europe for several long-term projects which we are currently working on. Shipments on these large orders will begin in the next quarter and over the following twelve to eighteen months. Going forward, we're cautiously optimistic about a recession over the next six to nine months in Europe and the US. China is clearly in a recession, but there have been some recent signs that recovery may occur in that market sooner than expected. Our cautious optimism does mean that we will work to continue to keep costs down and continue to look for more opportunities to improve production efficiencies. We achieved a 38% gross margin in Q2. I want to caution everyone not to extrapolate that forward. We felt in advance that Q2 had the right mix to create a good level of margin in Q3 and Q4. We will start delivering on existing higher volume contracts with favorable pricing to customers. At the same time, we will ship new products under contract with more value-added contributions and consequently better margins. The mix, while positive in dollars, may not result in lower gross margins as a percentage. With this review, our financial highlights and recent developments concluded, I'll now turn the call back over to the operator to begin the question-and-answer session.

And our first question comes from Scott Buck of H.C. Wainwright. Please go ahead.

Hi, good afternoon, guys. Thank you for taking my questions. First one, Sam, I was wondering if you could put some dollar figure around what that China headwind is maybe versus a year ago. And how much of that business do you think you can reasonably expect to earn back over time?

Yeah, I don't know if I would call it a headwind, Scott. My expectation is that they have hit bottom. That was not clear, let's say, three months ago. But the opening up from COVID looks like it's having a positive effect, particularly in the service sector of the economy and definitely in consumer purchasing. Eventually, that will have to trickle down to the rest of the manufacturing supply chain. So we're still cautiously optimistic. We are cautiously pessimistic in terms of estimating our revenue and earnings out of that organization. But I do think it might not be as long as we thought it would be, but we don't believe it will get back to the levels it was two, three years ago. It's still going to be significantly lower than, I'd say, 2020 or so.

Right, okay, that's helpful. And then Sam, I'm curious. Is there anything on the acquisition front that could help accelerate some of the scaling into whether it's defense or some other piece of business that might make sense for you guys?

Yeah, I think that currently we're more focused on expanding capacity and growing. We're seeing great signs of growth. We're even seeing customers saying they would give us more work on some existing projects if we would add capacity. Historically, the company relied heavily on capacity in China. Now with defense work, we need to shift or set up different types of capacity in the US and Europe. Europe is getting its own defense license for our Ludwid facility, which we believe will bring more growth. I think that as we progress on the engineered solutions and products like Mantis or great examples and reference designs for that, we would be looking to add technology and continue to focus on differentiating technologies to supplement that.

Great, that's helpful. And then last one for me, I'm just curious about your US and European manufacturing facilities. What is kind of the timeline on getting some of this work done to ease any kind of capacity constraints?

Yeah, I'll start with you because that's the easier one. So if you had a call about two years ago, we made a pretty significant investment in our European facility to add optical coating. That was set up in a way that we really staged it toward adding more capacity easily later. Now, with the money that we raised, we're starting to do that. Some equipment is arriving surprisingly fast right now, and we can get some pieces of equipment in a matter of weeks. Some take about half a year, and some still have a twelve-month lead time. So in Ludwig, that's purely equipment. In Orlando, we've been renovating and expanding the facility. As a reminder, we signed a lease for the expansion, we just haven't started using that space yet. Last week we finished moving the optical coating into that space here in Orlando. It was previously in separate buildings, and that will streamline our operations significantly. We're also going to start investing in more equipment and capacity in Orlando; lead times vary considerably, but I'd say to be safe, they would be typically six to twelve months on adding capacity.

Great. That's helpful, Sam. Thanks for the additional color, guys.

The next question comes from Gene Inger of ingerletter.com. Please go ahead.

Hi Sam and Al; I thank you both for your leadership and the tough effort that is ongoing in turning the company around. I'm just curious about a couple of things. I agree. The headwinds from China, by the way, are probably turning into tailwinds, but I don't know…

It appears we only lost Gene. Our next question comes from Aaron Martin of AIGH Investment Partners. Please go ahead.

Hi, guys. Sam, I think you mentioned four different automotive customers that you're engaged with on the automatic braking system. Can you give a little more color around that process and where you are with the different automotive customers?

Yes, absolutely. I'd say that all of this is fairly fresh with some of the customers, but moving surprisingly fast compared to the automotive industry. With one customer that has already field-tested our system extensively, we've been working for, I'd say, a year and a half, maybe even close to two years. With that customer, what we provide is actually more than just an optical assembly; we also do some of the electronics related to the system. I'd say that customer we're most advanced with would probably start taking deliveries within the next year and a half, if everything goes well, and gearing up and scaling up. They have a timeline of five years. This customer is the most advanced that we know of in terms of actually testing systems in the field, on cars and so on. Other customers are at different stages. Some are just exploring the area, taking some general samples from us to sort of play around with thermal imaging. Others are well-established companies that know exactly what they want in this and have very clear specifications. But their timelines sometimes vary and change. So I'd say with the automotive industry being where it is, swinging between no inventory to over inventory and so on, I would be a bit cautious about when we would see this go ahead. But at least with one customer, the signs are very positive.

And for this customer, are you dependent upon them sort of specing in a new system or really this is adding your solution to an existing solution?

Well, I'd say the base system that they are adding this into, meaning the automatic braking system, exists, and they know how to handle the input from those systems. They have a platform for it. What we're doing is working with them to add another sensor, another input into that system, which is why I feel comfortable enough talking about it. It's not a pie in the sky requiring the customer to learn a whole new system and a whole new set of data. It's something they're familiar with and can deal with. However, as far as I know, they're not going to retrofit it into existing cars. This is for new models that would hit production in that time frame.

Okay. And then on the gross margin, obviously a great quarter there, and I heard the caution a little bit. As we think longer term and hopefully with revenue growth, where should we be thinking on the gross margin side; medium to longer term?

I think the positive thing I'm taking from the gross margin, and hopefully others are noticing it too, is a consistent improvement and no longer the big swings that the company had experienced in the past. I see it continuing to improve. We're not resting back and feeling that 38% is good; we will not be complacent. There’s more for us to improve there, and we expect over the next few quarters is really starting to see revenue scale, we are starting to see a lot of the improvements we did both in cost of goods sold and in SG&A take more and more effect. We’re very positive about what we would be seeing.

Okay, thank you. Congratulations on the progress and look forward to speaking to you.

The next question comes from Gene Inger of ingerletter.com. Please go ahead.

Hi, Sam and Al. The call dropped just as I started to ask about how many employees you had in China. Maybe there was a balloon over Orlando. Am reading.

Too much news, Gene. Yeah, no kidding. I don't know the exact number, Gene. It's around 70 in terms of headcount.

And what is the headcount, if I may ask, roughly in Riga, Al, as well, Orlando. Did you mention something about the Philippines?

No, I didn't mention that. Riga is creeping up on 100. They're just shy of 100. We're about 120 here in Orlando.

Okay. Well, first of all, I think you guys are working hard and doing a good job. I know it's tough. I got back on the call. I don't know what happened, and I heard the word automotive, and I assume you were talking about the braking aspect that Sam has alluded to rather than infrared nice driving. Or some of which are products that BMW and others discontinued, for reasons you might know. I don't know why, because it seemed like a pretty good idea. Or maybe this is all reflected by LiDAR.

Yes. I mean, we're definitely talking about the braking system and trying to say in my comments, I think we're feeling far more confident talking about that than any conversation we had about LiDAR, for example, in the past. Simply because it's sort of a known aspect, understandable for the automotive companies. It's not a computer that now downloads an enormous amount of data that you need to figure out how to use it and what to do. It's not giving the customer, the driver, any sophisticated display that might be confusing. It is simply adding another yes/no sensor like a binary black and white kind of addition to the automatic braking system. These systems have been implemented in the field for years and are pretty well-known. I think most new cars have them, so we think that would be something with a much higher potential for actually rolling out into production.

I can appreciate that having just been rear-ended a month ago, and my car could not defend against getting hit. Thank you. Speaking of computing, you have Mr. Quantum Computer and LiDAR as your chairman of the board now. I wonder whether since Scott Ferris, at one of his roles, had to do with the start-up of a quantum computing company, whether there is a linkage between all three of these areas, LiDAR, quantum computing, and your infrared work and so on.

Yeah, absolutely. All of them share a commonality of being really photonics technologies most of all. Without photonics, they would not happen. Quantum computing or any part of quantum, whether computing or quantum sensors, is essentially optics. It's very interesting that as we talk about optics taking more of a center stage, enabling more applications, enabling more industries. Those are two great examples of that. But I also want to touch on something you briefly mentioned: Scott becoming the chairman of the board. Last quarter we completed a transition on our board of directors, scaling it down to a size that much better matches the company's strategy and direction. The board of directors now has six people, five independent and myself. We have a new chairman of the board, Scott Ferris, who, as you mentioned, is very active in the industry, has built and successfully exited numerous companies. We feel this is a significant part of the alignment of the company over the last three years. I've been here, nearly three years, we've gone through many different aspects of that, and now we can comfortably say we've really gone through all aspects of this, from the very top of the board of directors through the structure and strategic focus and operationally.

I think you make a good team, all three of you. By the way, I am curious, other than what you can't discuss, you're involved with youth and defense, battle management, and that involves AI. I know that's a buzzword of the moment, but doesn't artificial intelligence play a role in all of these applications and products?

A product like Mantis really lends itself to be used together with artificial intelligence simply because it brings so much more data. To really make the best use of that, especially if you put it on drones hovering around collecting data, you need some artificial intelligence to identify and signal to you when something important is happening. You can't have soldiers sitting there and looking at the monitor all the time or looking at screens trying to decipher all of that. So I think artificial intelligence, just like in LiDAR, the power of AI has really enabled a lot of great things in LiDAR. I think the power of AI is going to enable things like our Mantis to be deployed on a much larger scale than ever before.

Could you touch for a moment on the state-based aspect of what you're doing? I realized that a lot of it is classified and even corporations don't want to talk because competitors become competitive as time goes on. I wonder because there's talk of new cellular systems that won't need a cell phone, that any cell phone can use without specialized satellite linkage. I wonder whether you're involved in the type of infrared linkage between these global encircling satellites that would be involved.

I'd say to some degree, yes. But of course, as you can imagine with the type of companies involved where we have signed or would sign, powerful NDAs prevent us from being able to talk too much about it. I would say that I believe optical communication and infrared in particular are playing a major role in enabling satellite-based internet.

I think it's underappreciated, which is why I brought it up. I might mention, I thought the secondary offering was a wonderful entry opportunity to get into the stock. Was it essentially oversubscribed? It tends to run up after if people couldn't get enough shares. Were the buyers, that you know of, in the offering restricted as to when they can sell, or can they roll out stock anytime they want?

First of all, thanks for bringing that up. We didn't talk too much about it. We see the offering as extremely successful; it was oversubscribed and, despite everything going on in the market and all other offerings we saw in Microcaps, we did not need to provide any warrants or any financial incentives like that to execute the offering. I believe that the offering created a lot of interest, which probably played a role in the stock being positioned favorably and continues to do so. As you see, our volumes have also improved. After a few months of low volumes, we're starting to generate the interest we should be getting again. The market really signaled we did the right thing.

Glad to hear it. I'll let you go. Thank you, guys. I appreciate your leadership. I'm curious what we can anticipate this spring, and hopefully, it's not merely another progression of an earnings report.

Thank you, Gene. Good luck with your call.

This concludes our question-and-answer session. I would like to turn the conference back over to Sam Rubin for closing remarks.

Thank you, everyone, for taking the time today to follow LightPath Technologies and listening to the call. As hopefully you all gathered from the remarks and our enthusiasm about this, we really feel that we're at a strong point and turning into a great company that will now hit a steady and good growth rate. We appreciate the trust placed in us by stakeholders and look forward to future calls when we further discuss the fruit of our efforts to retool this business and move the company forward. Thank you.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.