Lightpath Technologies Inc (LPTH) Q3 2023 Earnings Call Transcript

Good afternoon, everyone. And welcome to the LightPath Technologies Fiscal Third Quarter 2023 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. At this time, I'd like to turn the conference over to Albert Miranda, Chief Financial Officer. Please go ahead, Al.

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, as discussed in our periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can prove 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. We refer to these as non-GAAP financial measures. Please refer to our SEC reports and certain press releases that include reconciliations of non-GAAP financial measures and associated disclaimers. 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. Good afternoon to everyone and welcome to LightPath Technologies' fiscal 2023 third quarter financial results conference call. Our financial results press release was issued after the market closed today and posted to our corporate website. As we expected, shipments in the third fiscal quarter of 2023 were impacted by the ongoing construction and expansion of our Florida facility. While we planned and expected some disruptions from the move and expansion, this resulted in missing shipments amounting to between $1 million to $1.5 million worth of products in the quarter. Those orders, however, are not lost, and their shipment has moved into Q4, the current quarter we're in. Completing such construction will position the company for larger, more sophisticated orders, a growth that is backed by a strong backlog and continued bookings and customer commitment. In prior quarterly calls, we discussed LightPath's strategic shift from a components manufacturer to a value-added solutions provider. To discuss this further, I'd like to outline the three pillars of growth that I've been communicating in recent months. Some of those points we've discussed previously, and a complete understanding is important. The three pillars of growth include the shift to the solutions business, an increase in defense business driven mostly by our new materials, and the new high-volume markets primarily in automotive. While the latter two growth areas are market and application-driven, the first, the solutions approach, is strategic in nature and, in many ways, ties into and enables the two strongest growth segments. Our solution business defines the first part of our growth strategy. The solutions business is built on leveraging unique capabilities we have and continue to develop and provide customers with solutions engineered to their exact needs that solve problems that current solutions either don't address or are too expensive. Over the last two years, we have been executing and getting to the level of length simply. Instead of selling individual lenses, we’re offering and delivering assemblies that include multiple lenses, often designed to specific customer requirements. Today, about 20% of our backlog of future deliveries is comprised of such lens assembly. In addition to this organic expansion into assembly, in December 2022, we announced our first imaging product—a lens assembly designed for a specific detector. Our Mantis imaging module combines a special lens assembly with a modified microbolometer array detector to deliver a multispectral infrared camera. The Mantis multispectral infrared camera provides customers with a more advanced imaging system, one that images in more than one spectral range, and demonstrates the next level of offering for LightPath's integrated optical systems with imaging electronics, delivering cutting-edge infrared solutions. While our intention is not to manufacture a line of off-the-shelf infrared cameras, we have developed this camera product as an example and design reference that will be the basis for customized OEM modules for specific applications. We have seen strong interest and reception in the market for the unique capabilities of an imaging solution like Mantis across various applications in defense as well as commercial uses such as sorting, plastic recycling, fire detection, and more. It is clear that the need for imaging solutions exists, and some customers were simply waiting for the right solution to emerge at the right price point. Rather than having a $100,000 cryogenically cooled camera, which was previously the only option, we are now offering a solution at an order of magnitude less. Over the last few months, our camera has been tested and evaluated across various applications, receiving significant attention from groups within the Department of Defense. We are very encouraged by this progress and believe it will lead to substantial OEM business for customized solutions. Additionally, we have developed some unique technologies around this camera for which we have been applying for patents. Recently, we applied for more patents than the company has in the last 10 years combined, representing a significant buildup of unique intellectual property. The second pillar of growth involves the defense sector and leveraging our unique infrared materials. This is in addition to any defense business I discussed related to the camera. The defense industry, whether in the U.S. or Europe, has been using infrared optics for an extended period. Stable supply chains already exist, providing timelines and sometimes challenges with optics and optical systems. To achieve significant growth and market share in this established market while commanding a premium, LightPath is leveraging its unique and exclusive materials for infrared imaging as an entry point into new programs and becoming the supplier of choice for infrared optics in the aerospace and defense industry. The advantages of our materials are twofold: First, they present an alternative to germanium for infrared optics. The DoD and White House identify germanium as a strategic vulnerability within the supply chain, as most of the germanium originates from China and Russia. It is strategically important to have alternatives. We have been collaborating with the DoD and various government agencies to accelerate the qualification of our new materials, with most of this work being funded directly by those agencies. Secondly, our materials provide distinct advantages over germanium, primarily in complex imaging systems. A prime example would be our Mantis camera, which could not be produced solely with germanium. While new defense contracts may take time to materialize, we are seeing very positive indicators suggesting the success of this strategy, along with faster wins evident in our backlog. The first part of our growth strategy concerns the adoption of thermal imaging or infrared imaging in general, focusing primarily on the automotive industry. Independent of other advancements in automotive, such as LiDAR, multiple car companies are working on integrating thermal imaging as a safety sensor in their systems, particularly in relation to automatic braking systems and additional safety features. We are at varying stages of development and testing with various players in this field. While each has different timelines, use cases, and projections, one major automaker from Detroit stands out in our pipeline, as it has already fully qualified our product. To put this in perspective, while we do not expect to win all the opportunities we are pursuing, winning even one or two major accounts would be transformational for our company, especially considering a price tag between $20 to $50 per assembly and the potential for tens of millions of new vehicles hitting the market each year. Since completing the equity raise in January, we have accelerated construction on expanding our Florida facility. This construction aims to increase our facility's capacity and capability. We are excited to have the construction phase behind us, as we are now back at full capacity and expect the next construction phase to be completed in the second half of the calendar year. With our facility's increased capacity, we will look to add capabilities that will come from both organic and inorganic development. As always, I want to thank our employees and stakeholders who have diligently worked through various transitions and hurdles we have endured. We see a bright future ahead for our company, thanks to their dedication, patience, and hard work. That's it. I will now turn the call 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 will be part of the 10-Q for this period. I encourage you to visit our website. I will discuss some primary financial performance metrics and provide additional context to assist investors in analyzing the company. On a consolidated basis, revenues for the third quarter were $7.4 million, compared to $8.3 million in the year-ago period. Sales of infrared products were $3.6 million, or 49% of the company's consolidated revenue for the third quarter. Revenue from precision-molded optics (PMO) products was $3.1 million, or 42% of consolidated revenue. Revenue from specialty products was $0.7 million, or 9% of total company revenue. The decrease in infrared product sales is primarily due to timing issues related to a renewed large annual contract, which was partially offset by the sale of most of the company's infrared catalog inventory to Edmund Optics. The decrease in PMO revenue was primarily attributed to reduced sales to customers in the telecom and commercial markets, partially offset by increases in defense and industrial customers. PMO sales in China remain soft across all industries. The increase in specialty optics during the quarter was the result of heightened demand for collimated assemblies and custom visible lens assemblies for the medical industry. Gross margin in the third quarter of fiscal 2023 was approximately $2.5 million, a decrease of 16% compared to approximately $3 million in the same period of the previous fiscal year. Total costs of sales were approximately $4.9 million for the third quarter, compared to approximately $5.3 million for the same period last year. Gross margin as a percentage of revenue was 34% for the third quarter, compared to 37% for the same period last year. The decrease in gross margin percentage is partly due to lower revenue levels with less fixed cost coverage, as well as a product mix that was more heavily weighted towards infrared products. PMO products, which typically have higher margins than infrared products, comprised 42% of revenue for Q3 of fiscal 2023, down from 49% for Q3 of fiscal 2022. SG&A costs were approximately $2.8 million for Q3 of fiscal 2023, an increase of about $140,000, or 5%, compared to approximately $2.6 million for the same period last year. The increase in SG&A costs is primarily due to stock compensation and other personnel-related expenses. We also incurred approximately $129,000 in costs related to exiting our secondary facility in Orlando, which ended its lease in February 2023. The net loss for Q3 of fiscal 2023 was around $1.2 million, or $0.03 basic and diluted loss per share, compared to $495,000, or $0.02 basic and diluted loss per share for the same quarter last year. The increase in net loss for Q3 of fiscal 2023, compared to the same period last year, was mainly due to lower revenue and gross margin. We believe EBITDA, a non-GAAP financial measure, is useful for investors to better understand our underlying business operations. Our EBITDA for the quarter ended March 31 was a loss of approximately $242,000, compared to earnings of $647,000 for the same period last year. The decrease in EBITDA in Q3 of fiscal 2023 was mainly attributed to lower revenue and gross margin. As of March 31, 2023, we have working capital of approximately $16 million and total cash and cash equivalents of around $9.9 million, with over 25% of our cash held by foreign subsidiaries. Cash used in operations was approximately $921,000 for Q3 of fiscal 2023, compared to about $352,000 for the same period last year. The cash used by operations for the first nine months of fiscal 2023 is largely due to a pause in production during Q3, as inventory was built and not shipped. The increase in backlog during the first nine months of fiscal 2023 was due to several large customer orders, including a $4 million supply agreement with a longstanding European customer for precision motion control systems and OEM assemblies. Shipments for these large orders will begin between next quarter and continue over the following 12 to 18 months. I'd like to comment on two points for the quarter. First, we feel good about the Q3 gross margins considering the low shipping volume; 34% in Q3 compares favorably to 30% in Q1 on similar revenue and mix, which we believe reflects the operational improvements we've made. Second, the equity raise we completed. As we stated, we plan to use the proceeds over the next 12 to 18 months for production capacity and new capabilities, especially related to our assembly business. This raise also enabled us to secure favorable terms with our senior lender, including a reduction in monthly principal payments, removal of financial covenants, lifting of restrictions on acquisitions, and removal of limitations on other financing sources. This gives us the flexibility to manage cash and debt sensibly to meet the company's growth needs, including finding a new finance partner. With this review of our financial highlights and recent developments concluded, I'll now turn the call over to the operator to begin the Q&A.

We will now begin the question-and-answer session. Our first question comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Hi, guys, thanks so much for taking my questions. I have a bunch. We'll start with some around the numbers. The large renewal order that started to shift but hurt your year-over-year sales for infrared. How much was that a year ago versus this quarter? Or what was the headwind from that?

Well, the biggest impact of the move here in Orlando has been the coating chambers for the infrared. So all right, we're not only that, most of the impact from the downtime that we had, would show up as impact in sales of infrared.

I thought you said, in addition to that, that the timing of that order affected year-over-year comps. So I was just wondering what that was. Sorry, go over there afterward. That's okay. When I looked at the Q, I was a little surprised, even with the Orlando facility down what unit volumes were, then I was even more surprised to see that the average selling price jumped, almost twice what it typically is for both your main categories. So can you help me understand these dynamics?

So just to clarify, by twice being higher, right?

Almost $100 a unit, whereas normally it's $50 to $70?

Yeah, so the biggest impact, the biggest driver of that is really the decrease in sales in China, where we've spoken in the past about the big drop in revenue, nearly two-thirds of our sales in China, which comprised 20% of our global consolidated sales, have diminished due to several geopolitical events. These tend to be on the lower end of the spectrum of products, specifically components, which typically cost around $1. So, less of that lower-priced component sales has driven up the average selling prices, along with our movement into more engineered solutions that align with hundreds or thousands of dollars per unit. Brian, that's particularly visible in the telecom industry, especially out of China.

And what about infrared? That was like $128 per unit, instead of $80 for the last few quarters? I mean—

The second customer in China with the infrared was for a consumer-level product that we're using infrared lenses.

Okay. So a couple of big picture questions. Maybe an update—I mean, you provided a lot of information this quarter on Mantis. In the last conference call, I believe you said you were probably six months away from its initial sales. Can you update us on where discussions are with OEMs and partnering with you? And does that timeline still hold?

Yes, absolutely. I think we have very extensive tests, and I don't feel at liberty to disclose too much about the specific applications within the DoD. However, I would say that, different groups have been evaluating our cameras and have been taking deliveries of samples for a couple of months. Things look very positive, with some results demonstrating even better performance than we initially anticipated. These groups involve technology development labs within the DoD, which typically don't engage in immediate product development, but those results are promising. For the commercial side, we've had many fascinating conversations, including field tests in firefighting and industrial applications related to high-temperature process monitoring and plastic recycling. I believe that in the next few weeks, we will start shipping small volumes of units to some of those customers for them to test their integration into their applications, although we still expect to be a few months away from many substantial commitments.

Right. Okay. And then you discussed the auto brakes opportunity. It's great to hear more about it. Last quarter, I remember you mentioned it was a supplier, but you're now saying it’s a car manufacturer, not merely a supplier.

I meant the supplier. So we’re just, at this level of product, we tend to get involved with more than one level. Therefore, we're supplying this to the integrator, which is a connection with the car company we know well.

So your primary customer is a tier one supplier, whose primary customer is a Detroit car manufacturer.

Correct, yes.

And then back to the timeline. I don't want to hold you exactly to it, but I mean, you sort of think you’re five to six months away from a supply agreement. Does that still feel right? I guess I don't care about margins; I just want to ascertain if there are major changes to that timeline.

Yeah, nothing has changed regarding that timeline. We're not there yet, but there have been no negative changes in any way. On the contrary, we’ve seen discussions regarding expanding the scope of work, so we may end up doing more assembly work than we initially planned, which is progressing well right now.

Okay. And then my last question is about the three major government agencies in the U.S. and Europe that you’ve mentioned have approved and completed testing on BD Six. When could this become a revenue catalyst? What needs to happen for that to actually take off?

We expect to compile all data from different projects or programs funded by various government agencies, which have exceeded over $1 billion to this point. We anticipate in the next two months to be compiling this data into a commercial format. This will help our customers receive BD Six in a more standard fashion, ensuring they have the proper specifications and technical data they need. At that point, we would begin to conduct more sales, and sometimes even in the more lower format, where we'd sell uncoated materials to customers that desired additional processing.

Great. Thanks so much.

The next question is from Gene Inger with ingerletter.com. Please go ahead.

Hi, Sam. Hi, Al.

Hi, Gene.

Hi. It's sort of an interesting time. Obviously, the preceding quarter is, I'm sure, I'd say use an old Irish word a little bit, nebbish. But I don't think that's what we're all holding shares in LightPath for; we're looking to the future, as are you. Because it's pretty obvious to me at this point that this company is primarily about new directions and new solutions, and so on. Although, I do want to ask you one question about BD Six, which the other gentleman was just asking about. Because you have talked, you said before, I think you could make as much as 10 metric tons a year of that. And the assumption has been that it's something of a secret sauce that you don't want to license or sell the materials, rather focusing promoting them specifically for your own projects; is that the case, or is this something you are considering?

Yeah, I separate it into two parts. We've somewhat created confusion by talking about BD Six, BD Six, BD Six. Now, BD Six is just one of 12 materials we have, where 10 of the other materials are exclusive to us under licensing agreements. BD Six alone is not proprietary; equivalent materials are produced by companies like Indiscernible. We do not plan to sell BD Six due to the existence of similar alternatives, which suggests economies of scale in manufacturing could be manageable.

Okay. At the recent Photonic Show, I spoke with numerous major military contractors and defense contractors. They all seemed to know about LightPath, recognizing some level of business with your company. I find this intriguing, especially concerning smaller multispectral cameras which may have specific utility, including drones. What are your thoughts on that? Are we venturing beyond an area that can be discussed?

Well, I must say we cannot disclose specific programs within the DoD. However, I can confirm that we are involved with loitering munitions and various programs related to next-generation capabilities. I'm pleased to hear everyone you spoke with was aware of our work—at this point, I believe there isn't a defense company out there that we do not engage with. While we're not the sole provider of infrared optics, we do have a broad array of collaborations across the industry.

Okay. I certainly do not have questions regarding previous performance, as the situation is clear. I genuinely believe you and Al have balanced the finances and held things together remarkably well, given your focus on new product relationships thus far. I'd like to ask, though, whether you still anticipate announcements regarding military contracts or possibly automotive partnerships by this quarter or next quarter? I understand things have been delayed, but what is your perspective on possible developments?

I can affirm that we’re juggling multiple opportunities that could yield potentially over $10 million each in the long term. I see these opportunities as options. As you noted, we don't need them to occur all at once, but some will. I strive for us to have noteworthy progress to discuss by the end of this summer; however, I also do not expect any major announcements or short-term revenue from these opportunities.

Well, it would seem that since you've mentioned integrating thermal products into technology, you might consider changing your company's name to LightPath AI.

AI certainly seems to be all the rage now. But if public interest wanes, we might need to change it again.

I don't think it will fade, as it significantly changes the world. However, I'll leave it with this statement. LightPath possesses a value similar to an option that never expires, while it currently exists in a sort of neutral zone. I'm curious about your thoughts on exploring acquisitions or partnerships instead of merely selling products once they come to fruition.

Indeed, the more we stabilize the business and enhance financial performance, as you rightly pointed out, we'll seek out strategic investments or partnerships that could elevate us to a new level. Naturally, as we innovate sophisticated cameras integrated with electronics, we would seek to add capabilities there.

I'll leave you with this last question as I have to jump off. You currently have an impressive backlog. Do you believe that problems related to ramping up the Orlando facility could hinder your ability to fulfill that backlog? After all, it's important to keep customers satisfied.

Yes, our production team and Peter Greif, our VP, have worked diligently to create alternatives and address weaknesses. We’re not averse to outsourcing, even to competitors or other companies, for certain components or fabrication processes to ensure timely delivery. Our team is fully engaged in ensuring our commitments are met, and we will deliver our products while enhancing margins as we increase capacity and capabilities. We remain committed to fulfilling our backlog.

I'm glad to hear that. However, you have yet to mention space. I feel it might be worth discussing, given our past conversations about low-orbit satellite communications. Could you share what you are doing in that area, if anything?

We've been involved in several space projects over the years, primarily focused on optical communication. Recently, we've seen indications that some of these projects may grow faster than anticipated. I'm hopeful we can share this information publicly in the upcoming quarters, but our various optical communication activities in space engage multiple customers.

Okay, thanks a lot, guys. Good luck to you, and let's hope for some timely progress.

Thank you, Gene.

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

Thank you everyone for taking the time today to follow LightPath Technologies. We appreciate the trust you place in us as stakeholders and look forward to future calls where we will further discuss the fruits of our efforts to return the business to growth and move the company forward. Thank you and goodbye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.