LightPath Technologies Inc (LPTH) 2011 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and thank you for holding. Welcome to the LightPath first quarter 2011 earnings conference call.

(Operator Instructions).

It is now my pleasure to introduce your host, Ms. Dorothy Cipolla. Thank you. You may begin.

Thank you, and good afternoon. I would like to thank everyone for joining us today for LightPath Technologies' fiscal 2011 first quarter financial results conference call. If anyone participating on the call does not have a copy of the earnings release, you can find a copy on our website at LightPath.com. Or if you're unable to access these materials online, you may call LightPath at 407-382-4003. I would like to start by reviewing the Company's Safe Harbor statement. Statements in this conference call that are not descriptions of historical facts are forward-looking statements relating to future events, and as such, all forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially. Forward-looking statements, when used in this call, can be defined by the words anticipate, could, enable, estimate, intend, expect, belief, potential, will, should, project, and similar expressions, as they relate to LightPath Technologies. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from those anticipated by LightPath Technologies at this time. Factors that could cause or contribute to such differences, include those risks fully described in LightPath Technologies' public filings with the US Securities and Exchange Commission, which can be reviewed at SEC.gov. It is now my pleasure to turn the call over to your host, Jim Gaynor.

Thank you. And good afternoon, everyone. I would like to thank everyone for joining us today on the call, And give us this opportunity, to explain our business situation, and how we're growing the business. Our business continues to transition into low cost, high volume lenses used in numerous product applications, such as laser levels, range finders, gun sites, and projectors. Our ability to address large overseas markets primarily in China, provides an immediate opportunity to expand our product line, and diversify our revenue streams, resulting in increased downside protection in the global economy. During the first quarter of fiscal 2011, LightPath continued it's trend of increased revenues, improved backlog, and higher shipment volume -- per unit volume, primarily within our precision molded optics product line.

Despite the very difficult economic conditions affecting our customers and LightPath, revenues in the first quarter of, first fiscal quarter of 2011 achieved steady growth of 45% year-on-year, to $2.25 million. It's important to note, that the first quarter is typically the slowest in our business due to the European holiday season, and seasonality affecting several of our major customers. During the quarter, we gained five new high volume customers, and lost two existing customers. One due to market conditions, and the other due to nonpayment for goods already shipped.

We plan to move into production on our new accounts over the next two quarters. And while our new customers will more than offset the loss of those -- of those lost over the long run, this change has caused a temporary softening of our revenues in the first quarter of 2011, as compared to our plan. As a result, our costs were under absorbed, resulting in lower gross margins. Despite these challenges, our EBITDA and net loss showed continued improvement in the first quarter of fiscal 2011, and our backlog also remained strong. As of September 30, 2010, backlog scheduled to ship within the next 12 months was $3.2 million, compared to $2.9 million as of June 30, 2010. We would now like to turn the call over to Ms. Dorothy Cipolla, our CFO, to discuss our financial results for fiscal 2011 first quarter, which ended September 30, in greater detail.

First, I'll talk about the three months ended September 30. Revenue for the first quarter totaled $2.25 million, compared to $1.56 million for the first quarter of last year, an increase of 45%. This increase was primarily attributable to higher sales volumes of precisionals at optics, and increased sales in GRADIUM lenses, collimators, and isolators. Our precisionals at optic sales were higher, as a result of our increased production capacity, and our pursuit of high volume low cost lens business. Growth in sales going forward, is expected to be derived primarily from the precisionals at optic products lines, particularly our low cost lenses being sold in Asia.

Our gross margin percentage in the first quarter, compared to last year decreased to 37% from 43%. Total manufacturing costs of $1.43 million was approximately $539,000 higher in the first quarter, compared to the same period last year. The manufacturing cost increase was a reflection of an increase in cost, in order to support higher production and sales volume, and a product mix change including increased sales of isolators and collimators which have a higher material cost. Unit shipment volume in precisionals at optics increased by 11% in the first quarter of 2011, compared to the same period last year. Direct costs, which include material, labor and services increased to 27% of revenue in the first quarter, as compared to 17% of revenue in the first quarter last year, due to this product mix change.

Gross margins were lower due to reduced overhead absorption, and higher material costs due to the product mix change. During the first quarter, total costs and expenses increased $109,000 to $1.3 million, compared to $1.2 million for the same period last year. This increase was due to $63,000 higher wages, $21,000 higher sales tax for tooling, and $21,000 higher stock compensation expense due to stock options granted in the third quarter of fiscal 2010. Included in total costs and expenses for the first quarter of this year, were $1.1 million in SG&A expenses. As a result, total operating loss to the first quarter of fiscal 2011 was reduced to a total loss of $475,000, compared to a loss of $527,000 for last year.

Net interest expense was approximately $378,000 in the first quarter of 2011, as compared to $180,000 in the same period last year. The convertible debentures issued in August 2008 accounted for approximately all of the interest expense during the quarter. This included periodic interest at 8%, and amortization of the related debt issuance costs, debt discounts, and a write-off of debt issuance costs, prepaid interest, and debt discount for debentures which were converted into shares of common stock during the first quarter.

During the first quarter, we reduced our debt by $732,500 through the conversion of debentures to shares of common stock by certain investors, leaving a remaining balance due to these certain investors of $1.2 million, which is covered by our existing cash on hand. The conversion of the debentures resulted in an accelerated charge to the income statement totaling $200,000, to cover the interest and debt issuance costs that were being amortized over the life of the debentures.

Net loss for the first quarter of fiscal 2011 increased $147,000 to $853,000, or $0.09 per share basic and diluted, compared to a net loss of $706,000, or $0.09 per basic and diluted common share for last year. This increase in loss is the result of the $200,000 of accelerated interest charges, due to the early conversion of the -- a portion of the debentures. Weighted average basic shares outstanding increased to 9 million in the first quarter of fiscal 2011, compared to 7.6 million in the first quarter of last year, which is primarily due to the issuance of shares of common stock, related to a private placement in the fourth quarter of fiscal 2010, and debentures converted into the -- into equity in this quarter.

I now would like to talk about a few areas on the balance sheet. Cash and cash equivalents totaled $1.35 million at September 30, 2010. Total current assets -- the total current assets and total assets at September 30 were $4.7 million and $7.3 million, compared to $4.8 million and $7.5 million, respectively at June 30. Total current liabilities and total liabilities at September 30 were $2.3 million and $2.9 million, compared to $1.1 million and $3.2 million, respectively for June 30, 2010.

This change is primarily related to the convertible debentures, moving from long-term liabilities to current liabilities, with $1.1 million due to be repaid in August of 2011. As a result, the current ratio as of September, was 2.01 to 1 compared to 4.41 to 1 as of June 30. Total stockholders equity at June 30 totaled $4.4 million, compared to $4.2 million at June 30, 2010. As of September 30, our backlog of orders scheduled to ship within the next 12 months was $3.2 million, compared to $2.9 million as of June 30. I would now like to turn the call back over to Jim for some closing remarks.

Thank you, Dorothy. We expect margin improvements based on the production efficiencies and reductions in product costs, as a result of the shift in the majority of our manufacturing operations to our Shanghai facility. Our direct-to-China sales channels have opened up a greater market opportunity to fill demand, with our low cost lenses used in laser systems, laser tools, biomedical instrumentation, and telecommunication equipment, provided by high volume manufacturers throughout Asia. In the coming quarters, we remain cautiously optimistic. And in the long run, believe our business strategy offers significant financial rewards for the Company and our shareholders. This concludes my comments at this time. And I would like to open the call for questions. So, operator, would you please start the Q&A portion of the call?

(Operator Instructions).

Our first question comes from the line of [Michael Dyat], private investor. Please proceed with your question.

Hi, Jim and Dorothy. Good report, again. I appreciate it. I do have two quick questions. Maybe you could talk a bit more about the -- the shift in the gross margin that you noted in the press report, where it seemed to go down. Is that going to be staying there, or coming back? And coming back to an earlier question I've had in prior calls, you've talk about Europe and some of the action there, as well as how you have done in some of these technical trade conferences?

Okay. Well, let me take the first one. The margin did dip, primarily because our volume dropped a little in the first quarter, compared to where we had been running, and we didn't absorb all the same overhead costs that we had before. And as I said, we fully expect that to come right back, as we move through this current fiscal year. And so, I'm not too worried about that. The -- looking at all the operating parameters in terms of our yields and productivity, those kinds of measures that we keep pretty tight reign on, everything is still in line to where it has been in the past. So really it's just a matter of making sure that we bring in that revenue. And we had this little dip as a result of these two major customers that -- one lost his contracts, which means we lost some business.

And the other, we made a conscious decision to stop doing business with because of over payment issues. And we resolved those current payment issues, but we decided that we would not continue to do business with that particular customer. And those were some pretty tough decisions, and some pretty big impacts. Now, we have been able, as I said, to replace that business, but now it's a matter of how quickly we can bring it online. And I think we'll start to see that in this current quarter. And the following quarter, we should be back to where we have been.

Again, I asked about the -- Europe? And are you getting good sort of order interest at these technical conferences?

I mean, the technical conferences and the trade shows that we attend are one of the major generation, lead generation tools that we have. And it's actually where we get quite a bit of our business from. So they have been doing very well for us, and we're going to continue that. And as you may have noticed in some of the press releases, we're expanding that effort, particularly in China. And we started to make really good progress in the relationships, and the number of customers that -- that we're getting directly in China. It's taken us a while to get LightPath recognized within the Asian market. And the guys over there have done an outstanding job, and are really being accepted as a player in that market locally.

And locally, by that, I mean the Asian continent, and China in particular. So that's done very well for us. In Europe, in particular, since we put AMS technologies on, and used this master distributor strategy that we have -- that we set in place, we have seen a tremendous growth in our business in Europe. And we're really very pleased with that. And AMS has moved to one of our larger accounts, and customers -- and it's doing quite well. I'm very pleased with that. That strategy has worked -- has actually exceeded our expectations.

Great. Well, thank you. I like particularly the new staffing in China. It looked very strong.

Thank you.

Thank you. Our next question comes from the line of Bob Ainbinder with Garden State Securities. Please proceed with your question.

Good afternoon, Jim. Good afternoon, Dorothy.

Hi, Bob.

First, let me congratulate you both on another solid quarter and great work over the past several years, Jim, since you've taken the reins. We've really noticed the difference in LightPath, and the progress that you are making. I really want to congratulate you on a job well done. With that, could you give us a little more color, as to the margin question that Michael Dyat asked you. In particular, what was it that actually drove down those margins? Was it the customer, or are you selling more isolators, I guess is more my question? Is the isolator business starting to really pick up in China, and is that something you see as a real revenue generator, as we move forward?

Well, I think there's a couple of things behind that. One is, there was a pretty good product mix shift in this particular quarter. And part of that was because we were selling more isolators, given the recent strength in the telecom markets. So some of that business has come back. We don't expect that to be long-term, but that is a higher material content product, and it has lower margins associated with it, so it was a bigger piece of the mix. We also have been working on a development of some new designs with some particular customers in the collimator line, and so we were actually putting out some prototypes. So we had some upfront costs that as they go into production, which they will be going this current quarter, and the follow-on quarters, we'll see a much better return from that business.

So there are some definitely -- and then some of the -- what happened is some of the low cost, which have pretty good margins on them -- some of that business dropped off with these customer shifts. And which -- and will be coming back. So we had that kind of a mix change as well. And all of that, the unit volume dropping off temporarily, we didn't cover all the overhead that we had been covering. So the biggest portion of that is just that absorption of the fixed costs that we have, which we believe is right-sized for the business that we expect to have. And I really feel that this will be a very temporary situation. We'll see very good, very quick improvement as we go through this fiscal year.

Great. Okay. With that, could you give us a little color as to the new hires in Asia, and a little background on the people that you hired, and what you expect out of them?

What we've done there, is we've hired a -- we're putting in a level of middle management in the Shanghai operation. As that plant becomes more and more the major producer of our product, we wanted to make sure that we had the right skill level and experience level, in the quality and the materials planning and supply chain management areas. And those were the two key positions that we added. And both of those guys come to us with about ten to 15 years experience in international companies, in China. And they are able to know where -- how to run things, how to make sure that our quality systems are operating properly and consistently. And from a supply chain management point of view and materials flow and planning, giving us a level of expertise that we didn't have on the -- on site prior to this. So that was the idea between putting those people in. And as we're continuing to develop that organization, we wanted to make sure that we had the right management skills in place.

Okay. And as far as our operations in the US, do we anticipate building out any manufacturing capacity for our government contracts? Is there anything in that area that you might be able to disclose?

Well, what we're trying to do there, Bob, we've had this strategy for a couple of years now, where we're moving the majority of our commercial type operations, and the manufacturing for that into the Chinese facility to take advantage of the low cost platform. And focusing the Orlando operation on engineering work, the development, research and development work, as well as some defense work. And setting it up as we go through time here, and we develop this infrared product line. We really expect that to be the next thing that puts significant manufacturing operations back into the Orlando operation, as we go forward.

And so that's the way we've viewed implemented our strategy to take advantage of those cost advantages. And now we've got the organization set up properly to do that, and then as we develop this infrared product line, what we'll see is more manufacturing. And infrared, we feel that at least 50% of that business opportunity is going to be defense-related. Whether that's from our perspective, that would be for us selling to a major defense contractor who has got some kind of a defense contractor who has got some kind of defense contract.

It's an exciting time for LightPath. Sounds like we're firing on all cylinders.

I think the real thing that people want to know about is, how are we going to get off this bubble? And when will we be able to sustain profitability and those kinds of things? And I think what we have done, we've done the majority of the internal cost work that's required for us to open up larger markets as we've explained in the past. And now, it's a matter of how quickly we can grow our revenues. And we've got some very aggressive plans in place to make that happen. And you've seen some of the events.

And we've disclosed them, where we've expanded our new distributors and our distribution channel, both in Europe and in Asia. And I think Europe is a little ahead of the curve there, and it's working very well. And we're doing that same thing in Asia as we add, we've added a couple of distributors there. We're going to add a couple more, so that we get better exposure in that very vibrant market. We've hired an experienced and well qualified executive in Brian Soller, as our business development, so that he can help us define the right directions that we need to go, and what the opportunities for the future are. And he comes to us with quite a bit of experience, and really the proper background to help directly in our business.

And then, we continually actively pursue additional cost reduction. We haven't stopped trying to get our costs, and improve those cost structures as we move forward. And as we do that, that will allow us to have even deeper penetration into these high volume markets, and really see some really good opportunities for us along that line. And so what that's led us to, is our strategy is in the short-term, we have a very aggressive focus on this high volume, low cost markets, both, which basically are telecom and industrial laser tools.

In the midterm, we're going to be beefing up our value-added services, and move the Company a step up in the ladder in terms of value, value-added type opportunities. And in the long-term, it's based on our penetration into the infrared. And we truly believe that we have an enabling technology there that will allow us to offer a very cost competitive product into the infrared space in thermal imaging and sensors and security type devices. So I think we have -- we're continuing to execute this strategy. We're continuing to make good progress. And I think it's going to lead to a very bright future for this Company. I'm really very excited about it.

Very good. Jim, I really appreciate it. Dorothy, thank you so much, both of you, for your hard work. Look forward to the next conference call.

Thanks, Bob.

Thank you.

Thank you. Our next question comes from the line of Steven Donovan with Donovan Associates. Please proceed with your question.

Hi, Jim and Dorothy.

Hi, Steve. How are you?

I'm doing great.

Great.

Well, I was -- first of all, I'm grateful that you, you sounded a note of caution in the previous conference call, because it made me tune, tune into the fact, that it might be a little weak. But when I got up this morning, and saw the size of the quarterly loss, I was shocked. And I was just wondering, how -- can you give some detail on how, how big these two customers were, in terms of order size or something like that? Were they -- the ones that you lost because they didn't pay?

Well, the one customer was in the telecom space and that was a, that was a pretty good size customer for us. And he was doing pretty good volume business, which is why we got so much money owed to us so quickly. And then, he decided that he wasn't going to pay it. I mean, he had at one point, he had successfully used almost 30,000 lenses, and didn't pay us for them. So we had to do something rather drastic, which in my 30-plus years of business, never had to do before, in dealing with a customer.

And then the other one was a -- in the industrial tool space, he was at the time, the higher volume customer we had. And he was using close to about 20,000 to 30,000 lenses a month, and that was also a pretty, pretty big hit. But we've been able to replace that business. So I was quite pleased with that. I guess the only thing I would say, Stephen, is almost half of the loss that we reported had to do with the early conversion of the debentures, and cleaning up that balance sheet, and getting some of that debt off the books. So I think that actually, in the long-term is a very good thing.

Right. And so this, you're experiencing this as a hiccup, or a temporary setback. And you would know by now, if it's more settled in.

Yes, I'm very, very convinced that this is a short-term event.

Okay. Well, I'm just curious, you said in the report that you had an 11% increase in the unit volume from quarter-to-quarter. And that seems very low to me, with your transition to high volume.

Well, I mean it's -- when you're doing the pluses and minuses, I guess that's just the way it worked out at this particular point, in terms of the business that we had, versus the business that we were able to replace. And I think that's kind of an anomaly of those kind of numbers.

Okay. Well I'm sure you have read and studied closely, the Cullen report that came out a month or so ago.

Yes.

Does this in any way, impact the prediction for the year 2011?

No, I think we're going to see good growth this year. And similar to the kind of growth we saw between 2009 and 2010, Steve. I think so -- I'm very confident that we'll be able to recover the -- if you really look at this quarter, compared to the first quarter of last year, it's a significant increase, as we reported. We had a couple of unique events occur, or it would have been a much different situation if those things hadn't happened. And I think we've got ourselves -- we still feel very good about that research report, and feel like that it's still pretty accurate portrayal of what we expect to happen going forward.

It was an excellent report.

Thank you.

Really beautifully written, and very thorough. Okay. Well, I'm grateful for the report. Thank you for all your hard work, and I look forward to checking in three months.

Okay, Stephen. Thank you.

Thank you.

(Operator Instructions).

It appears there are no further questions at this time.

All right. Thank you, operator. Well, I would like to thank our shareholders, and everyone who has participated on today's call. And as usual, I would also like to thank the team at LightPath for their hard work and dedication. And I look forward to updating you again, on our fiscal 2011 second quarter conference call. And if you have any further questions, please feel free to contact myself or Dorothy. And also, you may also visit us online at LightPath.com. And have a great day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.