LightPath Technologies Inc (LPTH) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Third Quarter 2011 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Dorothy Cipolla, CFO, Corporation Vice President.

Thank you, and good afternoon. I'd like to thank everyone for joining us today for LightPath Technologies fiscal 2011 third quarter financial results conference call. If anyone participating on the call this afternoon does not have a copy of our earnings release, you can find a copy at our website at lightpath.com or if you're unable to access these materials online you may call LightPath at 407-382-4003.

I'd 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 anticipates, could and able, 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 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 our CEO, Jim Gaynor.

Thank you, Dorothy, and good afternoon everyone. I'd like to thank everyone for joining us today for LightPath Technologies fiscal 2011 third quarter financial results conference call. LightPath continues to make significant progress in the execution of our business strategy.

Today, my remarks will deal with comparisons to the previous quarter, to the prior quarter, as I believe [this current] information gives you a better picture of the progress the Company is making as we transition and grow our business.

EBITDA, which stands for earnings before interest, taxes, depreciation and amortization, improved by $118,000 from the previous quarter. Operating loss improved 41% from the previous quarter and backlog grew 11% from the previous quarter. We did use some cash during the quarter, but it was all used for expansion towards capacity increases by increasing the number of tools available and completing the installation of our new press stations.

During the third quarter, we also stabilized our debt by extending the maturity date of our convertible debentures from August 2011 to August 2013. Although our revenue decreased slightly, this was a solid quarter for LightPath given our continued penetration of our targeted markets and resulting backlog of orders growth.

Our quote activity has improved with over 343 quotes issued in Q3 and a win percentage that is the highest in the last 18 months. We have established business with over 11 major customers in the Asian industrial tool market. And over the next three to six months, this new customer demand equates to an additional 200,000 units per month. This increase in unit volume over our existing business will utilize our recently installed capacity.

We are also continuing to improve our channels to market. We have upgraded our distribution coverage in Israel, establishing a relation with Millitram, a world-class distribution company. We have also added a fifth new distributor in China, VTSC, who has multiple locations on the Mainland, who is a very strong laser and photonics distributor. We've also expanded our direct sales force in China.

We continue to position the Company to take advantage of these larger markets. LightPath is transitioning its business to focus on providing low-cost, high-volume lenses for products such as laser levels, range finders, gun sights and projectors.

In addition to the industrial tool market, we are targeting opportunities in biomedical instruments, communications and imaging. As we continue to work to grow our revenue, improve our production efficiencies and continue cost reduction efforts, our margins and cash flows will continue to improve.

We are confident in our strategy and we see the improvements occurring. In the coming quarters, we remain optimistic and in the long run believe our strategy offers significant financial rewards for the Company and our shareholders.

I would now like to turn the call over to Ms. Dorothy Cipolla, our CFO to discuss our financial results for fiscal 2011 third quarter and nine months ended March 31 in greater detail.

Thank you, Jim. I'll first talk about the results for the three months ended March 31, which is our fiscal third quarter. Revenue for the third quarter totaled $2.43 million compared to $2.66 million for the third quarter of last year, a decrease of 9%.

The decrease from the third quarter of last year was primarily attributable to lower sales prices on increased unit volume of precision molded optics, also on lower sales volumes of GRADIUM lenses and isolators, which was offset by higher sales for infrared lenses and collimators.

Growth in sales going forward is expected to be derived primarily from the precision molded optics product line, particularly our new low-cost lenses being sold in Asia where we have experienced an increase in bookings during this quarter.

Our gross margin percentage in the third quarter compared to the third quarter of last year was 40% compared to 47%. Total manufacturing costs of $1.46 million were $47,000 higher in the third quarter this year compared to the same period last year. The increase in manufacturing costs is a reflection of a product mix change associated with increased sales of infrared lenses and collimators, which have a higher material cost.

Unit shipment volume in precision molded optics increased by 61% in the third quarter compared to the last year. Direct costs, which include material, labor and services, were 24% of revenue in the third quarter compared to 26% of revenue in the third quarter of last year.

Our average cost per unit decreased by 34% due to higher unit volumes reducing our overhead cost per unit offset by slightly higher labor costs and higher freight costs. This improvement in the average cost per unit was offset by a 41% decrease in the average selling price per unit, which negatively impacted our gross margins.

During the third quarter, total costs and expenses increased $80,000 to $1.13 million compared to $1.05 million for the same period last year. This increase was primarily due to a $76,000 credit in the prior year for reversal of an accrual for legal expenses. Also included in total costs and expenses for the third quarter were $861,000 in SG&A expenses. As a result, total operating loss for the third quarter was approximately $151,000 compared to $203,000 for the same period last year.

Net interest expense was $93,000 in the third quarter, as compared to $191,000 in the third quarter of last year and this represents interest on our convertible debentures at 8% per year and amortization of debt discount and debt costs.

Loss on extinguishment of debt of $132,000 during the third quarter resulted from the two-year extension of the maturity date of our convertible debentures and included the write-off of approximately $89,000 of debt issuance costs and debt discounts and a premium of $43,000 from debt exchange for a non-related party debt holder.

Net loss for the third quarter was $376,000 or $0.04 per basic and diluted share, compared with a net income of $12,000 or $0.00 per basic and diluted share for last year. The $388,000 increase in net loss resulted primarily from the loss on extinguishment of debt of $132,000 and a $76,000 reversal of legal accrual in the prior year and was due to lower revenue.

Weighted average basic shares outstanding increased to 9.7 million in the third quarter compared to 8.2 million in the third quarter last year, which is primarily due to the issuance of shares of common stock related to a private placement, which happened in the fourth quarter of last year and convertible debentures that were converted into shares of common stock in the first and second quarters of this year.

Now, I'd like to talk about the results for the nine months ending March 31. Revenue for the first nine months was $7.22 million compared to $6.44 million for the first nine months of last year, an increase of 12%. This increase from the first nine months was primarily attributable to higher sales volumes in all of our product lines.

The number of units of precision molded optics increased 34% due to our increased production capacity and our pursuit of low-cost, high-volume lens business. Our growth in sales going forward is expected to be derived primarily from our precision molded optics product line, particularly our low-cost lenses, which were sold in Asia.

Our gross margin percentage in the first nine months decreased to 39% from 45% last year. Total manufacturing costs of $4.41 million were $846,000 higher in the first nine months of this year compared to the same period last year. This increase in manufacturing costs resulted from an increase in costs necessary to support higher production and sales volumes and a product mix change to products with a higher material cost, such as isolators and collimators.

Direct costs, which include material, labor and services, increased to 26% of revenue in the first nine months, as compared to 23% of revenue in the first nine months of last year. Our average cost per unit decreased by 8% due to higher unit volumes reducing overhead cost per unit, which were offset slightly by higher labor costs and higher freight costs. This improvement in the average cost per unit was offset by a 17% decrease in the average selling price per unit, which negatively impacted our gross margin.

During the first nine months, total costs and expenses increased $686,000 to $3.69 million compared to $3 million for the same period last year. This increase was due to $128,000 increase in wages, $89,000 increase in sales tax, $38,000 in recruiting fees, $46,000 in outside services for information technology support, a $51,000 increase in stock compensation expense due to stock options granted in the third quarter of last year, and a $24,000 increase in materials for engineering projects.

In addition, in the first nine months of last year there was a one-time benefit resulting from legal expenses incurred, which was offset by a receipt of a reimbursement from our D&O insurance carrier in the net amount of $278,000 for legal expenses incurred in connection with litigation. As a result, total operating loss for the first nine months increased to a loss of $879,000 compared to a loss of $120,000 last year.

Net interest expense was $583,000 in the first nine months, as compared to $534,000 last year. This increase was due to the write-off of unamortized debt discount and debt costs related to the conversion of debentures. This conversion, which total $832,500 of debentures, was converted into shares of our common stock in the first nine months of this year.

Our interest expense included interest on our convertible debentures at 8% per year, and include amortization of the related debt issuance costs and debt discount and the write-off of debt issuance costs, prepaid interest and debt discount for debentures, which were converted into common stock during the first nine months of this year.

Loss on extinguishment of debt was $132,000 during the nine months, resulting from an extension of the maturity date of our convertible debentures from August 2011 to August 2013 and it included the write-off of approximately $89,000 of debt costs and debt discount and $43,000 premium from the debt exchange for a non-related debenture holder.

Net loss for the first nine months was $1.6 million or $0.17 per basic and diluted share, compared to a net loss of $653,000 or $0.08 per basic and diluted share for the same period last year. The $950,000 increase in net loss was primarily on the result of the loss on extinguishment of debt of $132,000, the reimbursement of $278,000 from our D&O insurance carrier for legal expenses, which was received last year and an increase of $457,000 in wages associated with the increased unit volume and increases in sales and engineering development and an increase of $51,000 for stock compensation expense.

Weighted average basic shares outstanding increased to 9.5 million in the first nine months compared to 7.9 million in the first nine months of last year, primarily due to the issuance of shares of common stock related to a private placement in the fourth quarter of last year and the convertible debentures, which converted into shares of common stock this year.

And I want to talk about a few areas on the balance sheet. Cash and cash equivalents totaled $1 million as of March 31. Our total current assets and total assets as of March 31, 2011 were $4.49 million and $7.04 million compared and this compares to $4.79 million and $7.46 million, respectively, as of June 30, 2010.

Total current liabilities and total liabilities as of March were $1.54 million and $3.11 million compared to $1.08 million and $3.21 million, respectively, as of June 30, 2010. As a result, the current ratio as of March 31 was 2.92 to 1 compared to 4.41 to 1 as of June 30, our last year-end.

Total stockholders' equity as of March 31, 2011 totaled $3.92 million compared to $4.24 million as of June 30, 2010. As of March 31, our backlog of orders scheduled to ship in the next 12 months was $3.63 million compared to $2.95 million as of June 30, 2010.

I would now like to turn the call back over to Jim for some closing comments.

Thank you, Dorothy. LightPath is a different company today than it was historically or even last year. We are a, if not the low-cost producer of molded glass aspheric lenses today. We are in different markets that are significantly larger than we were previously in.

We have more higher quality and more geographically diverse channels to market and we are continuing to expand our channels to market with new distributors, additional direct sales personnel and increasing market efforts. We are continuing to develop new products in all areas, visible and non-visible lenses, assemblies and other value-added products.

We have positioned the Company well to participate into a very large market that total in the billions of dollars. The growth opportunity this presents is very exciting for our Company and we believe in the long run 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 Laura, if you would, please start the question-and-answer portion of the call.

Thank you. (Operator Instructions) [Steve Donovan].

Hi, Jim and Dorothy.

Hi, Steve, how are you?

Hi, Steve.

Good. Well, I am very excited about this report and I was originally going to grill you about the 468,000 lenses that you produced last quarter, but I'm totally blown away by the 200,000 increase that you say is going to be [happing] starting over the next three to six months. So that's little more than double your monthly capacity -- your monthly production.

That's correct.

And can we assume that you're pretty much stabilized in terms of your average selling price, it's around $4 to $5 a lens?

I think that's probably an accurate -- I mean what's happening, Steve, is our market in particular within the PMO product line, which is our major product line, is becoming segmented between our historical business for the telecom operation or markets and then the industrial tools and the low-cost type products that we've been moving in to.

So what we see is that historical stuff that LightPath has done for years and years and years, it's not a very stable volume and the prices are still very good and the average is in the mid-20s and up. The telecom business is kind of in the middle, it's lower cost -- I mean it's a little higher cost to produce because it typically involved the metal holder or some other additional type operations required for those lenses. So those lenses kind of fall into a -- around a $10 type price range, I think between $5 and $10.

And then the low-cost stuff is anything that we consider below a $5 price target and those are averaging anywhere from around $1 to $1.5 to $2. And we see that probably still have some volatility and as we -- we're going to take some very large opportunities. We may get some very aggressive pricing in that business.

So within those three categories, the first two categories are pretty stable in their pricing and the third category in my mind, we know where the pricing is in the marketplace and we're competitive with that and we'll continue to work that.

But you may see some -- from an average point of view, a little bit of decline as we go forward, which means also that as the volume continues to increase where that's actually the highest unit volume and as we continue to grow that piece, that's going to have a bigger weight on the overall average prices that you see. So that's what you're seeing in some of that thing. But we're making very good margins in all of those areas.

Wow.

We think it's -- we've really had worked very hard and we're having very good success with our costs and we're continuing to be very aggressive with the programs that we're doing in place to continue to lower that cost. And that's really what has opened up another segment of the marketplace where you're seeing this very large volume start to come in.

[We have moved] the cost point down another notch, and that's allowed us to go down and get into a replacement business in this industrial tool where we can now replace a doublet, which is two optical elements, with a single asphere, where before we were working at more of the high end where we were able to replace a triplet, three elements with an asphere and given a competitive price.

So now we've moved down that next notch, it's a little lower cost, little lower performance by product, but the volumes are three to four times of what that high-end segment has. So now we're moving into that segment and as a result, you're starting to see some very, very large volumes, which is what we were -- we've been planning and targeting for over the course of time.

That's a big number. Is that all in Asia or all in China?

Well, most of it is -- there is some of it that's in other places, but the vast majority is -- we're dealing with China OEM type companies. And what they're doing is building some subassemblies to go into a variety of applications.

So at this point, you have hundreds of thousands of lenses out there in their respective applications basically being field-tested. How is the quality holding up?

We're not having any issues in that regard whatsoever. I think, well, these guys are building hundreds of thousands of assemblies per month for these laser diode applications. And as a result, they're demanding hundreds of thousands of lenses per month.

And what is happening in China, we're going in and replacing with an asphere a spherical solution. Now, even as long as aspheric technology has been around in those types of lenses, it's relatively new in China. But we've had a learning curve and we still have to do a lot of teaching to show them the advantages of an asphere over a spherical application.

Now, here's the (inaudible), right? We're suffering a little bit from the increasing labor cost and inflationary pressures that you hear about in China. Those are very real. And we see increases in labor. But it's also working in our advantage, because the spherical guys are also seeing those same inflationary pressures and increases in their labor costs, and their process is four to five times more labor intensive than ours. So that's an advantage to us.

And then the other advantage is a single-element assembly is a much simpler operation than a multi-element assembly. And our customers also see that as the advantage. So those kinds of things are working to our advantage and beginning to -- there is a lot of interest, we've done a lot of education and we're starting to reap the benefits of that hard work.

So that means you'll be producing maybe 400,000 lenses a month looking out a couple of months.

Correct.

And if you could just project that out into the next fiscal year, that could easily double LightPath's total revenues from $10 million to $12 million to $20 million to $25 million?

I mean you got to keep the pricing in mind, Steve, but yes, it's going to give us a significant boost in our revenue and the growth rates in our PMO lines that are probably in the mid-20% range in terms of compounded annual type growth.

And then in terms of the yield in the current production, is your yield over to 100% or are you --?

Our yield from these lenses is in the upper-90s.

Upper-90s. Well, Jim and Dorothy, that's fantastic. I'll ponder that and come up with some other questions maybe later in the call.

Okay. Thanks a lot.

[Bob Ainbinder, JP Turner].

Good afternoon, Jim. Good afternoon, Dorothy.

Hi, Bob.

Hi, Bob, how are you?

I'm very well. Congratulations on picking up the new business.

Thank you.

First question is to Dorothy. Dorothy, with the amortization of the debentures over the past couple of years, what does this extension -- how will this extension affect that and what can we look forward to going forward with regard to any interest expense hitting the earnings?

Going forward, since we have now effectively written off all of the debt discounts and the debt issuance cost of the original debenture, I anticipate about $20,000 per quarter of interest expense.

Okay, great. So essentially it's gone?

Essentially.

Okay.

(inaudible).

Okay. Next question is, Jim, this is great, obviously picking up 200,000, nearly 200,000 lenses a month. Does this include any of the new products that you recently announced or could we look forward to even more business with some of those newer products that you recently brought for the catalog?

I mean there are some new products in here that are focused on the laser tool business. There are also a couple of products that don't have anything to do with us. I mean we recently just this week announced a couple of new infrared lenses that we've come out with. We've got some new collimator products that are out there now. Those are customer-specific, custom designed type stuff.

And we have a whole array of our family of blue lenses that we put out in the recent past that are targeted to different markets than the industrial tool market. Those are more for the medical imaging, those kinds of things, and medical instrument type applications. But we're still working on other segments of our business.

And this brings up a good point, Bob, is when I say the Company is different than it has been historically, we are working to diversify the product line and spread it across multiple applications and different markets, as well as lower these costs, so that we can be competitive in those markets. And what it's allowing us to do is get some action that we couldn't previously touch because now we can come in with some better pricing for our customers and we're taking some share. So that's a very good thing for us.

And then on top of that, we're expanding our feet on the street, so to speak, with these new distributors, as well as we're upgrading the type of distributor and the size of the distributor that we're dealing with. So I think it's going to take a little while for those to come online. But we had great success with that strategy, which we did in Europe with AMS Technologies and now we're moving that to the other parts of the world and expanding our presence geographically, as well as good products.

And so, we're a different company and that's the point that I was really trying to make is, we're making some of these comparisons and in some cases, they don't look that good. They're not really as valid as they might normally be given the nature of what we're doing with our business.

Got it. Got it. So effectively what Mr. Donovan was alluding to -- what he was alluding to in his question with regard to revenue growth, there is a potential for even more upside as we move out into 2012 for additional business to be brought on with some of these other products, correct?

Yes, absolutely.

Okay. And as far as the existing business, are we seeing margins? Some of the margins erode because of prices, is that what I heard? Are we hearing prices come down to some of the lower-end lenses?

Well, we're seeing price/volume tradeoffs, Bob.

Okay.

I think these are tools where we were selling 5,000 units or 10,000 units or even 100,000 units, now we're taking orders that are several hundred thousand units or 50,000 and 60,000 units a month. And so we're doing some pricing appropriate with the volume-type commitment.

Okay. Well, do you expect to see those margins get back up near that 47% mark or --?

I think as we increase the volume and get the revenue line, yes, I think we'll see margins come back a few percentage points. As we take advantage of the efficiencies of being a very, very -- what's the word -- some utilization of our capacity and the coverage that -- and the way we [split] that overhead across on a per lens basis.

Fantastic. Well, very much look forward to the next quarter. Thank you very much.

Thank you, Bob.

Bart Marcy.

Hello, Jim and Dorothy.

Hi, Bart.

Hi, Bart.

(inaudible) a little bit of elaboration if you would. I know last time when you talked, you had 130 people in Shanghai and 52 in Orlando. I'm hearing about the 88 presses that we heard about at the last conference call, 11 new press stations and now we're looking at numbers like the next three to six months to adding 200,000 lenses per month. I'm interested in your head count and the number of shifts and if you have more capacity by adding more shifts, or is this going to -- as orders come in, you're going to need to add more stations and more presses?

For the current loads that we're talking about, I mean the 400,000 plus lenses a month, we have capacity in place to produce that from an equipment and facility point of view.

Okay.

We will have to add a few more operators to run all that equipment. But it's not a huge number at least by China standards. We do have some labor efficiency programs going on. As I said, our benchmark used to be that for every operator, we got 100 lenses per day per press. We are averaging close to 170 lenses per operator per press today and our goal is slightly higher than that.

And how many shifts are you running at the moment?

Right now we run -- in China, we run three shifts five days a week and then we pick up a couple of shifts over the weekend, and it's not a full load. We will be expanding that as we go forward here to run -- and it's the most efficient operation for us to run a 24/7 operation.

Jim, are you finding you're more spending time in China, just curiosity?

Yes. I go about every two months there.

Okay. Thanks very much. That answers it.

Thanks.

Steve Donovan.

Couple of questions before I sign off, Jim and Dorothy. The $3.6 million backlog, what is that -- how many units does that reflect? Is that 180,000 units or --?

Steve, I'm not sure I know right off the top of my head how many units that reflects in that backlog.

Does that backlog include these 11 new customers and the 200,000 a month lenses?

It includes a portion of them. They're not all in there yet. Of the 11 customers we have booked, nine of them have booked orders on our backlog right now and I expect to have the next two within this quarter. So I think there is -- that totals about -- of the 200,000 new, I think we've got probably, I'm going to say about 150,000 of that booked and that's per month.

Okay. Thank you. And then one final question. It looks like you're going to be needing some cash soon, because you only have $1 million left. What are you going to do?

Well, I think the investments that we've made this year so far and we made last year have put in the capacity from an equipment, as well as from a tooling and we've also boosted up the inventory materials and some lenses. We've been running a little bit of this forecast as we anticipated this business coming. So from an investment point of view, we're in pretty good shape.

We believe it will carry us through fiscal '12. When we get to that point, we'll have to start looking to add some additional equipment. We've got enough floor space to do it. So in the very short term, we're in pretty good shape. As we look forward and we have some new investments that we need, we may be looking to raise some money in the future, but that's yet to be determined, Steve.

So you're not going to be issuing any more stock in the next six to 12 months?

I'd like to leave that open, but I don't -- I would certainly say we're not going to be doing anything in the next two to three months.

Okay. Okay. Listen, I'm really excited. Thanks so much for all your great work and we'll talk to you again in three months.

All right. Thanks, Steve.

Sir, there are no further questions at this time. I would like to turn the call back over to you.

All right. Well, thank you. I'd like to thank our shareholders and everyone who's participated on today's call. I'd also like to again thank the team at LightPath for their hard work and dedication and making these things happen for us and look forward to updating you again on our fiscal 2011 fourth quarter and year-end conference call. If anybody has any further questions, please feel free to contact myself or Dorothy Cipolla or you can visit us online at www.lightpath.com. Thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.