LightPath Technologies Inc (LPTH) 2012 Q3 法說會逐字稿

Good afternoon, and welcome to the LightPath Technologies fiscal third quarter earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions.) Please note this event is being recorded. I would now like to turn the call over to Mr. Jeff Stanlis of Hayden IR. Please go ahead.

Thank you and good afternoon. Welcome to the LightPath Technologies Inc. third fiscal quarter 2012 financial results conference call. Our call today will be hosted by Mr. Jim Gaynor, President and Chief Executive Officer, and Dorothy Cipolla, Chief Financial Officer. Following management's discussion, there will be a formal question-and-answer session, open to participants on the call.

Before we get started today, I am going to review the Safe Harbor statement. Today's conference call may contain certain forward-looking statements within the meaning of Section 27a of the Securities Act of 1933 as amended, and Section 21e of the Securities Exchange Act of 1934 as amended. All statements other than statements of historical fact included in today's presentation are forward-looking statements including statements regarding the Company's business strategy, plans, objectives and statements of non-historical information. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks, uncertainties and these expectations may prove to be incorrect.

You should not place any undue reliance on these forward-looking statements which speak only as of today, May 10, 2010, all forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors. Other than as requested by Securities law, the Company does not assume any duty to update these forward-looking statements.

With that out of the way, it is now my pleasure to introduce Jim Gaynor, President and Chief Executive Officer of LightPath. Mr. Gaynor, the floor is yours.

Thank you Jeff, and welcome to everyone who has joined us on the call today. We appreciate your ongoing interest in LightPath. I will open with an overview of the quarterly and the nine-month year-to-date operational results, and then turn the call over to Dorothy for a more in-depth review of our financials. After the conclusion of the financials, we will open the call to your questions.

We believe 2012 is going to be an important and transformational year for LightPath. Our core business in molded optics continues to grow at mid-double digit clip, and we are on the cusp of sustainable positive cash flow. In our core business related to precision molded optics, we saw continued improvement in business conditions. These improving conditions led to strong bookings totaling $3.9 million across all of our product lines for the quarter.

As we have previously announced our bookings also benefited from a major infrastructure contract with Raytheon Vision Systems, a global technology leader and defense contractor. As a result of the strong bookings, our backlog grew 18% to $4.39 million. We are just at the beginning of a compelling opportunity to grow our business rapidly with new products in the infrared sector. Though the growth we expect in infrared will potentially take several quarters to generate the kind of meaningful transformational financial results we envision, we are confident that our pursuit of opportunities that we are now locked in on, and those that we expect to develop are able to provide exceptional returns to our shareholders.

Recently we announced a significant deal in this space with Raytheon. The partnership with Raytheon in the infrared space serves a strong validation of our capabilities in this emerging market. We are partnering with Raytheon to develop low-cost manufacturing processes for infrared optics which supports Raytheon's $13.4 million defense advanced research project agency contract. The program goal is to develop a wafer scale manufacturing process that will result in a camera on a chip. Making thermal imagers affordable, accessible and ubiquitous to every Warfighter.

While applications of infrared and thermal imaging technology have grown significantly, cost is still a major barrier to further expansion into mission critical defense and high volume commercial applications. This contract supports and accelerates our work to develop even lower cost materials and processes for infrared objects, which we believe will enable critical defense capabilities and expanded commercial applications. With this technology, we are currently targeting multiple high-growth markets and applications such as infrared counter measures, thermography, gas sensing, commercial night vision systems, and automotive applications, such as blind spot detection and driver awareness systems. Our immediate work with Raytheon to develop new capabilities for these markets should lead to long-term technology that we can leverage into many other areas.

In addition, this is a strategic focus and competitive advantage for LightPath, because current ITAR regulations prohibit military components from being manufacturing abroad. This contract award reflects the momentum we are achieving in our ongoing strategic shift of our business, and we believe that over the next three years, sales of infrared products have the potential of doubling our revenue. While we are excited about our progress in the emerging infrared business, our existing base business continues to grow. Bookings, excluding the Raytheon Vision Systems contract have averaged $3 million per quarter over the last five quarters. Demonstrating continued growth of our base business.

Specifically, and as Dorothy will address in just a moment, on a consolidated basis, revenues increased 14% over the third quarter of 2011. With signs of recovery in our industrial tool business in Asia, and our entry into the imaging market. Unit shipment volume in precision molded optics increased 12% in the third quarter of 2012, compared to the same period last year. We expect continued sales growth going forward derived primarily from the precision molded lens product line, particularly low-cost lenses being sold in Asia, and from infrared products and collimator products. As we grow our business with new products and into new markets such as infrared, we must also pay close attention to our costs.

The gross margin in the second and the third quarter was 32%, lower than anticipated. The two primary factors contributing to these higher costs were increased costs associated with the ramp-up of the new infrared and collimator products, and some increased costs for lens coatings. The higher coating costs were due to the cleaning process issue that affected yields, and the conversion to lower cost glass materials that is temporarily impacting efficiencies. The coating on our current higher cost glass is different from the coating on the newer lower cost glass, and this requires separate coating runs. Once the transition to lower cost glass material is complete, we expect our coating efficiencies to improve, and our costs will decrease.

To improve gross margin in the coming quarters, we implemented measures to reduce our manufacturing overhead costs by approximately $400,000. Subsequent to the end of the third quarter of 2012. We expect these reductions will improve our gross margin percentage to the low to mid-40 range as soon as the fourth quarter.

At the end of the quarter, we were awarded for the second year in a row, the Cubic Defense Systems Supplier Award with a Superior rating. This is the highest rating the Cubic awards to its suppliers. We believe it reflects not only our product quality and our service to our customers, but also our close working partnerships with them. It helps us optimize efficiency and quality, which we continually work to improve with them and all of our customers.

I will now turn the call over to our CFO, Dorothy Cipolla.

Thank you, Jim. I will first talk about our fiscal third quarter which ended March 31st, 2012. Revenue for the third quarter increased approximately 14% to $2.78 million, which compared to approximately $2.43 million for the third quarter of last year. The increase from last year was attributable to increases across all of our product lines, as Jim just enumerated. Gross margin percentage in the third quarter was 32% compared to 40% last year.

Total manufacturing costs of $1.9 million increased by approximately $439,000 in the third quarter compared to last year. This increase in manufacturing costs is a result of direct costs of $242,000 for materials, labor and outside services on the increased sales, and an increase of $35,000 in coating costs, and an increase of $85,000 in labor costs for the infrared and collimator products, as we ramp up the development of these products.

We have implemented the actions that will reduce our manufacturing overhead costs by approximately 5%, and improve our gross margins in the coming quarters. Direct costs which include material, labor and services were 24% of revenue in the third quarter, down from 27% of revenue last year. This reflects increased leverage and higher productivity.

During the third quarter being total costs and expenses increased $258,000 to $1.51 million, compared to $1.53 million for the same period last year. This increase was primarily due to $227,000 of expenses related to the withdrawn equity offering, which happened in the third quarter. Selling, general and administrative expenses were $1.14 million for the third quarter of fiscal 2012. Total operating loss for the third quarter was approximately $506,000, which compared to income of $151,000 last year.

Interest expense was $23,000 in the third quarter which compared to $90,000 last year, which represents interest on our convertible debentures at 8% per annum, and amortization of debt discount and debt cost. Loss on extinguishment of debt of $132,000 last year 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 debt holder. Net loss for the third quarter was $519,000, or $0.05 per basic and diluted common share. Compared with a net loss of $376,000 or $0.04 per basic and common share last year. But remember, that this quarter's loss includes the $227,000 of the expenses related to the withdrawn equity offering. If you exclude these expenses, our loss for the quarter would have been $292,000.

Weighted average basic shares outstanding increased to 9.7 million in the third quarter compared to 9.715 million last year. The increase is primarily due to the issuance of shares of common stock related to the payment of interest on our convertible debentures, and shares issued for the employee stock purchase plan and shares issued upon the exercise of incentive stock options.

I will now review the year-to-date financial results for the nine months which ended March 31st, 2012. Revenue increased to approximately $8.18 million, compared to approximately $7.22 million last year. This increase was primarily attributable to higher sales volumes in all major product lines. The number of units of precision molded optics increased 35% due to increased production capability, and the pursuit of low-cost, high-volume lens business.

Gross margin percentage in the first nine months decreased to 34% compared to 39% last year. Total manufacturing costs of $5.37 million were approximately $962,000 higher in the first nine months compared to last year. This increase resulted from an increased direct costs of $412,000 for material, labor and outside services on the increased revenues. And an increase of $349,000 in labor costs for our collimator and infrared products, as we ramp-up the development of these products, and an increase of $174,000 in coating costs. Direct costs which include material, labor and services remains unchanged at 26% of revenue in the first nine months compared to last year.

During the first nine months, total costs and expenses increased $158,000 to approximately $3.84 million compared to approximately $3.68 million for last year. As a result, total operating loss for the first nine months increased to a loss of approximately $1.04 million, compared to a loss of $879,000 for last year. Interest expense was approximately $69,000 in the first nine months this year, compared to approximately $583,000 for last year. Net loss for the first nine months was approximately $1.06 million, or $0.11 per basic and diluted common share. Compared to a net loss of approximately $1.6 million, or $0.17 per basic and diluted common share.

Weighted average basic shares outstanding increased to 9.758 million in the first nine months, which compared to 9.474 million last year, this is primarily due to the same reasons mentioned earlier.

Cash on hand at March 31st 2012 was $490,000, as compared to $929,000 on June 30th, 2011. However, subsequent to the end of the quarter we have received payments including the initial funding for the Raytheon contract, giving a cash balance as of May 9th, 2012 of $922,000. Total current assets were approximately $4.71 million, and total assets were $6.94 million at March 31st, compared to approximately $4.61 million of current assets and $7.12 million of total assets respectively at June 30th, 2011.

At March 31st 2012, total current liabilities were $2.17 million, and total liabilities were approximately $3.63 million, which compared to approximately $1.53 million total liabilities and $3.09 million total liabilities respectively at June 30th, 2011. The current ratio at March 30th 2012 was 2.71 to 1,compared to 3.01 to 1 as of June 30th. Total stockholder equities at March 31st, 2012 totaled approximately $3.31 million, compared to $4.04 million at June 30th of 2011.

With this financial review concluded, I will turn the call back to Jim.

Over the course of the past year, our management team and Board members have worked together on a comprehensive analysis of our products, strengths, market position, and market needs, and have set a strategy for the future focused on establishing innovative manufacturing processes, and new products for industries with large potential growth. We have identified an appropriate $24 billion total market, and this includes $22 billion market for infrared devices that require optics,as well as laser optics and optical assemblies.

We are in a position now to leverage manufacturing technology and optical expertise that we have developed over the last 20 years, and we are targeting multiple market verticals, in defense, medical, industrial, telecommunications, and focusing on lower cost, high volume, and high margin applications. We have built the leadership team to drive growth, and we appropriately expanded and enhanced our global sales channels as well. We continue to focus on reducing our cost structure and LightPath has a process that when completely developed has the potential to reduce infrared optics by cost by 35% to 40% or more. This should have a significant impact on our business.

We have the manufacturing and distribution infrastructure to support this growth, with minimal additional investments relative to the aggregate opportunity in front of us. We have already put in place the cost reduction initiatives designed to expand our gross margin and reduce our operating expenses. We are targeting gross margins in the 40-plus percent range in the near future due to operational improvements and reductions in our cost of goods. In addition we initiated adjustments to our SG&A.

These changes in aggregate, coupled with our forecasted revenue should enable us to return to a positive EBITDA in the fourth quarter. And this low-cost capability will result in increased profitability as we layer incremental infrared revenue on top of our core business. We have a number of positive factors aligning and metrics trending in the right direction as we proceed through the fourth quarter of fiscal 2012. This bodes well for LightPath and for creating additional value for shareholders.

I hope you share my enthusiasm for the future, and we look forward to delivering on this promise in the coming quarters. I will now open the call to any questions.

Thank you, sir. (Operator instructions). Our first question will come from Bhakti Pavani of CK Cooper and Company. Please go ahead.

Hi, Jim. Hi, Dorothy.

Hi Bhakti, how are you today?

Good. How are you?

Very good, thanks.

That was a good quarter. I was just curious to know about the margins. It was kind of a slight slowdown there, and how positive are you that it is going to go back up in Q4?

Well, very positive given the actions that we have taken. We incurred some additional costs primarily for two things, for investments we are making in the future, particularly in new products in infrared and the collimator product line, and we have this, we are in the middle of a cost reduction project, and we are moving away for some higher cost glass materials to lower cost glass materials, and what that is doing in the coating process, while we are in this transition is creating a situation where we have two types of lenses that we can't coat in the same batch.

So we have to run additional batches and they are smaller batches. So we don't run as many lenses per batch. That is temporarily causing some inefficiencies in our coating process, and thereby some higher costs. That is only a temporary situation. So that will go away. Those two things, I think when we combine that with the cost reductions, and the changes we made in the organization at the end of April, I am 100% confident that our margins will return to previous levels.

Okay. Sounds fair enough. Could you talk, or could you give me some color about the Raytheon contract? Where is that at? You have shipped them anything or what is going on on that end?

Well the Raytheon contract is really a development program to develop low-cost infrared optics. The stated value of this is to develop a new process. The Defense Advanced Research Project Agency is a futuristic looking agency that is looking for new technologies and ways to do things, which is great. I mean we have some ideas that we can develop, but along the way, we will be developing processes that fit right into what we were doing anyway, which is developing low-cost methods to produce infrared optics, what this contract does for us, it gives us money today that we can use for material characterization, process development, and those types of things, and at the end of this, we will deliver to Raytheon a process with a few lenses for making very low cost devices. And I think this really develops a very good partnership with a very significant player in this business.

Okay. Fair enough. Talking about your base business, which is the PMO lens business, it seems you are really doing good in Asia. And it looks like the European market has been slowing down. So have you factored in that slow down going forward, or what is going on that end? Could you give me some color on that?

Well, in Asia, what we see is a recovery, particularly in the industrial sector where we sell our industrial tool, or lenses into the industrial tool market. That had slowed down, it is picking up. We see good recovery coming forward. Customers are giving us good signs. They are actually placing orders, which is the best sign, and we see that volume picking up. In addition to that, we have also begun to penetrate into the imaging applications in that same market in Asia.

Oh, okay.

We are now in production with three different customers on those types of lenses as well. And so we see that area of the world at least in terms of our products recovering.

Okay.

Europe is a different story. I don't expect the general overall economyEurope to get better. I expect it to get worse, however having said that, we are engaged with three or four major OEM customers over there on projects that would drive significant volume. So from an overall general business point of view, I think it is going to be pretty soft, and we have factored that in.

Okay.

But working with specific customers on specific projects, we can see significant growth opportunities there, and these are things that will drive very large volumes. When these things, they are not in the near term. They are kind of intermediate/longer term projects, but they will drive very high volume-type applications, and as I said, we are engaged with three or four. If we only land one, we will do very well.

Okay. So are you planning to add any more distributors or any more workforce, taking into consideration that you expect the increase in demand for the production side? Do you have any kind of addition to your workforce planned?

From a distribution point of view in Europe, I think we are in very good shape with our master distributor, AMS, I think he can handle anything that comes down the pike. In China, we added seven new distributors, and we are expanding that channel to market. So that continues to grow. And currently in our Asian factory, we are running between 55% and 60% capacity, and it is very easy for us to ramp that up. So I don't anticipate any issues there. Taking on volume as it comes towards us, as it solidifies.

Okay. So talking from the financial point of view, especially the sales and marketing, do you expect that percentage to go up going forward in the quarters, or it is just expected, I mean, it is just where it is? I mean, going to stay like that, or what is going on that end?

We have some plans to add one or two people in the sales and marketing area.

Okay. Okay.

But that is been factors into our forecast and that is not a significant increase to our overhead.

Sounds great. Just one question for Dorothy. You mentioned there was, you have a withdraw equity, and there was a charge on that. I'm sorry I could not catch the number. What was the number?

$227,000 of expenses that were related to the equity offering that was withdrawn in January.

And that is included in the SG&A cost, am I correct?

Right.

Perfect. Okay. Yes, thank you very much. That is it from my side. Thanks.

Thanks, Bhakti.

And our next question will come from Michael Dyett, a private investor. Please go ahead, sir.

Hi, Dorothy and Jim. Great report. I was glad to hear about Europe. I just had one sort of specific thinking back to our last call, you had mentioned some custom designs that you were bidding and working on, and hoping to reach fruition in the sort of $3 million to $4 million range. I may not have gotten that exactly, and I just wondered, have those conversations and all of that proceeded as you expected over this past quarter?

Yes, I think we are making good progress with that. I think the one thing I was a little disappointing in this, just this recent quarter was we had expected to see a little faster recovery from Emcore on some of their products, as they are working to get their lines back up that were decimated in the Thailand floods, and so they are running a couple of months behind what their anticipated schedule was. So that business we expect to see very soon, because I think they are getting very close to bringing that back up. In addition, they have come in for some new designs. So there are additional projects coming.

So what I expect to see from them, for example, is the resumption of the lenses that we put into these transceivers for this 4G LTE type tuneable laser application, as well as a couple of new projects that are coming along. Their business is healthy. I think they are going to get there. It is kind of a timing thing. We all wish it sooner rather than later. We have had good success with that. We are also seeing some other opportunities also in the telecom space, as we are making some really good progress there. So I think those kinds of things are moving along from the infrared standpoint, we have many projects going right now with five or six different customers, and those things are making good progress as well. So it is coming, Michael. It really is.

That is great. Just a quick follow-up on the European potential, would the infrared and some of these new products also be attractive over there?

I believe so, yes. I think that market I mean, that is a worldwide-type thing. And from the infrared side, Michael, there are, I don't know, one, two, three, four, five, six, seven, 10 or 12 major system level market leaders, people like Fleer, VA Systems, and DRS, and L3, and Fluke, Raytheon, Axis, which is a European company. We are engaged with all of these people in the infrared space. We don't have specific projects with all of them, but we are talking to all of them, and with many of them we do. So we just got a new quotation from Fleer for some new lenses. So they continue to work with us.

The program that we working on with Raytheon is leading to and will lead to a lot of other opportunities. So very excited about that opportunity and that is a worldwide market. I mean it is an absolutely huge market. If you just think about the automotive market is just for those three applications, in terms of night vision, blind spot detection, and driver awareness, that is expected to grow to $3 billion to $4 billion in just the next couple of years. And we are talking with some Tier 1 automotive suppliers on applications in that area as well. So the market, there is no question the market is there. And if we can provide and we will provide a local-cost option for optics, that is the easiest thing in the world to sell. So I am very confident that we are going to have a home run there.

Thank you very much.

(Operator Instructions.) And we have a question from Brett Moyer, a private investor. Please go ahead.

Yes, hi Jim. How much of the Raytheon back orders, the 1.1 contract is in that backlog number?

Well in our backlog, it is all in that number. Okay. But from a revenue recognition point of view, we are only going to recognize revenue as a percent of completion as we work through that contract, and it is about a 20-month contract.

Okay. And one more question. So you withdrew the financing in January. So what are the new plans for financing the Company?

Well, I think we are going to be very opportunistic to that. We have rejuggled our plans. Raytheon gives us the ability to continue to move, and as I said it integrates very well with what we were doing, and when we went to market, we went with a plan to try to finance a total package where we not only did molding of IR optics, but we were also going to invest and do diamond turning of these types of optics, and that was a big expense. Given that we weren't able to raise that amount of money, and given that the market wasn't quite ready to pay us at a decent share price, we collapsed that plan. So now that we are focusing initially on just the molding piece of it, which allows us to do it with a lot less funding. And we will move through that, and when we need, so any funding we would do would be done at the point that we have to put in additional capacity and it would be really focused on that, a lot of the development work is covered by what we are doing with the Raytheon project. So it helps us a lot from that standpoint.

Okay. Thank you.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Jim Gaynor for any closing remarks.

Well again, I want to thank our investors and potential investors for joining us on our call today, and I would also like to thank the employees of LightPath for their hard work and dedication. And we have a tremendous bright opportunity in front of us, and we are all very excited about it, and we will be moving this forward as rapidly as we can. So thank you very much for your interest.

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