LightPath Technologies Inc (LPTH) 2015 Q4 法說會逐字稿

Good afternoon and welcome to the LightPath Technologies fiscal 2015 fourth-quarter financial results conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Dorothy Cipolla, Chief Financial Officer. Please go ahead.

Thank you and good afternoon. Welcome to LightPath Technologies' fiscal 2015 fourth-quarter financial results conference call. We would like to start off by apologizing for the delay in reporting our results. The postponement was due to a delay in the completion of the audit of our financial statements by BDO, our new independent public accountant.

BDO acquired the accounting practice of Cross, Fernandez & Riley, our previous independent public accountant, and was combined with BDO's USA division in August of 2015. There were no matters in contention. The delay in the completion of the audit was simply the result of an increased review cycle due to the recent combination of the two firms.

Now on to our conference call. The call today will be hosted by Mr. Jim Gaynor, President and CEO. Following management's discussion there will be a formal Q&A session open to participants on the call.

Before we get started I would like to remind you that during the course of this conference call we will be making a number of forward-looking statements that are based on our current expectations and involve various risks and uncertainties that are discussed in our periodic SEC filings.

Although we believe that the assumptions underlying these statements are reasonable, any of them can prove to be inaccurate and there can be no assurance that the results will be realized. With that out of the way, it is now my pleasure to introduce Mr. Jim Gaynor, President and Chief Executive Officer of LightPath.

Thank you, Dorothy. And welcome to everyone who has joined us on the call today. We appreciate your interest in LightPath. I will open with an overview of operational results, highlights and recent developments and then we will turn the call over to Dorothy for a more in-depth review of our financials. After some closing remarks we will open the call to your questions.

The excellent results reported today represent the third quarter in a row of solid and improving fundamentals, highlighted by significantly increased revenues produced from the growth initiatives implemented earlier in the year.

The hard work undertaken by LightPath's team over the last several years to put in place a low cost infrastructure and custom design capacity, along with the strategic actions to drive long-term revenue growth implemented in the first half of fiscal 2015, have resulted in impressive performance for the fourth quarter and full year. Here are some of the highlights from the fourth quarter of fiscal 2015.

Our 12-month backlog increased approximately 52% to $6.5 million at June 30, 2015 from June 30, 2014. Revenue increased 45% to approximately $4.5 million compared to approximately $3.1 million in the 2014 period. Revenues from sales of infrared products increased by more than 176% in the fourth quarter compared to the 2014 period.

Gross margin was 47% in the fourth quarter of this year compared to 44% in the fourth quarter of last year. Operating income was approximately $448,000 compared to an operating loss of $171,000 for the prior year period. And adjusted EBITDA was $622,000 compared to an adjusted EBITDA loss of $40,000 in the fourth quarter of last year.

While all of this is very encouraging, we are more focused on long-term improvements in our business in creating meaningful value for shareholders. The strategic initiatives put into action have positioned the Company to take advantage of future market opportunities, particularly with molded infrared lenses and value added specialty products, while further building upon our competitive differentiators and advantages.

Momentum in bookings earlier in the year continued to accelerate in the fourth quarter, which bodes well for revenue growth in future periods. Our order intake remained strong in the fourth quarter of fiscal 2015, up 63% from the fourth quarter of fiscal 2014 and up 31% from the previous quarter.

Our global diversification strategies have enabled us to overcome certain challenging macroeconomic forces and resulted in increased shipments across our different businesses and we fully expect this trend to continue in fiscal 2016. We have fortified our revenue line through a diversification of product lines and by enhancing and expanding our marketing efforts to better target multiple geographic regions around the world.

This diversification enabled us to deliver strong financial results across the board even though unit shipment volume in precision molded optics for fiscal 2015 was 28% lower than in fiscal 2014.

We are seeing interest in new applications in fiber laser delivery systems, medical applications and telecom which bodes well for the future order flow. The decrease in revenue from our lower price precision molded lenses was primarily due to the demand for such lenses slowing in China during fiscal 2015.

While China has been somewhat challenging, but stabilizing more recently, there has been a pickup in orders in other parts of Asia such as Thailand and we have seen increased activity in Europe and North America.

Our order intake remained strong in the fourth quarter which continued the momentum from the third quarter as we experienced solid bookings across all six of the major markets we serve. We expect continued growth in sales to be derived primarily from precision molded optics product lines, specialty products and our newer infrared product lines.

We are finding more accelerated adoption to our unique technology processes. We discussed this on the last quarter's conference call and I believe it bears repeating. Where we used to spend a lot of time educating people on the advantages of our processes and materials, we are spending less time on this. In fact, they are now coming and seeking us out as a lower price alternative for their optics.

In the case of our infrared products, for example, engineers and designers are increasingly comfortable with our chalcogenide glass material over the germanium material that had typically been spec'd in. They are now more willing to look at the material system that we use in our unique molding process.

This is a trend favoring LightPath's technologies. As commercial applications begin to take hold and the other elements, particularly sensors and related components, come down in cost the commercial applications are expanding. That is where we see tremendous growth opportunity for this product line and why certain project orders that have come in that we hope to turn into more traditional revenue streams going forward.

Meanwhile, operational efficiency measures taken earlier this year and from the addition of our third lower cost facility in China led to improvements in our profitability. Operating income in the fiscal 2015 fourth quarter was $448,000, a vast improvement from the loss of over $170,000 in the prior year period.

Specifically in prior periods we had incurred higher wages associated with the overlapping manufacturing workforces during the transition of production between our two facilities in China, including the severance for Shanghai staff as production was moved to Zhenjiang. And in fiscal 2015 we reduced our headcount in Shanghai from over 120 people to 15.

Our previously announced strategic growth plan also focused on profitability measures. To this end we targeted an estimated annual reduction of operating expenses of 5% to 10%. We can see the effect of this reduction reflected in the improvement in net income of $657,000 between 2014 and 2015. And when compared to the total cost and expense and cost of goods sold combined of $12.2 million for 2014, this is a 5% improvement.

With our global workforce refocused we saw continued strength in bookings throughout the year. The higher revenues, improved gross margins as we completed our move in China, workforce productivity enhancements, and ongoing management of expenses drove the significant increase in operating income and adjusted EBITDA that I mentioned earlier.

The strength in our business and overall financial position may be the reason for another emerging trend. The onset of this trend coincides with the overall slowdown in China. As the slowdown has negatively impacted smaller suppliers of certain -- and certain competitors, I have said -- I'm sorry, I've lost my place here. The onset of this trend coincides with the overall slowdown in China.

As the slowdown has negatively impacted smaller suppliers of optical components, LightPath's improving health has enabled us to capitalize on the demise of certain competitors. I have said that while the bad news in China is that China has slowed down, the good news is that China has slowed down. The really good news is that we are benefiting from decreased competition and improved market presence that is helping build out our sales pipeline and the ability to track experienced talent.

In what has been an overcrowded market we are now being more sought after which has put us in a position to bid on key industrial tool programs in the continued need for telecom infrastructure equipment to accommodate the unrelenting smartphone usage in China.

Importantly, for certain orders relating to end products manufactured in China, the OEM customer may actually be from other parts of the world, so our pricing may be in US dollars yet our costs may be denominated in China -- Chinese RMB. We are experiencing numerous advantages due to the slowdown in China for which the story will be told in the coming quarters.

In conclusion, we are very pleased to have reported an excellent quarter and full year. We are committed to further improving upon this progress and believe it is achievable. I will now turn the call over to our CFO, Dorothy Cipolla, to provide additional detail on our fourth-quarter results.

Thank you, Jim. First I would like to mention that much of the information we are discussing during this call is also included in the press release issued earlier today and on Form 10-K which was filed today. I encourage you to visit our website at LightPath.com and specifically the section entitled Investor Relations.

I will now review financial performance and operational details from our fiscal 2015 fourth quarter which ended June 30, 2015.

Revenue for the fourth quarter was over $4.5 million, an increase of 45% as compared to the same period last year. The growth is attributable to an increase of 113% in sales of specialty products and a 176% increase in sales of infrared products. This marks the third consecutive quarter where we have experienced year-over-year increases in sales of both of these product lines.

As we have previously disclosed, during the fourth quarter not only did we benefit from enhancements to our sales programs and strategic growth initiatives implemented in the beginning of the year, our performance was bolstered by several unexpected project specific opportunities totaling approximately $400,000 in revenue.

The gross margin as a percentage of revenue in the fourth quarter was 47%, this compared to 44% in the fourth quarter last year. The improvement in gross margin as a percentage of sales was driven by higher sales volumes, production efficiencies and most significantly the elimination of certain costs associated with the transition of the Company's newest manufacturing facility in China, which had been a drag on prior periods.

With the lower cost base in Zhenjiang as compared to Shanghai we have approached a range for gross margins of high 40%s to low 50%s which we view as a normalized base. This normalized level is subject to certain project orders which may impact our revenue and margin mix. Increases in overall volume and revenue on an ongoing basis tend to move our margins higher as we take advantage of the leverages in our model.

Due to the significantly higher revenues in the fourth quarter, total costs and expenses increased by approximately $147,000 compared to the same period last year. The increase was due to a $260,000 increase in wages primarily from manufacturing, partially offset by declines in legal expenses and a reduction in costs for materials.

The increases in revenues, improved gross margin and effective expense management led to a total operating income for the fourth quarter of approximately $448,000 compared to a loss of approximately $171,000 for the same period last year -- and an increase of over 100% sequentially from the fiscal 2015 third quarter.

In the fourth quarter the Company recognized non-cash expense of approximately $839,000 related to the change in the fair value of warrant liabilities issued in connection with our June 2012 private placement. The warrant liability has an inverted correlation to the change in the price for our common shares.

During the quarter the price of LightPath's common stock increased 81%. This resulted in a significant non-cash expense tied to the warrant liability. In the prior year period the Company recognized non-cash income of approximately $278,000 related to the change in the fair value of the warrants.

Net loss for the fourth quarter was approximately $367,000 and this includes the $839,000 non-cash expense for the change in the value of the warrant liability, or a loss of $0.02 per basic and diluted common share. Compared to net income of $102,000 which included a $278,000 non-cash income for the change in the value of warrant liabilities or $0.01 per basic and diluted common shares in the same period last year.

Net income adjusted for the effects of the non-cash change in the value of the warrant liability improved by $648,000 to $472,000 in the fourth quarter as compared to a loss of $176,000 in the same period last year.

Looking at our adjusted earnings before interest, taxes, depreciation and amortization for the fourth quarter, which eliminates the warrant liability, we reported $622,000 in the fourth quarter of fiscal 2015 as compared to a negative adjusted EBITDA of $40,000 in the prior period.

Contributing to the improvement in adjusted EBITDA was a decrease in interest expense related from the Company paying off nearly 70% of its debt. Please refer to our SEC filings and website for EBITDA reconciliations.

Now on to financial results for the 12 months ended June 30. Revenue for fiscal 2015 totaled approximately $13.7 million, an increase of 15% as compared to last year. The increase is attributable to: an 11% increase in sales of low volume precision molded lenses; and a 172% increase in sales of infrared products; a 53% increase in specialty products which was partially offset by a 22% reduction in high-volume precision molded optics due to the economic slowdown in China.

The gross margin percentage for fiscal 2015 was 44%, this compares to 46% in the same period last year. Gross margin percentage decreased in 2015 due to changes in the product mix with new product lines that are experiencing higher growth having lower gross margins until production efficiencies are achieved, and project-related revenue, which also may have lower margins.

The higher level of revenues in the current fiscal year drove total manufacturing cost to $7.7 million, an increase from $6.4 million last year. We incurred additional costs due to higher direct labor costs associated with a ramp up of infrared production, the overlapping manufacturing workforces during the transition of production between the two China facilities, and severance with terminated Shanghai staff as production was moved to the Zhenjiang facility and costs associated with the Company's strategic growth initiatives.

Total operating loss for fiscal 2015 was approximately $261,000 compared to an operating loss of approximately $376,000 last year. The 2015 operating loss was attributable to the losses from the first half of the year.

Net loss for fiscal 2015 was approximately $715,000 and this includes the $464,000 non-cash expense for the change in the value of the warrant liability or $0.05 per basic and diluted common share. Compared with a net loss of $313,000 including the $94,000 non-cash income for the change in the value of the warrant liabilities or $0.02 per basic and diluted share for the same period last year.

Net loss for fiscal 2015, adjusted for the effect of the change of the fair value of the warrant liability, was $251,000 compared to a net loss last year adjusted for the change in the fair value of the warrant liability of $407,000, an improvement of approximately $156,000.

Weighted average basic shares outstanding increased to 14.7 million compared to 14 million in fiscal 2014 primarily due to the issuance of shares of common stock for the private placement in January 2015 and shares issued in the employee stock purchase plan.

Cash and cash equivalents totaled approximately $1.6 million as of June 30, 2015, an increase of about 60% from the beginning of the fiscal year. The Company received gross proceeds of approximately $1.3 million from the sale of common stock to Pudong Science and Technology Investment Cayman Company Limited in January 2015.

As of June 30, 2015 the Company's 12-month backlog was $6.5 million, a 52% increase from June 30, 2014, and 5% higher on a sequential basis from the end of the fiscal 2015 third quarter.

With this review of our financial highlights concluded I will turn the call back to the operator so we may begin the question-and-answer session.

(Operator Instructions). John Nobile, Taglich Brothers.

Actually I want to congratulate you on the quarter; I just broke out the numbers. When I saw the exclusion of your change in fair value of warrant liability net income would have been $472,000 or roughly $0.03 a share excluding that. I know you can't exclude that for GAAP, but I just thought that was interesting that you had such a big jump up both in top and bottom line excluding that.

And actually I just want to thank you also for the breakdown of your revenue with the five product groups. I mean, as an analyst it is great to have that kind of transparency. I just want to get into certain specifics here.

You mentioned that you had increased orders for specialty and infrared products. I was hoping that you could provide some more specifics on those products and in each group and their particular applications.

Okay. Well, I mean the first group goes back to where we took our precision molded optics which has been our major product line over the years. And we really kind of drew a line in the sand, John, that said anything we sell for greater than $10 fits into what we call the low volume PMO. These tend to be the legacy products of LightPath that are higher-priced type products.

And then the high volume PMO is anything less than $10. And this tends to be the higher volume type orders that go into the lower type applications and these are -- the average price in here is around $2 to $3 for these types of products.

And then we put together what we call specialty products. These are basically value added products. These are the mounted lenses, connectorized collimators or fiber collimators, anything where we have -- we are doing some value add to it kind of falls into this category. So these tend to be more custom designed products for customer specific type applications and they lean on a little more than just a lens by itself.

And then the last one is the infrared product line which is both lenses and assemblies. And as it is a new developing business for us, we have split that out separately as well. I think the fifth group you are referring to happens to be our nonrecurring engineering charges where those are project charges for engineering work on these custom type things.

Okay. But more specifically with the infrared products, you said both lenses and assemblies. What particular applications are you seeing for that?

Well, the major one so far that we have seen has been in firefighting cameras. That seems to be one of the first commercialized type applications that these camera guys are getting into. We believe there is going to also, in addition to that, be a very good market in sensors and sensor type applications for infrared. I think that will tend to be in the automotive section.

And then I think there is the low end thermography type stuff where you are doing -- for checking maintenance type things in buildings where you are looking for moisture in insulation or hotspots in electrical panels, things of that nature.

So I think those are the types of things that we are seeing so far. There is also a move afoot to put infrared lenses into attachments for the smartphones to make -- to turn that camera system into an infrared scanner. That is another application that we have -- we haven't really started participating in but we have been quoting. So I think there is some opportunity there.

Okay, so (inaudible) for smartphones. And I was hoping you could break out your infrared backlog for Q4 and actually compare that to Q3. I know that you put the actual numbers in the Ks and Qs but not backlog, you just put it as a total. So I was hoping you might be able to give me that on this call. I don't know if you have that info available or not.

John, I don't have that right in front of me right now. And I am not sure we are going to do that. But let me take a look.

I mean I just wanted to get a feel. Obviously there's been tremendous growth in this product line and it is off a relatively small base. But I just want to get a feel for how we are comparing maybe quarter over quarter in regard to orders and backlog in that regard.

Yes. I mean it is starting to get into the seven-figures, so I mean in terms of the backlog and the revenue that we are shipping. So it is starting to grow into something -- becoming a more significant part of our business.

Okay. And I am curious, what are you budgeting for R&D and capital expenditures in 2016?

Go ahead, Dorothy.

R&D we were budgeting similar to what our actuals were for 2015.

Okay, which was -- all right, that was about what, $1.1 million?

Yes.

$1.1 million. And CapEx?

CapEx we were budgeting about $1.1 million.

$1.1 million for both R&D and for CapEx then?

Yes.

Okay. And in regard to China -- I know I brought this up on prior calls, and obviously things are slow in China in regard to the real estate market, construction spending. But I was wondering if you could break out what percentage of sales went to China in 2015? And compare that to 2014 just to get an idea of what is happening in that market.

Well, interestingly enough, John, let me give you a couple of statistics here. If we look at our 2015 revenue -- LightPath has historically been a North American domestic type supplier, the majority of our business. But in 2015 our domestic business was only 46% of our total and our worldwide foreign business was 54%.

In 2014, okay.

No, this was for 2015.

Oh, for 2015, all right. Because that is similar to 2014 I believe. I think you had close to a 50-50 mix of US and (multiple speakers).

It continues to more foreign as opposed. Now of the 54% that went foreign, Asia was 28% of that, Europe was 20% and the rest of the world was 6%.

Asia was 28%? I just want to (multiple speakers).

Yes. 28% of the 54%.

Yes, so basically 28% of -- basically half of it. And I think, if I read correctly from prior Ks and Qs, that a majority of the China business is in regard to the high-volume PMOs, is that correct?

That is right. Historically it has been. Now with the slow down we have moved into some other types of applications associated with a fiber laser delivery system, some medical applications and telecom is one sector that even in China is still going very strong. Now China -- back to those percentages. China was 19% of the business in 2015.

Okay, so China was 19%. And that is for 2015. Do you have what it was in 2014? Although I am looking here -- actually I am looking at the third quarter, I didn't have the fiscal results yet. But I am realizing in the quarter -- let's see, it actually was up the high-volume precision molded optics in third quarter. But for the year, nine months, it looked like it was down but not substantially. So does it look like that China market, even though the overall economy has been slowing dramatically, it is not slowing that much for you?

It is true. And the unit volume is down, like we said, 28% and that is predominantly that high volume PMO. But it is being offset by significantly higher pricing for the products that we are selling in China now, which is now associated with medical applications, fiber, laser and telecom.

Oh, they (technical difficulty).

(Multiple speakers) is up (multiple speakers) is down.

Okay. And forgive me, I am looking at the third quarter Q and I am seeing that there was a significant drop in that high-volume market. However, I notice that your revenue was actually up. So I can see what you are saying there, how that kind of offset it to some degree. Interesting. All right.

Anyway (multiple speakers). Yes, anyway -- and actually speaking of that, I won't keep you much longer. I just wanted to comment about the gross margins, now they were up from last year's fourth quarter. But looking at it sequentially it was down from the third quarter. You had about a 50% gross margin. It -- let's see, it was 47.3%, so a significantly higher volume, or actually revenue, but your gross margin went down from Q3.

And not only that, I noticed that SG&A, we were looking at about a -- was it a $1.5 million SG&A and typically you were about a $1.1 million, $1.2 million SG&A run rate. So I was hoping to get a little color on that to see if there it was any one-time items maybe in SG&A or something that might have affected your gross margins in the fourth quarter. So I was hoping you could talk a little bit about those two items.

The biggest component of the SG&A increase is because of the good results we were able to actually earn the management bonus. So there is about a $300,000 charge that is hitting Q4 in SG&A for a management bonus based on attainments of goals.

And that is -- compared to last year was there a management bonus in that quarter?

No.

No.

Oh, okay, so that could explain a big chunk of this jump right there, management bonus of $300,000. Okay, and anything else in SG&A that needs to be spoken about or that was really the main cause of that (multiple speakers)?

That was really the only significant difference between prior years.

Okay. And backing up to gross margins, still -- don't get me wrong, it was a good gross margin. But to see it trickle down from the third quarter on much higher revenue, if you could talk about that, if it was product mix related or whatever. If there was something in there that needs to be spoken about I would appreciate that.

Well, it was a couple of things going on, but it is mostly -- I mean first of all let me say that we believe our margins will fluctuate from the high to -- mid to high 40%s into the low 50%s depending on the mix. And the biggest driver is whatever the product mix happens to be.

Now in recent quarters, particularly as we have gotten into more production orders related to infrared product versus doing prototypes and samples, there is a little bit of difference in pricing when we go into production as opposed to when we are just making samples and those kinds of things.

So that is a little bit of a factor, particularly until we get the run rate really covering all the overhead expense, etc., associated with that product line and we start getting the production efficiencies that we anticipate to have long-term. So that is one driver (multiple speakers). And then the rest of it I think is just the overall difference in mix between the different products that you see on an ongoing basis.

Okay. So basically prior quarters you had a lot more prototypes, but this quarter was predominantly lower production pricing (multiple speakers).

Well, we are still doing a lot of prototypes but now we are doing more production along with it. So you are starting to (multiple speakers).

Okay, so -- so, going forward at least -- well, not necessarily the level that you had this quarter because you had that $400,000 extraordinary, not gain but higher revenue. But going forward on revenue that is at least levels that are 3.2 or so or better, we can anticipate gross margins being at least into the upper 40%s or even touching the 50% range?

Yes, we believe that to be the case.

Okay, that is all I wanted to find out. I appreciate the comments. Thank you.

[Ronald Sprague], [RROY Enterprises].

I realize it is for GAAP purposes and I realize it's a non-cash item. With that as background can we talk just a little bit about the warrant revaluations, like what future -- and primarily going forward what future exposure do you have and for how long?

The warrants have a five-year life and we will be having to remeasure the value of them every quarter until December of 2017.

Okay, so you have got roughly 2.5 -- a little over 2 more years.

Yes.

2.25.

Yes. So --.

And do you anticipate these on the same orders of magnitude?

Well, the problem is there's a number of factors that come into valuing the warrants and the predominant one is what happens with our stock price. So what happened in Q4 is our stock price went up 81% from the Q3 ending point, so that had a big driver in what one of the warrants is equal to.

Okay.

So I guess the answer to your question is we hope so because we would like to see the stock price go up 80% a quarter.

Yes, okay, but it does somewhat follow things. Okay, thank you very much.

[Bart Mercy], private investor.

Congratulations for those numbers. I have three little areas I would like to touch on. If I heard you correctly, Jim, you said things have picked up in Thailand. I am assuming some of that is the EMCORE business that has come back following the storms and the trouble they had. But the real question is Fabrinet in Thailand is involved with a number of OEMs. Are you seeing some new customers through those connections?

Yes, we do see a few. I mean they are coming -- nothing that is on the scale of what we are doing with the EMCORE business which is now I guess NeoPhotonics. But the -- but we are getting more business in there through Fabrinet and there are a number of different projects that we are working on.

Great. Second thing is congratulations on bringing on DRS Technologies as another of your thermal device customers, they are an impressive organization. I did notice after all of the publicity about the suspects being arrested in Virginia and Kansas City and Phoenix using the automated license plate readers, that one of DRS' sister companies, [S-Lag], makes those readers, the ALPRs. And I was curious as to whether that is a possible market.

I know so many of those are now having an infrared night vision capability and then San Jose, California is considering adding these readers to all of their garbage trucks, which is an interesting development.

Yes, I mean we are doing a number of things with DRS, I think we have -- right now I think we have six or seven different lens designs that they are using and they have a whole series of things that we are working on with them. So I wouldn't be surprised if we get into some other applications with those different designs.

Right. My third thing is kind of a technical question that you can maybe answer in layman's terms. I understand that the infrared sensors have resolutions of about [19-20] to 12x1280 at the moment, pixels. They are moving towards resolutions of 2000 by 2000. And this is supposedly going to open up I've heard markets of hundreds of millions of dollars over the next two or three years.

The real question for me was does this increase in the resolution result in new applications but also the need for current sensors to be retrofitted with new lenses?

Well, --.

Can the current infrared sensors handle better pixels?

I think generally -- I think the two things that are really driving it, obviously they are working on resolution with the increased density of the pixels. But the two things -- I mean the sensor cost is coming down dramatically and has continued and it is also becoming smaller. And the standard when we started was about a 17 micron, now it is down to 12 in a lot of designs and there are some that are even going to 10 microns.

So I think -- I mean that is good news for us because the smaller these things are they fit our smaller lenses and it works very well. Now -- so I think -- and you get -- and then the obvious benefit from the sensor point of view is since these are wafer-based technology, the smaller they are the more sensors per wafer which is a huge cost reduction.

So that continues to drive the applications and where these things could be used. So it is really all about cost of these thermal imagers and how those things come down. And the optics are becoming one of the more expensive elements of the bill of material of these cameras and sensors.

So we offer a different kind of process that has a lower cost associated with it on a relative basis, as well as molding is a mass-producing process versus machining and using single point diamond turning as a manufacturing process. So as these commercial applications come onto the market and they get into more consumer related type things, the volumes become very large and that just plays into the way we produce our product.

Very good. Thanks much. Carry on.

(Operator Instructions). Veselin Mihaylov, Newport Coast Securities.

Congratulations on a great quarter and a very good year. And also thank you for the improved frequency of communications with the financial community and the higher quality of the data that is being released on a quarterly basis.

So I wanted to ask you first a follow-up on the warrants. Can you tell us how many of these warrants are still outstanding in terms of number? What is the strike price? We already heard about the term.

Yes, it is 1.1 million shares at $1.26.

Okay. Thank you very much. Now what percentage of business was annually and for the fourth quarter this low -- low price, high-volume, the below $10.

The low volume -- let's see, I think the (multiple speakers).

(Multiple speakers), high-volume, low price.

Yes, let me give it to you. The high -- for 2015 the total PMO was 67% of our business, of our revenue. And that is split 48% of the revenue was the low volume PMO and 19% was the high-volume.

Okay, 19% of high-volume?

Yes.

Okay. Now --.

That is not on a unit basis but on a dollar basis.

Is that division generally profitable at this time? Because the analyst from Taglich Brothers noted that prices actually went up sequentially. And you said that some of your competitors have actually experienced a demise. So the high-volume division or the high-volume portion of the revenues, is that profitable at the operating line?

Yes, it is.

Okay, great. So can you tell me what was the cash flow from operations during the fourth quarter of this year? Please.

I think it is in the press release. I have got to look it up.

Not the EBITDA, the cash flow generated. I think you alluded to about a $600,000 increase in the cash balances. Was that -- what was the cash flow from operations?

Cash provided from operating activities in -- for the year was $179,000.

Okay, and we had three negative quarters before that. So a total of about [$450,000], so what does that mean about --.

I think the free cash flow in Q4 was something like $540,000 or something.

Yes.

Okay, great. So my question is going forward with the increased backlog and elevated level of revenues, do you see that this Company will have a more predictable positive cash flow from operations versus last year it was three negative quarters and then a very big fourth quarter of collections I guess or you know --.

Yes, I think we will see continued -- I think we have got the fundamentals where they need to be so that we see those kinds of good cash flows going forward. And we are at now a revenue level that if we can stay in this range, I am not saying we are going to be at $4.5 million every quarter, but I think we should be in the upper 3s, low 4s for sure. And I think at that level we don't have any problem with cash flow.

I just wanted to mention that the operating cash flow for the fourth quarter was $747,000.

Okay, that is awesome. Congratulations. So, okay, so you just gave us just a little bit of guidance, which I really appreciate. Clearly you did state that last quarter was a little bit of an aberration and normalized revenues were a little bit lower, there was a one-time item. But are you now, generally speaking, more comfortable giving guidance going forward?

For example, you told us that the custom optics and the infrared combined, I mean they are approximately $4 million in annualized revenues and they are growing well in excess of 100% year over year, at least historically so far. We don't know what the future is, but at what time will we have some comfort in giving us annualized guidance for revenues?

Well, I think we are approaching something like that, but I think any guidance we give, Ves, will be on a longer-term basis, at a minimum it would be annualized up. I am not going to get into quarterly guidance, I just think that is too short a term view for the business -- and not just my business but any business. And it just -- you end up making decisions you shouldn't be making for short-term things, and business doesn't work that way, as you well know.

We have to have the ability to make longer-term decisions to run the business properly. And I think the proof is in the pudding here. We have been marching along at a fairly steady pace and things are getting better and better and it is paying off. And it has been a long struggle but we are making very good progress and I think we are very well-positioned to continue along that trend.

Okay, very well. So in conclusion, I'd just like to ask you to continue to update us regularly including, if possible, give us quarterly pre-announcements especially for the fourth quarter as, like we said, we are talking late September about things that happened in June. And you have been very nice lately starting with those press releases in May.

And you see for yourselves and the stock price actually reacted to that. We have a lot of good news to say. And starting in May when you spoke about custom and when you spoke about infrared the stock properly reacted and is now at a much higher level and hopefully we will see a positive response from the market going forward. So thank you very much and keep up the good work.

Bob Ainbinder, Newport Coast Securities.

Let me congratulate you and the entire LightPath team for an excellent quarter and a great year and a lot of hard work through the years. It is obvious that the Company is well on its way to producing shareholder value and we appreciate that.

Well, thank you Bob. That's our job.

Absolutely. And most of my questions have been answered already. But I don't want to continue on and on about these warrants and how they affect the numbers. But hopefully in the not so distant future with the stock doing what it has over this last quarter we might see those warrants go away and then they won't be an issue going forward.

But with that, can you kind of give us a little more color as to what is happening in China? And you commented about some of the competitors over there kind of falling to the wayside and what that really means to LightPath and some of the business it might see going forward.

Well, I guess there's a couple things, Bob, about China. I think there are some fundamental changes going on with China, I think people are aware of that. Their exports are slowing, they are starting to get more mature in their marketplace and that comes with its own set of challenges. They are working diligently to expand their domestic market. And there is more competition. There is a rise of domestic and foreign competition for China.

They also have a number of issues. The issues -- their labor, material and service costs are rising. There is some push for unionization. The labor demands and the activism in labor is increasing and the government has become more tolerant of that and is also mandating some labor increases. I mean those are all things that are going from an economic political thing.

There is also a demographic change going on. The Chinese workforce is getting older. The workforce population, which is in their minds ages 15 to 64, is going to continue to grow through 2015, which is this year. The age group, the younger part of that, the age group 15 to 24 is actually shrinking. It is about 225 million people today and by 2022 it will only be 150 million.

So what that means is there is fewer younger workers and a lot more factories in China. So there is going to be some increased competition for labor as we go forward. Also you have got a second generation of people there, children of this reform era basically that are entering the workforce.

Now they are better educated and they are exposed more to the mass media through the Internet and things of that nature. They're more aware of their rights, they are sensitive to inequalities, they have different expectations and they are more city dwellers as opposed to farmers. So you have got a change in the demographic that you have to work with as well.

And so, there is a whole bunch of things that you need to do to make sure that your Company is positioned well to do that. And LightPath has done almost all of them. I think we have looked at our product not only as a product that we export out of China but also that we try to serve into the Chinese market.

We put R&D and engineering talent into our organization in China. We have moved from the first-tier cities to the second and third tier cities so we are in -- our move to Zhenjiang put us in a third tier city -- which by the way, just as an anecdotal note, is 3 million people. So it is not a small place. But by Chinese standards it is a third tier city.

We have empowered our local managers; we don't have any ex-pats in China on a day-to-day basis. We have a great management team over there that is Chinese. We have trained them on ethics and policies and we treat those kinds of things the same way and our expectations and standards are the same as they are in the US.

We have a solid human resources function over there. We do a lot of training with the people. We bring the managers to the US, our US people go there, so there is a lot of back and forth between the organization there and our organization in the US. As we source product our first priority is quality, not cost. But we do take advantage of the lower-cost sourcing there. And so as I said there is frequent engagement between the two organizations.

So having done all those things we treat -- it puts us in a very good position. Our team over there is very talented, they are very dedicated and they perform very well for us and we just don't have any issues from that standpoint.

Now from the economic point of view, the recent stuff, I mean a lot of Chinese companies, these upstarts, I will call them, are undercapitalized and they run on very small margins. And so when the volume starts dipping they are not able to sustain the business.

So we have seen that, we have seen some of the competitors that have come in with just unrealistic low prices, grab a piece of the business, but they are going away now. So now we have got people seeking us out to -- and we are picking that business up. And we see that emerging trend continuing.

The other thing that's happened is some of the talented people in those other companies are leaving and going to other places like Japan. We have been fortunate enough to pick up a few people that we needed as well. And they are very experienced and talented people. And so, we have been very fortunate on that as well.

So like I said, the bad news is the economy there is slowing. I mean -- and I think the key word is slowing. It's still growing, it is not shrinking and it will continue to grow. That is just not at a fast rate as it was historically. And the good news is the Chinese economy is slowing because we are taking advantage of that situation as a well foundationed Company and with good fundamentals and we are taking that business.

Sure. Sure. Obviously companies like to do business with companies that they know are going to be there for their next order.

Right.

So as you talk about revenues and kind of this new level that the Company appears to be at in terms of quarterly revenue, I can really appreciate the fact that you take this long-term view and this long-term approach with the Company so you are not a slave to the next quarter. I get that. And it is appreciated and the value creation over the long-term is obviously where we all look forward to as investors.

With that, I see companies like FLIR announce, and I know they are listed as one of our customers, announcing products back on -- just as recently as of September 8 they announced an uncooled thermal camera, a new thermal camera that they have released onto the commercial markets.

And seeing these defense contractors that LightPath has worked with over time -- over a long period of time. Some of these type of products and some of these new potential areas of business, I have got to assume they are not factored into those quarterly numbers at this point, correct?

I mean there is opportunities there I think as those things occur. They are factored into our planning process as we think we are going to be able to grow the business and that is one of the reasons why. But on a specific basis, no, we don't have -- we are not forecasting stuff that we don't have.

Understood. So it is really what is in the backlog, what is there now. So any new business that you might bring on would be in addition to those numbers, correct?

Could be, absolutely.

Okay, okay, great. That is great. Well, with that, listen, I look forward to next quarter's conference call which shouldn't be too far off considering we are almost at the end of the quarter. And I'm looking forward to continued success. Thank you so much.

(Operator Instructions). This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Gaynor for closing remarks.

Thank you. In conclusion we appreciate the support of our shareholders and the dedication of our global team at LightPath. We remain focused on our efforts to drive diversified revenue growth and continue to derive benefits from the leverage in our business as we improve our profitability and generation of cash flow.

With the progress that has been made and our plans for continued execution we look forward to delivering long-term profitable growth, which may deliver meaningful returns for the benefit of our shareholders. Thanks again and we look forward to speaking with you next quarter.

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