LightPath Technologies Inc (LPTH) 2016 Q2 法說會逐字稿

Good afternoon and welcome to the LightPath fiscal 2016 second-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, CFO. Please go ahead.

Thank you and good afternoon. Welcome to LightPath Technologies' fiscal 2016 second-quarter financial results 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'd 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's now my pleasure to introduce Mr. Jim Gaynor, President and CEO 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.

We had another great quarter with strong revenue and margin -- strong revenue growth and margin expansion that really set us on a course for a record year. This marks our fifth consecutive quarter of strong fundamental performance since we implemented the series of new growth initiatives in early 2015.

Here are the highlights for the second quarter of fiscal 2016. Revenue for the second quarter increased 26% to approximately $4.2 million, compared to approximately $3.4 million for the second quarter of fiscal 2015. Among our previously disclosed operating performance objectives, annual revenue growth was set at 12% to 16%, so we have significantly exceeded our target year to date. Gross margin was 56% in the second quarter of fiscal 2016, compared to 38% in the quarter of -- the prior quarter of 2015.

Operating income for the second quarter of fiscal 2016 was approximately $607,000, compared to an operating loss of approximately $405,000 for the second quarter of fiscal 2015.

Adjusted EBITDA, which excludes the change in the fair value of the Company's warrant liability, which Dorothy will address later, was a positive of approximately $737,000 for the second quarter of fiscal 2016, compared to a negative EBITDA of approximately $240,000 for the second quarter of fiscal 2015. The fiscal 2016 second-quarter adjusted EBITDA margin was 17%, well in excess of the annual operating performance objective, which was set at greater than 13%.

Our reported net income for the second quarter, adjusted for the effect of the non-cash change in the value of our warrant liability and other non-cash items in currency, which Dorothy will review further in her remarks, was approximately $520,000 and is compared to a loss of approximately $394,000 in the same period of fiscal 2015.

Our 12-month backlog was approximately $6.4 million at the end of the quarter, a 27% increase as compared to approximately $5.1 million at the end of the first quarter of 2016. And our cash and cash equivalents were approximately $2.5 million as of December 31, 2015, as compared to approximately $1.6 million as of June 30, 2015, a 52% increase.

We believe our second-quarter results demonstrate continued operational progress and an increasingly favorable growth outlook, along with improvements in our financial position.

I would now like to address some of the areas of progress and momentum. Contrary to public reports from other companies and economists, the Asian markets continue to be fertile ground for LightPath. We've seen some of the larger OEMs that we have done business with in the past returning to place volume lens orders. This is coming from industrial tool manufacturers, as well as telecommunications and Internet infrastructure markets, particularly for optical network expansion, which continues due to the bandwidth demand around the world. We have developed some new applications for fiber laser delivery systems, which are getting some attention.

Also, moving into a separate market, we've seen interest in our products for use in medical instrumentation. In most of these new applications, we are seeing higher price points. When coupled with our efforts to drive margins higher, we are seeing a lot of leveraging from our model coming into play.

This leverage is in large part built around a relatively lean company with low overhead costs and a new lower-cost manufacturing facility in China, which is roughly 35% cheaper than our former facility in that country. This new facility is running around 50% of its capacity right now, so we have ample room for topline growth, as well as contribution margin expansion. It is relatively easily to incrementally expand our capacity as needed.

Part of our gross margin improvement comes from revenue mix. This refers to the type of products being sold and, in some cases, will be impacted by nonrecurring engineering projects. Within our specialty products groups, we are seeing very good growth for what are basically value-added devices and custom designs. The specialty products group, which are basically value-added products such as mounted lenses and fiber collimators, our products that tend to be more custom designed for customer-specific applications, and they often are assemblies or come with other add-ons so the deliverable is more than just the lens. Orders are generally lower volume, but at higher prices and margins.

For our nonrecurring engineering work, or NRE, this is essentially revenue-generating engineering and technical R&D which would be otherwise expensed. NRE revenues increased 234% in the second quarter, so when you look at our R&D and product development expenses, which have been modest in the amount of $1 million to $2 million per year, it is important to understand that we also have the NRE work, which adds to our intellectual acumen.

In fact, the NRE work we did for Raytheon Vision Systems through a DARPA defense program a few years ago was instrumental in the commercial applications for our infrared product group. The infrared products have for the past few quarters been an extremely fast-growing business for us and enable us to tap into what is the larger addressable market than our traditional aspheric molded lens market.

Now let's segue into a discussion of our infrared products group. This puts us into an estimated addressable service market of $500 million annually for passive lenses, which are a small, but essential, component of most optical systems. This more than doubles the market for our traditional aspheric lenses of $300 million.

Within the infrared segment, we are initially targeting five key markets, including automotive, surveillance, low-end thermography, sensors, and IR imaging in smartphones. For all of these commercial applications, our proprietary molding processes are an enabling technology.

Some of the specific applications for our infrared products include safety equipment, particularly related to firefighting safety and firefighting cameras that are used by individual firemen. Overall, we view the sensor market as presenting some of the most important growth opportunities. End usage also includes commercial applications for gauging and controlling temperature as part of a drive towards home and office automation, which is also associated with the Internet of Things trend.

Then there are automotive automation technologies that are emerging for both safety, as well as driver convenience. There are many other applications, each of which is very exciting. The adoption for many of these applications will be driven by lower cost availability and we are doing our part to bring costs down.

Our molding process is a competitive advantage for us, winning the business and creating demand through lower-cost, higher-volume availability of components. We have a relatively lower-cost process and higher manufacturing production capability than the current typical manufacturing operations.

We have been adding to our capabilities on the infrared side of the business. In the quarter ended December 31, we completed our glass preformed manufacturing capabilities. Last month, we completed the integration of optical testing. Later this quarter, we expect to finish improvements that enable high-volume molding capacity for lenses used as part of the infrared assembly. And we are on target to have in-house capability for antireflective coatings by June of this year.

By June 2016, for the visible optical lenses and the infrared lens business lines, LightPath will be a fully integrated company, providing innovative optical design on a competitive, low-cost, high-volume manufacturing platform.

Not only have we been performing well on the near-term quarterly basis, we've also been planning for investing in the Company's future.

On a separate matter, I would like to address briefly the adjournment and rescheduling of our annual shareholders' meeting until February 25, 2016. The adjournment period will allow for the continued solicitation of proxies from shareholders with respect to a proposal to increase the Board size from seven to 12 directors as we seek the ability to strengthen our Board and emphasize our objective for maintaining the highest standards of corporate governance and a proposal to modify the percentage of the shareholder votes from 85% to a majority of the shares represented, which will be needed to change the Board size.

You see, we don't want to just grow the Company; we want to ensure we have the proper framework to support smart growth that has the Company's shareholders' best interests in mind. As of January 28, 2016, the proposal had the support of over 80% of the Company's outstanding shares. Under the Company's articles of incorporation, the proposal requires support from 85% of the outstanding shares.

During the period of adjournment, the Company will continue to solicit proxies from stockholders. Shareholders who have already voted do not need to recast their votes. Proxies previously submitted will be voted at the reconvened meeting, unless properly revoked. Shareholders as of record date of December 1, 2015, who have not yet voted are encouraged to vote before the February 25 meeting date.

In conclusion, we're very pleased to have reported another successful and a strong quarter. The stage has been set for not just a promising year, but a record year of growth and expansion for LightPath Technologies. We are committed to improving upon the progress that has been made and we will be following our organic growth plans, as well as contemplating opportunistic acquisitions to further strengthen our position in the market.

I will now turn the call over to our CFO, Dorothy Cipolla, to provide additional detail on our second-quarter results.

Thank you, Jim.

First, I'd 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-Q, which we 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 for our fiscal 2016 second quarter, which ended on December 31. Revenue for the second quarter was $4.2 million, an increase of 26% as compared to last year. The growth was attributable to a 133% increase in sales of our specialty products and a 234% increase in sales of nonrecurring engineering projects, of which 93% of these was for infrared NRE projects.

Precision molded optic revenues increased by 1% and infrared product revenues increased by 8% in the quarter, as compared to the prior year. This marks the [first] consecutive quarter when we have experienced year-over-year increases in sales of both of our infrared and precision molded optics lines. In addition to these product groups, this is the second consecutive quarter in which our nonrecurring engineering revenues increased by over 200%.

In terms of geographic revenue mix, 40% was from the US, 32% was from Asia, 24% was from Europe, and 4% was from the rest of world.

The gross margin as a percentage of revenue in the second quarter was 56%, which compares to 38% last year and 54% in the first quarter of the current year. The improvement in gross margin as a percentage of sales on a quarter-over-quarter basis was driven by the favorable product mix, with higher selling prices, leverage of the sales volume against our manufacturing overhead costs and the realization of the full benefit of our lower-cost manufacturing facility in Zhenjiang, and the elimination of modest amounts of costs associated with the transition from our new manufacturing facility in China, which had been a drag on prior periods.

As previously disclosed, with the lower cost base in Zhenjiang as compared with Shanghai, we have approached a range for gross margins of high 40s to mid 50 percentages, which we believe is a normalized base.

Due to the significantly higher revenues in the second quarter, total cost and expenses increased by approximately $78,000 compared to last year. The increase was due to a $180,000 increase in wages to accrue for fiscal 2016 management goals -- bonus goals, driven by the strong start of the year. This was partially offset by an decrease in professional services fees and ongoing expense management.

The increase in revenues and improved gross margins were partially offset by an increase in total cost and expenses that led to a total operating income for the second quarter of approximately $607,000, compared to a loss of $405,000 last year. In the prior-year period, the loss was elevated due to [difficult] expenses associated with the transition to the new manufacturing facility.

In the second quarter, we recognized a non-cash expense of approximately $1.1 million related to the change in the fair value of the warrant liabilities issued in connection with the June 2012 private placement. The warrant liability has an inverted correlation to the change in the price of our common shares. During the quarter, LightPath's common stock increased by 90%. This resulted in a significant non-cash expense tied to the change in the fair value of the warrant liabilities. In the prior-year period, we recognized non-cash income of approximately $535,000 related to the change of those warrants.

Net loss for the second quarter was approximately $536,000, and this includes the $1.1 million non-cash expense for the change in the fair value of the warrant liabilities, or a loss per share of $0.04 per basic and diluted common share. This compares to a net income of $546,000, in which -- which includes $535,000 non-cash income for the change in the value of the warrant liability, or earnings loss per share of $0.01 per basic and diluted common share last year.

We were also impacted by foreign exchange losses in the second quarter of this year, due to the recent devaluing of the Chinese yuan in the amount of approximately $78,000. This had a $0.01 impact on basic and diluted earnings per share. This compares to a foreign exchange gain of $19,000 in the same period last year.

Adjusted net income, which is adjusted for the effects of the change in the fair value of the warrant liability and other non-cash items, was approximately $520,000 in the second quarter, as compared to a loss of $394,000 in the same period last year, an improvement of approximately $900,000.

Moving on, our adjusted earnings before interest, taxes, depreciation, and amortization, or adjusted EBITDA, for the second quarter was three hundred and -- $737,000, as compared to a negative adjusted EBITDA of $240,000 last year.

Weighted average basic shares outstanding increased to 15.3 million in the second quarter, compared to 14.3 million in the prior year, primarily due to the issuance of shares of common stock for a private placement in January 2015 and the employee stock purchase plan shares issued.

I'll now briefly review financial performance and operational details for the fiscal first half for the six months ended December 31. Revenue for the first half was $8.4 million, an increase of 41% as compared to last year, and this growth is attributable to increases in all of our product groups. Gross margin as a percentage of revenue in the first half of 55%, this compares to 38% last year. The improvement in gross margin is primarily attributable to favorable product mix resulting in higher sales prices, leverage of the sales volume against our manufacturing overhead cost, and the realization of the full benefit of the lower cost structure at the Zhenjiang facility.

Due to the significantly higher revenues in the first half, total cost and expenses increased by approximately $179,000 compared to last year. The increase was due to an approximately $360,000 increase in accrual for wages related to fiscal 2016 management bonuses, given the strong financial performance during the first half. This increase was partially offset by a decrease in professional service fees compared to the prior year.

Total operating income for the first half was $1.3 million, compared to an operating loss of $915,000 last year. In the first half, we recognized a non-cash expense of approximately $687,000 related to the change in the fair value of the warrants. In the prior-year period, we recognized non-cash income of approximately $481,000 related to the change of these warrants.

Net income for the first half was approximately $307,000 and this includes the $687,000 non-cash expense for the change in the value of the warrants, or an income per share of $0.02 per basic and diluted common share. This compares to a net loss of $438,000, which includes the $481,000 non-cash income for the change in the value of the warrants, or earnings per share of three -- loss per share of $0.03 per basic and diluted common share.

We were also impacted by foreign exchange losses in the first half due to the devaluing of the Chinese yuan of approximately $253,000, which had a $0.02 impact on basic and diluted earnings per share. This compares to a foreign exchange gain of $20,000 last year.

Adjusted net income, which is adjusted for the effect of the change in the value of the warrant liability, was approximately $994,000 in the first half, as compared to a loss of approximately $919,000 last year, an improvement of approximately $2 million.

Moving on to our adjusted EBITDA for the first half, and remember, this eliminates the change in the fair value of the warrant liability, it was $1.4 million and that compares to a negative adjusted EBITDA of $620,000 last year.

Weighted average basic shares outstanding increased to 15.2 million in the first half, compared to 14.3 million last year, primarily due to the issuance of shares of common stock for a private placement in January 2015 and shares issued under the employee stock purchase plan.

Cash and cash equivalents totaled approximately $2.5 million as of December 31, an increase of 52% from the balance of $1.6 million as of June 30. Cash flow provided by operations was approximately $1.05 million for the first half. During the first half, we extended approximately $596,000 for capital equipment, while growing our cash balance $859,000. As of December 31, the Company's 12-month backlog was $6.4 million, compared to $6.1 million as of September 30.

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.

Good morning, Jim and Dorothy. Congratulations on a good quarter. Excluding the warrant liability, it was a nice bottom line.

I wanted to ask you in particular the Q2 revenue. That obviously, compared to last year, was nice, but it was relatively flat with the first quarter. They were both at about $4.2 million, so I was hoping you might be able to break out which segments grew and which declined from Q1. I just wanted to see what the specifics were in those segments. I'm sure some improved and some didn't. And I'm just curious at this level here, what do you think it's going to take to get you past like the $4.2 million, $4.3 million range going forward?

I think we will just continue to keep growing. The growth that we are seeing, I think, is representative of the type of business, and I think as we continue to exceed or be around $4 million of revenue a quarter with the kinds of margins that we are generating, it's pretty damn good performance.

So I think it's either the business continues to grow like it is, that's going to be the natural course of things and it will continue. As we have the NRE type things, you saw those types of development monies coming in, those are all for new projects. That's the beginning.

So as that -- as we continue to get those kinds of opportunities and do those design works for our customers, those generally will turn into business down the road. So I think the revenue growth will continue. We've said we could grow between 12% and 16% are our targets and we are exceeding those. I don't look at it the way you're looking at it, I look at it as we are maintaining that level of growth and it's -- I think that's a good level.

And speaking of gross margins, because obviously the last two quarters you did about 54%, now you just did a 56% gross margin on similar revenue of $4.2 million. So with an anticipated product mix you see going forward, where do you think gross margins would be good for modeling purpose right now? You just came off of a 56% quarter, prior was 53% on similar revenue, so I'm just trying to get a handle on this because I think I looked at it about 50%. But I think I may be a little bit conservative on that. You tell me if like lower 50s is more to look at your business going forward.

That's what I believe. As we said, we expect, based on how the mix flows, it will be in the upper 40s to mid 50s. But I think the kinds of margins that we are generating in those lower to mid 50s is the right place for us and that's what we're trying to maintain.

The reasons that we are hitting that level, I think, are going to continue. We have that lean overhead in place, we've gotten very good performance out of our Chinese facility as we moved to that new facility, so those kinds of changes are permanent. They should continue. The part of that that will fluctuate is the part that's affected by mix.

But the areas that we are growing in the specialty products area, and as we are continuing to build volume in the infrared, those are higher-margin type opportunities. And so, I think that's about right where we should be, in those low 50s.

Okay. And one more question, you mentioned the growth of specialty products and infrared, and if I could just pinpoint in particular the end markets that are primarily responsible for the growth in infrared sales. I know that you are involved in a lot of areas, but if we could just pinpoint maybe one or two end markets that you believe are really driving those sales.

I think right now the business that we are generating right now has to do in the safety equipment, particularly in firefighting type cameras. That's the stuff that's in production now.

I think going forward we will see more commercial applications in some of the low-end thermography stuff, as well as some surveillance security type stuff. Then I think the future type stuff that really hasn't shown itself in the production numbers yet, and will be down the road, will be in the sensing technologies, whether that's with autonomous automobiles or driver safety type things or in the smart home type home automation type things. I think that's where we will see some good growth.

And then longer term than that, just because of the development cycles are so long, you'll start to see it come in the automotive sector. At least that's where we're trying to drive the business.

Okay, but with what you currently have, the firefighting cameras, you see that still growing from the level that you're at right now?

I think that type of product, yes. Those kinds of thermal imaging type applications, that should continue to grow.

That's all I have. Thank you.

Ronald Sprague, Roy Enterprises.

Hi, one comment and two short questions. The comment, thank you very much as a shareholder for your very prompt, aggressive response to the recent Street Sweeper share attack. It really makes me proud to be a shareholder to see how you handled that.

The question, you mentioned the vote was 80%-plus as of January 28. Do you anticipate any announcements before the AGM or are you just going to hold to the AGM before you announce the results?

I think we'll just hold until we have the meeting on February 25, I think. The whole idea of the adjournment was to allow us time to continue to solicit those proxies. I will say that we are having success. We are getting additional votes in and that's what it's all about.

The last comment, you opened your call expressing optimism with your business in China, unlike many other companies that are reporting this period. Would you ascribe that to the market and the industry that you are in or to the specific LightPath products that you're selling?

I think it has to do with -- there's two events going on for us. First of all, we have a product line that fits into the telecom type space and that's very strong right now, particularly, and it's one of the areas that the Chinese government is continuing to invest in infrastructure, as well as that's going on all around the world with the demand -- the bandwidth demand increases that continue. So I think that is a major market theme that's driving business and we are in the right market, and China is part of that, so we are benefiting there.

The other part of it is we compete against some Chinese competitors that -- they typically have run their business on very thin margins, and as soon as volume drops, they are hurt. So some of those guys have gone away and we have been able to pick up share as a result of that.

And a third thing is we deal with some very large OEM-type guys that serve us all around the world, but they do their business, their production in China, and we (technical difficulty) them, so that's also very beneficial for us in our Chinese area.

So it's a good market. It's slowing from where it has been, but it is still growing. I think people sometimes get caught up in the press and they forget that it's still growing, because it's all about how much slower it's growing as opposed to that. So I think those are the reasons that we are very optimistic.

So we are in the right markets. We are in a little bit of unique space, optics, and the fact that we are so diverse across the different markets that we serve helps us, and we have a very strong customer base. And all of those things are working to our advantage, and in particular in Asia.

Again, thank you very much and thanks to your management team for the good efforts.

You're very welcome. Thank you for being a support -- shareholder.

[Bart Marcy], Private Investor.

Hi, Dorothy and Jim. Thanks very much. I have one statement and then a question. I'm really impressed with the specialty products being up 133%. I am particularly interested, as you may gather from other conference calls, in the laser projectors and the medical. And I certainly appreciate the efforts you are making to get that 85% because as you diversify and get more markets open, like medical instruments and laser projectors, there may be an opportunity to strengthen the Board by adding some people with some relevant experience from those kinds of industries.

On the specifics, I read a lot about Star Wars and I know that Christie's has opened up in a new theater in Spain and they also are in South Korea's largest multiplex with their 3-D projectors. I know last year you are working with Christie and I'm curious as to whether you're continuing to work with them or converting them into customers and anything you could tell me would be helpful.

I will say, Bart, the laser projector business that we've had in the past got very weak because we were selling to some Chinese manufacturers who ran into some economic problems. The major guy has fixed his problem and has come back, so that business is starting to pick up again.

That doesn't address Christie's. Christie's uses a different kind of technology than one would use a typical lens, the type that we make. They use an XL laser and then they use an acylinder lens to distribute the optic -- the light through those kinds of optics. In the past, we didn't have the capability of making that type of lens, but we do now. So we are going to reapproach that and see if we can't do some business there. (multiple speakers)

I just said in the medical instruments, can you elaborate a little bit on the kind of instruments that you are seeing LightPath lenses?

Yes, I think the kinds of things that we have been in in the past, that we have been in types of endoscopes and those kinds of things, and then now there is some opportunities in that area, again, that we think could be -- are quite exciting for us.

It's still in a risk stage because of development. But there is a push to do some work with companies that are involved in disposable medical devices, like disposable endoscopes, which has a tremendous market opportunity. There's like 45 million procedures done in the US alone using endoscopes, and currently endoscopes that are currently used cost thousands of dollars and are reused. They have to be cleaned and that presents a cost, as well as liability for infection. By using a disposable one, you eliminate that.

So if those types of companies that are doing that type of work are successful, we are going to be very successful along with them. So it's kind of an exciting opportunity and it's a very large market opportunity.

Many thanks, carry on.

Robert Ainbinder, Westpark Capital.

Hi, Jim; hi, Dorothy. Congratulations on another great quarter. Appreciate all the hard work to get here and I want to congratulate you. Thank you so much. I appreciate [your entire life afnee].

Thank you, Bob. I appreciate the comment.

Absolutely. So alluding to the first caller, my colleague, who was asking questions about your revenues and revenues kind of grinding higher, obviously we are at a good level here, throwing off some nice cash. With the backlog sitting at $6.4 million, obviously we can expect to start -- we can expect to see that work its way into higher revenue growth as we go forward, can we not?

That's the whole idea. We're going to continue to grow, and as we said, we're trying to grow our business between 12% and 16% a year. We are currently exceeding that.

The only caution I would put out there is that, as we all know, things don't go in a straight line usually, so we expect to get to the goal. But sometimes, these things don't happen in three-month increments, right? We have to work it towards that, and unfortunately we report every three months, but some of this stuff takes longer than that to come to fruition, as you are well aware. (multiple speakers)

I'm very positive on what we are doing. I'm very pleased with the business that we are able to generate. The order intake is strong and continues to be. And I think that's a remarkable situation in the uncertain economic environment that we are all operating in, and I just think we are in a very good business. We are well positioned and I think we will grow.

This coming quarter is the quarter of the Chinese New Year, so we have some effects from that that people should expect. There are some shutdowns in Chinese business in Asia that are protracted. The holiday is about a week, and then people leave early and come back late, so there's a slowdown in business in Asia and in China in particular for this major holiday. It doesn't mean anything except people go on vacation, but it does slow business enough that we have to be cognizant of that.

But even given that, I think we are going to do fine and we're going to continue to grow.

And you alluded to some of the work that you are doing in the telecommunications space, and you mentioned collimators. Are we starting to see a pickup in some of the older businesses of LightPath? I call them older businesses because they've been around for quite some time prior to us really ramping up the lens business. But the isolator and collimator businesses, are we starting to see some of that really tick up in China?

There are some opportunities there, but for us we are only interested in some very high-end type stuff. We are not participating or do we want to participate in the very low price points in the isolator and collimator type opportunities.

Our products have some unique capabilities in terms of reliability and those kinds of things that are for some very special type applications. So they tend to be more custom in nature, as well as higher ISPs and margins. So, to say that that business is coming back in those areas, I don't see that as a major business. I see it as a part of our specialty products business, which includes anything that we do that's really basically value added.

Got it. (multiple speakers) understood. And if you can just comment a little bit more and give us a little more color as to the type of opportunities that are coming down the road in the automotive sector, what type of applications and volumes that might come into play down the road as they start to come online?

I think the easiest way to explain that is to look at what we think is going to happen in the thermal imaging type area because most of this is related around infrared.

We started and we are currently working on has to do with the building inspection, some night-vision type systems and firefighting safety type equipment. The next segment, we believe, will move into the home automation and smart building where you are now using sensors to control things like HVAC and lighting in rooms as they become more or less occupied by people, that type of stuff, as well as counting entrance and entry or exits through the building and doing that kind of stuff.

And then, there's a whole number of sensors. For example in nursing homes and facilities, you can monitor patient movement in beds and that kind of stuff with these kinds of sensors. You can -- in homes, you can keep track of hot spots; for example, you can put a sensor on the stove, and if it gets abnormally hot, then you can set that off much faster than a smoke alarm would, for example. In stadiums, you can count people; in intersections, busy intersections, you can control the movement of vehicles, as well as pedestrians, by keeping track of where the loads are and how the traffic is moving.

So these types of sensors, I think, is what's coming next. And then, following that, you get into the automotive area with night-vision systems and LiDAR type systems where you're doing distance measuring and controlling that kind of stuff and other sensors -- sensing applications that control the environment of the cabin or all of that kind of stuff that are aids to the driver.

And then you have the autonomous car, so I think all of those things come in the future. So you have traditional stuff that we've talked about that started in the early 2000s. You got the smart buildings, which I think now are coming into fruition this year and next, and then a couple years down the road from that you have the automotive. So we're going to try and participate in that progression as it goes because what we bring to market is the capability to produce mass production, as well as a lower-cost optic for these types of devices. So, I think that's going to be a winner.

That sounds exciting. This is an exciting time for LightPath. I appreciate it. Thank you so much for all the hard work and I look forward to the next quarter.

Michael Diette, Private Investor.

First, my congratulations, as well, to everyone. Terrific news. In past conference calls, I've asked about Europe, and I wondered maybe, Jim, you could just expand a little on that. I heard Dorothy talk about the sales over there, and I know you've gone to a larger distribution model. I wonder if that distributor is coming through and the trade shows there are paying off the way you wanted.

I think our business in Europe is doing quite well. It's about -- what do we say, 24% of our business, which is a pretty healthy piece.

So the distribution network we have there through a master distributor has six or eight offices around the continent in different countries. It's headquartered in Germany, which is really the hub for optics, and he is doing a very good job. We keep working with them so that they continue to do more and more, and he is one of our largest customers, so he is doing a pretty good job and we are doing that.

In addition to that, we have some house accounts where we have done some custom work, and as the business opportunity has gotten large enough, it's now taken back and controlled through the house. So we have several of those and we continue to see some opportunities growing within those accounts.

And now we are redoubling our efforts, particularly with the larger players over there where we have a piece of business with them to get the second and third opportunities. So that's what we expect to happen. So I see that opportunity, that area, growing for us as a geographic area. And it's -- again, optics is a very good market product segment to be in because even -- it's growing in spite of whatever is happening with the macro economy.

Just a quick follow-up on the older fiber business. When I see that Google and the high-frequency trading wants to go more into fiber networks for their -- some of their server farms, is that something that's a potential?

I think data center interconnect is an area of interest to us and an area where we are going to try and do some better penetration going forward. So, stay listening and we will keep you posted on how much success we have there. But I do agree, that's an area of opportunity.

Thanks very much.

Veselin Mihaylov, Newport Coast Securities.

Good evening, Dorothy and Jim. Thank you for taking my call. Congratulations on a great quarter indeed. So I have a few comments and questions mixed in as I wrote them down. I'll try to be brief.

Number one, I've noticed in the last couple of weeks significant uptick in the price of infrared-related optical companies, such as II-VI systems, Coherent, as well as in pure fiber optic place, like JDS Uniphase and Oclaro, which I know are your customers. My call to you going forward is to start breaking down the infrared business and the custom optic business so people can see the growth in the revenue, not just the percentages. It's kind of hard to reconcile sometimes when you see those divisions growing at triple digits and the overall revenue 26%, which I'm very happy with. But if people also see that these divisions each are doing a couple hundred thousand dollars, in the high hundreds of thousands of dollars, and then millions, I think that additional value in the stock price can be unlocked. So, do you anticipate breaking out fiber optics and/or infrared going forward?

I will consider it. I think it has to be done at the appropriate time. The infrared is a developing business, so we keep track of it, but I just have to consider how much (multiple speakers) granularity we want to get into, as well as I don't want to give our customers -- I mean, our competitors too much information. But I'll take a look at that and we'll see what we can do to make it a little easier to understand.

Very well. Okay, number two, just I keep asking this question all the time to educate new investors that are reading transcripts and listening to the phone call. How many more warrants are left to be exercised and how many years on them?

They expire -- or mature December 2017, so there's basically two years left.

(multiple speakers) a little under $1 million.

I think it's about $1 million, just under it.

Very well, because I get these questions from new investors all the time and it's nice to put it on the record. Net loss carryforwards, some of these were incurred as early as the mid-1990s. Are any of them starting to expire or are they being utilized now that we are profitable?

We have some expire every year, but we -- starting with this year, we started using them. So we are using them, but we still have about -- just under $90 million of tax loss carryforwards.

Just under $90 million, you said?

Yes.

Okay. And they expire probably at the rate of a couple million a year. These are the oldest ones from the mid-1990s, correct?

Correct.

All right. So, hopefully they won't be expiring going forward because we will be even more profitable.

Question number four. This was -- talking about expanding the Board of Directors, to some shareholders it looks like asignificant increase in the number of Board seats, potentially, from a Company that -- two years ago, we were doing about $11 million in revenues; now we are doing about $18 million, $19 million annualized. Hopefully, we will end with $20 million annualized. So we are expanding the Board by a factor of two; it seems rather large. I was going to ask you, as a shareholder, what is the annual cost in cash to add a new director? Because I assume that you are paying people pretty much the same. Only for the director services in cash.

The cash portion is about $30,000.

So, okay. So $30,000. And usually, what is the stock option package?

That is usually about $50,000.

Okay, all right. So, just wanted to be cautious of the potential additional costs that we may be incurring if we double the Board of Directors. Some people are asking, why suddenly a company that hasn't grown that much in absolute numbers, and (multiple speakers)

(multiple speakers). What we're asking for is to have -- this is a proactive move on the part of the Company to be prepared to do things in the future.

We don't have any -- there's no way we're going to overnight increase the Board to 12 members; that's not the intention. The intention is to have room on the Board if we have a reason to increase it, based on what we're trying to do, whether that be an acquisition or those types of things in the future. We want to be able to do that and I don't want it as an impediment to our growth.

There is no plan to have 12 directors next week. I think that is not the idea behind it. And if you read both of these proposals, the one to remove the supermajority and this one to have the ability to increase the size of the Board, I believe they're in interest of our shareholders. It makes it easier for the shareholders to have a voice and be able to have that voice acted upon than what the current situation allows, just as it restricts us as a management of the Company.

So I think both of these things are, one, in the interest of the shareholders overall and, two, they are things that we are trying to be proactive to make sure we have the ability for the Company to grow uninhibited by certain restrictions.

And in addition to that, we did do some research and we said what's -- what I would like to do is not have a restriction on the size of the Board whatsoever. But you get more than 12 people on a Board, it becomes a little unwieldy. Most people say a Company our size of this market cap, 20 would be a good number. But we think that's way too many. 12 is about the maximum that we could ever see we would need, and only then if there is a particular need or if we would need to bring in some particular expertise, I want the ability for the Company to have the ability to get that insight and have it available to us from a strategic point of view. (multiple speakers)

I welcome that. Maybe if the vote for some reason fails here, you can come back with another proposal to increase it to seven or eight, something that might be more palatable to those that are opposed. Because, again, I believe you disagreed with me that going from six to 12 at this stage is too much, potential acquisition, who knows, maybe dilutive, maybe not. It has to be considered, but bringing so many new directors on this kind of revenue run rate, probably not a great idea, in my judgment only. So I'm just speaking for myself. And --

But I'm just saying that's not the intention.

Not the intention, okay. And I was going to call on you going forward to increase, if possible, the rate of news dissemination per quarter. I would love to be able to see a few pieces of news per quarter, maybe once every three weeks, on the average. Clearly, you don't put a press release for the sake of press release, but compared to other similar companies, there seems to be a dearth of press releases from LightPath from design wins, applications, distributors.

I follow many, many companies, and companies of this size usually will put out a few press releases a quarter specific to new design wins, new customers, new applications, new distributors, things like that. Are you under so many restrictions from your current customers that you cannot absolutely say anything?

We do run into that situation where there are some things that we would love to put out that our customer doesn't want us to, for whatever competitive reasons, so we try to honor that. But I noted your suggestion and we will take some action on it.

Okay, thank you very much for great stewardship, great quarter. Please keep the dilution to a minimum from stock options or other acquisitions, and let's grow this Company even at a faster rate.

Okay, I agree.

[Steven Donovan], Private Investor.

Hi, Jim and Dorothy. I just have (multiple speakers). About six months ago on your website, under investor relations, there was a presentation, a LightPath presentation, and on the list of customers with all those logos, there was the Apple logo. And that was on there for about six months and then it disappeared. And I talk with people who know LightPath and it was confirmed that there was validity to the Apple logo being there. Apple was some kind of a customer. Can you comment on this in any way?

Yes, I think we do -- have done some work with them. It's preliminary type stuff. They generally don't like to have other companies use their logo, etc., as promotional, in some respects. So we decided that just rather than to get on the wrong side of them before it was a good thing to do, we would just take that off of there. So we are still working with those kinds of companies and, hopefully, we will one of these days do something significant with them.

Okay, and you just don't want to comment anymore.

Correct.

Okay. Many, many thanks. I look forward to the next quarter.

All right, thanks, Steve. Thanks for your longtime support as well.

Ladies and gentlemen, that concludes our question-and-answer session. I'd like to turn the conference back over to Jim Gaynor for any 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 and growth and continue to deliver benefits from the leverage in our business as we improve our profitability and generation of cash flow.

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

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