LightPath Technologies Inc (LPTH) 2022 Q3 法說會逐字稿

Afternoon, and welcome to the LightPath Technologies Fiscal 2022 Third Quarter Financial Results Conference Call. (Operator Instructions) Please, note this event is being recorded. I would now like to turn the conference over to Albert Miranda, Chief Financial Officer. Please go ahead.

Thank you. Good afternoon, everyone. Before we get started, I'd like to remind you that during the course of this conference call, the company will be making a number of forward-looking statements that are based on current expectations, involve various risks and uncertainties, including the impact of COVID-19 pandemic, those discussed in its periodic SEC filings. Although, the company believes that the assumption to underline these statements are reasonable, any of them could be proven to be inaccurate, and there can be no assurances that the results would be realized.

In addition, references may be made to certain non-generally accepted accounting principles or non-GAAP measures, for which you should refer to the appropriate disclaimers and reconciliations in the company's SEC filings and press releases. Following the management's discussion, there will be a formal question-and-answer session open to participants on the call. I would now like to turn the conference over to Sam, LightPath's President and Chief Executive Officer.

Thank you, Al. Good afternoon to everyone, and welcome to LightPath Technologies Fiscal 2021 Third Quarter Financial Results Conference Call. Our financial results press release was issued after the market closed today and posted at our corporate website. I want to start today's call by providing you a brief update on our company and the vision we have for the future of the business.

The area of optics and photonics is at the truly exciting inflection point. Technological advances have made solutions in optics and photonics available and applicable to products and services in a wide variety of industries. Optical solutions are now applicable to products in LIDAR, [Jones,] augmented and virtual reality, medical field, sporting and consumer goods, to name a few. An example of one such application is LIDAR for autonomous drones for which we recently announced a collaboration with follow engineering.

We believe that when a technology like photonics moves from being a specialty technology to being integrated into mainstream industries and applications, our advantages and domain expertise make us an ideal partner for providing the optical engine of our customers' systems. Owning to critical differentiating technologies such as unique materials, high-volume molding technology, free for optics and others position us to both create unique value for those customers and to capture that value in the form of stronger profit margins and long-term agreements, engagements with our customers.

Photonics can be embedded in products across many indices. This is estimated to represent as much as 11% of the global economy. The integration of photonics into mainstream products provides us with a built-in product and customer diversification opportunities. In the past, LightPath was primarily focused on components within them and factoring supply chain.

That strategy was designed around the premise that photonics is not widely adopted, and therefore, the supply chain was highly fragmented and specialized. Today, with the accelerating adoption of photonics into many applications and industries, our industry is moving -- our strategy as moving away from being simply a component provider to a company focused on providing optical engineered solutions.

This means designing and integrating optics, mechanics, electronics and software to provide the complete optical engine to the customer. We are positioning LightPath to be the partner of choice in this eventually growing field of optics and photonics. By focusing on our key differentiators, including our design and manufacturing expertise enabled by key optical technologies, low-cost and vertically integrated global manufacturing, we believe we can be a leading OEM to customers across the globe.

One area where adoption of photonics is accelerating is the growing need and the benefit of infrared imaging, improvements in infrared imaging are opening up new applications to an existing technology across short-wave, mid-wave and long-wave inferred imaging. (inaudible) applications are being applied in border surveillance, drones, maritime and coastal surveillance and critical infrastructure projects.

Infrared imaging has, for the most part, in based on the use of germanium as the optical material. However, germanium comes primarily from China and Russia, with the U.S. importing as much as 95% of the germanium users. An alternative to germanium is chalcogenide glass, which we name Black Diamond glass. Through our ongoing production of our Black Diamond 6 glass BD6. We have gained over the last few years significant experience in making and using those materials.

Positioning us is probably the lead manufacturer for this kind of material in the U.S. Further, receiving an exclusive license to commercialize further chalcogenide glasses developed by the Navy Research Lab, positions us as the only true source for a portfolio of materials that provide an alternative to germanium.

To that end, I recently traveled to Washington, D.C. to give a talk about the subject, followed by meetings with DoD and government officials on the topic. We are beginning to see that owning this key technology is well aligned with the growth of infrared imaging in the efforts to build a resilient and robust supply chain in the U.S., an important effort that is further emphasized by the recent geopolitical events, all of which reinforces our strategy and indicates that we are in the right place, in the right time and most importantly, heading in the right direction.

To reiterate this, it is owning critical technologies that positions us to capture much of the value in those growing markets. The essence of our strategy revolves around technologies that are critical to the implementation of optical system in those areas and leveraging those to develop and deliver optical systems and subsystems that produce better infrared images with an overall lower cost of ownership to the customer.

Even as the commercialization is happening more broadly, there remains a large addressable market for government and military applications. Our unique technology and expertise with producing and processing the infrared materials, including fabrication of components and assemblies, lower cost manufacturing in our ITAR approved facility in Latvia and technological advancements like our Diamond Like Carbon, DLC coating process, which has been qualified for all U.S. military applications, places us in a leading position in this market.

We believe our value proposition makes us an increasingly important partner, commercial development of engineered solutions for departments of defense agencies, defense industrial base, BID, pine contractors and other infrared optical imaging businesses. In October 2021, we announced our entry into the Freeform optics arena.

Freeform optics involves lenses with surface shapes the black certain symmetrical attributes, which makes them more challenging to mass produce that provide improved aperture, field review and miniaturization. Freeform optics are becoming a key element in applications such as augmented and virtual reality, AR and VR infrared and military optimal systems and 3D imaging and visualization.

Many times, these systems require the higher performance and more compact form factor that Freeform optics can provide, allowing increased flexibility and overall size, weight and power optimization. The qualities of the material use of the keep using smaller and lighter augmented and virtual reality glasses that look more like conventional eyeglasses and less like the multi-AR, VR goggles of today.

Additionally, with Freeform optics, LIDAR systems can achieve larger field of use and lower losses, which in turn translates to higher resolution images and the ability to extend detection distances. The adoption of Freeform optics in such applications has been limited due to the manufacturing technologies that previously made glass mass commercialization cost prohibitive.

We believe that our technology solves for that. In January of this year, we announced that there were Freeform optics won the 2022 Prism Award for manufacturing, which is an annual international competition that one best optics and photonics products on the market. In March, we announced that Apollo Engineering chose our Freeform optics for use in its LIDAR products. Apollo's line of laser range finders and LIDAR products provide fast measurement with high accuracy and precision in an ultra-compact package.

We integrate our molded Freeform optics in the systems, which allows them to achieve optimum performance while minimizing the number of optical components. Our Freeform optics reduce the cost and weight of their system. At the same time, we continue working with more customers on developing Freeform optics for their applications and continue working on 8 large, high-opportunity applications, which are in different stages of development and qualification.

This is truly an exciting time to be working in photonics and optical solutions. We believe the application of the technologies we use will continue to grow as costs are reduced and product acceptance increases. We're really excited about the progress the company has made and the direction they're going in.

We have endured several hurdles over the past year or 2, but believes that we are on firmer footing now, and we're at the point where applications for our technology solutions are beginning to be more mainstream. I will also provide a brief update on the ongoing situation in China before making concluding remarks.

As we have mentioned before, although we have taken steps to minimize the business impact from the termination of the previous management employees and transition to new management personnel in our China subsidiary, we have experienced some short-term adverse impact on domestic sales in China and the results of operations in the 3-month period ending June 30, 2021, and the 9-month period ending March 31, 2022.

These adverse impacts have significantly declined. Yes, management anticipate that may still have some effect in the next quarters. Domestic sales in China are also being impacted by COVID-19-related shutdowns, which have not directly impacted our factory but have impacted the operations of some of our Chinese customers. Lastly, I would like to thank all LightPath employees and stakeholders who are working every day to grow the business and achieve breakthrough products and technologies.

This concludes my prepared remarks. Now I will pass the call over to Al Miranda, our CFO, to review financial results for the third quarter.

Thank you, Sam. I'd like to remind everyone that much of the information we're discussing during this call is also included in our press release issued earlier today and will be included in the 10-Q for the period. I encourage you to visit our website at lightpath.com. I will discuss some of the primary financial performance metrics and provide additional color on them to better assist investors in analyzing the company.

As a reminder, we have been significantly impacted by the transition of business conditions in China during the fourth quarter of fiscal 2021 and into the fiscal year. LightPath's third quarter financial results are also negatively impacted by expenses associated with the management employee transition in our Chinese subsidiaries, although to a lesser extent than in recent quarters.

On a consolidated basis, revenue for the third quarter of fiscal 2022 was $8.3 million compared to $10.7 million in the year ago period. Sales of infrared products were $3.7 million or 45% of the company's consolidated revenue in the third quarter of fiscal 2022. Revenue from the PMO products was $4 million or 48% of consolidated revenue.

Revenue from Specialty Products was $547,000 or 7% of total company revenue. The decrease in revenue from sales of infrared products is primarily due to a decrease in sales to customers in the industrial market and for temperature sensing applications, which peaked in demand during the third quarter of fiscal 2021.

PMO sales increased 3% in the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021. Since the drop-off of PMO sales in the fourth quarter of 2021, sales of PMO products in China have improved sequentially each quarter of fiscal 2022, driven in part by other telecommunication customers as well as an increased sales to customers in the industrial and commercial industries. Increased sales in specialty products were primarily due to NRE projects for customers in the industrial and defense industries during the third quarter of fiscal 2022.

I want to take a moment to expand on the revenue topic. As Sam alluded to earlier, revenues from China for the first 3 quarters have been recovering. However, our lack of sales growth is still related to disruptions in China. Revenue was down fiscal year-to-date versus last year year-to-date in China by $5.1 million. Outside of China, primarily in the U.S. and Europe, our sales are up by 8% or $1.6 million.

We do see a China recovery on the horizon as bookings are coming back to pre-transition levels. However, with the recent wave of COVID shutdowns, it's difficult to determine precise shipping dates, as Sam mentioned earlier. Further to the revenue discussion, we've taken a strategic approach regarding the quality of revenues. First, we started the process of sunsetting certain specialty products that are no longer part of our growth plans.

Second, we've taken a more targeted approach to annual volume contracts regarding pricing, which has had the anticipated effect of reducing volume but increasing the average selling price on the contracts and hence, our margins. Moving on to margins. I'd like to remind listeners that PMO margins are typically higher due to our molding technology and capabilities, which enable mass production and a more automated machine process.

Infrared diamond turned ones has historically have lower margins due to the extra manual production step. But with the growth in our molding technology as applied to infrared products being made from our proprietary BD6 material, the margins will increase over time from both the advantages of the material cost and using the automated molding process.

Gross margin in the third quarter of fiscal 2022 was approximately $3 million compared to approximately $3.9 million in the same period of the prior fiscal year. Gross margin as a percentage of revenue was 37% for the third quarter of fiscal 2022 compared to 36% for the same period of the prior fiscal year.

The increase in gross margin as a percentage of revenue is primarily due to product mix. Favorable product mix resulted in a slightly higher gross margins as a percentage of revenue despite the lower revenue level in the third quarter of fiscal 2022. As we transition the business to Engineered Solutions, we would expect margins to increase over time. This is due to several factors, including multiple lenses required for an assembly as Sam had describe.

Selling, general and administrative costs were approximately $2.6 million for the third quarter of fiscal '22, a decrease of approximately $187,000 or 7% compared to the same period of the prior fiscal year. Decrease in SG&A costs is primarily due to a decrease of approximately $149,000 of expenses associated with the previously described events that occurred in our Chinese subsidiary, including legal and consulting fees.

Although certain legal activities are ongoing, the related costs have leveled off and should cease by the end of this calendar year. New product development costs were approximately $590,000 in the third quarter of fiscal 2022, a decrease of approximately 50,000 or 8% as compared to the prior fiscal year. Net loss for the third quarter of fiscal 2022 was approximately $495,000 or $0.02 basic and diluted loss per share compared to $2.23 or $0.01 basic and diluted loss per share for the third quarter of fiscal 2021.

The decrease in net income for the third quarter of fiscal 2022 as compared to the same period of the prior fiscal year was primarily attributed to lower revenue and gross margin, partially offset by lower operating expenses. Additionally, we recognized $210,000 of other income in the fiscal third quarter related to the reversal of accruals following the China investigation. And we determined that a Chinese subsidiary would not be responsible for those expenses and the reversal is recognized as a gain.

We believe EBITDA is helpful for investors to better understand our underlying business operations. Our EBITDA for the 3 months ended March 31, 2022, was approximately $647,000, compared to $1.1 million for the same period of the prior fiscal year. The decrease in EBITDA in the third quarter of fiscal 2022 was primarily attributable to lower revenue and gross margin, again, partially offset by the aforementioned $210,000.

As of March 31, 2022, we had working capital of approximately $11 million in total cash and cash equivalents of approximately $5.2 million. More than 50% of our cash and cash equivalents was held by our foreign subsidiaries. Cash provided by operations is approximately $352,000 for the first 9 months of fiscal 2022 compared to approximately $3.1 million for the same period of the prior fiscal year.

The decrease in cash flows from operations in the first 9 months of fiscal 2022 is due to the decrease in net income and a decrease in accounts payable and accrued liabilities, partially offset by a reduction in inventory. We also renegotiated an amendment with BankUnited, extending our term loan until April of 2024. The extension further strengthens our intermediary financing abilities that enable us to continue along our strategic path.

Our total backlog at March 31, 2022, was approximately $19.7 million, an increase of 1% as compared to $19.5 million as of March 31, 2021. Compared to the end of fiscal 2021, our total backlog decreased by 8% during the first 9 months of fiscal 2022. The decrease in backlog during the first 9 months of fiscal 2022 is largely due to timing of the renewal of a large annual contract for infrared products.

Consistent with prior years, we received renewal of this contract in the fiscal second quarter and began shipping against that contract in the fiscal third quarter. As a reminder, it is customary for our backlog to fluctuate during the year because of the timing of bookings of orders and annual renewals from our customers. With this review, our financial highlights and recent developments discussion has concluded. I'll now turn the call over to the operator to begin the question-and-answer period.

[Operator Instruction]

And our first question will come from Gene Inger of ingerletter.com.

Sam and Al, it sounds like an interesting quarter, obviously, still in the turnaround mode. And I think the -- it looks like the SG&A were actually lower, but it also looks like unit profits dropped the debt for both PMO and infrared.

Yes. So the unit saturate all time and it's really dependent on the mix. We began to see some of the larger customers in China, especially in telecom, come back to some degree as we discussed last quarter, and those tend to be lower unit prices on them. In the infrared, it's very significantly engineered solutions and assemblies can be in hundreds of dollars sometimes where individual components can be in tens of dollars or less.

So we tend to stay away from giving too much importance to the average sale prices fluctuation since the mix of products and what we do has been varying considerably more. But yes, thanks for noticing that G&A and the FX, I think the one thing is considered, given the $8.3 million top line, the results are pretty good and the continued improvement in gross margins, even when top line hasn't grown really in that specific quarter is very encouraging.

Right. That causes me Sam to ask this. The market cap is so low, of course, there's hundreds of companies that are humbled into almost oblivion at this point. A, it looks like you'll make it through this; b, you've been pointing in the right direction, but you're trading at around 1x sales. And you would think from an investor standpoint, that's very cheap. Maybe I'm just giving an opinion. But -- and I don't know whether you actually want to eventually shop the company for a sale or some sort of a merger. But is it essentially undervalued based on even a reasonable growth?

Yes. I think, first of all, I agree with you that in my independent opinion that it's undervalued and an attractive investment the public company, we're always open for all options and we never rule out anything. We're not actively shocking the company around. We think that we are, as you said, heading in the right direction, a lot of the indications while that we're doing the right thing. Sometimes it's a matter of timing. And it happens to be that our discovery of the multiyear fest in China happened at the time where the market was valuing and so we didn't enjoy it as much of that value. And now where recovery is happening in the time where the market is down in a better market. So sometimes, it's just as simple as that.

So I guess my last question for the moment, so others could come on, it might be -- if you have a lot of experience in China, you turned around and built some big company there in -- at earlier life. And I wonder whether you envision growing China or eventually with this new focus with the Navy and so on and on Freeform optics, and I enjoyed your discussion, which is on YouTube in Washington. I wonder whether you would eventually drop the China, spin it off somehow and concentrate on the domestic scene, which seems to be doing better for the company.

Yes. Definitely, our investment approach has changed considerably in the last 2 years since I joined. We stopped investing in China even before all of those events, we revolted really all of our investments choose the Latvia operation, which serves the U.S. by being an vital facility. And now to Orlando, where we're essentially doubling our manufacturing space and bringing manufacturing back.

That said, the operation we have in China is still very important. It's a good cash generator for us. It's our core technology, which we wouldn't spin off because that would essentially include giving away the technology. But we still see it as a valuable piece of the company, just not our strategic long-term focus as much.

Do you have a timeline and I'll let you go. Do you have a timeline on when you envision the new licenses with the Navy and so on and AI and VR actually, and you talked about some of that. Give a timeline when you think this will crystallize into bookable business?

Yes. So 2 separate things, right? The Navy -- the licensing of the Navy materials, as I mentioned, really one thing we've seen from the discussions I've had in Washington and with different government officials and such is that we're really at a perfect timing from that then. The U.S. through the Defense Production Act and through the executive orders of the Biden administration on a resilient supply chain is heavily investing in developing a manufacturing base in the U.S. and accelerating readiness of new technologies, increasing local capacity and such.

So the U.S. currently imports, as I mentioned, 95% of it's germanium. That is $2.7 billion roughly of germanium a year. 1/4 of that goes into optics to around $600 million, $700 million of germanium goes into optics in the U.S. Chalcogenide is at a perfect spot to substitute that. Now we cannot -- it's not a one-to-one substitution and you will not completely eliminate germanium.

But we're definitely the best option at this point for the U.S. in terms of reducing the dependence on China and Russia for that material. So I think accelerating that is a key element of many stakeholders, including some of our prime customers who are seeking to be involved in helping us accelerate that and bring those materials to market.

We're anticipating that in the next few months, the first material might be already released. We're currently already working on prototypes, and we're working with some of the primes also on designing the material and seeing the encouraging results that we have, but it's really a key element here, I think, in much of what the U.S. is looking at.

In terms of the Freeform optics, it's a bit of a different play in the sense that this is a technology that we've already developed and matured enough now is the time for the customers to take that in and to utilize it. We've mentioned the last month that the Apollo engineering, for example, has already adopted Freeform optics into their LIDAR products.

And it looks very promising and successful. They have some very unique products in the sense of being able to very quickly monitor the location of drones or fully autonomous drones, making sure they don't collide with others and so on. And the Freeform optics are really a key element there. In other places, we've shipped prototypes already to AR companies, for example, have already our Freeform optics in prototypes.

Others are at different stages of it. LIDAR is becoming a bigger piece there, but that will take longer because most of those -- the Freeform optics is enabling the cutting-edge application to such a degree that that application needs to first be adopted and win its own commercial success before the Freeform can scale upward. That looked really encouraging.

I don't want to -- well, if you have time for one quick. You didn't give any color in your -- on 2 areas that I was interested in the past. One was lower organic satellites such as SpaceX system, which there's even talked about China wanting to intercept that and so on. And I'm wondering, speaking of intercepting, whether you're involved in that and whether you're involved with the new laser interception systems in Israel, which is infrared and laser to try to intercept enemy rockets.

Yes, obviously, as someone who grew up in Israel, and be proud of that system and seeing it. I can't comment on specific systems and technologies, of course, I can say our business with Israel has grown exponentially in the last half a year or so. And I feel very good about it. In a great part, it is because of the investments we made in the Latvia operation, enabling them to really service customers from there are far better than we could before.

We are involved in multiple lower orbiting and space projects, all the way from optical communication projects to thermal cameras and for detection cameras. Definitely, mid-wave cameras are playing a major role today in detecting supersonic missiles through lower forwarding. The government and the Pentagon has decided to readout money. Just recently, it was in the news to deploy a whole satellite network related to that. And that's a very exciting applications that we see for mid-wave.

Another place where chalcogenide glass plays a major role. It's really being a thermal and very low weight compared to alternatives makes it a great, great material for any space applications, especially lower for orbiting camera systems.

I haven't heard anything lately from you about that.

Absolutely. Yes. And we also just to close the loop on that. We have announced previously that we have gone from Space Florida from the European space agencies and a couple of other projects and such, all related to accelerating our technologies for use in space, especially all the chalcogenide materials to replace germanium and to be used in very specifically lower for orbiting satellite.

I suppose as a footnote to that, you could mention whether ISP Optics, your Latvia operation is involved with the drones that are going to Ukraine now all coming from Turkey and whether or not you see a surge in business in Europe as a result of this.

I say that we don't know where our product ends up always. I can definitely say that we proudly deliver products to multiple UAV and drone companies that hopefully made good use of it. I can say that our expansion in Latvia adding the optical coatings are making it vertically integrated and independent of U.S. manufacturing for that sense, aligns perfectly in timing to all the increases in defense budgets in Europe now and to an increase in demand that we are seeing already in terms of designing our products into defense applications.

The Latvia operation, the first thing in light of operation can also serve European defense companies now by being completely vertically integrated, having coating and assembly capabilities there, which is something that we're confident is going to deliver significant growth in Europe or in the infrared imaging.

(Operator Instructions) This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation, and you may now disconnect.