LightPath Technologies, Inc. (LPTH) Q4 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the LightPath Fiscal 2016 Fourth Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Dorothy Cipolla, CFO. Please go ahead.

Thank you and good afternoon. Welcome to LightPath Technologies' fiscal 2016 fourth quarter and full year 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 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'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 turn the call over to Dorothy for a more in-depth review of our financials. After some closing remarks, we'll open the call to your questions. Now onto my remarks. What a year it’s been. There are so many exciting things to talk about. If I had to summarize the year and our outlook it is best defined as accelerating growth. The fourth quarter of fiscal 2016 marks our sixth consecutive quarter of strong fundamental performance since we implemented a series of new growth initiatives in early 2015. Our solid performance in the fourth quarter completed a year in which we achieved substantial growth in route to setting numerous financial performance records over recent years. Here are some of the highlights from fiscal 2016 financial results. Revenue increased 26% to a record $17.3 million in fiscal 2016 from $13.7 million in fiscal 2015. Gross margin as a percent of revenue reaches record annual levels of 54%, up from 44% in 2015. Operating income of $2 million improved as compared to an operating loss of approximately $259,000 in the prior year. Net income of $1.4 million increased from a net loss of $715,000 in the prior year. EBITDA for fiscal 2016 was approximately $2.5 million, compared to a loss of approximately $144,000 in fiscal 2015. Adjusted EBITDA, which excludes the non-cash income or expense related to the change in fair value of the company's warrant liability was $2.6 million, up over 700%, as compared with $320,000 in the prior fiscal year. And our operating cash flow increased by 700% to a record $1.5 million in fiscal 2016, up from $179,000 in 2015. Early in the fiscal year, we publicly disclosed certain operating performance objectives that we felt would set the stage for the LightPath to solidify a prominent industry leading position. In terms of revenue growth, we intended to exceed the industry growth rate, which at the time was less than 10%. For fiscal 2016, I am pleased that we nearly tripled the industry growth rate with the company reporting revenues of over $17 million or 26% increase from the prior year. Strategic revenue, a subset of consolidated revenues was up 93% year-over-year, well in excess of our goal to exceed 30% growth. LightPath has continued to execute on its business plan to drive growth. In fact our revenue growth has been accelerating, improving from under 1% growth from 2013 to 2014 to 16% growth from 2014 to 2015 to 26% growth from 2015 to 2016. Another of our operating performance objectives was to deliver an adjusted EBITDA margin in excess of 13%. Adjusted EBITDA for fiscal 2016 was a record $2.6 million. Our adjusted EBITDA margin of 15% for the year was well above our goal an increase from 2.3% in the prior year. Finally, we set an objective for weighted return on assets of ROA of 12% to 15% adjusted to exclude the effects of warrant evaluations. Asset changes in the past year included a cash position that increased by 77%, an increase in receivables from higher sales in the year and an increase in inventories in anticipation of continued revenue growth from a more diversified worldwide customer base. Amid the changes to our assets and our record-setting adjusted net income of $1.5 million for the year, which is up from an adjusted net loss of $251,000 in the prior year our ROA of 15% was at the high-end of our target range. Among other operating performance measure we increased our 12 month backlog to record $6.6 million. This improvement is highly understated given our successful efforts to maximize manufacturing efficiencies and production capacity. During the past two years, we have invested in the development of new technologies and machinery, as well as moving to a larger facility in Zhenjiang China to increase manufacturing volumes and improve production yields. In fiscal 2016, we benefited from favorable trends, which resulted from the successful implementation of our organic growth strategy. Throughout the year, we experienced improvements in our sales mix and were able to increase prices as demands for our product grew, attesting to our product differentiation and technological leadership. The volume of our precision molded optic lenses produced in fiscal 2016 increased by 17% from the prior year. Our financial performance further benefited from an increase in the average price per precision molded unit up 2%. We expect continued growth in sales to be derived primarily from our specialty products and our precision molded optics product line, particularly our high volume precision molded optics or HVPMO’s sold in Asia and our infrared product line based on recent quote activity and market trends. I believe we've made a lot of progress improving our product line, manufacturing capabilities, market position, sales funnel, and outlook for growth. In the wake of this impressive performance, we are extremely excited with the pending acquisition of ISP Optics. I’d like to discuss this acquisition. We have known ISP Optics for several years. The more we were intrigued with the growth potential for our infrared products and the very large markets they address the more we wanted to place greater emphasis on this part of our business. We spent a great deal of time talking with ISP’s leadership to determine the optimal ways to penetrate the market and perhaps collaborate. We've taken a huge leap forward by moving to acquire ISP Optics. Here are some of the details, which have already been publicly disclosed. We announced on August 8, a definitive agreement to acquire ISP Optics for $18 million of which $12 million will be payable in cash with the balance in the form of a note issued to the sellers. ISP is headquartered in New York State and has major manufacturing operations in Latvia, thus giving us a strong presence in Europe, which complements our existing strengths in US and Asia. The company is a premier manufacturer of advanced infrared optical components, coatings, and optical subsystems, substantially accelerating our market share and suite of products in the infrared side of our business. Upon the closing, ISP will become a wholly-owned subsidiary of LightPath. The sub owners have agreed to the acquisition and will stay on-board for a period of time to assist with the successful transition and integration, as well as to ensure that our collective growth plans are intact. In 2015, ISP generated on a consolidated basis $12.1 million of revenue, $1.5 million of net income, and $3.3 million of adjusted earnings before interest, taxes, depreciation, and amortization or EBITDA. On our last conference call, we talked about the leverage in our model. We have benefits from some pricing power, as well as ongoing manufacturing efficiencies in the fourth quarter. When coupled with our efforts to drive margins higher, we believe the ISP acquisition provides for additional leverage opportunities. This leverage is grounded on ISPs Latvian facility and our low cost, our low overhead cost and lower manufacturing facility in China, which is roughly 35% cheaper than our former facility in that country. The new facility is running at under 60% of its capacity right now, so we have ample room for continued topline growth, as well as contribution margin expansion. From a sales and manufacturing perspective, we gain leverage, but there are also the shared public company costs over a larger base of business that will further drive our profitability and cash flow generation. More importantly however, it is that the combination of LightPath and ISP Optics combines two fast growing high-technology infrared and optical product pioneers to establish a premier global leading edge industrial technology company. We will have complementary product and manufacturing with LightPath's high volume molding technology and ISP’s high value diamond turning, coatings, and polishing capabilities. ISP's primary vertical markets are infrared lenses for sensors, military electro-optical products and infrared imaging cameras, which are all areas of focus as we continue to implement our growth strategy. The ISP business broadens LightPath's global customer base significantly with nominal overlap and expands our market reach to include major operations in Asia North America and now Europe with ISP’s Latvian operation. We believe we will be able to generate significant synergies through cross selling of products with the expanded product offerings and our greater production and assembly capabilities, as well as material processing capabilities. ISP effectively expands LightPath served available market to $1.7 billion from $800 million today. By all measures, this is expected to be a transformative acquisition that will create a global infrared and optical industry - industrial technology leader with even more enhanced growth opportunities than we’ve had in the past. Among other changes to LightPath, I’d like to acknowledge Dr. Xudong Zhu who has resigned from our Board of Directors effective September 6, 2016. Dr. Zhu is President of Pudong Science & Technology Investment, a LightPath shareholder. Dr. Zhu began serving on the Board on April 28, 2015 following Pudong’s direct investment into the company. Pudong currently owns just under 15% of our outstanding common stock. Dr Zhu is determined that he needs to devote more time to his primary business responsibilities for Pudong and his other business interest. We appreciate both his contributions at the Board level and his continued support of LightPath as we implement our growth strategy. Upon Dr. Zhu's resignation the Board will have seven directors, six of whom are independent as defined by NASDAQ listing rules. For the results we achieved in fiscal 2016 and on behalf of our Executive Management and Board of Directors I would like to acknowledge the tremendous efforts and dedication of our growing team around the world. I’ll now turn the call over to our CFO, Dorothy Cipolla, to provide additional detail on our fourth quarter and full-year results.

Thank you, Jim. First I’d like to mention that much of the information we're discussing during this call is also included in the press release issued earlier today and on Form 10-K, which we will be filing shortly. I encourage you to visit our website at lightpath.com and specifically to the section entitled Investor Relations. I’ll now review financial performance and operating detail from our fiscal 2016 fourth quarter and full year which ended on June 30. I’ll begin with a review of the fourth quarter. Revenue for the fourth quarter was $4.7 million, an increase of 5% from $4.5 million last year, which was nearly up by 15% from the third quarter. Although we have increasingly diversified revenue base, which Jim has addressed in his remarks on today's call in which we expect further diversification from the ISP acquisition, it is best to view our performance on a year-over-year periodic basis rather than on a sequential quarter basis. The fiscal 2016 fourth quarter growth is attributable to a 63% increase in sales of our high volume precision molded optics or HVPMO lenses, and an increase of more than 70% for sales of our infrared lenses and infrared non-recurring engineering products or NRE, which was offset by decreases in our low volume precision molded optics or LVPMO's in specialty products. Total precision molded optics revenues increased by 19% in the fourth quarter compared to last year. This marks the fifth consecutive quarter we have experienced year-over-year increases in sales of both our precision molded optics lines and for our infrared products. In addition to the product proof there is also the fifth sequential quarter in which our non-recurring engineering revenues showed marked improvement. It is important to note that for our non-recurring engineering work or NRE it is essentially revenue generated from engineering and technical R&D, which would otherwise the extent. So when you look at our R&D and product development expenses of about $1 million to $2 million per year the NRE work further adds to our technological leadership. Moving to our geographic revenue mix 41% was from the U.S., 33% was from Asia, 21% was from Europe, and 5% was from rest of the world. Our geographic mix have moved from 55% to 59% international sales from the third quarter last year. Adding to the transparency of our financial reporting, I’ll provide vertical market sales figures, which are further demonstrating our diversification. In the fourth quarter of fiscal 2016 vertical markets sales include 9% from telecom and wireless, 9% from medical, 35% from industrial, and 14% from government and defense sectors, and 33% from our catalogue and distribution customers. The gross margin as a percentage of revenue in the fourth quarter was 52%, compared to 47% last year. The improvement in gross margin as a percentage of sales on a quarter-over-quarter basis was driven by the increased revenue with the favorable product mix resulting in higher sales prices, leverage of our sales volume against our manufacturing overhead cost, the realization of the full benefit of our Zhenjiang facilities lower cost structure, and better yield for infrared products. As previously disclosed with the lower cost base in Zhenjiang as compared with Shanghai, we have approached a range for gross margins of high 40% to make 50%, which we believe is a normalized base. Total cost of sales was approximately $2.3 million for the fourth quarter, a decrease of approximately 111,000, compared to the same period last year. Total cost and expenses increased by approximately $254,000 compared to last year. The increase was primarily due to a 252,000 increase in professional fees and legal expenses related to the ISP acquisition. Despite the higher expenses to provide for continued and accelerated growth, total operating income for the fourth quarter of fiscal 2016 was $523,000 compared to $449,000 last year. The increase in revenues improved gross margin were partly offset by an increase in total cost and expenses. Total operating income for the fourth quarter of 2016 was $523,000, which is a 16% increase as compared to $449,000 in the last year. In the fourth quarter, we recognized non-cash expense of approximately $27,000 related to the change in the fair value of warrant liability, which were issued in the connection with our June 2012 private placement. The warrant liability has an inverted correlation to the change in price of our common shares and the assumptions on when the warrant shares will be exercised. In the prior year period, we’ve recognized non-cash expenses of approximately $839,000 related to the change of these warrants. Net income for the fourth quarter was approximately $331,000 and this includes the $27,000 non-cash expense for the change in the fair value of the warrant liability or earnings per share of $0.02 per basic and diluted share. This compares to a net loss of $367,000, which includes the $839,000 non-cash expense for the change in the fair value of the warrant or a loss per share of $0.02 per basic and diluted common share last year. We had foreign currency exchange losses in the fourth quarter of fiscal 2016 due to the changes in the value of the Chinese warrants and the amount of approximately $149,000, which had a $0.01 impact on basic and diluted earnings per share. This compares to a foreign currency exchange gain of $26,000 last year. Adjusted net income, which was adjusted for the effect of non-cash change and the fair value of the warrant liability and other non-cash item was approximately $359,000 in the fourth quarter, as compared to approximately $472,000 last year. Moving on, our adjusted earnings before interest taxes depreciation and amortization or EBITDA for the fourth quarter and this also eliminates the change in the fair value of the warrant liability was $673,000 as compared to an adjusted EBITDA of $623,000 last year. Weighted average basic shares outstanding increased to $15.6 million, compared to $15 million last year, primarily due to the shares of common stock issued under our 2014 employee stock purchase plan and exercises of stock options and warrants. I’ll now briefly review financial performance and operating details for the fiscal year, which ended in June 30. Revenue for fiscal 2016 was $17.3 million, an increase of 26% from $13.7 million last year, where the growth was attributable to increases in all of our product groups. The gross margin as a percentage of revenue in fiscal 2016 was 54%, this compares to 44% last year. The improvement in gross margin is primarily attributable to favorable product mix, resulting in higher sales prices and the leverage of the sales volume against our manufacturing overhead cost. Due to the significantly higher revenues in the year, total cost and expenses increased by approximately $1.1 million, compared to last year. The increase was primarily due to a few reasons, one being the $412,000 accrual increase for fiscal 2016 managed bonuses given the strong operating performance, a $100,000 payment and early termination fee of the sales agreement, $60,000 increase for fees related to our annual stockholders meeting and related proxy solicitation, a $334,000 increase in professional services and fees related to the annual meeting and the ISP acquisition, and $139,000 increase in other expenses. Total operating income for fiscal 2016 was $2 million, an improvement as compared to the operating loss of approximately $259,000 last year. For all of fiscal 2016 we recognized non-cash expense of approximately $52,000 related to the change in the fair value of the warrant liability issued in the connection with the June 2012 private placement. In the prior year period, we recognized a non-cash expense of approximately $464,000 related to the change of these warrants. Net income for fiscal 2016 was $1.4 million or $0.09 per basic and $0.08 per diluted common share, which includes 53,000 non-cash or $0.01 per share income related to the change in the fair value of the warrant liability. This compares to a net loss of $715,000 or $0.05 cents per basic and diluted share, which includes the $464,000 or $0.05 per share impact of the change in the value of the fair warrants for last year. We are also impacted by foreign currency exchange losses in 2016, due to recent devaluing of the Chinese warrant and the amount of approximately $370,000 which had a $0.02 per share impact on basic and earnings per share. This continues to foreign exchange income of $24,000 in the prior year. Adjusted net income, which is adjusted for the effect of the non-cash change in the fair value of the warrant liability and other non-cash items was approximately $1.5 million in fiscal 2016 compared to a loss of approximately $251,000 in fiscal 2015, an improvement of over $1.7 million. Moving on, our adjusted EBITDA for 2016, which eliminates the change in the fair value was $2.6 million as compared to adjusted EBITDA of $320,000 last year. Weighted average basic shares outstanding increased to $15.4 million in fiscal 2016, compared to $14.7 million last year due to the issuance of shares related to issuances under the 2014 employee stock purchase plan, the private placement in January 2015 was Pudong investment and shares issued with exercises of stock options and warrants. Cash and cash equivalents totaled approximately $2.9 million as of June 30, an increase of 77% from $1.6 million as of June 30 last year. Cash flow provided by operations was approximately $1.5 million for fiscal 2016, as compared to $82,000 for fiscal 2015. During the 12 months of fiscal 2016, we expanded approximately $1.1 million for capital equipment, while growing our cash balance by $1.3 million. As of June 30, the company's 12 month backlog was $6.6 million, compared to $6.5 million as of June 30 last year. With this review of our financial highlights concluded, I’ll turn the call back to the operator so we may begin the question-and-answer session.

Thank you. [Operator Instructions] Our first question comes Joe Maxa from Dougherty & Company. Please go ahead.

Thank you and congratulations on a nice quarter.

Thank you, Joe.

I wonder if you could expand a little more on the key drivers you are seeing perhaps by vertical, the strength in the quarter and then the outlook if that is expected to be maintained in 2017, on your core business I’m talking.

Yes, I think there is a few catalyst that are driving our business right now. The telecom sector which is kind of a sweet spot for us is doing very nicely and it’s being driven I think by three factors that we think will continue for the foreseeable future over the next several years and those are the Chinese investment in its infrastructure and in particular in its networks and that kind of thing is driving - some construction projects that they have reinstituted such as the expansion of the high speed rail, is driving our industrial tool volume and that’s a very nice thing. In the telecom sector you have again the Chinese, but you also have the data centre interconnect driving volume in these networks and the upgrade of the metro core of the shore haul high-speed data transmission. So I think those things are driving the telecom sector and we are seeing very nice growth in our customers and those catalysts are, from our perspective verified by the orders we see from our customers who build that type of equipments or put components into those type of networks. So, I think those are very strong drivers of our existing business and then on the infrared side we see continued adoption of commercial type applications in the infrared sector and technology developments that are continuing to drive and open that market up and we think that will continue for the foreseeable future. Things like the autonomous car and LIDAR type systems, there are sensor systems, firefighting and safety equipments are all things from a commercial perspective that are driving that market. So those factors I think are what we see driving our markets for the foreseeable future and yes I think they are going to continue for the next several years.

That’s helpful. And Jim on your, the acquisition - potential acquisition with ISP, are they seeing a similar type growth rate you are, I mean you have a pretty nice 26% growth rate, maybe give a little color on if you think that’s going to continue for you, but also curious on how ISP is doing and what’s driving their business?

Well, I think ISPs business is strong as well. They are into different kind of business, little bit different than ours, although it is very complementary. They are much more project-based in their business model. So they do, the majority of their business is driven by custom optics or particular programs and designs for specific applications and relatively high-end type product. So, I think their growth rate is in that - historically has been running 8% to 9%. We think that will continue, they've had some very nice pops in recent years that are more like, what was it, Dorothy, 15% or plus percent growth. So, we are seeing nice growth and from what we see in the forecast and stuff we expect that to continue.

And margins, your business, do you think you can maintain that say mid-50s, low-to-mid 50s range and should we assume based on your comments made on ISP for that to be a little bit higher gross margin?

Well, I think, actually LightPath’s margins are currently a little bit higher than ISP’s, but I think that has more to do with material costs and we have some very low-cost operations in China and very efficient. So, I think our gross margins are currently a little bit higher than theirs and I think that’s probably what we will see in the immediate future. As we said, we really expect our margins to run in the high 40s to low 50s. We think that’s a normalized rate and we certainly expect that to continue. ISPs margins are in the high 30s to low 40s, which is also very good margin for the type of work that they do and the amount of development work et cetera that’s associated with their products.

Okay thank you, it’s very helpful.

The next question comes from John Nobile from Taglich Brothers. Please go ahead.

Hi, good afternoon, Jim and Dorothy, and thanks for taking my questions. In regard to ISP, I just wanted to get a better understanding of your acquisition here, correct me if I'm wrong, isn’t your molded optics method, isn't that in direct competition to ISP’s diamond turning method?

Well, it depends on the product you're talking about John, but no, I would say not. I think they are totally complementary. You know there is a business of molded optics that has a lower cost structure that’s generated more towards commercial with slightly higher volumes. Where their product - and there’s also a need for turned and polished lenses as well. And the way we look at it is, it is completely complementary. It now expands our capabilities to do those types of things and expand that business, but we think it’s an additive, a scope enhancing type thing. Moving forward, we are very excited about that. But I really want to focus on our results this quarter and we will be talking more about the acquisition as we move forward here, but today's call really needs to be focused on the performance that we had in our 2016 and our fourth quarter, which we think we had a phenomenal year.

Well, no doubt about that. Actually, in regard to the quarter, the fourth quarter was very strong looking at it compared to Q1, Q2, Q3, and I look back at last year the fourth quarter was much stronger also, so it raises the question of seasonality, is there a seasonality that we could expect in the fourth quarter, I mean this is two years in a row where there was a nice jump up in the fourth quarter and if there isn't, I mean, is this a level that we should expect going forward, a revenue run rate?

Well, I think if you look at what happened in 2016, we’ve - I don't think we had a quarter below 4 million, 4.1 million for the year and so we've continued to increase the volume in our business year-over-year and quarter-over-quarter. So, I think we are reaching higher levels of business overall and I think that those types of levels are the levels that we are at. Early in the year, we put out some metrics that said we would continue to grow 12% to 15%, 12% to 16% a year for the next several years and we fully expect that level of growth to continue. We exceeded it this year, but as I said we went from 1% to 15% to 26%. So, we're having a nice run. The catalyst in the business that I talked about earlier are driving that and we continue to see those types of opportunities and the other exciting part is, Dorothy talked about the level of NRE's and stuff that we're had this year and that’s all future stuff. I mean that’s engineering work, designing products for newer applications and custom type stuff that we’ll play out in the future, some in the immediate future, some longer term, but that increase in that type of work is a good bellwether of what you can expect going forward.

Okay. And as far as seasonality, should I say that there really wasn't any seasonality?

I think you see a slight increase in our quarter. Generally, our Q3 because it has the Chinese holidays and the U.S. holiday season impacting it, tends to be a little weaker and so you get a little bump in the fourth quarter as a result of that. It is probably a carryover from some slowdown in the third quarter. But given the strong year, it’s – you kind of got, the third quarter was still pretty good even though we did see some slowing. So, I think you see a little carryover based on the holidays and those kinds of things. We lose a couple of weeks of focus in China in that October time period when they have their big holiday and so that, the whole country kind of slows down there and that we see some impact from that. Now having said that, the Chinese economy is not strong right now overall, but for us, we've had very good success this year in China and very good growth because we’ve been positioned properly and because we're picking up some business from some of the weaker players that are dropping out, so while overall people talk about the weakness in China it has slowed down quite a bit, but our business has grown in that sector and we see that continuing and partially it’s because we have high end customers and we produce quality product at great value and so we are able to pick that up.

Okay. A question for Dorothy, I think the last quarter the NOLs in China were fully depleted, so I’m just curious what to expect as the tax rate for sales in that region?

The tax rate that you should expect is 25%.

Okay. 25% for that region and just one more question in regard to the board with the Dr Zhu’s resignation, I’m curious if there’s going to be a need to replace him or is the board going to stay at the current size?

Well, we don't have any plans to add any new directors at the moment, so right now there are no plans to replace that. The board will be at seven directors with six of them on the outside as I said, outside directors and that’s sufficient for what we're doing right now, but we went through where we could add some people, we put some flexibility into the size of the board at our annual meeting last year, which is, we appreciate the shareholders doing that and we did that so that if the opportunity or the need arises that we can add those skill levels to the board and have that flexibility as we move forward here to grow the company, but for the immediate time frame we don't intend to immediately replace them.

Well alright. Well, thanks Jim and Dorothy for taking my questions. That's all I have right now. Thank you.

Thanks John.

[Operator Instructions] Next question comes from Chris [indiscernible] a Private Investor. Please go ahead.

Hello. Thank you for taking my question and congratulations on a great quarter?

Thank you very much.

So, I have a couple of questions. First, am I correct in noticing that the adjusted EBITDA and the adjusted net income are really actually still lacking about, they haven’t adjusted for about 400,000 a one-time cost, like maybe together 50,000 but the professional cost regards with acquisition and another, well kind of $50,000 of currency losses, is that correct?

No, that’s not correct. EBITDA and net income is only for the change in the fair value of the warrant.

All right, so if you want to adjust for a onetime cost than the adjusted EBITDA and the adjusted net income would be about 400,000 high, is that correct.

Yes.

Alright. So why, I mean if you are providing adjusted metrics why don't you adjust all the way, I'm just curious?

Well, I tell you, we try to be as fair as we can with the numbers and there always seems to be these recurring, non-recurring charges, so we try to be fair to what we report and give a relatively conservative base.

All right, I understand that you want to be conservative. Okay [indiscernible] backlog, you had a nice increase year-over-year, but it seems like a small decline sequentially, what is that about?

I think it is more just timing and have the orders flow and I think if you really look at, we grew our backlog while we significantly increased our shipment volume, so rather than sitting on the backlog we're pushing it out into shipments and revenue.

Okay and the kind of a relatively large increase of inventories year-over-year is that indication of higher revenues for the next quarter?

I think yes, as well as we’re growing our infrared business and that has some higher material costs associated with it, so as those materials go in to raw material and web, get a little bit of an increase there just because of the value of those materials.

Okay.

So, like a 70% increase in our infrared volumes in the course of the quarter. So that business is developing and so we will see that type of thing is the working capital requirements increase.

Okay so, can we assure that those kind of in inventories are mostly in infrared and high volume molded optic areas are really growing really fast?

Yes, I think it is quality inventory that is not, we're not growing on our obsolete inventory here and our reserves and stuff had not really increased that substantially nor do they need to.

Okay. And gross margins also increased nicely year-over-year, but also slightly lower sequentially, I thought you would have more benefit from your new Chinese facility this quarter, can you give us some more detail on that?

I think that’s just, you're going to see some quarter-to-quarter variation based on product mix. That is just a normal course of thing. So I think that is one you have to look at a little longer term given the nature of business in the quarter-to-quarter fluctuations in mix that we have, so that tends to drive that. There really aren't any yield problems or those kinds of issues that are driving our increased cost that are driving on a cost of goods basis.

Okay. And some questions about particular areas that you pointed out during last conference call, the [indiscernible] are those growing in mass production, are those selling?

Well that’s still a developing opportunity. They haven't really hit the production volumes yet, although that we are still very excited about the opportunity looking forward. They are having very good results from their test cases. So, I think that’s still a very good premise for the future.

So, are you still waiting for government approvals on that?

Well it’s not our product, I mean we are providing some components into that device for our customer. He has that product approved, so now it’s a matter of getting it moved into the various doctors and hospital, clinics and those kinds of things it just take some time and some proofs that they are doing. So, they are we are working around the world to develop those and having good success with it. So, we look forward to that being a very nice opportunity in the future.

Okay this will be good speaking as a patient as well. It’s horrible to think you are getting used [indiscernible], anyways so the HVAC you said that there is new applications for completely optical HVAC systems that instead of sensing temperature they look at the temperature of different parts of the room is on, are those things happening?

Yes, I think you are seeing the growth in the infrared sensors for those types of products, whether that be lighting control or air-conditioning control or occupancy control, heat sensors or safety equipment that’s still again a developing area, but I think you are seeing that take off and the thing that we like about those types of sensing of operations are applications is they tend to have better volume from a commercial aspect and they've had lower costs as a result of that and that's where molded infrared optics really can have a good application.

Okay. That's good to hear and I know you don't want to talk about the acquisition, but I would just like to try a couple of questions, have you decided what portion will be debt, what portion will be equity of the new offerings?

Well I think what we’ve said is, we are paying $18 million of which $12 million will be cash, $6 million will be note taken back by the sellers, beyond that we just we don't know how that mix will play out, and when we go to market we will be able to further define that and there will be more information coming out about that into the near future, so I would like to leave it at that.

Can you at least assure us shareholders that you won’t dump $12 million worth of shares by some kind of - at the market offering because I mean you have a relatively lower market cap, if you got - and relatively low volumes, I mean can we assume that if you put in an offering it will be placed by a bank and not at the market?

Well I can't tell you exactly what's going to happen, but I will tell you that we are sensitive to delusion versus debt and we're going to try and balance that as best as we can and what we think is in the best interest of our shareholders and the company, so we will do our best to make sure that we do this in the most fair and equitable way that we can accomplish it.

Okay and final question about debt, you said that it would be accretive within 12 months, is that accretive per share including any possible dilution or do you just say – do you just mean that it is accretive as to total net income?

We believe you got to profitable companies together that should make a profitable company going forward with tremendous upside potential, so we believe it’s going to - very good income going forward and the potential to be very profitable as we move forward. There’s a lot of factors that go into that so, it is a tough one, but we believe we are in good shape.

Alright, thank you and I look forward to hearing again from you about this deal. Thanks.

All right. Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to Jim Gaynor, CEO for any closing remarks.

All right thank you. In conclusion, we appreciate the support for shareholders and the dedication of our global team at LightPath. This team is expected to significantly increase upon the acquisition of ISP Optics. And with this expanded global presence, which is bolstered in scale and scope we intend to remain focused on our efforts to derive diversified revenue and 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’s 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. And thanks operator.

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