LightPath Technologies, Inc. (LPTH) Q1 2018 Earnings Report, Transcript and Summary

Good day and welcome to the LightPath Technologies Incorporated First Quarter Financial Results Conference Call. All participants will be in listen-only mode. [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 2018 first quarter financial results conference call. Our financial results press release was issued after the market closed today and posted to our corporate Web site. Today's conference call will be hosted by Mr. Jim Gaynor, President and Chief Executive Officer. 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 would be realized. In addition, we will also be making reference to certain non-Generally Accepted Accounting Principles or non-GAAP measures, for which you should refer to the appropriate disclaimers and reconciliations in our SEC filings and press releases. With that out of the way, it's 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 continued interest in LightPath. I will open with an overview of operations results, highlights and recent developments and then we will turn the call over to Dorothy for more in-depth review of our financials. Following that, we will open the call to your questions. Now on to my remarks and perspective on our fiscal 2018 first quarter. LightPath continues to make progress with the implementation strategies to deliver global, diversified growth and solid cash flow generation. Here are some of the highlights of the first quarter as compared with the year earlier period unless otherwise noted. Revenue increased 51% to $7.6 million from $5.0 million, thanks in large part to the addition of ISP. Total cost and expenses as a percentage of our revenue continue to decline improving to 41% as compared to 49%. Net income increased 56% to $218,000 from $140,000. Adjusted net income which excludes the non-cash income or expense related to the change in fair value of our warrant liability, was $169,000 as compared to $97,000. Adjusted EBITDA, which also excludes the warrant liability, was $1.2 million, up 99% from $619,000. The 12 months backlog was approximately $8.6 million as of September 30, 2017, as we continue to ship against our contract that will renew later this year. We made significant investments in our global growth initiatives and product development with capital expenditures in the quarter of $1.4 million. Cash flow provided by operations increased by 80% to $1.7 million as compared to approximately $922,000. And our strong cash balance at September 30, 2017 was $8.1 million. In continuation from last year, we delivered significant growth in key performance metrics including revenue, profitability and cash flow. These results reflect the importance of our diversification initiatives implemented over the past few years, particularly in that consolidated revenues increased amid declining sales in certain vertical market which are traditionally some of our fastest growing areas. Sales of infrared products, one of our two key product groups, increased by $3.1 million or 579% compared to last year, primarily due to the acquisition of ISP Optics Corporation in December of 2016. We believe the acquisition of ISP is a transformative event for the company, given its contributions to our consolidated financial results, which was evident in the first quarter. Longer-term, ISP bolsters our technology roadmap and market share expansion strategies. We view infrared as a key product group because of the associated long-term attributes of addressing faster growing and larger markets. For our key product groups consisting of precision molded optics and other revenue lines, we experienced lower sales primarily reflecting prior inventory build in China and the United States by specific customers in the telecommunications and data communications industry. We are in the third quarter of this inventory correction, which historically takes three to four quarters to complete. Our customers are forecasting recovery in the telecommunications and data communication industry during the second half of our fiscal 2018 as China begins investing to upgrade its wireless networks to 5G. We also see a shift from 100G to 200G speeds that is being driven by increases in video content, Internet of things, cloud computing and mobile broadband demand. Further, in 2019 and beyond the shift is expected to continue to higher speeds supported by 400G networks. Our non-recurring engineering or NRE revenue increased 95% to approximately $260,000. Included in NRE during the quarter were projects relating to new designs for a major customer for the 5G build out in China. So we are very excited by the growth potential this represents. NRE, while recorded as revenue, is essentially paid research which when combined with R&D expenses further strengthens our intellectual property. As part of our investments in global growth initiatives, R&D spending increased by 37% year-over-year by remained consistent with the fourth quarter of fiscal 2017 when we determined that our cash flow could support this level of commitment. This level of spending which is about 5% of revenue, is within our target range in where we believe is necessary to advance our technological leadership. Some of the focal areas of our product development efforts include advanced driver assistance systems or ADAS, light distance and ranging or light hour sensing, and spectrographic and fiber delivery technologies. Many of these products are being designed for higher margin applications within the automotive electronics, healthcare and defense sectors. Automotive electronics has many potential opportunities for LightPath and could play an very important role in our growth. Many of our existing products and our technologies and development for both visible light and infrared light can be applied to automotive electronics. More specific to automotive sector is the electric vehicle. There is no doubt electric vehicles will arrive and likely sooner than we anticipate, when you read the latest stories from the media. The question for us is how much more content can we pack into each vehicle. These vehicles include automobiles for personal transportation, trucks for long-haul delivery of products and forklift and other automated factory applications. Car makers are in a race to be the first in autonomous cars. To get there they will need technologies that enable cars to see the road and have other technological innovations and laser scanning sensors, cameras and night-vision. As previously discussed, we are working with a partner on an optical subsystem assembly based on our proprietary fiber delivery technology for position mapping that can be used in autonomous industrial vehicles where accuracy and calibration are of paramount concern. All of these areas apply to LightPath so we have been busy building our brand globally. To this end, other planned spending increases that you saw in the first quarter included the higher sales and marketing expense. These are costs incurred now but intended to deliver forward revenue generation as we bring our expanded products portfolio to market. As we anticipate bringing more new products to market and higher volumes for existing product lines, we have increased our capital allocation from last year. Capital expenditures for fiscal 2018 are expected to be higher in fiscal 2018 than in previous years. A majority of the spending is frontloaded which including approximately $1.4 million that we spent in the first quarter, primarily for new machines, a substantial increase in our manufacturing capacity and process improvement investments. This was up from under $400,000 in the same period in fiscal 2017. We recently completed the addition of 13,000 square foot addition of manufacturing and production space to our facility in China, including clean room areas for advanced technologies. This space increase combined with the equipment increase positions the company for growth we anticipate, as our R&D efforts move into production and the telecom business recovers. While increasing our spending in anticipation of growth in forward periods, we remain vigilant in maintaining discipline within our current operations. Our strong performance absorbed the lower than expected gross margins, resulting primarily from one time production yield shortfalls which we now been resolved, and price concessions due to competitive pressure. We expect our gross margins to benefit in subsequent periods from a correction of these shortfalls and our success in obtaining increased volumes in return for the lower pricing. Collectively, our fiscal 2018 first quarter gross profit increased substantially year-over-year although our gross margin as a percentage of revenue declined as a result of the non-systemic yield issue. We remain solidly on track for our fiscal 2018 goal of growing responsibly through the diversification of our business lines and effectively managing our cost and performance metrics. I will now turn the call over to our CFO, Dorothy Cipolla, to provide additional detail on our financial results for the first quarter of fiscal 2018.

Thank you, Jim. First, I would like to mention that much of the information we are discussing during this call is also included in the press release issued earlier today and in our quarterly report on Form 10-Q. I encourage you to visit our Web site at lightpath.com and specifically the section entitled investor relations. Now on to the results for the fiscal 2018 first quarter. Revenue for the first quarter was $7.6 million, an increase of approximately $2.6 million or 51%, as compared to $5 million in the prior year. The growth is attributable to an increase of $3.1 million or 579%, in revenues generated by infrared products, primarily attributable to ISP, and higher NRE project sales which increased by $126,000 or 95%. These increases were partially offset by a $391,000 decrease in sales of low volume precision molded optics lenses, primarily attributable to fewer sale to the telecommunications and data communications sectors, and a $39,000 decrease in sales of high volume precision molded optics lenses, primarily attributable to fewer sales of position sensor applications and industrial tools. Specialty products revenue, which is project based business and has cycles, decreased by $234,000, primarily due to the timing of orders in the defense and medical sectors. Moving to our geographic revenue mix. 40% was from the United States, 34% was from Asia, 23% was from Europe, and 3% from rest of the world. Our overall geographic mix remains fairly consistent with 60% international sales for the first quarter of this year compared to 62% for the first quarter last year. Now for our vertical markets sales review. In the first quarter we had 23% of sales from distribution and catalog; 8% from telecom and wireless; 4% from medical, 38% from industrial; 16% from instrumentation and 11% from government and defense sectors. Notable shifts in vertical market orientation included increased sales to the industrial sector for infrared products sold through ISP, more than doubling our sales for this market quarter-over-quarter, and a decrease in sales to telecom and wireless customers which decreased from 17% of sales to 8% sales quarter-over-quarter. Gross margin in the first quarter was $3.3 million, an increase of 16% as compared to $2.8 million in the prior year period. Gross margin as a percentage of revenue was 43% for the first quarter compared to 57% last year. The change in gross margin as a percentage of revenue is primarily attributable to the inclusion of revenues generated by ISP and the associated cost of sales, as well as lower yields to certain precision molded optic lenses, resulting from technical issues that had been rectified. In addition, we offered a pricing discount in connection with a large contract in exchange for increased orders from the customer. Total cost of sales was approximately $4.3 million for the first quarter, an increase of approximately $2.1 million as compared to the same period last year. The increase in total cost of sales is entirely due to the increase in volume of sales, primarily because of the acquisition of ISP. First quarter total operating costs and expenses were approximately $3.1 million, an increase of approximately $665,000 compared to last year, but slightly lower than $3.2 million in the fourth quarter. The higher operating cost and expenses from the prior year period was primarily due to an increase in the expenses of $562,000 related to the acquisition and integration of ISP, which includes the amortization of intangibles, wages, professional fees and travel expenses, and $103,000 increase in R&D expenses. In the first quarter we recognized non-cash income of approximately $48,000 related to the change in the fair value of warrants which were issued in connection with our June 2012 private placement. In the first quarter of last year, we recognized non-cash income of approximately $44,000 related to the change in the fair value of these warrants. The applicable accounting rules for the warrant liability require the recognition of either non-cash expense or non-cash income, which has a significant correlation to the change in the market value of our Class A common stock for the period being reported and the assumptions on when the warrants will be exercised. The likelihood of exercise increases as the expiration date of the warrant approaches. The warrants have a five-year life and will expire next month. The fair value is re-measured each quarterly period until the warrants are exercised or expire. Our effective tax rate for the first quarter was 21%. In the first quarter we recorded income tax expense of approximately $58,000, which is the decrease of $207,000 compared to the first quarter last year. This decrease is primarily attributable to the jurisdictional mix of income and losses, as well as some prior period adjustments recorded in the first quarter last year. We have net operating losses or NOL carry forward benefits of $84 million in the United States. The NOL does not apply to taxable income from foreign subsidiaries. Income taxes are attributable to our Chinese subsidiaries and to a lesser extent income taxes attributable to ISP’s wholly-owned subsidiary, ISP Optics Latvia. We accrue income taxes in China and Latvia which are statutory income rates of 25% and 15% respectively. Moving on to net income. For the first quarter we reported net income of $218,000, or $0.01 per basic and diluted common share, which includes a non-cash income of approximately $48,000, which had no impact on the basic and diluted common share, for the change in the fair value of the warrant liability. This compares with net income of approximately $140,000, or $0.01 per basic and diluted common share, which included non-cash income of approximately $44,000, which also had no impact on the basic and diluted common share, for the change in the fair value of the warrant liability for the same period last year. Net income for the first quarter was affected by increases in amortization of intangibles, SG&A expenses, interest expense, and R&D as compared to the prior year period. All of the amortization of intangibles and a portion of the increase in SG&A expenses during the first quarter were related to the acquisition of ISP. Adjusted net income, which is adjusted for the effect of the non-cash change in the fair value of the warrant liability, increased to approximately $169,000 in the first quarter as compared to $97,000 in the first quarter last year. Weighted average basic and diluted common shares outstanding increased to 24.2 million and 26.2 million, respectively, in the first quarter, which was up from 15.6 million and 17.2 million, respectively, in the first quarter last year. The increase was primarily due to the 8 million shares of Class A common stock issued in connection with the acquisition of ISP. Adjusted EBITDA which eliminates the non-cash income or expense related to the change in the fair value of the warrant liability was approximately $1.2 million in the first quarter, an increase of 99% as compared with approximately $619,000 for the first quarter last year. The adjusted EBITDA margin for the first quarter increased to 16%, up from 12% in the first quarter last year. Now I will discuss some balance sheet items and cash flow. Cash and cash equivalents totaled approximately $8.1 million as of September 30, 2017, which was flat with the beginning of the year despite the substantial capital investments made in the quarter to increase our manufacturing capacity. Cash flow provided by operations was approximately $1.7 million for the first quarter, compared with $922,000 last year. During the first quarter, we expended approximately $1.4 million for capital equipment as compared to $387,000 last year. The current ratio as of September 30 was 3.2 to 1, compared to 3.4 to 1 for the prior year end. Total stockholders’ equity as of September 30 was approximately $30.2 million, a 2% increase compared to approximately $29.7 million as of June 30, 2017. This difference reflects the addition of net income and to a lesser extent, issuances of Class A common stock upon the exercise of warrants and issuances related to the 2014 employee stock purchase plan. As of September 30, our 12-month backlog was $8.6 million. This backlog is almost evenly split between infrared products and optical products. With this review of our financial highlights concluded, I will turn the call back to the operator so we may begin with the question-and-answer session.

[Operator Instructions] The first question comes from Matt Koranda with ROTH Capital. Please go ahead.

This is Brad Noss on for Matt. I just wanted, if we could first start off, I know most of that infrared increase was due to ISP but did you or can you breakout what ISP contributed for the quarter?

Yes, we can. ISP revenue in the quarter was about $3.4 million.

Okay. Thanks. And then just in regards to the second half recovery that your customers are expecting in telecom, have you seen any orders or contracts or any build outs from them that lead you to have more confidence there or is that mostly based on their, just their forecasts at this point.

Well, I think there is a couple of things. I mean obviously they are all forecasting it. We do have orders from one of the major guys for new products that are aimed at to 5G network upgrade. So we know that. And we did our channel checks with 4 or 5 of the other telecom guys and they are all doing the same thing. We are all getting now orders for products that are associated with the upgrade, particularly in China. In addition to that, the Chinese government has come out and said, they are going to invest in that infrastructure for the upgrade from 3G to 5G starting in 2018 and running through 2020. So I mean all of that fits. I think in addition to that, the drives of the market that are driving telecom network expansion in terms of video content, increasing the Internet of things, mobile broadband, all those things, those drivers haven't gone away. They are still there. They are still increasing. So we believe that it will happen and we have seen -- we expect it, I guess, a slow down. And we forecasted in our internal forecasts. We got the direction right because we didn’t quite get the intensity or the magnitude of it in Q1 totally correct. So I do believe what's going to happen in fiscal '18 and which is our second half of -- is the first half of calendar '18. We will start to see that sector recover.

Okay. And then in regards to, you said especially for the Chinese market but I believe you are experiencing some choppiness in the North American telecom market. Are there any indications of a recovery there as well? Or is it going to be primarily China in the near term?

Well, I mean the majority of what we do in that market goes through China, even though some of it comes back here. Yes, we see the same thing here in North America. We haven't as much activity but we see here the same story.

Okay. Thanks. That’s helpful. And then just regarding the yield shortfalls. Can you just breakout sort of the relative impact of the yield shortfall on margin versus some of the pricing pressure that you referenced in our prepared remarks.

Yes. I think most of the margin impact was due to the yield problem. We had two major things that went on. Our tool life was shorter than we normally experience and that’s really related to two things. One being the complexity of the lenses that we ran in the quarter was a little higher. In other words what that means for tool life is, if we run a lot of prescriptions that have a steeper radius on them, tool life is always a little shorter and there seems to be more of that. The other thing was related to, over the years we have developed and continue to improve the coatings that we put on our tools that allow the glass to release from the molds. And so we have some very sophisticated targets that are used in deposition process where we apply that coating. We had to replace one of the targets. As a normal course they get consumed. When we went to replace it, the replacement target was not available when it should have been from our vendor. And to keep running we had to take a step back and use a previous target that we had available didn’t provide quite the same tool life as this newer formulation did. So that impacted us there. It's a little complicated but we have taken steps now. Right targets are in place, the right coatings are going on the tools again and won't let that situation occur again. So we will take steps to -- we are not subject to that vendors capability. The second one was a little more insidious in its presentation in that it was involved with the coating yields that we were experiencing. Normally when we have a coating failure on the anti-reflective coating, it's a big batch failure. We lose a batch, a whole bunch of [indiscernible] they want. That did not occur. What did occur was very small yield losses compared to what our normal operating situations are and it took a while to recognize it and then once we recognized it, it took a while to figure out what was going on. We determined that we had some instability in the coating chambers that was due to some overdue maintenance. It's relatively new process for us from that perspective. We have been running these machines for about four years now. And so we learned something there. That also has been rectified and so we expect those things to recover. And if I take the financial impact of those things and adjusted the gross margins for the, our gross margins go right back to where we anticipate them to be. In the core business, LightPath, that’s in the lower 50s, and consolidated it would be in the upper 40s. So that was the magnitude of it. The difference almost five or six points in gross margin for the quarter.

Okay. Thanks for the detail on that. So I mean realistically now that the changes have been made to the equipment and everything has been more or less resolved, it sounds within the quarter what we see more of a relative snapback in Q2 or is there still some of the inventory to work through that may drag a little bit through some Q2.

Well, we certainly expect to see a pretty good improvement in the gross margin in Q2. There could be a little -- in the front end of the quarter there could be a little of that inventory being worked through on the tooling. But the good news here is these are non-systemic problems and they have been fixed and so it's not anything that we expect to repeat.

Okay. Perfect. And then just in regards to, looking to backlog, if we look at the backlog being down quarter-over-quarter and sort of assume that the revenues were orders that were delivered during the quarter. I calculate new orders around $6.9 million versus Q4 of $7.2 million. But can you just talk about some of the drivers of the order decrease quarter-over-quarter and just some of the relative mix within the backlog.

Well, I think, I mean overall the backlog decrease was associated with shipping of the major contract that we are doing and that’s mostly associated with the ISP business. So I think that really accounts for it.

Okay. And is the mix of the backlog pretty representative of your current revenues so we shouldn't expect much differences in gross margin flowing through there or is there any over-represented product.

No, I don’t anticipate the mix being much of a different impact on the gross margin looking forward from here.

The next question comes from Catharine Trebnick with Dougherty. Please go ahead.

Zack Turcotte on for Catharine. Just one or two questions here. So you talked again about LiDAR as it pertains to the autonomous vehicle race and it's obviously pretty early innings in there. But could you see any impact coming from there in fiscal '18 or is that more of a long-term plan there.

I guess more of a long-term win for us. I mean the impact that we are seeing currently is in development of products. So there are paid engineering and development costs that we are sharing with the customers that we are working with. So we are developing products in partnership with them. They are footing part of the bill and so that kind of revenue we are seeing, have seen and will continue to see. And then the product type stuff I think is longer term.

Got it. And so you saw some increases vertically in medical and instrumentation, coming with the decrease in telecom. So as I turn to recovery in telecom, are there any other specific verticals you see a lot of potential in in the rest of fiscal '18.

Well, I think you know fiber delivery systems which have basically revolved around two type 2 of our products type. One being the precision molded optic lenses and the other being collimator devices, there is opportunities there. And I think the other opportunities are the normal, just new lenses that we design and ship on a continuing basis.

Got it. Last thing, I think you talked in the last quarter as well as this quarter, about accelerated sales and marketing. So I just want to know if there are any particular initiatives or direct sales things that you are doing to try to ramp your sales and marketing as you increase the spend there.

I think we are constantly pushing on our Internet type products and presence, I think is one way we are doing it. We have been going through some upgrade in terms of an organization changes within the sales force itself and we have been doing with the consolidation and integration of the two companies. There has been a significant effort put into training of the two product lines, ISP and the core business of LightPath within the existing sales force. I think we have gotten through enough of that at this point where those guys have enough knowledge now that they will start to be even more effective in promoting whichever product they were learning the most, whether they be LightPath guys learning the ISP or ISP guys learning the LightPath side of the business.

The next question comes from Gene Inger with Inger & Company. Please go ahead.

Some of the questions I had have already been answered but let me say that first of all, I think it's not only extraordinary how you and Bob Ripp turned the company around. Totally different it seems than core LightPath initially was. But your acquisition of ISP essentially did that, not just carry the company through this past quarter. In another words, you broke out the revenue growth of ISP but I don’t think you did it quarter by quarter and does this suggest if you count the problem areas in telecom and inventory cycles domestically, that you would see almost a continued exponential earnings growth.

Well, I think, as we said, it was a transformative event for the company. It does broaden our product knowledge and it puts us over half of our business looking forward and currently is in the infrared sector which we have always said is where we think the strategic growth will be. So while I see the component lens business in the precision molded optics continuing as a very strong product segment for us which has been the majority of the business historically. I see that continuing. I think where we see and expect for the growth of these from the infrared side and ISP certainly made us a full player in that space.

How did ISP do relative to the preceding quarter which you already own the company?

Well, I think if you look at -- we have operated ISP now for two full quarters -- three full quarters, I am sorry. And if you look at generally, they were running at a rate of about 2.8 million to 3 million a quarter. And since we have operated them, that revenue has been about 3.6 million to 3.9 million. So almost up 28%. From a margin point of view, they were operating on the average of about 32% gross margin and now that’s more like 38%. So I think we have been very successful with how we have taken that business and started to get it to grow and contribute on the levels that we would like in that market space.

I would like to ask you two more quick questions, if I might. One regards the discussion you just had about LiDAR. Does that involve the kind of glass that you started making a few years after some others? I think it's pronounced -- I can't pronounce it.

Actually, no. The stuff they were doing in the autonomous vehicle in the LiDAR area has more to do with fiber laser delivery sensing. So those are more collimator type products, currently. And they also involve some precision molded optics as well.

This is Devin Standard. However that chalcogenide glass will come into play with the various types of automotive night vision applications. So a variety of sensor will often be packaged together. So that’s the infrared night vision or thermal night vision capability that many of these cars will start to see. We are seeing more and more of that build out right now.

And I saw recently that General Motors made a small acquisition of a sensor company and then of course there is LiDAR which you guys know well that is increasing operations in Orlando. And I am wondering, how this affects the -- do you feel that you can scale to provide cost effectively as a smaller company, product to these OEMs, even General Motors itself, as things develop.

Well, I guess the short answer to that is, yes. I mean our business is relatively easy to scale. We have been scaling it and we can continue to do that. So as we look at the plans and the demands that we see in the forecast that we are given from these various companies that are working on these types of components for the autonomous vehicles. We have some visibility to what their expectations are and the ramps that they are looking and, Gene, I don’t see any problem with us keeping up with that type of scaling.

At the annual meeting I asked about, a question that one of our subscribers had, which was about GreatStar. And I look back at your -- and I think maybe now reading at it, it was the most important press release of the year. You did one in April talking about, it's either pronounced OLE or 'OLE', a subsidiary of GreatStar. And it said, you wrote, that your work with them will result in a development of a fiber delivery system, again for production level position mapping for mission critical applications. So that means autonomous vehicles and more. Is this the same kind of -- is that your sole or primary focus as it relates to autonomous driving and guidance because I am not sure I understand because of China, would you make there? Where a coupling system will be used and why this is a major project, I am just a little confused.

Well, I think they are one of the companies that we are working with in this space. There are others. And we are developing jointly with them, as we put out in that press release. Optical subassembly that goes into a position sensing device that they are developing. OLE is a laser measurement development company that was borne out of another company that GreatStar acquired in China. That we have done business with in industrial tool sector for many many years. They make survey equipment and those types of devices where we have been providing optics to them in the range of three quarters of a million to a million lenses a year, for those type of products. This company now is a development branch. They were acquired by GreatStar. This is a development branch for them. So they are developing a number of products. This is one of them. And we anticipate that we will be helping them from the optical side of the development work that they get involved in. Right now we are focused on this fiber laser delivery system. In the future it could involve other infrared type products that are involved in other commercial applications -- whatever they might be, but there are a number of opportunities that we are working with these guys on. I think that quite fits.

I was just trying to isolate whether your primary focus on autonomous sensors and infrared is going through China or it's going through here, because both countries will have obviously a significant focus on this in the years ahead.

Yes. I mean it's a worldwide thing and we are working with companies in North America as well, and Europe. I mean that’s one of the beauties. What we are trying to do, the optical components that go into these things, that’s the beauty of being a component manufacturer. We are trying to work with as many of these guys as possible and whoever wins, we hope that at least that we have got one or two of those guys in our sight.

Thanks very much. My general thinking is, the market cap went up to reflect somewhat the ISP contribution to the company but I am thinking the market cap is not reflecting the future of these new fields which we will be obviously ramping over time.

I think that’s an insightful observation, Gene.

The next question comes from Michael Dyett, a private investor. Please go ahead.

I just have a couple of quick questions. In terms of the capital expenditure, which you said was mainly, sort of China related, that $1.4 million. I wondered if ISP in Europe and Latvia also need something or are they really pretty set in terms of capital equipment for the near-term.

Let me correct that misconception. If I indicated that, I didn’t mean to. The capital has been spread around the entire company at that point. I will give you one example. We have doubled the diamond turning capability that we have in Riga in this period of time. We have also upgraded a lot of the metrology equipment in New York, in Riga and Orlando, as well as in China. So the whole idea that we have been trying to do with this capital investment is ensure that we have the correct capacity in the right location so that we are well positioned for the growth that we anticipate. So we have tried to -- most of this, we have been doing a lot of rearranging of equipment and upgrading of equipment associated with that, in addition to expanding the capacity for our precision molding in China.

That sounds great, at the annual meeting you mentioned that one of the takeaways looking at the acquisition was the, maybe the sales consolidation was a little quick and your remarks today sound a little more positive. And then in the past conference calls you had mentioned to me shifting more to a European sales force team. And I wondered if you could tell me just a little bit more about the sales force marketing and particularly in Europe.

I am going to start Devin to respond to that since that's his area of expertise.

Michael, so this Devin Standard. I am the Corporate Development fellow. We are going a couple of very interesting programs where we are, number one is we are working on top-grading the quality and caliber of the sales force worldwide. So we are doing a lot of training of these people. Technical training as well as salesmanship training. And that includes our distributor sales forces as well as our in-house sales forces and so this means that an in-house sales person in China, in the United States or in Europe will have had the same type of training in both the ISP product line as well as the LightPath product line. And also our distributor sales forces will have this sort of training. So we are doing -- enhancing the skill set of the people and also identifying better, higher caliber people and replacing some of the lesser caliber people with higher caliber people. So it's better people, more deeper and better training. And that’s around the entire planet.

That sounds terrific. Another quick on. So, Jim, at the last conference call you said that with the storms in Orlando, you weren't quite sure whether there were going to be any cost impact because of having to be closed down for certain period. You didn’t mention that. Does that mean that this really was inconsequential, the storm?

I believe, from our perspective, it was, yes. I mean we were very fortunate from the standpoint that we did not suffer any physical damage. The only problem we had was, here in Orlando we were without power for about five days, which was painful on a personal as well as a business point of view. But in terms of the impact, because we have these capabilities around the world, we were able to shift some business and keep the operations going from the other locations. And that was very advantageous to us and we minimized that impact. If there was a slow delivery or something that was held up because of it, it's already been rectified.

Great. Terrific. Last quick question is, you mentioned 5G, I wondered if that’s got a potential in Europe and if so whether you can do anything on that.

Well, I think we sell to the equipment providers that sell to the network providers. These guys are global companies. So wherever that’s happening, we are going to participate. Now our channel to that is primarily in Asia because that’s where most of that equipment is being built. Whether it's been done an Oclaro, or by Huawei or JS -- I should call them Lumentum now. It doesn’t matter. I mean that’s where they are doing the work. NeoPhotonics, their headquarter is in California but their major manufacturing is in Fabrinet in Thailand. So that’s where all that business from our point of view as a component supplier really goes through the Asia, but the spread it all over the world.

The next question comes from [Chris Vokosky] [ph], a private investor. Please go ahead.

I wanted to ask some questions about the capital spending. It seems both a little scary and a little exciting for investors to see you increase capital spending at a time where revenues, well, it seems you are working below capacity. Can you talk a little bit more about why you are doing this at this moment and why you wouldn’t wait until you are filling up your capacity to start capital spending? And are you spending for new capabilities that you don’t have or for more of the same capabilities that you do have and so on.

Well, I think from our perspective, and we have been successful in the past. We are trying to be proactive with the way we are growing our businesses as opposed to reactive. In our business, if you are not ready, to supply the product when the customer wants it, you are not going to get the business. So we have to be able to do it. So you got to work from a forward looking point of view from that perspective. Now, I will say that capital was split between increasing capacity for existing type businesses as well as preparing for what we think are going to be some new products and future type products that we have not yet released. So it's a mix of both. I think we are, as we said, we are spending more on R&D. Our R&D, there is a certain amount of it that is moving towards production type businesses in the very near future. And so some of that capital is associated with that. We have talked a lot about assembly work for more than a couple of quarters now that that’s one of the areas that we want to expand. So some of that capital is targeted towards that which is for new types of business for us. There are some other product lines that we see opportunity in that we are expanding, and then there is the precision molded optic business which is our core business today. Whether that is in the infrared side or on the visible side of our business, and some of that capital is targeted there. As well as, upgrading some of the equipment that we have been using for the last 20 years. So there was a piece of capital that was associated with replacing equipment that had reached, more than reached the end of its life.

All right. And then on the small price concession that you did. Am I understanding you correctly that it is a small price concession for higher volume and higher volume is still to come in the current quarter two.

Yes. I think if we are going to give up price, it's only fair to expect something in return. So when we get into those negotiations, we work very hard to say, okay, we can lower our price but we need a bigger piece of your business. And we have been successful with that strategy with our customers multiple times here. And, yes, some of it is shorter term and some of it has yet to be realized in terms of the volumes that are coming. But I think, so we will see that in Q2 and Q3. As we move forward, we will see those volumes increase as a result of those price impacts. We are in a competitive business. We compete, in many cases, with a lot of Chinese companies which have very aggressive pricing. We are able to do that because in part we are a Chinese company and so we are able to go head to head with those guys, but those result sometimes in lower prices and the prices have to -- you see the pricing effect before you see the volume effect, in some cases. But we are very sticky about -- okay, if we are going to lower our prices, we want more of your business. And Devin is reminding me that’s one of the reasons that we are moving, trying to move up the food chain into the value added, more value added work, more assembly type work.

The next question comes from Shawn Boyd with Next Mark Capital. Please go ahead.

Jim, the first thing I wanted to hit here. Given the weakness you are seeing from telecom and wireless and the comments about a recovery not hitting until March and June quarters. Should we expect to December to be fairly flat with September?

I think with telecom it's always hard to predict Shawn but as I said, this thing is being driven by some inventories that got built up ahead of what they were doing, particularly in China and U.S. Historically, I think we see that that usually takes three to four quarters. We are currently in the third quarter. This current quarter is the third quarter of that recovery. So we could see another quarter of weaker telecom type business, probably not weaker than we saw in this previous quarter but it could be at the same level. And then we will start to see it increase. We are encouraged from the standpoint that we are seeing a lot of new projects from these telecom guys that, as I said, are associated with the upgrade to this 5G network, as well as more network type work on existing technology, just because of ever increasing demand for more bandwidth and faster speeds.

Got it. And not to split hairs, but September quarter is the third quarter or the December quarter is the third quarter?

Remember, we are currently operating in our second quarter, our fiscal second quarter, right. So first quarter, second quarter calendar of 2018, by second quarter of calendar 2018, we expect to see some increase of that volume, which is one quarter removed from now. I think I did that right. So I mean -- I get confused when I am talking between calendar and fiscal sometimes but.

No. Jim, I am sorry, I was referring to just your analogy of being in the third quarter of the telecom slowdown. The third quarter being right here in the December quarter.

Correct. That is correct.

Okay. Okay. Very helpful. And then going from December quarter to March. Often times the telecom equipment, especially the optical guys have to kind of give up price concessions to the carriers. Do you see that much in your business or is that not really something to worry too much about?

Well, we don’t really worry too much about that. That’s couple of steps removed from where we are. I mean like any other business, these guys are always after a lower prices and we have been very successful from the standpoint of being able to maintain our pricing up until recently with these guys. And it's kind of like, particularly in Asia, we have almost been a victim of our own success. As the Chinese economy has been very slow, we are seeing some pricing from competitors that we haven't seen for a while. Guys like Kyocera, who have been busy doing other things but that business went away, they looked at LightPath and said, these guys are doing really well so maybe we ought to look at their market and they came in very aggressively. So that’s the kind of things that we are up against right now. But, again, so we are able to do it. We are able to get priced concessions and still maintain good margins and because of our relationships with these guys we have been able to increase our share of their business as a result.

I got it. Very good. And just in terms of the comments about the recovery in the first half of calendar 2018. You are basing that just on your experience in these cycles in the past and how long they have taken as opposed to any solid orders in hand. Is that correct?

It's based on that experience. It's based on what we are being told by our direct customers and it's based on what I think is even more important, the Chinese government saying they are going to start investing, starting at that period of time in this upgrade. And then the real proof has been the NREs and new lens developments that we have been asked to do by these equipment guys. So they are aggressively designing stuff for this 5G upgrade. So they all believe it's going to happen and they are putting their money where their mouth is at this point.

Got it. And Jim, just kind of bigger picture here. Last quarter I think we talked about 20% organic growth for the full year, fiscal '18. Given the kind of slow start to the year here, do we need to temper that down at this point or do you think that you kind of can still make that up in the back half of the fiscal year and still hit that 20% organic growth bogie.

Well, I think the back half of the year is going to be much stronger than the first half and I have always been saying that our growth projections have been around -- have been 20%, plus or minus 3% to 5%. So I think we can hit within that range of 15% to 20%.

This concludes our question-and-answer session. I would 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 and expanding team at LightPath. With our strength and presence around the world, we remain focused on our efforts to drive top line, bottom line and cash flow growth. We are very excited about our growth prospects and will be sharing or story with current followers and prospective shareholders next month at the 10th Annual LD Micro Event, Investor Conference, in Los Angeles. Thanks again for participating on today's conference call. We look forward to speaking with you next quarter.

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