LightPath Technologies, Inc. (LPTH) Q2 2018 Earnings Report, Transcript and Summary

Good day and welcome to the LightPath Technologies’ Second Quarter 2018 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] Please also note today’s event is being recorded. I would now like to turn the conference over to Dorothy Cipolla, LightPath CFO. Please go ahead.

Thank you and good afternoon. Welcome to LightPath Technologies Fiscal 2018 second quarter financial results conference call. Our financial results press release was issued after the market closed today and posted to our corporate website. 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 make a 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 now my pleasure to introduce Mr. Jim Gaynor, President and CEO of LightPath.

Thank you, Dorothy, and welcome to everyone who has joined us on the call today. We appreciate your interest in LightPath. I will open with an overview of operational results, highlights and recent developments and then we will turn the call over to Dorothy for more in-depth review of our financials. Following that, we will open the call to your questions. Now on to my remarks and perspectives on our fiscal 2018 second quarter. The headlining numbers are strong and we showed improvement in several areas sequentially from the first quarter of fiscal 2018. And our LightPath management views the second quarter results as mixed. With our overall long-term objectives remaining constant in delivering global diversified growth and solid cash flow generation, here are some of the highlights of the second quarter, which reflect our overall positive but mixed results for this past quarter. Compared to the fiscal 2018 first quarter, our second quarter precision molded optics or PMO business increased 3% and our infrared business increased 12%. Total revenue for the second quarter of fiscal 201 increased to $8.4 million, up 42% as compared to the $5.9 million for the second quarter of fiscal 2017 and 10% from the $7.6 million in the first quarter of fiscal 2018. Total operating cost and expenses as a percentage of revenue was 36% in the second quarter of fiscal 2018, an improvement from the 41% for the first quarter of fiscal 2018, reflecting the continued leverage of our overhead as we increase our volume. Adjusted net income for the second quarter of fiscal 2018, which excludes the non-cash income or expense related to the change in the fair value of the Company’s June 2012 warrant liability was $666,000 as compared to $851,000 for the second quarter of fiscal 2017 and $169,000 in the first quarter of fiscal 2018. The good news here is that the warrants have all expired or been exercised now. So we’re done with them. Adjusted EBITDA, which also excludes the non-cash income or expense related to the change in the fair value of the warrant liability, was $1.5 million in the second quarter of fiscal 2018, an increase of 9% as compared with $1.4 million in the second quarter of fiscal 2017 and up 21% from the $1.2 million in the first quarter of fiscal 2018. The Company’s 12-month backlog was $12.3 million at December 31, 2017, an increase of 43% from $8.6 million at September 30, 2017, and up 32% from $9.33 million at June 30, 2017. This is a great improvement and in line with what we have been forecasting and supports the capital investments that we have been making. We have invested approximately $1.9 million in the first half of fiscal 2018 in global growth initiatives and product development and we ended the quarter with a strong cash balance of $7.7 million. Also significance into our benefit, subsequent to the end of the fiscal 2018 second quarter, debt was reduced by $3.3 million or 32% through a debt restructuring and minimal use of cash on hand. I’ll elaborate on this in a few minutes. As noted, we made considerable investments in our platform for growth. Despite softness in certain sectors including the telecom and datacom space, which has slowed our growth during the past few quarters, there were signs of substantial market expansion as demand and technological creativity continues to evolve in the favor of products that we make. To take advantage of this, we have made investments to remain at the forefront of this technological evolution, added staff to position us with adequate sales, engineering and customer support and increased our production capacity. Through these recent investments, our consolidated production capacity increased by approximately 60% depending on product mix to support planned growth in infrared and specialty products including light distance and ranging or LIDAR applications and the 5G network conversion. This means that with minimal staffing adjustments, we can continue our significant growth. We are better positioned than ever to advance up the value change from a component supplier to provider of assemblies. As such there remain significant operating leverage in our model, which gets us excited and validates our strategic imperative and the investments being made in about a growth platform is going to industry events such as the annual CES show in Las Vegas last month. In the automotive section alone there were job dropping displays of autonomous vehicles, driver system like automotive electronics and safety features. Every single one of these applications requires sensory equipment, requiring infrared or visible light optical technologies that we now make. And likely will make better than anyone else in the world. We’ve only begun to scratch the surface globally. On other fronts, we see recent telecom and datacom weakness nearing an end as 5G network upgrades are being implemented by carriers domestically and globally. We continue to be engaged with most of the major OEM optical network equipment suppliers around the world. We expect recovery of the telecommunication industry to increase our revenues. The majority of our second quarter 2018 top line growth, however, reflects our drive towards diversification into the infrared side of our business where we made a transformational acquisition of ISP Optics Corporation in December 2016. The infrared product represented $4.3 million in the second quarter of fiscal 2018 revenues, primarily attributable to ISP, which was up nearly fourfold from the prior year when ISP was only included for a 10 day period following the acquisition. During the fiscal 2018 second quarter, we celebrated the one-year anniversary of the ISP acquisition. Significant progress has been made in the past year for our ISP subsidiary including taking steps necessary to bring it closer to LightPath model of leveraging proprietary technologies including driving production cost down in excess of price reduction and increasing production volumes and capabilities in order to drive sales growth as new market opportunities are accessed with our lower price points. This process was executed as part of the first transition in the company following my appointment to CEO in 2008. At that time, LightPath was producing about 200,000 optical lenses per year at an average cost between $7 and $10 per lense. We essentially had this single product group and address the limited number of vertical end markets. Today, for our optical lens production alone, which does not include the entire infrared side of our house, we are producing just under 3 million lenders annually with a significantly lower average cost. In turn, we have opened up many new market operations have been exposed to customers around the world and now have a profitable company and now we have added a tremendous complementary business without infrared capabilities. Further to our infrared business, we announced that our ISP subsidiary was awarded a $5 million contract after winning a competitive bidding process. This was an existing customer put the contract up for bid where we believe we had to compete against companies who sold value proposition was based on price. Our ability to competivetively price and our technological superiority secured the contract win. We acquired an ISP to broaden our product and customer base, which in turn would boaster our bookings and revenues. This large infrared award in the second quarter provides evidence of our ability to increase bookings. An unanticipated but welcome benefit is that LightPath is booking more annuity contracts, which we believe will reduce backlog volatility. One of our goals is to have more assured current quarter bookings that will drive our revenues each quarter. To that end, we have recently booked over $7 million of orders with nine different customers that are longer-term orders. The Company’s 12-month backlog at the end of fiscal 2018 second quarter increased to $12.3 million, up 43% from the previous quarter. We see tremendous opportunity ahead. Consistent with the first quarter and in light of our anticipated order flow as well as market demand, we continue to invest in global growth initiatives including capacity expansion and increase spending on research and product development. We invested approximately $500,000 in new equipment in the second quarter. Capital expenditures for the first half of fiscal 2018 was $1.9 million, more than double as compared with the first half of the prior year. Earlier, I mentioned the Company’s consolidated production capacity increase, but research and development has also been a priority as we increased spending by 54%, for the same quarter as of last year. We now have 43 engineers worldwide out of a total workforce of nearly 325. Our team is focused on the burgeoning opportunities ranging from LIDAR to autonomous vehicles to variable and recreational electronics to 5G networking all of, which require light based or infrared capabilities. Channel checks from around the world confirm that we are in the early stages of a secular trend for sensory technologies. From optical to infrared products, LightPath has taken a necessary steps to achieve exponential growth with best-in-class products and manufacturing and customer support around the world. During the second quarter, we remain vigilant in maintaining our financial health. Cash at the end of the second quarter was $7.7 million only marginally lower than the $8.1 million at the start of the fiscal year. As I mentioned earlier, subsequent to the end of the second quarter our debt was reduced by $3.3 million or 32% through a debt restructuring and minimal use of our strong cash position. This restructuring eliminated $5.7 million in principal debt plus amortized interest to date from the sellers note associated with the acquisition of ISP. In exchange, for 967,208 shares of the Company’s common stock and approximately $3.5 million in cash. The cash used for the elimination of the sellers note included approximately $600,000 from cash on hand and $2.9 million secured from an increase in refinancing of the Company’s credit facilities. These developments further strengthen our balance sheet and improve our cash flow with the improvement in earnings given the reduced debt servicing and eliminates the overhang of the balloon payment. And by the way, the lower interest rate will improve earnings per share offsetting any dilution from the issued stock. The fiscal 2018 second quarter represents a pivotal period in which we mark strengthened – markedly strengthened our global presence from a product development and capacity standpoint while bolstering our financial position subsequent to the end of the period. Along with all warrant conversions and elimination of warrant liability exposure, which distorted our quarterly financial performance, we are energized to embark on our mission to develop top line growth and enjoy the benefits from the leverage in our operating model. I’ll now turn the call over to our CFO, Dorothy Cipolla to provide additional detail on our financial results for the second quarter of fiscal 2018.

Thank you, Jim. First, I’d like to mention that most of the information we’re 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 website at lightpath.com, and specifically, the section titled Investor Relations. Within our 10-Q, we provide information pertaining to the new Tax Cuts and Jobs Act, which I will summarize now as it has been a topical subject in earnings reporting this season. As you know in December of 2017, the U.S. government enacted new tax regulations. Among other things, it will have a specific implications to LightPath the 2017 act changes U.S. corporate tax rate, generally reduces the company’s ability to utilize accumulative net operating losses and requires the calculation of a one-time transition tax on certain foreign earnings and profits or E&P that had not been previously repatriated. In addition, the 2017 Act impacts a company’s estimates of its deferred tax assets and liabilities. Pursuant to U.S. GAAP, changes in tax rates and tax laws are accounted for in the period of enactment, and the resulting effects are recorded as discrete components of the income tax provision related to continuing operations in the same period. We’re currently in the early stages of evaluating impacts of the 2017 act on our financial statements. Based on our initial investments to date, we expect the one-time transition tax on certain foreign E&P to have a minimal impact on us as we anticipate that will be able to utilize our existing net operating losses, which were $84 million at December 31, 2017. And this will substantially offset any taxes payable on foreign E&P. Additionally, we expect significant adjustments to our gross deferred tax assets and liabilities. However, we also expects to record a corresponding offset to our estimated full valuation allowance against our net deferred tax assets, which should result in minimal net effect to our provision for income taxes. Now, on to the result for the fiscal 2018 second quarter. Revenue for the second quarter was approximately $8.4 million, an increase of approximately $2.5 million, or 42%, as compared to $5.9 million in the prior year period and up 10% from $7.6 million in the first quarter of this year. The growth is attributable to an increase of $3.4 million or 378%, in revenues generated by infrared products, primarily attributable to ISP. This increase was partially offset by a $745,000 decrease in sales of high volume precision molded optics lenses, and a $200,000 decrease in sales of low volume precision molded optics lenses. The reduced PMO sales was largely due to softness in the telecommunications and data communications sectors. Moving to our geographic revenue mix. 45% was from U.S.; 26% was from Asia; 27% was from Europe; and 11% was from rest of the world. Our overall geographic mix remains fairly consistent with approximately 55% international sales for the second quarter, this compares to 60% for the first quarter of this year and also compares to 64% in the second quarter of last year. Now for our vertical markets sales review. In the second quarter, we had 18% of sales from distribution and catalog; 8% from telecom and wireless; 6% from medical, 39% from industrial; 4% from instrumentation and 14% 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 $3.5 million, an increase of 7% as compared to $3.3 million in the prior year. Gross margin as a percentage of revenue was 42% for the second quarter compared to 56% for the second quarter last year. The change in gross margin as a percentage of revenue is primarily attributable to the inclusion of revenues generated by ISP and their associated cost of sales. In addition, we offered a pricing discount in connection with a large contract in exchange for increased orders from the customer. The increased orders have reflected in a significant jump in our backlog from the end of the first quarter to the end of the second quarter, which I will address further in my comments. Total cost of sales was approximately $4.8 million for the second quarter, an increase of approximately $2.3 million as compared to the same period last year. The increase in total cost of sales is primarily due to the increase in volume of sales, which is mostly driven by the acquisition of ISP. Second quarter total operating costs and expenses were approximately $3 million, an increase of approximately $1.1 million compared to last year, but slightly lower than $3.1 million in the first quarter of this year and $3.2 million in the fourth quarter of last year. Nearly half of the increase in operating cost and expenses as compared to the prior-year period was due to the acquisition of ISP, including the amortization of intangibles. Overall, changes in second quarter fiscal 2018 operating cost and expenses were primarily due to $380,000 increase in wages, a $140,000 increase in IT services and consulting, $130,000 increase in travel expenses and $73,000 increase in professional fees, which were partially offset by $125,000 decrease in expenses related to the acquisition of ISP, which is incurred during the second quarter of last year. In the second quarter, we recognized non-cash expense of approximately $243,000 related to the change in the fair value of warrants, which were issued in connection with the June 2012 private placement. In the second quarter of last year, we recognized non-cash income of approximately $247,000 related to the change in the fair value of these warrants. The applicable accounting rules for the warrant liability requires the recognition of either non-cash expense or non-cash income, which had 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 would be exercised. The likelihood of exercise increases as the expiration date of the warrant approached. The warrants have a five year life that expired on December 11, 2017. The fair value was remeasured each reporting period until the warrants are exercised or expired. There are no outstanding warrants and no remaining warrant liabilities as of December 31, 2017, and as such, we will no longer be subject to non-cash expense or income in connection with warrants. During the second quarter, the company recorded an income tax benefit of approximately $194,000 compared to income tax expense of approximately $241,000 for the second quarter last year. The decrease in tax expense and the effective income tax rate were primarily attributable to the mix of taxable income losses generated in the company’s various tax jurisdictions. During the second quarter, the statutory tax rate applicable to LightPath, Zhenjiang facility was lowered from 25% to 15% in accordance with an incentive program for technology companies. The lower rate applies to the 2017 tax year, beginning January 1, 2017. Accordingly, the Company recorded a tax benefit during the second quarter of fiscal 2018 related to this retroactive rate change. These changes are outside of the anticipated impact of the U.S. tax reform as I discussed earlier in my remarks. Moving on to net income in the second quarter, we reported net income of $423,000, or $0.02 per basic and diluted common share, which includes a non-cash expense of approximately $243,000, and the impact of $0.01 per basic and diluted share from the warrant liability. And a $194,000 or just under $0.01 per basic and diluted share from the overseas income tax benefit adjustment. This compares with net income of approximately $1.1 million or $0.07 per basic and $0.06 per diluted common share, which includes non-cash income of approximately $240,000 or $0.01 per basic and diluted common share for the change in the fair value of the warrant liability for last year. Net income for the second quarter was also affected by increases as compared to the prior-year period in the following: Amortization of intangibles, SG&A expenses, interest expense, new product development cost. All of the amortization intangibles and a portion of the increase in SG&A expenses during the second quarter 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 was $666,000 in the second quarter, as compared to $851,000 in the second quarter of last year. Weighted average basic and diluted common shares outstanding increased to 24.5 million and 26.4 million, respectively, in the second quarter, which was up from 16.5 million and 17.9 million, respectively, last year. The increase was primarily due to 8 million shares of Class A common stock issued in connection with the acquisition of ISP, as well as shares of Class A common stock issued under the 2014 Employee Stock Purchase Plan, and shares of Class A common stock issued as a result of the exercises of stock options and warrants. EBITDA for the second quarter was $1.2 million compared to $1.6 million in the second quarter of last year. The difference in EBITDA between periods was principally caused by a $490,000 claim related to the fair value of the June, 2012 warrant liability, which went from non-cash income in last year to non-cash expense in the second quarter this year. The second quarter results were also impacted by increased SG&A expenses associated with the acquisition of ISP, partially offset by increased revenues in gross margins. Adjusted EBITDA, which eliminates the non-cash income or expense related to warrant liability, was $1.5 million in the second quarter, an increase of 9%, as compared to $1.4 million for last year. Now, we will discuss some balance sheet items and cash flow. Cash and cash equivalents totaled approximately $7.7 million as of December 31, which was slightly lower than $8.1 million balance as of the previous quarter and also at the beginning of the fiscal year. This is despite the substantial capital investments that Jim mentioned. Cash flow provided by operations was $1.6 million for the first half of fiscal 2018, compared with $1.5 million for the prior year period. During the first half of fiscal 2018, the Company expended approximately $1.9 million for capital equipment, as compared to $873,000 last year. The current ratio as of December 31 was 3.9 to 1 compared to 3.2 to 1 at September 30 and 3.4 to 1 for the prior year end. Total stockholders’ equity as of December 31 was approximately $32.3 million an increase from $30.2 million at the end of the first quarter, and $29.7 million as of June 30. This difference reflects the addition of net income and to the lesser extent, issuances of Class A common stock upon the exercise of warrants and options and issuances related to the 2014 Employee Stock Purchase Plan. As of December 31, LightPath’s 12-month backlog increased 32% to $12.3 million, as compared to $8.6 million at September 30, and $9.3 million at June 30, which reflects the booking of a large annual contract to be shipped over the next 12 months. The current backlog is comprised of approximately 60% for infrared product orders and 40% for optical products orders. With this review of our financial highlights concluded, I will turn the call back to the operator so we may begin the question-and-answer session.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Matt Koranda with ROTH Capital. Please go ahead.

Hey guys, good afternoon. Maybe just a housekeeping. I want to start how much PMO infrared revenue was the there during the quarter versus diamond turned? I’m just trying to get a sense for sort of organic infrared growth through molded optical product versus ISP contribution.

Yes. The turned infrared was $4 million.

Got it. $4 million turned, okay. And then just in terms of the telecom end market softness I think sort of well understood there during the quarter – but could you help us out with the outlook and the prepared remarks I think you mentioned some improvements around 5G deployment but wanted to get a sense for essentially how long the current softness persists? When we see that pick up really flowing through the P&L for you guys? Got to be as soon as the March quarter or are we looking probably March, June and September?

Well, I would say Matt, it’s a really tough question to answer in terms of the timing if that occurs. I don’t – I mean I think we have talked previously that we would see it in the second half of 2018 but it looks like it’s still weak and we may not see it at least in our third quarter, we may start to see some in the fourth but it looks like it’s pushing to the right.

Got it, okay. And I guess last time on the call in November, you guys talked about having decent visibility into the 5G build out in China, that’s maybe changed a little bit since we last heard from you?

Well, I think we’re still seeing the activity for 5G. The number of lenses are – designs are continuing. I think we’ll start to see some of those moving towards production levels in these months but trying to figure out the intensity of that is pretty difficult at this point. But the major guys are still moving towards that. We’ve seen more announcements from the service providers concerning that they’re going to implement 5G over the next year or so. So – and since we are in the front-end equipment, it’s required for that as that starts to take all will be in the front end of that change.

Got it. Okay, that’s helpful. And then in the backlog, if I strip out the $5 million order for thermal sites during the quarter, it looks like pretty strong underlying growth in bookings maybe as much as 40% over last year. So what – help us with sort of what’s driving that strength in that underlying new order rate?

I think there’s strength in the infrared segment of the business and the turned lenses. We see that business in the industrial sector continuing to strengthen. We have seen some parts in the medical side and instrumentation. And – so I think that’s where the major drivers are in that industrial sector.

Okay. And then some examples would be helpful when you guys mentioned annuity type contracts and longer-term orders. Could you help us understand just maybe an example in terms of end markets solution they’re providing? And then what is the duration like average for those orders when you say long-term, do you mean a year? Do you mean further out than a year?

I think most of them are in the 6-month to 12-month frame, I mean there’s a few that are three-month type orders that we’re seeing. And that’s really that as opposed to the turns business that we have where we book and shipped within the same quarter. So what we’re trying to do is get a longer-term view in more visibility and fill the quarter up on a higher percentage of the quarter that we don’t have to turn in the same quarter. And so we’re seeing those kinds of – that kind of business, so these are typically six figure type orders that are moving through the system now, that are anywhere from 3 months to 12 months in duration.

Got it. And in terms of end markets, where those are coming from us?

Well, a lot of them are in the infrared’s sector, firefighting type equipment. We are seeing more in the – what we call aiming lenses for binoculars and then there is the mobility side of it where we’re seeing orders associated with the sensing technology.

Okay. Maybe that’s a good transition to a mobility question. So is there a way to quantify Jim like the percent of the major LIDAR hardware providers that you’re supplying currently for either on road or non-on road applications.

I don’t know if I can give you a percent because I really don’t know how many of them are out there. But we’re dealing with six different companies I think at this point that we feel we have pretty good product technology and pretty good shot at continuing on.

And that’s on road or is that both on road and further industrial applications?

It's both, I mean as I’ve said, several times, I’m more excited about the industrial applications because I think they’ll come quicker and they have fewer hurdles to overcome but these are involved with both and if there is some in the agricultural side as well. So it looks like kind of previously into the industrial side, so that kind of stuff.

Got it. On margins, this quarter – I guess was there any residual weakness from the tooling life or coding chamber issues that you saw during the first quarter? Or was the low 40% sort of a mix issue only? I know you did call out I guess for pricing discount as well in that large ISP contract. So help us understand the – sort of the moving pieces to gross margins this quarter and then how do we sort of think about it on a go forward basis? Does that – I guess does that pricing give back spill further into the second half? Or should we be kind of looking at margins firming up and coming up from this low 40% level?

Well, I think first of all, the issues that we had in the first quarter have been resolved and I don’t think they were the contributors to the margin in the second quarter. What we saw really driving the margin in the second quarter were two things. There isn’t a price mix issue with the contract as we mentioned when we had the lower some of that price and we haven’t fully recovered the margins that we will. There are some actions underway to do that. And then the second part was the weakness in telecom and the impact – the volume impact there that also impacted margin as we had to take some lower price business in that sector as well. So those were really the drivers. It’s really a pricing type issue, which I think as we implement some of the actions that we are taking in terms of cost reductions, in terms of how we’re – where we’re producing product and how we’re coding it where we cover the majority of that that margin I think over the next couple of quarters.

Does the margin recovery I guess you’re alluding to maybe low cost country production? Is that the majority of the action you take to sort of combat the pricing give back? Or are there other items that you could kind of highlight for us?

Well, I think that’s the majority of it, but some of this capital that we spend has been to realign capacities into our lower cost geographies and to take advantage of that. So we’re still in the process of getting the processes qualified and set up, I think over the next six weeks to eight weeks, we’ll start to see the benefit of those changes.

Got it. Maybe just one more, then I’ll pass it over, in terms of CapEx, I think it was about $500,000 for the quarter. I know it was sort of an elevated rate for some of the capacity expansion issues you guys had in Q1? Is that sort of the rate it is for the remainder of the year, the $500,000, sort of gets us through, the rest of the year and just a little color there would be helpful?

Yes. I think we’re trying to – based on what telecom is doing and the impact of that resonate will probably throttle back a little bit on capital investment, moving into the next couple of quarters. So I think it will probably be slightly less than that unless we have some specific event that we have to take advantage of. So I mean I’m trying to – we’re trying to manage it down until we see the whites of the eyes of the revenue growing at the proper rate.

Got it. Guys, thanks. So I jump back in queue.

Our next question comes from Zack Turcotte of Dougherty. Please go ahead.

Hi guys, Zack on for Catharine here. Just a couple of things, sort of a follow-up on the telecom. You mentioned that HVPMO and LVPMO are both down year-over-year I believe it was primarily attributable to the telecom softness. I’m just wondering kind of how impactful the telecom weakness is on the PMO business? So if you see it continued – I know you just touched on it moving outward as far as the bounce back we see it continued to be soft in Q3. So we continue to see PMO trending downward as well and ISP still driving the revenue.

Well, I mean I think this quarter versus the future quarters were probably in the trench and at this point it should recover from here? I don’t think it will get weaker than we have, but it maybe a little longer before it starts to get stronger.

Okay. And then I think you’re touching on LIDAR before, and appreciate I might asked this last time as well, just the potential applications in autonomous vehicles and that’s really a 2019 kind of objective there mostly correct?

I think that’s probably true given where the state of the developments and how those things will progress. It takes some time, but yes, I think that’s something we should start to see in increasing business in there in 2019 and 2020.

Great. And then just kind of a from a modeling perspective, for the last few quarters, you had some kind of ramped up sales and marketing to bring more products to market quicker and whatnot. So it’s been pretty flat as far total sales general and administrative for the last few quarters, should this continue to trend flat or go back to levels that we saw in 2016?

I think it will stay probably pretty flat. I don’t see it going back to 2016 levels. No.

All right, thank you.

Our next question comes from Gene Inger of Inger Letter. Please go ahead.

Hi, Jim and Dorothy. In any event guys, the quarter I think was a little stronger than maybe you are giving a credit for. I don’t know, but of course, your guidance previously was, we would see a couple of quarters next until benefits in telecom started to show up in China and so on. And now you’re suggesting that ultimately that will probably be beyond original expectations as more companies have announced 5G. What I’m curious about is, you’ve made a fair amount of expansions in capacity in apparently New York as well as well as Latvia, Orlando and China and I doubt you would do this without expectation of growth. Obviously, you have the expectations but you’re also hiring. So I wondering if you can put the two together and being intentionally conservative in expectations? Or do you think you’ve expanded prematurely?

Well, I think we see tremendous opportunity in front of us and we’re trying to position the company for growth in areas other than telecom. I mean telecom is great business when it’s here and it will be able to support that at whatever level it ramps to. So that’s fine but as I said, we’re really focused on the infrared side of the business and establishing where we think the strategic growth will be coming in that. And in that area, the sensing technologies, those kinds of things where we are seeing the growth are the anticipated growth. So I think we’re moving more in that direction and the types of investments that we’ve been making are much more geared to that side of the business than the historical legacy business that we’ve had in the core business. Now, having said that, we still are taking some aggressive cost reduction actions as we always do over the total business, which would work on the visible side of the business as well.

And – but the size of the expansion you’ve had hiring increases and you also referenced making assembly that’s supposed to parts or components and I wonder this is another change in the characteristic of the company? And in other words you’re delivering module not just lenses for example?

Well, that’s part of our strategy and the transition that we think is – it’s the right one for the company to make, but in addition to just being supplying components and lenses, that we move up the value chain and do more subassembly and assembly work and part of those investments are geared towards that and what we see happening where we’re putting multiple lenses and housings and doing the alignment of those kinds of devices, collimating type devices et cetera. So those types of value added higher-level assemblies is definitely a direction that we’re kind of move the company.

Do such products competitively yield decent margins or even better than sending lense assemblies alone? And/or do you have competitive concerns with other perhaps larger companies then may be trying to do the same thing?

Well, I mean our business has always very competitive and we believe that we have the wear with all and the ability to be very competitive in these types using the various operating platforms that we have, combined with the technology that we bring to the party. The sales force is the same. The customers that we deal with on the lenses are the same customers that we’ve dealt with historically. So what we have is the ability to go into these guys where we may have been involved in one or two projects and now we can talk to them about five or six different projects. So I think that’s where we have an advantage and we can exploit that in the marketplace.

Great. I appreciate it, sounds like you’re on track and the sounds like we’re waiting for next year perhaps with respect to what? The infrared as part of the business grow. I’m just – I’m curious because I know you’re hiring trends have been higher and I was just wondering whether that suggests that perhaps business is expected to perk up more in the immediate months than simply waiting until 2019?

Well, I think Gene first of all, little confused, because we have been hiring that aggressively. We’ve been trying to do surgically higher where we can put in the right type of people in the right positions. That enables us move the company forward. But the infrared business has been growing substantially. i think what we say it was clear and 3:78% if I remember. Some of that was due to the acquisition, but we’ve also increased the level of business that ISP is doing or is that subsidiary was doing compared to what it was doing before we acquired it substantially. I think we’ve moved it – I think when we acquired at the year we were doing around $13 million. We’re on track to do a couple of million more than that easily this year. So we’re already expanding the business. We expect that to continue and we’re hiring as we need and as we prepare the company for this next transition.

Our next question comes from Marc Riesenberger [ph] of B. Riley FBR. Please go ahead.

Thank you very much. In an effort to lower the cost production, can you talk about how quickly you can shift amongst the different facilities and are you would all limited based on their certain certifications. Does that pose a problem?

No. I think – I mean, it’s pretty easy for us to shift certain types of business between the locations. There are some specific things in specific locations that are required and depending on the nature of the business. For example, I mean if we’re doing some defense or [indiscernible] type stuff, obviously, we’re limited to our U.S. facilities as well as our Riga facilities, which happens to be certified. So we have that capability. If we’re turning lenses, we can do that in multiple locations. We can do that in New York, we can do that in Latvia facility. If our molding lenses, we can do that in multiple locations either in Orlando or in our Chinese facility. Now we try to put the manufacturing product in the lowest cost operations and we can finish. So that’s always a consideration when we start to schedule and take this type of business. We have pretty good flexibility I think for the most part.

With regards to the ISP integration, and spend probably about a year now. Do you see any additional cost rationalizations that you can kind of squeeze out? Or is everything related to that kind of been worked through the system?

I think for the moment, we’re still digesting I think we have ourselves in pretty good shape, but as I said we’re always looking for opportunity in that area and we’ll continue to do that. But I think for the most part were set.

Okay. And last one, are you seeing any input cost increases? And specifically maybe you could call out kind of the input cost that you are seeing rise?

Well, I mean, these [indiscernible] up and down all the time. So we have seen some increases in cost of Germanium and zinc sulfur nitrate materials associated with some of the IR products. We cataract that, there’s great majority of them that we can convert into our BD 6 material, which we manufacture in house and that mitigates that quite a bit. But we also are trying to make sure that we have the right inventory of those raw materials so that we don’t have real short-term fluctuations and we are not held hostage to that.

Great. Thank you, that’s it for me.

Okay, thank you.

Our next question is from Chris Petrovski, a Private Investor. Please go ahead.

Hello. Most of my questions have answered, but I want to ask just about the current quarter, the March quarter since it’s interesting that the telecom is in a trough that it’s not going any further down and your revenue is more the industrial market. That gives us hope that we want to see much of a seasonal decline sequentially in March quarter revenues?

I don’t believe we’ll see a seasonal decline in the March quarter. We do have one hurdle to overcome and we try to plan around, which is Chinese New Year. So we do have a week holiday – weeks holiday. Not a – it’s a strong holiday but it would last for a week. Our factory in China is shut down. So – and that happens to start this week on Wednesday. But we have plans around that and so – but it does have an impact on our production overall for the quarter. It’s something we have to take into consideration. Other than that, I don’t think we have any concerns around that line.

All right. Well, that’s it for me. Good luck.

All right, thank you.

Our next question is from John Matlock [ph], Paradice Investments. Please go ahead.

Hi, Jim. My question is, it seems like you guys are in a position doing so well on the balance sheet just across the board that possibly a potential target for a buyout. Has there been an interest to that? Or is that just something that you guys wouldn’t be interested in doing?

I don’t think we’re particularly interested in being acquired. It’s not part of our strategy. I haven’t had any inquiries. So that’s not something that I can really control. We tried to operate our businesses to make it desirable but other than that, no. I don’t think so.

Okay, thanks for answering my question.

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

All right, 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 topline, bottom line and cash flow growth. We’re very excited by our growth prospects and we’ll be sharing our story with current followers and prospective shareholders next month at the Roth Capital Conference in Southern California. Thanks 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 your lines.