LightPath Technologies, Inc. (LPTH) Q1 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the LightPath Technologies Inc., Fiscal 2020 First Quarter Financial Results Conference Call and Webcast [Operator Instructions] Please note, that today’s event is being recorded. At this time I'd like to turn the conference call over to Donald Retreage, Chief Financial Officer. You may begin sir.

Thank you. Good afternoon. Before we get started, I would like to remind you that during the course of this conference call, the company will be making a number of forward-looking statements that are based on current expectations and involve various risks and uncertainties that are discussed in the periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can prove to be inaccurate and there can be no assurance that the results will be realized. In addition, references may be made to certain non-generally accepted accounting principles or non-GAAP measures, for which you should refer to the appropriate disclaimers and reconciliations in the company's SEC filings and press releases. Following management discussions, there will be a formal Q&A session open to participants on the call. I now would like to turn the conference call over to Jim Gaynor, LightPath's President and Chief Executive Officer. Jim, please go ahead.

Thank you, Don and good afternoon all. Welcome to LightPath Technologies fiscal 2020 first quarter financial results conference call. Our financial results press release was issued after the market closed today and posted to our corporate website. Following my remarks, our CFO, Don Retreage will further review our financial results and provide more perspective on key areas. And we will then conduct the Q&A session and now onto my remarks. Although our first quarter of fiscal 2020 financial results did not meet our expectations, we believe that we are beginning to see the benefits of significant strategic changes we implemented for our expanding global business activities. The impact of these activities does show up in our financials, but there were a number of events and other moving parts that made that progress less noticeable. The areas I am referring to, which I will address in my remarks today, pertain to our sales, unit volumes and sales pipeline and our gross margins. Our CFO, Don Retreage will address the other performance areas we'd like to highlight today, including operating expense reductions, accounting related issues, and foreign exchange. Progress on many fronts in the first quarter was offset by two issues impacting our revenue and gross margin, which we believe have been substantially addressed at the present time. Looking at our revenues, we reported $7.6 million in the quarter down from $8.5 million in the prior year. In the current year period, we had anticipated nearly $1 million of additional revenue pertaining to a single annual contract with a large customer who buys several of our infrared products through different contracts. This is a very good customer that we've had for many years and we fully expect to renew their single largest contract that we have successfully, won for each of the past three years. In the first quarter, the customer experienced a problem with another of their vendors that provides parts for the same assemblies that our parts go into. The customer asked us to delay the shipment of approximately $1 million of our products – $1 million of our products until they had rectified the situation with their other vendor. Given our longstanding relationship with this important customer, we obliged. We also knew that the terms of our contract for this project require the customer to take these shipments no later than this coming March, 2020. We're currently in progress process of shipping against the delayed quantities and expect the entire order to be completed through our second and third fiscal quarters. Further, we believe the annual renewal of this contract will be signed in November. Had the first quarter had been shipped – had the first – entire first quarter been shipped and recognized as revenue has had been intended, our revenue would have been closer to our expected range. Instead, this revenue will shift to the right and add to our second quarter and third quarter financials. With our strong 12 month backlog, which stood at $15.4 million at September 30, up 10% from a year ago, we believe the second quarter looks very good at the top line. As we have stated in the past, we are confident our strategic growth will come from the infrared business we are developing. This belief is supported by looking at the makeup of our backlog. Comparing the total backlog from September 30, 2018 to September 30, 2019 the total infrared backlog value has grown 30%. And within that growth, the infrared molded BD6 products have grown 37% and the diamond-turned germanium products have grown 23%. This also reflects a product shift mix that impacts average selling price. As the molded products are smaller in size and have lower price points. We have an increasing demand for BD6 products being temporarily impacted by our lagging supply capability. Following investments made last year, our infrared lens unit volume production and manufacturing capacity can now sustain much higher order flow. The completion of planned spending last year enabled significant production capacity increases, even without the $1 million in deferred infrared lens shipments, which are to be made from germanium, total unit volumes sold in the first quarter of fiscal year 2020 were up by more than 13% as compared to the first quarter of fiscal 2019, with growth in our precision molded optics products driven by 5G demand and growth in the infrared related to the BD6-based products. Legacy infrared lenses sales declined by 27% year-over-year due to the aforementioned delay, but we'll make that up. And what's really exciting is that we experienced the 250% increase year-over-year in the number of units sold for our new line of BD6 lenses. In the second half of last year and in concert with the relocation of our New York facility, we have been ramping up production for end market applications in our infrared solutions, removed and added equipment and manufacturing personnel as production capacity was substantially increased for our infrared product lines, primarily in our Orlando facilities, but also in our Lothian and Chinese facilities. We've doubled our capacity in the bottleneck areas of glass smelting, preform polishing and coating. This significant increase in demand and production for our BD6 family of products led to a second setback in the quarter that masked many of the other areas where we had improved performance. We encountered a yield issue for our BD6 product line, which is not uncommon when ramping a new production line for the high-level of demand that has been garnered for this groundbreaking technology. Certain BD6 lenses were performing to our high specifications, but there was a cosmetic imperfection. For the effective lenses, we maintained our commitment to our customer for the highest level of product quality and produced – and proceeded to remake these lenses. This took a toll on our margins along with lost production capacity, which could have been used to generate additional revenues on other orders in the pipeline. Gross margin in the first quarter of fiscal 2020 was $2.4 million, a decrease of 21% as compared to the $3 million in the prior year. On the lower revenue, you would expect gross margins to be even lower on the reduced factor utilization considering we have substantially more production capacity on the plant floors. So we can handle a lot more production, which should lead to more efficiencies to improve gross margin. This was part of our strategic overhaul from last year, instead because of the lower revenue associated with the delayed large contract for germanium infrared lenses and the BD6 yield issue associated with our accounts denied infrared lenses, gross margin as a percent of revenue was 32% for the first quarter of fiscal 2020, compared to 36% for the first quarter of fiscal 2019. We are addressing and improving upon the BD6 yield setback, so again, with the add back of the delayed revenues and yields moving to more normalized levels, we expect the second quarter results to benefit. Another factor influencing our lower than anticipated gross margin, was the new tariffs spawned by the trade war between the U.S. and China. The increased tariffs on our products were enacted primarily in June of 2019 and we expect the impact of these tariff increases to be significantly reduced beginning in the second quarter, as the mitigating actions we began implementing in September will have been in effect for a full quarter. In the first quarter, we estimated that our gross margin as a percent of sales was negatively impacted by approximately 2 percentage points, as a result of these tariff increases. We expect to recapture most of this, as well as benefit from other gross margin improvements as our revenues normalize from shipping against the delayed order and with improved BD6 yields. This concludes my formal remarks. Now I'll pass the call back to our CFO, Don Retreage to provide more detail on some other critical areas of our first quarter 2020 financial results.

Thank you, Jim. First, I would like to mention that much of the information we’re discussing during this call is also included in the press release issued earlier today and on our 10-Q filed with the SEC. I encourage you to visit our website at lightpath.com, and significant – specifically, the section title Investor Relations. Now onto my remarks pertaining to the first quarter of fiscal 2020. As Jim mentioned, I will be specifically discussing key performance areas pertaining to expense reductions, accounting related issues on foreign exchange. Our IR capabilities and overall production capacity are growing steadily, while our overhead has significantly declined following our transition out of New York. This facility relocation on other cost savings eliminated $400,000 in operating expenses in a fiscal 2020 first quarter. At the same time, we're funding targeted areas of growth, including our newly aligned product management roles, while exercising prudent spending elsewhere. As a result, total operating expenses declined by $300,000 year-over-year and by $900,000 from the fourth quarter when we incurred duplicative and other elevated costs related to the relocation. The cost of the facility relocation was $1.2 million in fiscal 2019. At the ending of the last fiscal year, we estimated that the exit cost was expected to be more than offset with savings of at least an equal amount in fiscal 2020. With our first Q results undergo, we're delivering on track. In terms of operating expenses, categories, both SG&A and R&D were lower in first quarter 2020, as compared with fourth quarter 2019 and first quarter 2019. Amortization was unchanged from fourth quarter 2019, but lower than last year. And we have onetime gains or losses on equipment which has fluctuated but primarily related to the exit from New York. All-in total operating expenses were $3 million in the first quarter 2020, down from $3.9 million in fourth quarter 2019, and $3.3 million in the first quarter 2019. Another area of savings is interest expense, which we reduced by about 30% quarter-over-quarter, primarily due to more favorable terms associated with a new term loan entered during the third quarter of fiscal 2019. We’re modeling for interest expense to remain near current levels for the balance of our fiscal 2020. Among some of the accounting complexities that created some imbalanced or result, foreign exchangeable activity continued with changes in the value of the Chinese yuan and the euro against the U.S. dollar, leading the currency losses of first quarter 2020 of $497,000 or $2 [ph] per share compared to an unfavorable impact of $338,000 or $0.01 per share last year. Income tax expense in the first quarter 2020 was $148,000, primarily related to income tax on the operations in China, this compares to a net income tax benefit of approximately $179,000 recorded for the first quarter of fiscal 2019, which included a benefit on losses in the U.S., offset by income taxes on China, where we have a net operating loss of $74 million against taxable income in the U.S., we’re required to pay income tax on earnings generated by our China subsidiaries. Income generated in last year is subject to distribution taxes. Our overall performance were highlighted by fiscal discipline, following the completion of the planned spending last year, enabling significant production increases and the strengthening of our balance sheet. Capital investment in fiscal 2019 to increase our vertical integrated regional production capacity, enabled us to reduce capital expenditures in your first quarter of fiscal 2020 by more than half as compared with the same period of fiscal 2019. Capital expenditures including equipment purchased to capital leases were $257,000 in the first 2020, down from $670,000 in the first quarter of 2019, and $2.5 million for all fiscal 2019 and $3.3 million in the prior fiscal year. The heavier period of investment is behind us, however, so we do anticipate improved free cash flow as our flow increases and we move into more efficient on higher quantities of production. Along with our translation on heavy investing in facilities and product development, we have focused on cash management to improve our financial condition. Total debt including financed leases was reduced by 3.7% in the first quarter of 2020, following in a 11% reduction during fiscal 2019. We ended the quarter with a slight increase in cash at $4.7. In summary, meaningful progress have been made in the fiscal first quarter 2020, following measure steps taken in fiscal 2019. Our improvements in the quarter was masked by two temporary issues that we have addressed. In turn, we are well on our way to our delivering sustainable improvements in long-term revenue performance, profitability and cash flow beginning with the second quarter. With this review of our financial highlights concluded. I will turn back to the operator, so we may begin with question-and-answer session.

We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from David Luebke of Summit Financial. Please proceed.

Hello. My question is concerning expenses and I noticed, well, August, September, October, there was quite a few investor conferences and investor meetings in New York city. And my question is, why after fourth quarter results and in these first quarter results, why would you be spending money on these types of activities?

Mr. Luebke, I guess the answer to that question is that we continue to put our story out there, which we believe to be a good story, we invest in development.

Well, no. You’ve mistaken, it’s not a good story.

Well, that is your opinion, I’m sorry sir. Thank you very much for your questions.

No, that’s the opinion of the stock market.

Thank you very much for your question.

I just don’t know why you’re promoting, why you're spending the money. You think that's good to use a corporate cash?

Well, as I said, we spend the money to put our story out to interested investors. Investment – conferences were well received, as well as we like to talk to our existing investors as well. So thank you for your question, Mr. Luebke. Next question, please.

Our next question comes from Clark Lehman of Logos Partners. Please proceed.

Trying to get a feeling or an understanding of your customers in the end markets, they’re growing, they’re shrinking. And then secondarily, who do you lose business to and why?

All right. I think depending on the product line…

According to – you’ve got five products in your website Asphere, Collimators, Infrared. I mean, imagine they're dramatically different pricing, AST…

That is true. Each of our products have different material content, different conversion costs et cetera. So I think depending on the product line – on our precision molded optics in the visible side, we have a very low cost structure and we’ve earned very good margins on that product line. And we deal with customers across a wide variety of the market space, telecommunications, industrial tools, there are some defense applications, et cetera. So it's pretty varied market, being a component manufacturer. And that's a very good legacy business, currently it is growing and typically grows at the rate of the growth in the laser diode market currently, right now, it is being the growth there, it's a stable business with the growth being generated by demand from a 5G telecommunication sector.

Was that coherent and IPG, who are your customers there?

Well, we have a whole series of them, which I think you could see on our website and I think – but they would generally tend to be in the OEM equipment manufacturers, so people like Lumentum, Oclaro, Finisar, customers like that in that space. On the infrared space, we have a similar high end customer base, it's a newer space for us, but it tends to go into the sensor market, we do very well in sporting optics and firefighting cameras, those kinds of things, is where our optics are generally used. So we sell to a number of large OEM manufacturers that are doing things like barcode scanners or a rifle scopes, binoculars, night vision type systems or anything where you do some people counting type applications using an infrared technology.

So which markets are growing? I mean, aren't they growing? I mean why is your – why are your volumes, even if – and you predicted – before you miss this quarter, you predicted relatively flat year-over-year revenues, I didn’t understand, it sounds like most of those markets are fairly robust and growing.

They are growing, as I said, visible market tends to grow.

You’re not growing, that’s what I don't understand. Is price coming down or various piece coming down or you…

There is some price pressure in certain markets, we are growing, I think we grew 5% or 6% last year, the year before that we grew about 15%, so there has been growth overall in the business. The infrared market is a growing market with – in words, a developing market. So I think we're just getting started in the growth area for that market as well. So I think the unit volume was up, particularly in this quarter compared to the first quarter last year, overall about 30%. I think there is some pricing competition in the marketplace, so there is some issues there that affect that…

Are these Chinese – who are your principle competitors?

Well, we do – particularly in the visible and now beginning in the infrared market, we do have a lot of Asian competitors that come out of China or Taiwan and Korea and those are very price competitive type businesses. In the infrared, we also compete against some very major corporations, company called Ophir, which is owned by MKS Instruments and the company called Umicore, which is a Belgian materials company are two of the principle competitors in that space. So I think it is a very competitive business from that standpoint.

How do you get to compete with them with no capital and no – I mean, do you do it on quality or price where you can – where is your edge?

Well, our edge is our optical design capability, our manufacturing capability and our cost structures such that we can compete. We have major facilities…

Why are you taking share then? Are you taking share in these basis?

We're beginning to, yes.

Okay. And then what – I mean, I don't see anywhere on your website as to market share in these products. And what market share you have vis-à-vis your competition. So I don't see – is there a presentation that shows that?

No. I don't think we have published that kind of data at this point. I would say that overall the company is growing. We didn't grow a lot last year, as we made a major transition. But I think we'll see that growth continuing, as we get through a couple of these issues, I really expect even with our moderate pipeline growth, which should be in the 6% to 7% range, we should see good bottom line growth as we start to improve our EBITDAs, as we moved through some of these issues, as we get these new product lines developed, we get the yield issue behind us and we start hitting the kinds of volumes that we expect to hit.

Do you have – let’s see, B. Riley. Hello…

The next question comes from [Jordan Cox] of [AECS]. Please proceed.

Hi Jim, how are you?

Very good, thank you.

Can you talk a little bit about the revenue growth this year? Is it more of a sequential growth versus a year-over-year, because of the change in the mix of business?

I think, when we look at the 2019, the completed year, we grew roughly I think 5%, 6% growth that we had for the year. In the first quarter, we didn't show growth with the issue, I think we would have been as we expected to be relatively flat with the first quarter of last year if in fact, we had not had that deferred shipment situation. So I think, we believe we'll make that up in the subsequent quarters. And then I think we'll see some growth continue, we don't expect the 2020 year given the situation with tariffs and the Chinese war, I think that has had some impact. The economies in Europe and Asia are weak and we do about 60% of our business between those country or areas. So I mean, we're not – we're trying to be conservative in our growth estimates there and really focus on improving the fundamental performance of the company. As I said in my remarks, we had a setback in the first quarter, but we believe we have that under control.

Is there any way to quantify kind of the pipeline of new opportunities out there? I know you guys have in the past have had a backlog that's bigger than your stated backlog based on potential orders or orders that are beyond 12 months. Is there any sign of increased activity for – especially for your new products?

Yes. I think so, I mean, as I mentioned in my comments the makeup of the backlog supports the growth in the areas that we anticipate, our total backlog has grown a little greater than 30%, each year for the last three years. And I think there is a shift occurring within our backlog that is favoring the infrared business over the legacy business and that's what we would expect to see. So I think from that kind of point of view, I think there is growth in the backlog and then we fully expect the chalcogenide material system that we've recently introduced allows us to mold a lot of the products that were currently a diamond-turned or formed with other lens fabrication technologies is growing quite rapidly compared to those. As I said the unit volume was up 250% year-over-year in that particular line. So we're seeing that growth opportunity. I think it'll start to flow through the revenue line here in the coming quarters.

And then if you look at the margin profile of your backlog, how does the new products of gross margins compare to your legacy products?

Well, right now the legacy products have a little stronger gross margin profile than the newer ones. I think there's a significant difference, if you look at the precision molded optics on the visible side that has a very nice margin profile that we've worked on for years and years in a very low cost structure. We expect to be able to show some improvements in the molded infrared product segment of our business as we build the volume. Now, we haven't put all the volume in there that needs yet, but that's coming. And then when you think about the diamond-turned product lines, those have good margins given the higher material content of those products. The infrared products have a much higher material cost given that they're using rare type glasses those kinds of things that they're much more expensive than on the visible side. And as I said, we have these different revenue streams, but they all have different material and conversion costs, so they are different types of businesses. And it's one of the reasons we did some of the reorganization that we did, so that we can focus groups of people on those particular lines and make sure we're doing the right things from the right kind of programs that we're going after.

And then one last question. With all the investments that you've made over the last two years, assuming that things start to move forward from a top end, bottom line, what are the priorities for cash usage for the next say six months to 18 months?

I think from a cash usage point of view, we're minimizing the capital investments as you saw in the first quarter compared to where we were last year. I think we did 257,000 compared to what was some 600,000 the previous year, quarter. So I mean, our priorities are really to focus on improving the fundamentals and the margins and building the volumes that we need in the particular businesses and take advantage of the investments, try to get and work the investment, the benefits out of the investments that we've already made. We believe we've installed sufficient capacity to handle the growth that we're anticipating.

Do you see it? No, I was thinking more on, if you generate cash, will you be looking to fund working capital, pay down debt? I mean, your stock right now at $0.70 cents, you're going to probably be delisted soon, how do you kind of balance all those things from a shareholder's perspective?

Well, I think we have been working on improving the balance sheet. We’re paying down the debt those kinds of things, which is a priority. So we continue to do that and generate the free cash flow that we need to support the ongoing business and that would be – part of that would be in the working capital as we grow the volumes.

Okay. Alright. Thank you guys.

Thank you.

The next question comes from Richard Schaefer a Private Investor. Please proceed.

Yes. Could you tell me a little bit about the delisting process and have you been in correspondence with NASDAQ? Have you received a letter? And if you were – how do you think declining stock price and potential delisting would impact your sales potential?

Well, I don't think delisting will impact our sales potential or our business from that standpoint. I don't think there's any concern from that issue – that part of it. Yes, I mean, we've responded to – we did received the letter from NASDAQ. We've responded to it. I know that's a matter of public record, the process is basically you have 180 days in the first period to recover the non-compliance which in our case is of price below $1, we have no other non-compliances. There is capability of asking for an additional extension of another 180 days, which we believe if we needed, we will get that and process that and we believe within that time frame our performance will be such that we have a really good chance of recovering our stock price in removing that non-compliance and that is the plan.

And you don't think that being above $1 would influence your sales at all? Either, you're signing these relatively long-term contracts, but those are not affected by popular perceptions of the company?

I don't think, from a business point of view and from our customers' point of view, I haven't run into any issue associated with that. I think the only concern they would have is the company able to sustain itself. And I don't think there's any question that we are, and we have sufficient cash to do the kind of growth that we're talking about doing. Our customers, never – not been asked that question at all by any of our customers, so I think it's a separate issue. It's a much more of a concern from the investment side and those kinds of things. And at this point we don't believe we need to go to the capital markets for whatever we need. And we're able to run the business that way. So no, I don't think it affects it at all.

The next question comes from Alex Ferguson, a Private Investor. Please proceed.

Jim, thank you for your call, comments. You actually I think answered my question from the last caller. So effectively with the delisting, you have 180 days and then effectively potentially another 180 days to get that stock back above the $1?

That's correct.

Okay. All right. And have you also – if push comes to shove, consider the reverse stock with or anything like that to turn?

We have considered it and something that we would probably only do as a last resort if we needed to.

Okay. All right. Thank you.

The next question comes from Brian Dodson, a Private Investor. Please proceed.

Yes. Thank you for taking my question. First of all, I wish you well.

Thank you.

The investors out here we all wish you well. Can you comment, I read in one of your documents that you released that you do not seek patents on the processes or the products that you produce and in that you may have competitors who are seeking patents on those things that may affect you or may affect the company's ability to continue to sell those items, can you comment on the risks there and what is the rationale for that? Just to help me understand?

Sure. In general, we evaluate whether we want to apply for a patent on a particular technology. And most of the evaluation comes down through the fact of, do we want to reveal that technology as much as is it worth it to reveal it for the patent versus what can be done as we use it as trade secret type approach. The reason for that is, in optics, it's pretty easy to make a small change and go around the pattern at that standpoint. Now having said that, there are certain things that we do apply is technologies that we have and do apply for patents. As a matter of fact, we just received the patent on a particular lens, hybrid lens design and it's applied for in the U.S. and was actually granted in one of the European countries that we expected, I think it was in Lithuania in this case. So we have a Lithuanian patent now, but for certain technologies we do go after some patents and that can be for the technology protection as well as could be for market based type protection against the product. So it's not a clean cut rule. It is generally to this point the majority of what we do we prefer to keep this trade secret so that we don't reveal those technologies to the public.

At this time there are no further questions in the queue. And this concludes our question-and-answer session. At this time, I would like to turn the conference back over to Mr. Jim Gaynor, President and CEO for any closing remarks.

Well, thank you. There are the key takeaways from our fiscal first quarter of 2020 that I'd like to summarize. First, we made significant progress on the major steps taken to restructure our business last year. First quarter results delivered improvement in a number of critical areas, but as we said, this was masked by two issues. The customer requested shipment delay and a yield on our new BD6 products. Both of these things are being addressed. Our infrared business is growing rapidly with the addition of our BD6 material system and our new family of lens assemblies that we've put out using this material. Our precision molded optics business is stable and with this growth driven by 5G demand and we have right-sized our operating expenses, reduced debt, and have invested to improve and expand our production capacity. And the last point I'd like to make is that we have sufficient cash to execute our growth strategies. We'll talk more about our strategy and progress at the upcoming LD Micro conference in Los Angeles on December 10, and we hope to see you there. Thanks again for participating on today's conference call and 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.