LightPath Technologies, Inc. (LPTH) Q3 2021 Earnings Report, Transcript and Summary

Good afternoon and welcome to the LightPath Technologies Fiscal 2021 Third Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today's event is being recorded. I will now pass the call off to Don Retreage, Chief Financial Officer of LightPath Technologies.

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, including the impact of COVID-19 pandemic that are discussed in this periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable. Any of them can prove to be inaccurate, and therefore, there can be no assurance that the results would be realized. In addition, references may be made to certain non-generally accepted accounting principles or non-GAAP measures, for which you should refer to the appropriate disclaimers and reconciliations in the company's SEC filings and press releases. Following management's discussion, there will be a formal Q&A session open to participants on the call. I would now like to turn the conference call over to Sam Rubin, LightPath's President and Chief Executive Officer. Sam Please go ahead.

Thank you and good afternoon. Welcome to LightPath Technologies fiscal 2021 third quarter financial results conference call. Our financial results press release was issued after the market closed today and posted to our corporate website. Following my remarks, our CFO Donald Retreage will further review our financial results and provide more perspective on key areas. We will then conduct a Q&A session. For those of you who have been following closely the company you know that the past nine months or more have been following closely the company hat the past nine months or more have been marked by changes designed to position LightPath for growth. I'm very pleased to report that our long term growth plans are beginning to yield their intended results, and seen the stronger results for the quarter, including the highest level of quarterly revenue in our history. This marks the second consecutive quarter, in which we set a new record for quarterly revenues, and we continue to deliver double digit growth rates on annual terms. In the nine months since the beginning of our fiscal year, we won over 15 new business contracts, including 16 from new design wins. This supports both our new strategic direction of being a partner for solutions, as well as our goals to diversify our customer base and reduce our customer concentration. With reflection I was appointed CEO of LightPath, a little more than a year ago. The onset, my initial focus was to assess the company's strengths, weaknesses, opportunities and leadership capabilities as they relate to our strategy forward. Once we completed the initial assessment, we began implementing our new strategy with an orientation towards becoming a valued and trusted photonics partner in the form of providing engineered solutions, which goes well beyond serving as a component manufacturer. As a reminder, our strategy is based on the fact that photonics as a technology is being adopted into more and more applications, and integrated into more and more products such that there is a growing number of companies that use photonics, and therefore need a partner that can support them through extensive knowledge and experience with the technology, making the adoption of photonics technology easier for them. This is a powerful growth mechanism, and is reflected in the strong revenue growth we reported today as well as in our fast growing number of design winds and prototype development work for our customers. During this time, our focus was not only growing at the top line. From the beginning of the fiscal year to the end of the third quarter, our financial and operational focus resulted in our cash increasing by 10% even as we reduced our debt by 8%, and funded capital expenditure at nearly 80% more than the prior year. Those investments have been focused on ways to better serve larger multinational customers and satisfy a higher volume production demand which is part of our solutions orientation. Along the same lines, our investment in R&D has grown this year by 24% as we invest in developing unique technologies and capabilities, which in turn translates to technological differentiators that allow us to provide our customers with solutions that enable them to better use photonics technologies in their application. This last part being the essence of our strategy and with it, we are pursuing an increasing number of sizable opportunities in diversified vertical markets, where our engineering expertise, volume production capabilities and proprietary technology are our competitive advantages. The growth we're seeing in sales is fueling the company and serve driving the need for additional changes and improvement. This has led to the next step of our long term growth plan, which requires strengthening and expanding our leadership team. With our recently announced changes in management, the focus is turning towards operations, efficiencies, and overall performanced similar to the efforts that led our initial growth in this fiscal year, which took a couple of quarters to be realized. Our shareholders should expect a period of adjustment with the new leadership team until we begin to more fully experience the intended results of operational optimization. Our objective has been secured right talent for the company, who have the skills and experience to drive forward our long term goal and implement our strategy to be the preferred partner to our customers on all things photonics. This included several changes to our leadership ranks and filling out the depth and of our border, middle and senior areas of management to. During and following the end of our fiscal third quarter, we announced a series of management appointments with corresponding one time expenses for the associated changeover as we put our new team in place. The normalized amount of operating expenses is expected to be reached through the course of the next few quarters as we eliminate temporary redundancies and other one time costs. This conference call provides a good opportunity to summarize LightPath's recently expanded management and leadership team. Early earlier this week, we announced two significant changes. First is the requirement of our longtime Chairman Bob Ripp, who has held the position since 1999. Bob has served the shareholders and the company very well for a long period of time navigating the company through periods of economic and market changes. He was instrumental in bringing the [indiscernible] and I'd like to personally thank him for this opportunity and assure him that we will very much continue to follow the strategic direction that has been shared on this call today. The boredom dissipates appointing a new chairman to replace Bob in the coming week. The second major appointment announced this week was Peter Greif , the position of Vice President, Operations. This position has been vacated about a year ago, and we finally found the right person for the job. Peter comes to us from New York Stock Exchange listed Jabil, one of the largest manufacturing solutions providers based in Florida, with a market cap of over $8 million and more than 260,000 employees worldwide, across 100 locations in 30 countries. Al Miranda, who is also sitting in today's call, was appointed to the position of Vice President, Finance effective April 19 as part of our CFO succession plan. We're grateful for the contributions of Donald Retreage our outgoing CFO who announced his retirement that will take place following the closing out of this quarter. I'd like to personally thank Don, who I have worked with closely for the past year. He has been an important contributor to the company's transitional periods during the expansion into the infrared market, and in building out our global manufacturing operations. As Don's successor Al previously was president of the North American subsidiary a publicly traded one and a $0.5 billion market cap Jenoptik, Germany based. He Jenoptik led a North American subsidiary to top and bottom line double digit growth. Jenoptik is known globally for specializing in photonics space technology across several markets. Now operation in China, Joseph Wang was appointed General Manager replacing Hui Yue. Joseph has more than 30 years experience in OEM manufacturing, working in various international markets with a focus on China, including 10 years with Samsung and IBM. This change in management in our China group, which included dismissing the previous General Manager as well as the sales manager and the engineering manager was instigated as a result of certain Code of Conduct infractions by the previous leadership of our China operation. This includes an attempt to set up a competing business LightPath, as well as an attempt to misappropriate part of our intellectual property. While we're confident that the swift corrective actions we have taken have resolved the issue, and any related findings debate. This also resulted in some related additional on one expenses to be entered in our fiscal third and fourth quarter. Additionally, we expect some limited impact to our domestic sales in China for the next two quarters while we stabilize our domestic sales operation in China. Finally, in another board level move, we were joined by Eric Creviston, who is president of the more global group products in NASDAQ listed Qorvo, a $22 billion technology company, which develops and commercializes worldwide semiconductor products and software for advanced wireless and wired technology. [Power] solutions oriented product and business development roadmap, Eric is an exceptional addition to our board. The series of management and leadership changes reflect opportunities presented the LightPath the accelerate global growth and permanent. Furthermore, the appointment as well as the results this quarter are in line with what our focus has been, which essentially is a departure from the way of old and in support of our new vision. These operational changes may take a few quarters the impact long with additional ebb and flow during the change management period before becoming material and substantial. One area of operational improvement length our gross margin performance. You'll note that our gross margin as a percentage of revenue is down by a meaningful amount in the third quarter and to a lesser extent for that first nine months of the fiscal year. This has to do with the lifespan of new design winds going into larger production into larger production run, and our yields in two specific parts of the process, which I discussed on last quarter's call. Our team has continued to focus on developing both unique technologies and processes and products particularly as they scale from prototype to mass production. Our R&D spending has been higher in part to develop new products that get us to the design win stage. Therefore, we have equally important work to do in scaling new products into volume production. We have a number of technical challenges are typically encountered related to the fabrication of the component as well as some of the value activities such as coatings and assembly. While we have not yet completely resolved those issues, they will yield issues with a lot of very encouraging and then confident that we are on track to have them resolved in the coming weeks. On the sales side, we see demand growing based on a number of new opportunities in our sales funnel both from existing customers and new customers alike. Yet we are only just beginning as we report another record performance for quarterly revenues which turned to double digit growth that marks another goal we set for the company this year and further improvements to our balance sheet, I am confident that our strengthened management team will lead us through our next phase of growth. This some dissipated growth on organic basis. While in addition, we intend to pursue selective acquisition to bolster our product lines and manufacturing capabilities. Our superior product, innovation capabilities, and deep customer relationships enable us to extend our leadership position. We are leveraging our competitive advantages to deliver a stable return on investment and ultimately returns for our shareholders. I'm energized by the outlook for our business and believe we're making considerable progress in our growth strategies. Now I will pass over to our CFO Donald Retreage to provide more detail on recent financial performance.

Thank you Sam. First, I'd like to mention that much of the information we're discussing during this call is also included in a press release issued earlier today. And in our 10-Q filed with the SEC. I encourage you to visit our website at LightPath.com specifically the section titled Investor Relations. Now onto my remarks pertaining to the fiscal 20 21 third quarter and nine months ended March 31, 2021. Sam's remark covered the highlights of the changes that came in form of strategies designed to position LightPath for growth. I will be specifically discussing some of the key financial performance areas. Revenue for the third quarter of fiscal 2021 was 10.7 million of 8% sequentially from 9.9 million in the second quarter of 2021, and an increase of 23% as compared to 8.7 million in the second quarter of 2020. Revenue for the first nine months of fiscal 2021 was 30.1 million, an increase of 4.2 million, or 17% as compared to 25.9 million in the same period of prior fiscal year. Infrared products revenue was 6.5 million in the third quarter of fiscal 2021 or 60% of the total revenue. This is up from 4.4 million or 50% of the total in the third quarter of fiscal 2020. IR revenues grow sequentially from second quarter of 2021 by 35%. Visible precision molded optics or PMO. Product revenue in the third quarter of fiscal 2021 was 3.9 million, or 36% of the total up from 3.8 million, or 44% of the total in the third quarter fiscal 2020. PMO products revenues were down sequentially from the second quarter of this year by approximately 800,000 due primarily through a reduction in spending on a large telecom customers' long term supplier agreement following accelerated purchases during the first half of the year. The balance of our revenue for the third quarter was 334,000 from specialty products. Specialty products and non recurring engineering projects, which vary greatly from quarter to quarter, but are substantially smaller contributors to the consolidated revenue. Revenue from this group in the prior year was 561,000. Moving on the gross margins. Generally speaking, PMO products are smaller and almost entirely molded. So we have faster turnaround time, higher volume applications and more automated processing. These products are also generally lower in price as compared to infrared lenses. We historically have a margin averaging in the 40 to 50 range for PMO lenses, which have been about 10 to 20 points higher than the margin on all infrared lenses. Of the two primary revenue reporting groups PMO is a smaller group with a higher margin. So on a consolidated basis our gross margin will skew more towards IR products, which comprise a greater percentage of revenue in the quarter. Infrared product group represents a larger and faster growing market opportunity. Infrared margins have historically been in the 20% to 30% range. The average selling price can vary based on the product and market. So we do not believe that this is a meaningful performance metric. Instead, we encourage investors to focus on our revenue and gross margin as a percentage of the revenue over the long term, not necessarily on a quarterly basis. Perhaps the most important factor to our gross margin this year has been the number of new product launches coming online. So I'm discussed the traction we're experiencing in the market with the increased number and design wins, as well as the factors that negatively impact margins in the early months of the new design going into volume production. And therefore product lines coming into production volumes in the second and third quarter of this year are from our [indiscernible] infrared lens family of products. These will come in on higher end of the margin range once we read the benefits of volume and efficiencies. Gross margin as a percentage of revenue was 38% for the first nine months of fiscal 2021 compared to 40% for the same period of prior fiscal year. The gross margin in third quarter 2021 was brought known by the 36% margin in the third quarter which included the primary influence of revenue mix influence of revenue mix [indiscernible] infrared products, a near term negative impact of the many new designs still in their early stages. We continue to produce more lenses overall. Again, the KPI is best viewed on a longer term basis since revenue mix and production ramp ups come into play as they did in the third quarter. Total production for our product lines increased to nearly 3.3 million lenses in the first nine months, up from 2.4 million lenses in the same period of the prior year. In the third quarter, where our revenue mix was heavily weighted towards infrared lenses and given the factors discussed total units declined to 862,000 units this year from 905,000 units last year, a decline of 5% even as our revenues increased 23%. Moving on to operating expenses. During the third quarter of the fiscal 2021 total operating expenses was approximately 3.7 million; an increase of about 790,000 as compared to 2.9 million in the same period of the prior fiscal year. The increase is primarily due to approximately 194,000 of non-recurring and legal fees and consulting expenses associated with the hiring of the new employees and termination of certain existing employees within the companies China's subsidiary and hire SG&A for a moderate increase in headcount and costs associated with operational improvement and growth strategies that Sam addressed in his comment. I will note that additional legal fees consulting expenses and severance expenses associated with these changes that are operations in China will be incurred in the fourth quarter of this year. In April 2021, we entered into a severance agreement with certain of the employees where we agreed the PMO aggregate of 470,000 over the next six months provided that these employees comply with certain terms set forth in the severance agreements. The third quarter and fourth quarter expenses as well as the second quarter charges related to a former CEO for about 400,000 combined for nearly 1 million of one time items for the year. New product development costs in the third quarter 2021 increased by approximately 249,000 from the prior year period, which was needed to address the demand for advanced optical designs, including or accelerate the level of design wins, which are expected to lead the future revenue growth. We added to our engineering headcount and related outside services in order to support demand for custom optical design. Partially offsetting these expenses in the OPEX was limited travel and marketing expenses from the COVID-19 restriction even as we incurred some pandemic related costs for cleaning and safety measures. Our consolidated corporate income tax in the U.S. is shield by our net operating loss powered benefits of approximately 74 million on March 31, 2021. But we must pay income tax in the countries of certain foreign subsidiaries. Third quarter 2021 income tax expense was approximately 308,000 compared to approximately 203,000, for the same period of the prior year, primarily related to income tax from the company's operation in China. Income tax return or also included Chinese withholding taxes of 100,000 associated with intercompany dividends declared by a company's Chinese subsidiary payable to the parent company in the U.S. Net loss for the third quarter 2021 was 223,000, or $0.01 per share, compared to a net income of 816,000, or $0.03 per share in the prior year. Net loss for the first nine months of fiscal 2021 was approximately 272,000, or $0.01 basic and diluted loss per share, compared to net income of 210 or $0.01 basic and diluted earnings per share for the first nine months of fiscal 2020. Our EBITDA, a non GAAP measure, which we believe provides important insight into our performance and progress. We had a positive EBITDA of approximately $1 million in the third quarter of 2021 as compared to 1.9 million for the third quarter 2020. This decrease was primarily due to the low operating income from lower gross margin an increase SG&A which included significant non-recurring costs, and high product development expenses. Again, looking at our longer term progress which is more meaningful, EBITDA for the first nine months of fiscal 2021 was 3.5 million, or approximately 4.1 million, excluding one time non recurring expenses related to the executive changes as compared to 3.7 million for the first nine months of fiscal 2020. Nine months EBITDA performance also benefit in the current year from favorable difference of approximately $325,000 in foreign exchange gains and losses. Moving to the balance sheet and cash flow related items. Capital expenditure was $0.05 million up in the third quarter was 0.05 million in the third quarter, and 2.7 million for the first nine months of fiscal 2021. This is up from 300,00 and 1.5 million in the respective areas of fiscal 2020. We are on track for capital expenditures for the year to come in, with a range of around 3 million for the year. Meanwhile, net cash provided by operation was 3.1 million for the first nine months of fiscal 21, up 64% from 1.9 million in the prior period. Total debt including financial leases was 5.5 million on March 31, 2021, a reduction of approximately 8% or 482,000, from 6 million at the beginning of the fiscal year. Approximately 200,000 of this reduction came in the third quarter. Our cash balance on March 31, 2021, was 5.9 million up 600,000 from the end of the second quarter, and as compared with 5.4 million at the beginning of the fiscal year. Onto a backlog as of March 31, 2021 LightPath's total backlog was 19.5 million down from 23.8 million at the ending of the fiscal second quarter and 21.9 million as of June 30, 2020. Our production capacity has grown and enabled us to deliver on more higher value IR contracts. Our backlog at the ending of the third quarter came down from the ending of the second quarter which was the highest level in the company's history. It should be noted that it is natural for backlog to fluctuate during the year because of the timing of each bookings of large orders and annual renewals. Our single largest contract valued at nearly 25% of our total backlog was renewed during second quarter. And we deliver against this contract as the fiscal year progresses. Finally, on a personal note, I would like to, as I will be retiring from CFO role LightPath tomorrow, I just wanted to say that it's been a pleasure getting to know many of you in investment community and the banking community and to serve as the CFO for a company's shareholders. LightPath is in very good hands with Sam and the expanding leadership team. With this review of our financial highlights and recent developments concluded, I will not turn the call over to the operator so that he may begin with our question and answer session. Thank you.

Thank you. We will now begin the question and answer session. [Operator Instructions] Today's first question comes from Brian Kinstlinger from Alliance Global Partners. Please go ahead.

Hi, thanks for taking my questions. This is Jacob on for Brian. Can you talk about the slowdown in PMO orders related to inventory for 5G rollouts? Can you talk about what's causing this? And do you believe this is temporary and related to global supply chain shortages? Or do you think this will persist?

Yes, first of all, hi, Jacob. And thanks for joining us. The slowdown that we're seeing is specific to one geographical area for customers in China itself. And the reasoning for that is two, first of all, this has been a significant overstocking on the behalf of that customer earlier on in 2020 and the second is some slowdown that they are seeing in the rollout of their equipment. We're pretty confident that this is a temporary thing. In fact, the customer is already discussing with us what will be the timeline for their future releases of orders. But right now, this customer typically releases orders on quarter by quarter basis that is affecting both our backlog number as well as sales for the coming two quarters to this customer.

Okay and are there any industries that you sell to facing inventory shortages which will result in fewer numbers of lenses in the near term? And if so which ones?

Yes, we've definitely seen our shares with customers mentioning shortage in certain chips or devices that are impacting the supply chain. We've had in a couple of occasions customers shuffle around schedule. I think a couple of quarters ago we talked about this that one of our larger customers was moving shipments around and was doing so at the short notice which impacted our inventory levels back then. But since then we haven't seen anything to a level of anyone canceling orders, not releasing new orders or delaying significantly our shipments because there's a shortage, shortage of other components.

Thanks. And one more and I'll hop back in the queue if I have any more. Can you talk about how far along you are for correcting your to yield issues? You identify that the year end conference call both the coding issue at the end of the process and the problem in the middle of the process. I think you said before that you plan on having this address in the next couple of weeks.

Yes, we're definitely very-very close to this. I think the results we're getting extremely encouraging. They're not yet statistically viable to the point of us saying definitely we resolved it. But the engineers are walking around with a smile on their face. So that's very encouraging.

Alright, thanks so much.

The next question comes from Scott [indiscernible]. Please go ahead.

Hey, good afternoon, guys. And Don, congrats on retirement.

Thank you Scott.

Of course. My first question on gross margin, is it possible to give us a percentage point impact some of these new product issues had on the quarter? I mean, was it 200 basis points, 300 basis points? Is that even something that you could do?

Overall, it's between 1.5% to 2%, overall, normally would have been closer to a 40.

Perfect, that's great. And second one for me on capacity. Could you give a little color around kind of your comfort level with where capacity is today? And maybe what that means for CapEx assumptions moving into your next fiscal year?

Yes, definitely. Absolutely some of the growth, we're seeing now as a result of the capacity expansions that we have been doing over the last few quarters and especially in the PMO, and the molding area, which affects both some of the infrared that is molded with infrared and, of course, the PMO itself. I'd say that at this point, capacity wise, we're not seeing ourselves limited right now in any specific area. Most of our investments, this point is going towards efficiencies, is going towards technological advancements, investing in new technologies that allow us both to capture new business and to do existing business better.

Okay, that's very helpful. And last one for me. I'm curious if you could tell us when you became aware of the issue in China and how quickly you were able to act on that?

Yes, we became aware of it at the beginning of March and I'd say within four weeks of when the suspicion team up, we already completely handled it and dismissed those employees.

Okay, great, guys. Thank you.

The next question comes from [indiscernible] FBR. Please go ahead.

Yes, Hi, good afternoon. First question is regarding on backlog between IR and PMO. Just wondering what the mix looks like? Is that kind of comparable to your revenue mix?

Well, because in the third quarter we increase sales by 60% in the IR, we reduced almost proportionately with our backlog. So we're a little more lower in the IR as of eight, but we have a lot more things in the pipeline with IR.

[indiscernible] is a place where we tend to get more longer term contracts compared to PMO.

Sure. Regarding gross margin, just wondering how we should think about course margin for the rest of this calendar year. I mean did I hear you correctly that you expect IR to grow faster than PMOs so that then will gross margin be trending down because IR has, carries lower gross margin?

Yes, in one way, as Sam said, though, the turnaround period is longer. So you're not going to see the effect of higher margins on the IR next quarter. Also, I mean, just remember that mix. You can do 50% of our total revenue in PMO at 50% gross margin, and pointed to 30% of IR, which is 50% of our revenue, the average won't come out, it'll come out in the 30s in the high 30s. So as time goes for cycle, the IR will sell more higher ASP and increase the margin but it won't be 20% from quarter to quarter.

Got it. Thank you.

[Operator Instructions] The next question comes from Gene Inger from The Inger Letter.com. Please go ahead.

Hi, gentlemen, and Sam, congrats and Don congratulations on a good quarter and revenue with some problems continuing as you make what seems to be a grand transition.

Thank you.

Thank you, Jean. And it's good to hear your voice. Welcome backwards the living?

Yes, thank you sir. I went through hell, but glad that we're glad to be alive. In any event, and genuinely doesn't know, believe me COVID is no joke, and it is a horrible disease. But in any event, it looks like you're talking about shrinking gross margins. But not by virtue of net margins, and not by virtue of price cuts, which used to be what would happen to me competition. Is that correct?

Yes, we're not, I'd say we're not seeing a significant price pressure that leads to cut in gross margin. As always, we have a product mix that can be very different we can have in PMO and another some lenses that are much higher margins and others that make shifts around sometimes. But I don't think there is anything that is leaving our gross margin on a long term view declining gross margins or anything like that. We're definitely facing our current yield issues which we talked at length about last quarter and still exists to some degree. But other than that, there's no downward trend.

In your comment there is a lot of the financial questions have been asked in your comments you mentioned acquisitions are [indiscernible]. And I wonder whether you could give us some ideas of where you would consider those to be fruitful, or whether you rather not, because as you've mentioned, before, you have the new direction but you don't necessarily want competitors to be totally aware of what you're planning.

Yes. Yes, absolutely. I would say that it would not come as a surprise given that we're investing in technology and capabilities here that some of the acquisition opportunities that we're seeking are similar in nature, meaning companies that could bring along additional capabilities or technologies that would supplement ours and that would allow us to go to accelerate our path downs a new strategic direction, we're not likely going to look at this point acquisitions that solely bring over capacity, for example. we are not that interested in.

When I look at the staff changes, I see the background of both Albert and Peter and welcome them to LightPath and what I see is also not only optics, but an industrial engineering background and I'm wondering if this personnel changes relate to the new direction they probably do. Maybe that I should assume that. But I'm just curious if you can expand on that at all.

Yes. I mean, as you mentioned, we definitely look for people that fit our needs and in this case, I think we're lucky to have landed two exceptionally talented people that bring with them experience and skill sets that fit really well, the direction we want to go. And it would be would come as no surprise to people that as we want to grow more vertically and as we want to create more value we're looking in our leadership teams that people that have done similar things have been part of similar things before.

We show no additional questions. I'd like to turn the conference back over to management for any closing remarks.

Thank you for participating on today's conference call. Before we leave, I would like again extend my thank you and best wishes to our departing Chairman Bob Ripp. We look forward to speaking with you the next quarter for our year end results. As we have typically done we intend to issue preliminary fourth quarter results in August with the full results coming out in September. Until then our next public engagement would be at the Needham Virtual Technology and Media Conference on May 18. We hope our institutional investor followers will join us at the conference and that all of you continue to follow our progress. Thank you again. And good bye.

The conference is not concluded. Thank you for attending today's presentation. You may now disconnect.