LightPath Technologies Q3 2023 Earnings Call Transcript

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May 11, 2023

There are 5 speakers on the call.

Operator

Afternoon, everyone, and welcome to the LightPath Technologies Fiscal Third Quarter 2023 Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. At this time, I'd like to turn the conference over to Al Miranda, LightPath's Chief Financial Officer.

Operator

Please go ahead, Al.

Speaker 1

Thank you. Good afternoon, everyone. Before we get started, I'd like to remind you that during the course of this conference call, the company will be making a number of forward looking statements They are based on current expectations, involve various risks and uncertainties as discussed in our periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can be proven to be inaccurate There can be no assurances that the projected results would be realized. In addition, references may be made to certain financial measures are not in accordance with generally accepted accounting principles or GAAP.

Speaker 1

We refer to these as non GAAP financial measures. Please refer to our SEC reports and certain press releases, which include reconciliations of non GAAP financial measures and associated Dan will begin today's call with an overview of the business and recent developments for the company. I will then review financial results for the quarter. Following our prepared remarks, there will be a formal question and answer session. I would now like to turn the conference over to Sam Rubin, Whitepath's Matt's President and Chief Executive Officer.

Speaker 2

Thank you, Al. Good afternoon to everyone, and welcome to LightPath acknowledges fiscal 2023 3rd quarter financial results conference call. Our financial results As expected, as we expected would happen to some degree, shipments in the 3rd fiscal quarter of 2023 were impacted by the ongoing construction And while we planned and expected some disruption from the move and expansion, This resulted in between $1,000,000 to $1,500,000 of products that was not shipped in the quarter. Those orders, however, are not lost and their shipments moved into Q4, the current quarter we're in. Completing that construction will position the company for larger, more sophisticated orders, a growth that is backed by a strong backlog and continued booking and customer commitments.

Speaker 2

In prior quarterly calls, we discussed Lightpath's Strategic shift from a components manufacturer to a value added solutions provider. To discuss this further, I'd like to use a framework of talking about 3 pillars of growth as I started communicating in recent months. Some of those points We've discussed previously, the complete understanding is important. The 3 pillars of growth we look at are The shift to the Solutions business, the increase in defense business driven mostly by our new materials and the new high volume markets, primarily automotive. While the latter two growth pillars Our market and application drivers, the first, the solution approach is a strategic in nature and in many ways Tied into and enables the 2 stronger growth segments.

Speaker 2

Our Solutions business defines the first part of our growth strategy. The solutions business is built on leveraging unique capabilities we have and continue to develop to provide customers With solutions engineered to their exact needs that solve problems that either current solutions don't solve are too expensive. Over the last 2 years in setting the strategic direction in place, we have been executing it in the level of lens assembly. Instead of selling individual lenses, offering and delivering assemblies that include multiple lenses often designed to specific customer requirements. Today, about 20% of our backlog of future deliveries It's comprised of such lens assemblies.

Speaker 2

In addition to this organic expansion into assemblies, In December 2022, we announced our first imaging product. More than just a lens assembly designed for a specific detector, Our MANTAIS Imaging module is a unique combination of a special lens assembly together with a modified microbilometer to deliver multispectral infrared camera. The Mantis Multispectral infrared camera not only provides The next level of offering from LightPath, integrated optical systems with imaging electronics to deliver cutting edge infrared solutions. While our intention here is not to be a manufacturer of a line of off We have developed a camera product as an example and design reference It will be the basis of customized OEM modules for integration for specific applications. This approach is somewhat different than the organic growth into solutions so far.

Speaker 2

In a way, we have built a hammer that demonstrates unique and advanced capabilities and are now working closely with our customers to uncover the right nails So far, we have seen strong interest and reception in the market to the unique capabilities of an imaging solution like Mantis. Those include a number of applications in the defense space as well as commercial uses such as sorting plastic and recycling, fire detection and more. It is clear to us that the need for such an imaging solution exists and that some applications and customers We're simply waiting for such a solution to appear at the right price point. Instead of a $100,000 cryogenically Over the last few months, our camera has been tested and evaluated in a number of applications and has especially received significant attention with some groups inside Department of Defense. We're very encouraged by this and believe it will lead to significant OEM business of customized solutions.

Speaker 2

Also, in addition to working with customers on their applications, we developed some unique technologies around this, for which we have been applying for patents. In the last few weeks, we have applied for more patents than the company has in the last 10 years combined, representing a significant buildup of unique IP. The second pillar of growth The defense industry, whether in the U. S. Or Europe, has Been using infrared optics for a long time.

Speaker 2

Stable supply chains already exist to provide primes and subtrimes with the optics and optical systems they need. To achieve significant growth and a market share in such an established market, While commanding a premium, LightPath is leveraging its unique and exclusive materials for infrared imaging as an entry point into new programs and to become the supplier of choice for infrared optics in the aerospace and defense industry. The advantages our materials provide are twofold. First, it is an alternative to using germanium for infrared optics. The DoD and White House identified germanium as a strategic vulnerability within the supply chain.

Speaker 2

With most of the germanium originating from China and Russia, it is of strategic importance to have alternatives. We have been working with the DoD and various government agencies to accelerate the qualification of our new materials. Most of this work is funded directly by those agencies. Secondly, our materials provide additional advantages over germanium, primarily in complex imaging systems. A good example to that is our own mattress camera, which could not be made possible if we were to use only Jomagun.

Speaker 2

While new defense contracts This can take a significant amount of time to come to fruition. We are seeing very positive lead indicators to the success of this strategy, as well as some faster wins as evident in our backlog. The first part of our growth strategy concerns adoption of thermal imaging or infrared imaging in general in more applications, And Lidar primarily with a focus on automotive. Independent of some of the other activities and advancements in the automotive, such as In the automotive world such as Lidar, multiple car companies are working towards the integration of thermal imaging as another safety sensor in their systems. Primarily, we are seeing this in relation to automatic braking systems and adding additional safety features.

Speaker 2

We are in different stages of development and testing with various players in this field. And while Each one has different timelines, different use cases and different projections. 1 customer stands 1 player stands out in our pipeline. And that is a major car company out of Detroit that has already fully qualified our product. Put this into the right perspective, though we obviously do not expect to win all the opportunities on our plate, Neither all of them necessarily turning into final products.

Speaker 2

With a price tag of between $20 to $50 per assembly And with tens of millions of new vehicles hitting the road each year, it is enough for us to win 1 or even 2 major accounts Since we completed the equity raise in January, we have accelerated construction on expanding our Florida facility. The purpose of this construction was to increase our facility capacity and capability. We're excited to have this construction phase behind us as we are now back at full capacity and expect the next construction phase to be completed in the second half of the calendar year. With our facility increased facilities increased capacity, we will soon look to add capabilities, which we can see coming from both organic and inorganic development. As always, I would like to thank our employees and stakeholders We have continued to work diligently through the various transitions and hurdles we have endured.

Speaker 2

We see a bright future and growing company because of their dedication, patience and hard work. That said, I will now turn the call over to our CFO, Al Miranda, to review our Q3 financial results. Al?

Speaker 1

Thank you, Sam. I'd like to remind everyone that much of the information We're discussing during this call is also included in our press release issued earlier today and will be included in the 10 Q for the period. I encourage you to visit our website.

Speaker 3

I will discuss some of the

Speaker 1

primary financial performance metrics and provide additional color on them to better assist investors in analyzing the company. On a consolidated basis, revenues for the 3rd quarter were $7,400,000 compared to $8,300,000 in the year ago period. Sales of infrared products $3,600,000 or 49 percent of the company's consolidated revenue of fiscal 3rd quarter. Revenue from precision molded optics or We're $700,000 or 9 percent of total company revenue. The decrease in infrared product sales is due largely to timing issues related to a renewed large annual contract, which was partially offset by the sale of the majority of The decrease in PMO revenue is primarily attributed to a decrease in sales to customers in the telecom and commercial markets, partially offset by increases in defense and industrial customers.

Speaker 1

BMO sales in China continue to be soft across all industries. The increase in specialty optics during the quarter was a result of increased demand for collimator assemblies and custom visible lens assemblies to the medical industry. Gross margin in the Q3 of fiscal 2023 was approximately $2,500,000 a decrease of 16% as compared to approximately $3,000,000 in the same period of the prior fiscal year. Total cost of sales were approximately $4,900,000 for the Q3 of fiscal 2023 compared to approximately 5 point $3,000,000 for the same period of the prior fiscal year. Gross margin as a percentage of revenue was 34% for the Q3 of fiscal 2023 compared to 37% for the same period of the prior fiscal year.

Speaker 1

The decrease in gross margin as a percentage of revenue It's partially due to lower revenue level with less fixed cost coverage as well as the mix being more heavily weighted to infrared products. PMO products, which typically have higher margins than our infrared products, comprise 42% of revenue for the Q3 of fiscal 2023 as compared to 49% of revenue for the Q3 of fiscal 2022. SG and A costs were approximately $2,800,000 for the Q3 of fiscal 2023, an increase of approximately $140,000 or 5 percent as compared to approximately $2,600,000 in the same period of the prior fiscal year. The increase in SG and A cost $129,000 in costs related to the exit of our secondary facility in Orlando for which our lease ended in February 2023. Net loss for the Q3 of fiscal 2023 was approximately $1,200,000 or $0.03 basic and diluted loss per share compared to $495,000 or $0.02 basic and diluted loss per share for the same quarter of the prior fiscal year.

Speaker 1

The increase in net loss for the Q3 of fiscal 2023 as compared to the same period of the prior fiscal year was primarily attributed to lower revenue and gross margin. We believe EBITDA, a non GAAP financial measure, Helpful for investors to better understand our underlying business operations. Our EBITDA for the quarter ended March 31st was a loss of approximately $242,000 compared to earnings of $647,000 for the same period of the prior fiscal year. The decrease in EBITDA in the Q3 of fiscal 2023 was primarily attributed to lower revenue and gross margin. As of March 31, 2023, we had working capital of approximately $16,000,000 and total cash and cash Equivalence of approximately $9,900,000 of which greater than 25% of our cash and cash equivalents was held by our foreign subsidiaries.

Speaker 1

Cash used in operation was approximately $921,000 for the Q3 of fiscal 2023 compared to approximately $352,000 for the same period of the prior fiscal year. Cash used by operations For the 1st 9 months of fiscal 2023 is largely a function of the pause in production during the Q3 as inventory was built and not The increase in backlog during the 1st 9 months of fiscal 2023 was due to several large customer orders. One such order is a $4,000,000 supply agreement with a long time European customer of precision motion control systems and OEM assemblies. Shipments on these large orders will begin between next quarter and ship during the following 12 to 18 months. I'd like to comment on 2 points for the quarter.

Speaker 1

First, we feel good about the Q3 gross margins Given the low shipping volume, 34% in Q3 compares favorably to 30% in Q1 On similar revenue and mix, which we believe is a testament to the operational improvements we've been making. 2nd is the equity raise. As we said, we are planning on using the proceeds over the next 12 to 18 months for production capacity and new capabilities, particularly as it relates to our assembly business. The raise also enabled us to achieve favorable terms with our senior lender, including monthly Principal payment reduction, removal of financial covenants, lifting of restrictions on acquisitions and removal of limitations on other financing sources. This really gives us degrees of freedom to manage cash and debt in a sensible way to meet the company's growth needs, including finding a new finance partner.

Speaker 1

With this review of our financial highlights and recent developments concluded, I'll now turn the call over to the operator to begin the Q and A.

Operator

We will now begin the question and answer Our first question comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Speaker 4

Hi, guys. Thanks so much for taking my questions. I got a bunch. We'll start with some around the numbers. The large renewal order that started to shift, but hurt your year over year Sales for infrared, how much was that a year ago versus this quarter or what was the headwind from that?

Speaker 2

Well, the biggest impact of the move here in Orlando has been the coating chambers for the infrared. So, all right. Well, not only that, most of the impact from the downtimes that we had would show up as Impact in sales is open for that. Is that Okay.

Speaker 4

I thought you in addition to that, I thought you said The timing of that order for year over year comps. So I was just wondering what that was. All right. We'll go over that after. That's okay.

Speaker 4

When I looked at the Q, I was a little surprised even with the Orlando facility down, what unit volumes were. Then I was even more surprised to see that the average selling price, I know it in Swing was almost twice what it almost ever is for both your main categories. So can you help me understand these dynamics?

Speaker 2

So twice being higher, right? Yes, you

Speaker 3

were building almost $100

Speaker 4

a unit, Whereas normally it's $50 to $70 for

Speaker 2

Yes. So the biggest impact The biggest driver to that is really the decrease in sales in China, where we've spoken in the past about the Big drop in revenue, nearly 2 thirds of our sales in China, 20% of our global consolidated sales Have gone away basically because of the different events in China, geopolitical primarily, but not only. And those all tend to be on the lower end of the spectrum of products, meaning really down to the components, single dollar Lenses around $1 even sometimes. So less of that is really driving more The unit prices up, their speed as well as of course assemblies and what the shift into the more engineered solutions, Which is taking us to 100 of dollars 1,000 of dollars per unit.

Speaker 1

And Brian, that's the telecom industry, particularly out of China,

Speaker 4

What about infrared? What about infrared that was like $128 per unit as opposed to $80 for the few quarters. I mean, that's Yes.

Speaker 2

The second customer in China was the infrared. It was for consumer level products That we're using infrared lenses.

Speaker 4

Okay. So a couple of big picture questions. Maybe An update on I mean, you gave us a lot of information this quarter and last on Mantis. In the last conference call, I think you said

Speaker 2

Yes, absolutely. I think we have very extensive tests and Down to field and lab with different groups in the DoD, which naturally we cannot talk too much about the application there. But I would say that the different groups there have been evaluating our cameras So taking deliveries of samples such for a while now, for a couple of months. Things look very, very positive in some elements. The results they were showing us that they got to even better than we thought Could be.

Speaker 2

But those are more the technology development groups within DoD, different not research labs, The different application labs or technology development, but that's to move into actual product For the most part, with the exception of 2 groups, the most part it takes longer. In the commercial side, we've had A lot of very interesting conversations leading some field tests as well in firefighting And some industrial applications of high temperature process monitoring, in plastic recycling and more. I believe in the next few weeks, we'll already start shipping some small volume of units to some of those customers for them to test Integrating them into their applications. But we're still a few months away from many substantial, I'd say, commitments

Speaker 4

Okay. And then you talked about the auto brakes opportunity, which is great to hear more about it. Last quarter you talked about it here when I thought it was a supplier, but you're talking about a car manufacturer, You're not a supplier. No,

Speaker 2

I meant a supplier, sorry. We just at that level of products, we tend to get involved In more than one level. So we're supplying to the integrator, but we know very well who the car company is and have Some interaction with them too. Right. So your

Speaker 4

primary customer will be the Tier 1, whose primary customer will be Detroit car manufacturer?

Speaker 2

Correct.

Speaker 4

Yes. And then and so again back to timeline, I don't want to hold you exactly to it, but I mean, you said you're sort of 5 to 6 months away maybe from a supply agreement. Does that still feel right? I guess, I don't care about small changes,

Speaker 2

there's any major changes to that timeline. Yes, nothing changed to the work in that timeline. But we're not there yet. So anything can happen, right? But there's been no negative Changes in any way, on the contrary, even some discussion of increasing the scope of work.

Speaker 2

So we will do more set assembly Initially, but I'd say that's going well right now.

Speaker 4

Okay. And then my last question is, You've got 3 major government agencies in the U. S. And Europe that have you talked about approved and Completed testing on BD6. So when could this become a catalyst to revenue?

Speaker 4

And what do you think has to happen in order for that to actually take off?

Speaker 2

Yes. We expect from the different Projects or programs with different government agencies, which funded those for over $1,000,000,000 to this point. We expect in the next 2 months to be compiling all of that data into some commercial form. That would then help our They'll have the proper book of specification and also technical data they need. And at that point, we'll start selling, I think, more of it, Sometimes even in a more format where we'll be selling it uncoated, for example, such that customers have want to do Some additional processing guidance.

Speaker 2

We expect in the next couple of months to start seeing a bit more of a drive on that. Great. Thanks so much. The next question is

Operator

from Thank you. Excuse me. The next question is from Gene Inger with Inger letter dot com. Please go ahead.

Speaker 3

Hi, Sam and Al. Hi, Gene. Hi. It's sort of an interesting time. Obviously, the preceding quarter is, I'm sure I say, use an old Irish word, a little bit nevish, but I don't think that's where we're all holding shares in LifePath 4.

Speaker 3

We're looking to the future, as are you, Because it's pretty obvious to me at this point that this company is primarily about The new directions, the new solutions and so on. Although I do want to ask you one question about BD6, which the other gentleman was just Asking about because you have talked you've said before, I think, that you could make as much as 10 metric tons a year of it. And the assumption has been that it's sort of a secret sauce that you don't want to license or sell the materials and that you wanted to Milton, specifically for your own products. Is that the case? Or is this now something you would license?

Speaker 2

Yes. I'd separate it into 2 parts. We sort of created a bit of a confusion over the years by talking about BD6, BD6, BD6. We're now, I'd say BD6, the number 6, is 1 of 12 materials, where 10 of the other materials Our license for Menor Elend are exclusive to us. So BB6 as a general material has And so that one is not a secret sauce alone.

Speaker 2

It's not The BD and Ls, the Naval Research Lab materials, those are the ones that are completely And where we do not plan to sell us the materials. But the BD6 itself, we see no reason Down the road to sell it to the material even, given that there are others that exist similar to that and it's going to help our economies of scale In the manufacturing of the glasses.

Speaker 3

Okay. At the recent Photonics show, I chatted with a number of Major military contractors, defense contractors, and they all seem to know LifePass. They all And I tend to have a focus On something that you may not want to touch upon, but seems obvious to me, I think I've mentioned it to you Sam, And that is the smaller, multispectral cameras have a use in a particular product, Which doesn't come back to its base and that is a drone. And I'm thinking what I'm talking not about a drone in general that you want Should come back, but what are termed kamikaze or suicide drones. Could you expand on that a little bit more?

Speaker 3

Or are we going beyond an area that

Speaker 2

Well, I'd say, obviously, we can't discuss the exact programs within the DoD, but I would say that Loitering munition, what you call the chemicals each own, 4 different missiles that are based on heat seeking Our products that we are already embedded in as well as multiple, way more than one Programs under development of next generation of some of those. So I'm not surprised, but I'm happy to hear that Everyone you spoke to knew of us. I don't think there's any defense company out there that we don't work with On the infrared optics at this point, although we're not the only infrared optics supplier for now at least. We're working on that part.

Speaker 3

Okay. I really don't have questions about previous performance because I think we all know What the situation is, I actually think you and Al have balanced the money and held things together pretty well, Considering that what you're really doing is taking care of things until you arrive at the point of these new product relationships, I presume. I would like to ask you though, you did think that It would be this quarter or the next quarter. I realize things got delayed. So you're still anticipating whether it's the military, probably maybe before the automotive, There will be something you can announce and quantify by the end of this summer?

Speaker 2

I very much hope so. I'd say we're juggling multiple balls in the air that have that are opportunities that would Potentially be over $10,000,000 each and in the longer run. And I look at those as sort of in a way to some degree. And as we don't need all of them to happen. It can't be that all of them will happen, But some of them were for sure.

Speaker 2

And the timing of it, I'm hoping that by the end of this summer, we might have some good progress to talk about, but I'm not anticipating necessarily a large announcement or a short term revenue contest.

Speaker 3

Well, I would say all you have to do since you've talked about integrating the thermal products into technology, It's almost like being embedded on our Board. Maybe you should change the name of the company to LightPath AI.

Speaker 2

AI does seem to flavor us amongst, but then we might need to change it to something else when people lose some of the passion for AI.

Speaker 3

Well, I don't think they will because I suspect the changes the world considerably. But in any event, I will leave that with the fact that LifePak as a stock is almost like an option that doesn't expire, But it just goes in a neutral sort of zone. I'm wondering where you stand on a topic that you've mentioned exploring in The past such as acquisitions or partnerships as opposed to simply selling these products even when they do get to fruition.

Speaker 2

Yes, I think that the more we the further along we're getting with Stabilizing the business of Pervations financial performance as you pointed out, the more we can start looking at Some strategic investments or partnerships that would bring us to the next level of some of those. And naturally, As we're starting to do things like a sophisticated camera valve, we've got the electronics, FPGA, some processing on it on board and so Naturally, we would want to add capabilities there.

Speaker 3

And I will leave you with this last question because I have to jump off. The last question is going to be, you have a really good backlog at the current time. Do you feel that the problems you've had because you haven't You ramped up Orlando fast enough with the new equipment. Do you feel that you'll be able to Meet and fulfill that backlog because you don't want to make customers unhappy.

Speaker 2

Yes. Our Production team and Peter Greiff, our VP of, have worked very hard at developing alternatives in places Where we have some weak spots and we're not ashamed to outsource even to competitors or to other companies in the industry Some parts of fabrication process or even coating when we need to in order to deliver on time. So I'd say that the team has It's pulling all stocks and in no means is letting any of those, I'd say events such as the move or such prevent us from delivering. So we'll deliver much better. Our margins will

Speaker 3

I'm going to leave you, but I have to bring up one word, space. You have not mentioned space. And I have a feeling because we've talked about low orbiting satellite communications and so on, can you color or provide Any indication of what, if anything, you guys are doing in that realm?

Speaker 2

Sure. It seems that we've had a number of projects In space over the last 3 years that I'm here, most of them have been around optical communication. And Definitely recently we started seeing signs that some of them could potentially grow at a higher rate than we were expecting. I'm hoping to even be able to talk about this publicly in the next few quarters, The various optical communication activities in space are

Speaker 3

Okay. Thanks a lot guys. Good luck and fingers are crossed that some of this happens sooner rather than later. Thank you,

Operator

James. This concludes our question and answer session. I would like to turn the conference back over to Sam Rubin for any closing remarks.

Speaker 2

Thank you everyone for taking the time today to follow LightSpark Technologies. We appreciate your the trust you place With us by our stakeholders and look forward for future calls where we will further discuss the fruits of our efforts to retool the business and move the company forward. Thank you and goodbye.

Operator

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

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