LightPath Technologies, Inc. (NASDAQ:LPTH) Q2 2023 Earnings Call Transcript

LightPath Technologies, Inc. (NASDAQ:LPTH) Q2 2023 Earnings Call Transcript February 9, 2023

Operator: Good afternoon, and welcome to the LightPath Technologies Fiscal 2023 Second Quarter Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Albert Miranda, Chief Financial Officer. Please go ahead.

Albert Miranda: 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 that are based on current expectations, involve various risks and uncertainties, including the impact of COVID-19 pandemic that is discussed in our periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can be prove to be inaccurate and there could be no assurances 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 reconciliation in the company’s SEC filings and press releases.

Sam 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 fiscal year. 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, LightPath’s President and Chief Executive Officer.

Sam Rubin: Thank you, Al. So good afternoon to everyone and welcome to LightPath Technologies’ fiscal 2023 second quarter financial results conference call. Our financial results press release was issued after the market close today and posted on our corporate website. The second fiscal quarter of 2023 proved to be eventful LightPath Technologies. In prior quarterly calls, we have touched on the fact that LightPath is evolving from a component manufacturer to complete solutions provider. Evidence of this evolution spouted up throughout the quarter and I’ll will spend a large part of our time today discussing these important events. Additionally, I will discuss what we see as there were three pillars of growth going forward; the solutions business, defence business and the new high volume applications for infrared imaging.

Starting with the first pillar of growth, the Solution business. The most important item I’d like to discuss here is our company’s first ever new system level product mantis. Mantis is an advanced infrared camera that allows the users to record images across both midwave and longwave infrared spectrum and without the need for cryogenic cooling. This camera is significant for LightPath in that it is the first standalone finished product LightPath has produced in many years and it serves as a proof statement for our capabilities. I want to delve deeper into the significance of Mantis. Our plan to evolve into a solutions provider depends on LightPath displaying two key capabilities; value-added system development and proprietary differentiators such as in this case, our Black Diamond glass.

With proprietary differentiators, we can design and deliver solutions that are better than otherwise available, while at the same time capture more of the value created versus only producing the components. Developing Mantis puts down with capabilities on display. The production of this unique camera represents a leap forward for manufacturing individual components to producing standalone systems. Design wise, our Black Diamond glasses all enabled the ability of the camera to image across that entire range that is two to 12 micro-meters or mid-wave and long wave bands without the need to refocus the camera when imaging different bands. For the user, this means that instead of having two separate cameras and focusing and pointing each camera separately, they can now do this with one camera, not only reducing their upfront costs substantially, but also improving significantly the operation and total cost of ownership.

This also means we can now use existing technology, that of an uncooled microbiometer, and deliver a camera system that can also image in the midwave without the expensive cooling mechanisms that today are needed for the existing midwave camera technology. We expect this in turn to open up new markets and applications which until now found midwave imaging to be cost prohibitive. We are already working with customers on specific opportunities in defense, industrial and safety applications — safety industries. The optical performance of this camera, because such a wide range of wavelengths cannot be achieved with traditional crystalline optics, it is really enabled by the unique properties of our materials. Chief among those — chief among them are the ones licensed exclusively from Naval Research Lab.

Besides the technical advancements visible in the camera, the camera also provides customers with a vision of the value LifePath can bring to any partnership by providing complete solutions. Additionally, during the last quarter, we also announced other exciting developments on the product front related to our second pillar of growth that is the defense business. Our BD Six glass was qualified by the European Space Agency for use in space, placing BD Six and Light path at the forefront of optics in extreme conditions. This project was specifically initiated by European Space Agency to develop and qualify an alternative specifically to germanium for use in space. Our BD Six glass was tested side by side with germanium to show and prove that it withstands the exact same conditions and performs at least as well as germanium.

Having been an advocate for the need and potential to replace germanium with materials like ours, we are happy to see customers not only driving towards that direction but also willing to finance the effort needed for their applications. Substituting BD6 for germanium continues to be primary focus of LightPath and other stakeholders in the industry and in particular in the defense and aerospace industries. The growing awareness among the DoD and other government agencies for germanium’s potential supply chain issues or liabilities. Is beginning to fuel demand to get more of our V Six materials qualified and designed into systems point. In case being that last quarter we announced that LightPath reached a backlog of 31 million in mid-December, our highest budget backlog in many years which beat our previous high watermark of 24 million set last August.

Much of the growth of this backlog is driven by new defense contracts for which our products have been qualified and for which we received associated orders. With those contracts we are beginning to see VD Six take center stage, while Germanium is in some cases being phased out completely or avoided. One of those recent awards represents a new program which is one of the several new products we have been discussing in recent quarterly calls. This program is anticipated to become a new 10% customer for us over the next few years and while backlog fluctuates over time, we do believe that they are a reliable indicator of future revenue. At the end of the quarter, our backlog remained at historically high level for quarter end of 29 million. As mentioned on several recent occasions, the backlog is skewed more towards defense and commercial customers in the US and Europe than it has ever been.

Photo by Quincy Follweiler on Unsplash

Additionally, around 20% of the backlog remains comprised of solutions oriented audits which is significant. We see both those developments being solution mixed in the backlog and the European and US dominance of the backlog as positive indicators that our strategy is working. This strategy focusing more on value added solutions. And lesson components also naturally leads us further away from the commoditized components that had historically driven our sales in Asia. Regarding our third pillar of growth, new high-volume applications for infrared imaging, we’re beginning to see the potential of new significant implementations for thermal imaging in the commercial world. More specifically, we’re working with several companies in the automotive space to explore adding thermal imaging to the automatic braking systems in new cars.

The Institute for Highway Safety published a report that concludes that automatic braking systems are four times less effective at night compared to daytime. One solution for this problem, which we’re seeing as potentially being implemented, is adding a thermal camera as another sensor input to the automatic braking system. This implementation, while far less sophisticated than some of the LiDAR solutions out there, is also far less risky and much simpler and lower cost for the automotive companies to implement. To date, we have been in various phases with four different automotive customers, with one of the assemblies having passed field qualification with one customer. The potential average sale price we are seeing for those assemblies varies between $20 to $50 a unit, depending on how much of the camera solution we offer.

And though automotive implementations take time and there is always some inherent uncertainty, we believe that such new implementations and applications could act as our third pillar of growth for the next few years. Lastly, but certainly not least. After the quarter end, and to support this growth that we’re beginning to experience, we raised a growth of $10 million in a secondary common stock offering. Among other things, this additional capital will be used to expand our manufacturing capabilities and significant increase in production capacity, in particular in the US. And Latvia, one of the largest first impediments to our ability to fulfil larger orders with limited production capacity, in particular in the defense business. We believe that the investment in our Orlando facility and our facility in Luthria will drive higher order volumes.

We also intend to use a portion of the funds to pay down and restructure our debt, further strengthening our financial standing and reducing our quarterly debt payments, repayments and interest expense. Before ending, I’d like to thank our employees and stakeholders who have continued to work diligently through the various transitions and hurdles we have endured. We see a bright future and a growing company because of their dedication and hard work. I will now turn the call over back to our CFO, Al Miranda, to review our first quarter financial results. Al?

Albert Miranda: 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 in the 10-Q. I encourage you to visit our website@lightpass.com to access these documents. I will discuss some of the primary financial performance metrics metrics and provide additional color on them to better assist investors on a consolidated basis. Revenues for fiscal second quarter were 8.5 million, compared to 9.2 million in the year ago period. Sales of infrared products were 4 million, or 47% of the company’s consolidated revenue of the second quarter. Revenue from precision molded optics or PMO products were 3.9 million, or 46% of consolidated revenue, and revenue from specialty products was zero 6 million, or 7% of total company revenue.

Revenue generated by infrared products was approximately $4 million in the second quarter of fiscal 2023, compared to approximately $5.1 million in the same period of the prior fiscal year. The decrease in infrared product sales is due largely to timing issues related to a renewed large annual contract. Sales from PMO product was $3.9 million, compared to $3.8 million in the same period of the prior fiscal year. The increase in revenue is primarily attributed to increased sales in defense, industrial and medical customers, somewhat offset by decreased sales to telecommunication customers. Sales in specialty products was 0.6 million, compared to 0.5 million in the same period of the prior fiscal year. The increase was primarily driven by increased demand for pollinator assemblies.

Gross margin in the second quarter of fiscal 2023 was approximately $3.2 million, an increase of 15% as compared to approximately $2.8 million in the same period of the prior fiscal year. Total cost of sales was approximately 5.2 million for the second quarter of fiscal 2023, compared to approximately 6.4 million the same period of the prior fiscal year. Gross margin as a percentage of revenue was 38% for the second quarter of fiscal 2023, compared to 30% for the same period of the prior fiscal year. The increase in gross margin as a percentage of revenue is partially due to the mix of products sold in each respective period. BMO products, which typically have higher margins than infrared, comprised 46% of revenue for the second quarter of fiscal 2023 as compared to 41% of the revenue for the second quarter of fiscal 2022.

In addition, within our infrared product group, sales for the second quarter of fiscal 2023 were more heavily weighted toward molded infrared products than in the same quarter of the prior fiscal year. Molded infrared products typically have higher margins than non molded infrared products. SGNA costs were approximately 3 million for the second quarter of fiscal 2023, an increase of approximately 84,000, or 3%, as compared to approximately 2.9 million in the same period of the prior fiscal year. The increase in SG&A cost is primarily due to an increase in stock compensation, partially due to direct retirements that occurred during the quarter, as well as increases in other personnel related costs. SG&A costs for the second quarter of fiscal 2023 also included approximately 45,000 in fees paid to Bank United associated with our term loan.

These increases are partially offset by decreased fees and taxes associated with our Chinese subsidiaries. Net loss for the second quarter of fiscal 2023 was approximately $694,000, or $0.03 basic and diluted loss per share, compared to 1.1 million, or point or $0.04 basic and diluted loss per share, for the same quarter of the prior fiscal year. The decrease in net loss for the second quarter of fiscal 2023 as compared to the same period of the prior fiscal year. Was primarily attributable to higher gross margin despite the decrease in revenue. We believe EBITDA; a non-GAAP financial measure is helpful for investors to better understand our underlying business operations. Our EBITDA for the quarter ended December 31, 2022 was approximately $207,000, compared to a loss of $41,000 in the same period of the prior fiscal year.

The increase in EBITDA in the second quarter of fiscal 2023 was again primarily attributable to higher gross margin. As of December 31, 2022, we had working capital of approximately $9.6 million in total cash and cash equivalents of approximately $3.8 million of which greater than 50% of our cash and cash equivalents was held by our foreign subsidiaries. Cash used in operations was approximately $752,000 for the second quarter of fiscal 2023 compared to approximately $157,000 for the same period of the prior fiscal year. Cash used in operations for the first half of fiscal 2023 are largely driven by a decrease in accounts payable and accrued liabilities, including the payment of severance related to the previously disclosed employee terminations that occurred at our Chinese subsidiaries for which that liability had been accrued in June of 2021.

Increase in backlog during the first half of fiscal 2023 was primarily due to several large orders majority of orders received from customers in the in Europe for several long term projects which we are currently working on. Shipments on these large orders will begin the next quarter in the following twelve to 18 months. Going forward. We’re cautiously optimistic about a recession over the next six to nine months in Europe and the US. China is clearly in a recession, but there have been some recent signs that recovery may occur in that market sooner than expected. Our cautious optimism does mean that we will work to continue to keep costs down and continue to look for more opportunities to produce, to improve production. Efficiencies we did achieved 38% gross margin in Q Two.

I want to caution everyone not to extrapolate that forward. We felt in advance that Q Two had the right mix to create a good level of margin in Q3 and Q4. We will start delivering on existing higher volume contracts with favorable pricing to customers. At the same time, we will ship new products under contract with more value added and consequently better margins. The mix, while positive in dollars, will want to result in lower gross margins as a percentage. With this review, our financial highlights and recent developments concluded. I’ll now turn the call over to the operator to begin the question-and-answer session.

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Q&A Session

Operator: And our first question comes from Scott Buck of H.C. Wainwright. Please go ahead.

Scott Buck: Hi, good afternoon, guys. Thank you for taking my questions. First one Sam, I was wondering if you could put some dollar figure around what that China headwind is maybe versus a year ago. And how much of that business do you think you can reasonably expect to earn back over time?

Sam Rubin: Yeah, I don’t know if I would call it headwind, Scott. The expectation is that it’s my expectation that they’ve hit bottom. Right. That was not clear, let’s say, three months ago. But the opening up from COVID looks like it’s having a positive effect, particularly in the service sector of the economy and definitely in the consumer purchasing. Eventually, that will have to trickle down to the rest of the manufacturing supply chain. Right. So we’re still cautiously optimistic. We’re cautiously pessimistic in terms of casting our revenue and earnings out of that organization. But I do think it might not be as long as we thought it would be, but we don’t believe it. Go back to the levels it was. Two, three years ago. It’s still going to be significantly lower than, I’d say, 2020 or so.

Scott Buck: Right, okay, that’s helpful. And then Sam, I’m curious. Is there anything on the acquisition front that could help accelerate some of the scaling into whether it’s defense or some other piece of business that might make sense for you guys?

Sam Rubin: Yeah, I think that currently we’re more focused on expanding capacity and growing. We’re seeing great signs of growth. We’re even seeing customers saying they would give us more work of some existing projects if we would add capacity. Historically, the company relied a lot of capacity in China. Now with defense work. We need to shift capacity or set up different type of capacity in the US and Europe. Europe getting its own defense license for our latter facility, which we believe will bring more growth. I think that as we progress on the engineered solutions and products like Mantis or great examples and reference designs for that, we would be looking to add technology and continue to focus on differentiating technologies to supplement that.

Scott Buck: Great, that’s helpful. And then last one for me, I’m just curious on your US and European manufacturing facilities, what is kind of the timeline on getting some of these work done to ease any kind of capacity constraints?

Sam Rubin: Yeah, I’ll start with you because that’s the easier one. So if you have a call about two years ago, we made a pretty significant investment in our European facility to add optical coating. And that was set up in a way that we really staged it toward adding more capacity easily later. And now with the money that we raised, we’re starting to do that. Some equipment is pretty fast right now, very surprisingly, and we can get some pieces of equipment in a matter of weeks. Some are a matter of half a year, some are still a matter of twelve month lead time. So in Ludwig, it’s purely equipment. In Orlando, we’ve been already renovating and expanding the facility. As a reminder, we signed actually a lease for the expansion.

Just haven’t started using that space yet. Last week we finished moving the optical coating into that space here in Orlando. It was in a separate buildings that will streamline our operations significantly. And we’re now going to start also investing in more equipment and capacity in Orlando and lead times vary considerably, but I’d say to be safe, they would be typically six to twelve months on adding capacity.