LightPath Technologies, Inc. (NASDAQ:LPTH) Q3 2024 Earnings Call Transcript

LightPath Technologies, Inc. (NASDAQ:LPTH) Q3 2024 Earnings Call Transcript May 9, 2024

LightPath Technologies, Inc. misses on earnings expectations. Reported EPS is $-0.06838 EPS, expectations were $-0.03. LPTH isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the LightPath Technologies’ Fiscal Third Quarter 2024 Earnings. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. And I would like to now turn the call over to your host, Albert Miranda, Chief Financial Officer. You may begin.

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, and discussed in its periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can be proven to be inaccurate and there can be no assurances that the projected results would be realized. In addition, references may be made to certain financial measures that are not in accordance with generally accepted accounting principles or GAAP. We refer to these as non-GAAP financial measures.

Please refer to our SEC reports and certain of our press releases, which include reconciliations of non-GAAP financial measures and associated disclaimers. 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 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, LightPath’s President and Chief Executive Officer. Sam.

Sam Rubin: Thank you, Al. Good afternoon to everyone. Welcome to LightPath Technology’s Fiscal Third Quarter 2024 Financial Results Conference Call. Our financial results press release was issued after the market closed today and posted on our corporate website. Fiscal third quarter and additional developments in early 2024 continue to underscore our strategic shift from a component manufacturer, what we like to refer to as LightPath 1.0, to LightPath 2.0, a value-added provider of assemblies, and set the stage for LightPath 3.0, a custom infrared camera and subsystem manufacturer. To recap for our investors, LightPath has been transitioning in the last few years from a pure component manufacturer focused on being the lowest cost provider to value-added partner for complete solutions based on optical technologies whose differentiators are mostly technological.

As you likely recall, during our first fiscal quarter call six months ago, we stated that LightPath was making a strategic decision to move away from Germanium-based business, and that as a result of that, the company would likely see two slow quarters. The quarter we’re reporting on today is the second of those two quarters, and as expected, we’re now on a recovery trajectory and on track to return to profitability during the next fiscal year. Together with the recovery in sales, we have also been working on multiple tactical initiatives that will assist in our return to profitability. One such initiative has been to finally complete the full integration of ISP Optics, which was acquired in 2017, into LightPath’s ERP system. I don’t think I need to explain why that is needed and its impact on efficiency and operation.

It did, however, create some short-term impact to our inventory value that also hit the cost of goods sold line for this quarter. I mentioned this just to provide the context of the lower gross margin and assure that this is a one-time event related to finally completing that integration. In addition to finally completing the integration of the ERP entities, we have also taken a number of initiatives that improve our cost structure. In the last few months, we have trimmed down our cost structure by over a million dollars and continue to do so with a few more projects that are not yet complete. All of this is designed to hand-in-hand with the growth in top line, bring us back to profitability. All of this has been on the tactical level and short-term impact.

I’ll now discuss some of the strategic direction and longer-term outlook of this. As has been the case since we started our strategic transition, we focus on three pillars of growth. One is Imaging Solutions, becoming a subsystem or camera provider. Second is growth in new markets, such as automotive. And the third is growth specifically in the defense business. All three pillars of growth are driven by the unique and differentiating technologies. Chief among them are our black diamond infrared materials. Also all three pillars of growth tie into and support our transition from a component manufacturer to provider of engineered solutions based on our proprietary technologies. This transition began a couple of years ago, starting from customized lens assemblies, which we now refer to as LightPath 2.0, through camera solutions, the LightPath 3.0, the first of which was our innovative MANTIS broadband infrared camera, which enables both new applications and capabilities for our customers.

The MANTIS was our first major step in that pillar of growth of becoming a solutions provider of higher value products, such as cameras, which we sell in the thousands of dollars, versus the ASPs of components we were used to in the past. Further activities in that pillar of growth included acquisition of Visimid last year, announcement of more additional cameras, such as our high sensitivity camera with a ultra-low noise of 15 millikelvin, and hiring our new VP sales Jason Messerschmidt, who joined us from Teledyne FLIR, where he was responsible for $250 million sales organization for infrared cameras. As mentioned, we strive to have every quarter some developments to report in each one of those pillars of growth, and this quarter is no exception.

The last point related to the pillar of growth is to share that in this third quarter, the revenue attributed to LightPath 2.0 and 3.0, including customized lens assemblies and camera solutions, and engineering — related engineering services, accounts to 18% of our revenue, demonstrating our ongoing success and commitment to our strategy. The second pillar of growth is the defense industry. Here, too, there are multiple of important developments. First is that we have delivered on our first milestone in the Lockheed Martin missile program. In this project, Lockheed Martin is competing against another prime defense contractor to develop an updated missile system. The project, as we had previously reported, includes, in the short term, a $7.5 million development money, $4.7 million already committed, but most importantly, a massive, massive sales opportunity for us down the road in hundreds of millions of dollars over the lifetime of this program, if we successfully deliver the system and are chosen by the army.

I will not elaborate more on this project right now, since it is on track and there are no additional changes or updates to report on, but for those that are not familiar with it, I’d encourage you to listen to our previous calls or press releases that discuss this project, as we see it as a major growth driver in the next couple of years. In the defense side, we also announced last month availability of the first of the exclusively licensed NRL infrared materials. That material is BDNL-4. This announcement has created significant interest from existing and new customers, and we have, in fact, started booking already new orders almost instantly for this material. As a reminder, this is one of nine new materials licensed exclusively from NRL, and the qualification of their manufacturing readiness is paid for by DLA through a grant.

We expect to continue announcing new materials on regular basis, with the next one being BDNL-8, which we plan to announce in the coming weeks. Also announced around the same time is another major design win for our products, in this case our new materials. This new airborne program is for an optical system designed almost exclusively with our own exclusive materials. This program of record is separate from the Lockheed Martin missile program. I’d like to emphasize that in case there was any confusion. Those are two separate opportunities. Each one of them is very, very significant in size. This also has a significant potential, almost as large as the Lockheed Martin opportunity. This program serves to demonstrate very well our strategy related to the new materials.

It’s a new system, which is designed using our exclusive materials, and which we end up building the entire optical system as a product. In our previous strategic direction, or LightPath 1.0 as we call it, we would have probably ended up making only the components for this. Now, because of the unique capabilities we developed, we get a much bigger piece of the pie, and we own exclusively a key ingredient in that pie. Last in the defense pillar of growth is our recent award of the European Defense Manufacturing License. This license, that is similar to what ITAR is in the U.S., allows us to now participate in European defense projects that are required to be designed and produced within the EU. Just like ITAR requires U.S. defense projects to be designed and produced in the U.S. We received this license as a result of the investments we made in our Riga operation three years ago, adding coating capabilities and making it, therefore, vertically integrated and self-sustaining, or in other words, able to serve the European defense market completely locally.

We also happen to have just completed and announced further expansion of that coating capacity and coating capabilities in Riga, in what turned out to be a perfect timing for this growth now expected with this license. With the EU defense market growing at 12.5% to a record of $295 billion last year, and the European Union publishing its first-ever European defense industrial strategy, which among other things, encourages cooperation and purchases in defense technology among EU members, such as Latvia, we are now well positioned to substantially grow our sales in Europe through this. For comparison, our defense sales altogether have grown in the last few years from 8% of our revenue to 30% of our revenue, 3-0. Most of it, if not all of that growth, has come from the U.S. defense market.

So, the potential for growth from the European defense market is substantial. The first pillar of growth is new applications, and specifically the automotive market. Those that follow us regularly will recall that we have entered that market three years ago, out of anticipation that thermal imaging will be adopted in automotive use. We further worked to have one of our solutions already fully qualified into one of the major car companies in the U.S., as well as have our products tested and evaluated by several others. Last year, we were on track to sign a significant supply agreement in the field, one that would be valued at tens of millions of dollars a year, when some changes in the automotive market led our customer to pause on that project.

Part of the reason was an announcement by DOT, Department of Transportation, of the intention to mandate automatic emergency braking systems in all vehicles. As a result, and understandably, car companies wanted to wait with any related decisions until DOT’s ruling. A couple of weeks ago, Department of Transportation announced that starting in 2029, emergency braking systems will be mandatory in all vehicles and light trucks. As expected also, the new rule talks extensively about nighttime performance and the use of thermal imaging. The extended timeline of implementation, which is longer than originally thought, is said to be such in order to provide car and technology companies enough time to improve the nighttime performance of their systems altogether, I’d say.

This is great news for us. Not only are we significantly ahead of the pack on this, we already feel qualified by one company, from which we’ve learned a lot on that process, and we’re working closely with other companies. The timeline of five years for implementation also benefits us, as it provides us now the time to evaluate the best way to approach scaling up our production for this market, without distracting us from our growth, or impacting negatively the growth in our two other major pillars of growth, cameras and defense. In short, I think it’s safe to say that this pillar of growth is now back to being active, and the potential there has grown even further than we initially estimated. Last thing, I will update on infrared materials and replacing Germanium.

To recap, LightPath has developed over the years, and mainly over the last two years, some exclusive unique materials that can be used instead of Germanium in infrared imaging systems. These materials, like the new BDNL-4, offer not only alternatives to Germanium, but also improved performance in many applications. China announced on July 4th export restrictions on Germanium, and with China being the largest exporter of this material, this has become a big deal. Since then, and even prior to that, we’ve been working diligently with customers to have their systems redesigned to use our materials instead of Germanium. These effects, these efforts are going very well, and we’re seeing strong adoption in the marketplace. As we indicated when we reduced the amount of Germanium work six months ago, our manufacturing capacity is now being filled with those new non-Germanium products, which not only have lower supply chain risk, but also better margins for us.

One hurdle for long-term adoption of BlackDiamond glass over Germanium has been the lack of a recycling process for these types of materials, which drives up its overall lifetime cost. We’re happy to announce that earlier this week, our efforts to kickstart development of a recycling process has taken root with Ursinus College and University of Central Florida, where the U.S. Department of Defense, via Americom, would fund this effort. Developing a recycling capability now will pay back down the road as more and more BlackDiamond glass is used and more scrap and leftover materials will be available for recycling. We expect this to help drive down the long-term costs of adopting thermal imaging in mass market applications such as automotive.

And as always, I would like to thank our employees and stakeholders who have continued to work diligently through the various transitions and hurdles we encountered. The efforts I described earlier to continue to drive down our cost structure, all driven by our team, and would not happen without them. And for that, I thank them greatly. We see a bright future ahead and a growing company because of the dedication, patience, and hard work of the team. With that, I will now turn our call to our CFO, Al Miranda, to review third-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 will be included in the 10-Q for the period. I encourage you to visit our website at lightpath.com to access these documents. I’ll discuss some of the 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 fiscal third quarter were $7.7 million compared to $7.4 million in the year-ago period. Sales of infrared components were $3.6 million, or 47% of the company’s revenue in the fiscal third quarter. Revenue from visible components was $2.7 million, or 35% of revenue.

Revenue from assemblies and modules was $0.8 million, or 10% of total company revenue. Revenue from engineering services was $0.6 million, or 8% of total company revenue. Infrared component sales increased approximately $0.5 million, or 16%, primarily due to an increase in shipment against an annual contract for an international military program. This contract was also renewed during the first quarter of fiscal 2024 for a higher dollar value than the previous contract. Visible component sales decreased approximately $0.4 million, or 13%, primarily due to a decrease in sales to customers in the defense and medical industries, and sales to customers in the telecom industry in China. Assembly solutions revenue decreased approximately $0.2 million, or 16%, primarily due to timing of shipments against a multi-year contract with a defense customer, partially offset by the addition of Visimid revenue.

Engineering services increased approximately $0.4 million or 211%, primarily driven by Visimid’s contract with Lockheed Martin, where revenue is generally recognized based on the achievement of milestones. Gross margin in the third quarter of fiscal 2024 was approximately $1.6 million, a decrease of $0.9 million, or 37%, as compared to the same quarter of the prior fiscal year. Total cost of sales was approximately $6.1 million for the third quarter of fiscal 2024, compared to approximately $4.9 million for the same quarter of the prior fiscal year. Gross margin as a percentage of revenue was 21% for the third quarter of fiscal 2024, compared to 34% for the same quarter of the prior fiscal year. The decrease in gross margin as a percentage of revenue is due to two main factors.

First, the decrease in visible components sales, offset by an increase in IR components sales, which typically have lower margins than visible components. Second, the quarterly revaluation of inventory at standard cost resulted in a several hundred thousand dollars of cost taken to the income statement. A little more color on this event, this was not a normal quarterly review, this was the result of physically consolidating the Orlando manufacturing into one building, and subsequent combining of the two operational entities into one ERP database. The two events removed manual handling steps and quality inspection steps that simply do not occur anymore. Therefore, the process change along with some raw materials and outside service cost reductions decreased the standard manufacturing costs, and thus, brought down the inventory values.

Selling, general and administrative costs were approximately $3.2 million for the third quarter of fiscal 2024, an increase of approximately $412,000, or 15%, as compared to approximately $2.8 million in the same quarter of the prior fiscal year. The increase in SG&A costs is primarily due to an increase in wages, including the addition of employees with the acquisition of Visimid. We also incurred additional legal and professional fees in the third quarter of fiscal 2024 associated with our rescheduled annual stockholder meeting and the Delaware chancery court proceedings. EBITDA and non-GAAP financial measure is helpful for investors to better understand our underlying business operations. Our EBITDA for the quarter ended March 31, 2024 was a loss of approximately $1.5 million, compared to $242,000 for the same quarter of the prior fiscal year.

The decrease in EBITDA in the third quarter of fiscal 2024 was primarily attributable to lower sales and gross margin, coupled with increased operating expenses. Turning to results for the nine months ended March 31, 2024, revenue for the first nine months of fiscal 2024 was $23.1 million, a decrease from $23.2 million in the same period of prior fiscal year. Sales of infrared components were $11 million or 48% of the company consolidated revenue in the nine months ended March 31. Revenue from visible components was $8.1 million, or 35% of consolidated revenue. Revenue from assembly solutions were $3.1 million or 13% of total company revenue. Revenue from engineering services was $0.9 million or 4% of total company revenue. The first nine months of the fiscal year infrared component sales increased almost $1.4 million or 15%.

The increase in infrared component sales is primarily due to an increase in shipments against an annual contract for an international military program. Visible component revenue decreased approximately $2.1 million or 21%. Again, this is primarily due to decrease in sales to customers in the defense industry, and sales to customers in the telecom industry in China. Assembly solutions revenue was flat at approximately $3.1 million, both periods, primarily due to timing of shipments against multiyear contract with a defense customer, which was partially offset by the addition of the Visimid revenue. Engineering services increased approximately $0.6 million, or 213%, primarily driven by Visimid’s contract with Lockheed Martin, where revenue is generally recognized based on the achievement of milestones, as well as revenue from one of our space-related funded research contracts.

Gross margin as a percentage of revenue was 26% for the first nine months of fiscal 2024, compared to 34% for the same period of the prior fiscal year. The decrease in gross margin as a percentage of revenue for the first nine months of fiscal 2024 is driven by the aforementioned factors impacting gross margin for the third quarter of fiscal 2024, of which, nearly half was due to the standard cost changes in Q3. SG&A costs were approximately $8.7 million for the first nine months of fiscal 2024, an increase of approximately $263,000, or 3%, as compared to approximately $8.4 million in the same period of the prior fiscal year. The increase in SG&A costs is primarily due to an increase in wages, partially offset by a decrease in stock-based compensation.

The company also incurred approximately $97,000 of cost associated with the acquisition of Visimid, which closed in July 2023, as well as additional legal and professional fees in the third quarter of fiscal 2024 associated with our rescheduled annual meeting and the Delaware chancery court proceedings. Other income for the first nine months of fiscal 2024 includes a gain of $190,000 for the return of funds previously misappropriated by the company’s former Chinese management team, as a result of the legal proceedings there. EBITDA for the first nine months of fiscal 2024 was a loss of approximately $2.4 million, compared to $427,000 for the same period of the prior fiscal year. The decrease in EBITDA in the first nine months of fiscal 2024 was primarily attributable to lower revenue and gross margin, coupled with increased operating expenses and partially offset by the aforementioned other income in the company’s Chinese subsidiary.

As of March 31, 2024, we had working capital of approximately $7.8 million, and total cash and cash equivalents of approximately $3.0 million, of which, greater than 50% of our cash and cash equivalents was held by our foreign subsidiaries. Cash provided by operations was $456,000 for the first nine months of fiscal 2024, compared to cash used in operations of $920,000 for the same period of the prior fiscal year. Cash provided by operations for fiscal 2024 was largely driven by decrease in accounts receivable, as sales were higher in the fourth quarter of fiscal 2023 than in each of the previous quarters. Capital expenditures were approximately $1.9 million for the first nine months of fiscal 2024, compared to approximately $2.3 million in the same period of the prior fiscal year.

The spending in the first nine months of fiscal 2024 is largely driven by the Orlando facility expansion. We also expended approximately $847,000 net of cash acquired, to acquire Visimid during the first-half of fiscal 2024. Our backlog at March 31 was approximately $22 million, a decrease of 17% as compared to $26.6 million as of March 31, 2023, compared to the end of fiscal 2023, our total backlog increased by 1% during the first nine months of fiscal 2024. The decrease in backlog as compared to March 31, 2023 is primarily due to shipments against several annual and multiyear contract renewals, which orders were added to the backlog in prior periods. In previous years, we have typically received a significant contract renewal from our largest customer for infrared products made of germanium during the second fiscal quarter.

However, as previously disclosed, and Sam touched on earlier, we have decided to reduce the amount of optics we produce from Germanium, both to reduce our risk of supply chain disruption, and more importantly, to work with customers to convert their systems to use optics made of our own BlackDiamond materials. As such, in the second quarter of fiscal 2024, we did not book our typical annual renewal order for Germanium Optics with this customer. Instead, we continue to work with this customer as well as other customers to convert their systems to BlackDiamond Optics. The timing of multi-year contract renewals are not always consistent and thus backlog levels may increase substantially when annual and multi-year orders are received and decrease as shipments are made against these orders.

Lastly, as Sam mentioned, we have begun the realignment process to shift resources towards LightPath 2.0 and 3.0. The realignment has three elements; first, reducing overhead and manufacturing and shifting production employees toward new products; second, reducing G&A expenses in most areas and increasing expenses for product development and marketing. And lastly, consolidating our manufacturing footprint in China, we began these efforts in Q3 and will continue in Q4. In Q4, we expect non-recurring expenses related to these activities. We anticipate the lower costs to begin in Q1 and be fully realized in Q2. With this review of our financial highlights and recent developments concluded, I’ll now turn the call over to the operator to begin the question-and-answer session.

Operator: At this time, we will conduct the question-and-answer session. [Operator Instructions] We are now ready to begin. Our first question comes from Glenn with Ladenburg Thalmann. You may begin.

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Q&A Session

Glenn Mattson: Yes. Thanks for taking the question. Congrats on all the progress. A lot going on, as you guys both referenced. I’m particularly interested in the second defense program for the new BDNL material. I know the press release, which came out, I guess, about a month ago, talked about 150,000 lenses in an existing program of record. Can you give us a little more detail as to what that is going into and maybe the timeframe of when you think that stuff might start and how long of a contract that might be?

Sam Rubin: Yes, absolutely. I think the number of 150,000 lenses is definitely correct, but things have changed a bit since then for the better in a sense that we’re now going to build the complete system. So, we’re not going to be selling them as 150,000 individual lenses, but rather build it into — I think it’s something like 30,000 systems, roughly five lenses system, something along that line. I don’t know yet the price per unit for that, so I can’t comment on that, but it’s a pretty complex assembly, so it’s not going to be insignificant, let’s say. I do know that the development part of it is started now and it’s going to be probably a year is what we’re looking into. In a year’s time or so, prototypes followed by LRIP, low rate production, and then if all successful, starting rolling out the 30,000 systems, which would probably take a few years, I’d say, most likely over a five to eight year period for the entire project, since this is an upgrade to existing aircraft and therefore needs to be done gradually as aircrafts come in for service.

I think that’s about what I can share at this point.

Glenn Mattson: Yes, no, that’s very helpful. Second, just quickly, I’ll move on to the highway safety stuff.

Sam Rubin: Yes.

Glenn Mattson: Since that came out, I realize it’s really recent, but have you been back in touch with some of the automotive customers? And just what’s your thought in terms of when they would have to sign on with projects in order to begin the ramp and all that stuff?

Sam Rubin: Yes.

Glenn Mattson: Would you expect some people to kind of roll it out earlier than the mandated timeframe and all that kind of stuff would be great?

Sam Rubin: Yes, definitely, communication has picked back up, including the large customers that went into sort of hibernation for a while. I’d say that at first, the communication was mainly all of us high-fiving each other on the success of getting this in. I mean, we’re all very excited, right? Besides the business prospect of it having better safety on the roads is something for all of us. I’m pretty sure that at least two companies that are already in a fairly advanced stage are not going to wait until then to start rolling it out. What is probably more likely, and this is just my assumption right now, not based on much, is that they will start rolling out some systems like that in a couple of selected models or so to start getting more data, more experience with it.

And the five-year timeframe gives all of us in time to take that data, take that feedback, fine-tune it, fine-tune the system, and so that by the time it actually does hit the road on the mandated date, it’s a far better system. And that’s really the intention of DOT, I think. If you read through the rule, they very specifically call out what are the areas in terms of the nighttime performance that need to be improved. They even talk about the testing subjects need to now emit heat so that the thermal imaging cameras would see that, things like that. There’s quite a bit of work to do that. For us, it’s really good. A short timeframe means we would have to throw a lot at it now, and it would significantly distract us from many other areas of growth.

The longer timeframe lets us do it right, lets us possibly look for a partner to work with on this. There’s a lot of really good options going forward now.

Glenn Mattson: Yes, that’s great. Thanks for the update, Sam, and congrats again.

Sam Rubin: Thank you.

Operator: Our next question comes from Jaeson at Lake Street Capital.

Jaeson Schmidt: Thanks for taking my questions. I just want to start with gross margin in the quarter. Appreciate all the color that you provided. I guess a two-part question. What would gross margin have been without that inventory write-down, and then how should we think about margin returning to a more normalized level going forward?

Sam Rubin: That’s you, Al.

Albert Miranda: Sorry, Jaeson. Can I hear the second part of that question?

Jaeson Schmidt: Just how we should think about gross margin going forward.

Albert Miranda: So, I guess, it was several hundred thousand was the adjustment. If you apply that to 7.7 million in sales, if we do the math on it, we get to around about 30% without the inventory cost adjustment. And margins should be in the low 30s the next couple of quarters. As we shift towards 2.0 and 3.0, we expect that to go up, but —

Jaeson Schmidt: Okay, perfect. And then, following —

Albert Miranda: Then I would say I’m going to qualify that and say independent of non-recurring expenses, because I did give you a heads up that you’re going to see some non-recurring expenses in Q4 as we drive more costs out of the organization. Jaeson, did we lose you?

Operator: All right. I think that’s the end of that question. [Operator Instructions] All right, looks like there are no further questions. Jaeson is back. One second.

Jaeson Schmidt: Hey, guys. Sorry about that.

Albert Miranda: Hey, Jaeson.

Jaeson Schmidt: Hey, sorry about that. Just following up on the auto opportunity, just to clarify, you guys won’t have to be requalified. It isn’t a new SPAC. It sort of just progresses. Your current relationships just continue to progress. Is that fair?

Sam Rubin: Yes. I mean, with that specific customer, every design is different for every customer. Every customer does their qualification process, right? That’s a given in the auto world. If that specific customer chooses to continue with the system that we’re working in, that we’re qualified in, then we do not need to get re-qualified. I don’t know yet if that customer is simply going to brush off the dust now and go back to that exact same system, or if that customer will say, “Well, you know, what? This now gives me time to redesign my entire car, redesign everything,” and therefore, we’re back to square one. In any case, it does give us a tremendous advantage since we’ve already shipped a large number of those, had them in the field, have them tested, so there’s quite a bit of credibility and learning curve behind this.