Q3 2022 LightPath Technologies Inc Earnings Call
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Good afternoon, and welcome to the Lightpath technologies fiscal 2022 third quarter financial results Conference call.
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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.
Thank you good.
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 those discussing is periodic SEC filings.
While 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 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 managements discussion there will be a formal question and answer session open to participants on the call I would now like to turn the conference over to Sam bypass President and Chief Executive Officer.
Thank you al good afternoon, everyone and welcome to the Lightpath technologies fiscal 2021 third quarter <unk>.
Results Conference call.
Our financial results press release was issued after the market closed today and posted at what corporate web site.
I want to start today's call by providing you a brief update on our company and the vision, we have for the future of the business.
The area of optics, and photonics is a truly exciting inflection point.
Technological advances have made solutions and optics and photonics available and applicable.
Products and services and a wide variety of industries.
Optical solutions now applicable to products in late July one argument that in virtual reality medical field sporting and consumer goods to name a few.
An example of one such application is lidar autonomous drone, which we recently announced a collaboration with Hello engineering.
We believe the point of technology like late like Photonics moves from being a speciality technology being integrated into mainstream industries and applications.
Our advantages and domain expertise make us an ideal partner for providing the optical engine.
Our customers' systems.
Owning the critical differentiating technologies.
Such a unique materials high volume molding technology, freeform uptick and others.
<unk> to both create unique value for customers and to capture that value in the form of a stronger profit margins and long term agreements and engagement with our customers.
But one can be embedded in products across many institutes and it is estimated to represent as much as 11% of the global economy.
The integration of football rights into mainstream products provides us with a built in product and customer diversification opportunities.
Yeah.
In the past life path, which is primarily focused on components within the manufacturing supply chain.
That strategy was designed around the premise that photonics is not widely adopted and therefore, the supply chain with highly fragmented and specialized.
Today with the accelerating adoption of photonics into many applications and industries.
Our industry is moving our strategy is moving away from being simply a component provider to a company focused on providing engineered solutions.
This means designing and integrating optics mechanics electronics and software to provide the complete optical engine to the customer.
We are positioning glide path to be the partner of choice and this essentially growing field of optics and photonics.
Are you focusing on our key differentiators, including our design and manufacturing expertise enabled by key optical technologies low cost vertically integrated global manufacturing. We believe we can be a leading OEM to customers across the globe.
Okay.
One area, where adoption is accelerating as the growing need and the benefit of infrared imaging improvement infrared imaging or opening up new applications for existing technology.
Shortwave mid wave and long wave infrared imaging.
Those applications are being applied in border surveillance drones maritime coastal surveillance and critical infrastructure projects.
Infrared imaging has for the most part in based on the use of Joe Minium optical materials.
However, germanium comes primarily from China, and Russia with the U S importing as much as 95% of the Joe Minium or to use it.
An alternative to germanium is held Cogenerate glass, which we named Black Diamond cost.
Ooh Ooh.
Ongoing production of our Black Diamond glass BB six.
We have gained over the last few years significant experience in making and using those materials.
Positioning.
I believe the lead manufacture for this kind of material in the U S.
Silva with Stephens exclusive license to commercialize perfect telco generate losses developed by the Navy Research lab.
<unk> is the only true stores for a portfolio of materials to provide an alternative to germanium.
To that end I recently traveled to Washington D. C to give a talk about the subjects followed by meetings with.
Government officials on the topic.
We're beginning to see that owning the <unk> technology is well aligned with the growth of infrared imaging.
To build a resilient and robust supply chain in the U S and.
An important efforts such as proof of emphasized by the recent geopolitical events.
All of which reinforces our strategy and indicate that we are in device fleet in the right time, and most importantly, heading the right direction.
To reiterate this.
It is owning critical technologies that positions us to capture much of the value that was growing market.
Essence of our strategy revolves around acknowledges the critical implementation of optical system in those areas and.
And leveraging those to develop and deliver optical systems and subsystems, let's produce.
Infrared images with an overall lower cost of ownership to the customer.
Even as commercialization is happening more broadly there remains a large addressable market for government military applications.
Our unique technology and expertise with producing and processing info, the materials, including fabrication components and assemblies lower cost manufacturing in our Utah crude facility in Latvia.
Technological advancements like our diamond like carbon DLC coating office, which has been qualified for all U S military application play.
Places us in a leading position in this market.
We believe our value proposition makes us an increasingly important partner to commercial development of engineered solutions for the department of defense agencies.
Industrial base.
<unk>.
Prime contractors and other infrared optical imaging.
Yeah.
In October 2021, we announced our entry into the free form of the Sylvania.
Preform optics involves lenses with surface shapes, the black certain symmetrical attributes, which makes them more challenging more challenging to mass produce.
Boyd improved aperture field of view and the choice station.
Reform optics are becoming a key element in applications, such as augmented and virtual reality AR and VR.
Infrared and military optical systems.
And three D imaging and visualization.
Many time.
<unk> required the higher performance and more compact form factor with free form optics can provide.
Allowing increased flexibility and overall size weight and power optimization.
The quality of the material use of the keep using smaller and lighter augmented and virtual reality glasses that look more like conventional eyeglasses.
And less bulky LVL goggles of today.
Additionally, with free form optics, Lidar systems can achieve larger fields of use and lower losses, which in turn translates to higher resolution images and the ability to extend accident detection distances.
Yes.
The adoption of free form optics in such applications has been limited due to the manufacturing technology that previously made law mass commercialization cost prohibitive.
We believe that our technology solves for that.
In January of this year, we announced that there were three form updates one of the 2022 Prism Award for manufacturing, which is the annual international competition on the optics and photonics products on the market.
In March in March we announced that the Pollo engineering chose our free form optics for use in its lidar products.
Poland's line of laser Rangefinders Lidar products provide fast measurement with high accuracy and precision.
Ultra compact package, we integrate our molded free form optics enlist systems, which allows us allows them to achieve optimum performance, while minimizing the number of optical components.
Our free form optics reduce the cost and waste from the system.
The same time, we continue working with more customers on developing free form optics, let's say of application.
And continue working on eight <unk>.
Large high opportunity applications, which are in different stages of development and qualification.
This is truly an exciting time to be working in photonics and optical solutions.
We believe the application of the technologies will you. We use will continue to grow its costs are reduced and product acceptance increases.
Yeah.
We are really excited about the progress the company has made and the direction we're doing it.
We have endured several hurdles over the past year or two but.
Believes that we are on thermo footing now and we're at the point where applications for our technology solutions are being are beginning to be more mainstream.
I will also provide a brief update on the ongoing situation in China before making concluding remarks.
As we have mentioned before although we have taken steps to minimize the business impact from the termination of the previous management employees and transition to new management personnel and our China subsidiary.
We have experienced some short term adverse impact on domestic sales in China and the results of operations in the three months period ending June <unk>.
30 of 2021, and the nine month period, ending March 31st 2022.
These adverse impacts from significantly declined yet management anticipate.
They may still have some effect in the next quarters.
Domestic sales in China also being impacted by COVID-19 related shutdowns, which have not directly impacted our factory that have impacted operations or some of our Chinese customers.
Lastly, I would like to thank all light pulse employees and stakeholders are working everyday to grow the business and achieved breakthrough products and technologies.
This concludes my prepared remarks, now I will pass the call over to I don't know Andre our CFO to review financial results for the third quarter.
Sam I would 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 our 10-Q for the period I encourage you to visit our website at Lightpath com.
I will just discuss some of the primary financial performance metrics and provide additional color on them to better assist investors in analyzing the company.
As a reminder, we had been significantly impacted by the transition of business conditions in China. During the fourth quarter of fiscal 2021 and into the fiscal year Ipass third quarter financial results were also negatively impacted by expenses associated with the management employee transition and our Chinese subsidiaries, although too.
Lesser extent than in recent quarters.
On a consolidated basis revenue for the third quarter of fiscal 2022 was $8 3 million compared to $10 7 million in the year ago period.
Sales of infrared products were $3 7 million or 45% of the Companys consolidated revenue in the third quarter of fiscal 2022.
Revenue from our PMO products was $4 million or 48% of consolidated revenue.
Revenue from specialty products was 547000 or 7% of total company revenue.
The decrease in revenue from sales of infrared products is primarily due to a decrease in sales to customers.
Excuse me in the industrial market and for temperature sensing applications, which peaked in demand during the third quarter of fiscal 2021.
BMO sales increased 3% in the third quarter fiscal 2022.
Third to the third quarter of fiscal 2021.
Since the drop off of PMO sales in the fourth quarter of 2021 sales or PMO products in China.
Improved sequentially each quarter of fiscal 2022, driven in part by other telecommunication customers as well as an increased sales to customers in the industrial and commercial industries, Inc.
Increased sales in specialty products were primarily due to NRG projects for customers in the industrial and defense industries during the third quarter of fiscal 2022.
I wanted to take a moment to expand on the revenue topic.
Sam alluded to earlier revenues from China for the first three quarters had been recovering however, our lack of sales growth is still related to disruptions in China Rev.
Revenue was down fiscal year to date versus last year year to date in China by $5 1 million.
Outside of China, primarily in the U S and Europe , our sales are up by 8% or $1 6 million.
We do see a China recovery on the horizon as bookings are coming back to pre transition levels. However, with the recent wave of Covid shutdowns, it's difficult to determine precise shipping dates.
I mentioned earlier.
Further to the revenue discussion we've taken a strategic approach regarding the quality of revenues.
First we started the process of sunsetting certain specialty products that are no longer part of our growth plans second we've taken a more targeted approach to annual volume contracts regarding pricing, which has had the anticipated effect of reducing volume, but increasing the average selling price on the contracts and hence our.
<unk>.
Moving on to margins.
I'd like to remind listeners that PMO or margins are typically higher due to our molding technology capabilities, which enable mass production in a more automated machine process.
And for Red Diamond <unk>, historically have lower margins due to the extra manual production step.
But with the growth in our molding technology as applied to infrared products being made from a proprietary BD six material margins will increase over time from both the advantages of our material cost and using the automated molding process.
Gross margin in the third quarter of fiscal 2022 was approximately $3 million compared to approximately $3 $9 million in the same period of the prior fiscal year.
Gross margin as a percentage of revenue was 37% for the third quarter of fiscal 2022 compared to 36% for the same period of the prior fiscal year.
The increase in gross margin as a percentage of revenue was primarily due to product mix.
Favorable product mix resulted in slightly higher gross margins as a percentage of revenue. Despite the lower revenue level in the third quarter of fiscal 2022.
As we transition the business to engineered solutions, we would expect margins to increase over time.
Due to several factors, including multiple lenses required for an assembly Sam described.
Selling general and administrative costs were approximately $2 6 million for the third quarter of fiscal 'twenty to <unk>.
A decrease of approximately 187000 or 7% compared to the same period of the prior fiscal year.
Decrease in SG&A costs was primarily due to decrease of approximately 149000 of expenses associated with the previously described events that occurred in our Chinese subsidiary, including legal and consulting fees.
Although certain legal activities are ongoing related costs have leveled off it should cease by the end of this calendar year.
New product development costs were approximately 590003rd quarter fiscal 2022, a decrease of approximately 50000 or 8% as compared to the prior fiscal year net.
Net loss for the third quarter of fiscal 2022 was approximately 495000 or <unk> <unk>.
And diluted loss per share compared to $2 23, a one basic and diluted loss per share for the third quarter of fiscal 2021.
A decrease in net income for the third quarter of fiscal 2022 as compared to the same period of the prior fiscal year was primarily attributed to lower revenue and gross margin.
Should we offset by lower operating expenses.
Additionally, we recognized 210000 of other income in the fiscal third quarter related to the reversal of accruals following the China investigation.
We determined that our Chinese subsidiary would not be responsible for those expenses and the reversal is recognized as a gain.
We believe EBITDA is helpful for investors to better understand our underlying business operations.
Our EBITDA for the three months ended March 31, 2022 was approximately 647000 compared to $1 1 million for the same period.
The prior fiscal year decrease in EBIT in the third quarter of fiscal 2022 was primarily attributable to lower revenue and gross margin again, partially offset by the aforementioned 210000.
As of March 31, 2022, we had working capital of approximately $11 million total cash and cash equivalents of approximately $5 2 million.
More than 50% of our cash and cash equivalents was held by our foreign subsidiaries.
Cash provided by operations was approximately 352000 for the first nine months of fiscal 2022 compared to approximately $3 1 million for the same period of the prior fiscal year <unk>.
The decrease in cash flows from operations in the first nine months of fiscal 2022 is due to the decrease in net income and a decrease in accounts payable and accrued liabilities.
We offset by a reduction in inventory.
We also renegotiated an amendment with Bankunited extending our term loan until April 2020 for the extension further strengthen strengthens our intermediary refinancing abilities and enabled us to continue along our strategic path.
Our total backlog at March 31, 2022 was approximately $19 7 million, an increase of 1% as compared to $19 5 million as of March 31 2021.
To the end of fiscal 2021, our total backlog decreased by 8% during the first nine months of fiscal 2020 to the.
The decrease in backlog during the first nine months of fiscal 2022 is largely due to timing of the renewal of a large annual contract for infrared products.
Consistent with prior years, we received the renewal of this contract.
Fiscal second quarter and began shipping against that contract in the fiscal third quarter.
As a reminder, it is customary for our backlog to fluctuate during the year because of the timing of bookings of orders.
You'll renewals.
Our customers.
With this review our financial highlights and recent developments discussion has concluded I will now turn the call over to the operator to begin the question and answer period.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
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Yes.
Yes.
Yes.
And our first question will come from gene Inger of Inger letter Dot Com. Please go ahead.
Hi, Sarah now.
Right.
And then fourth quarter, obviously still in a turnaround mode.
Excuse me.
I think the.
It looks like SG&A.
We're actually lower but it also looks like unit profit drop dead date for both BMO and progress.
Yes so.
The unit fluctuate the argument is really dependent on the mix we began to see.
Towards the larger customers in China, especially in telecom come back to some degree as we discussed last quarter and those tend to be lower unit prices on them in the infrared is very significantly engineered solutions and assembly can be in 100 plus sometimes.
Individual components can be in the tens of dollars less so.
<unk> tend to stay away from giving too much importance to their average sale prices fluctuation.
Mix of product and what we do has been having.
Considerably more.
Yes, thanks for noticing that G&A and the effects I think that all things considered.
Given the $8 3 million topline.
So pretty good and the continued improvement in gross margin, even when top line hasn't grown really in that specific quarter, it's very encouraging.
Right that causes me to ask this.
The market cap is so low of course theres hundreds of companies that are humbled.
Bundled into almost oblivion at this point it looks like Youll make it through this be pointing in the right direction, but you are trading at around one time sales.
From an investor standpoint, Thats very cheap that maybe I'm, just giving an opinion.
But I don't know, whether you actually want to eventually shop, the company for sale or some sort of a merger, but isn't as essentially undervalued based on even a reasonable growth.
Yes, I think first of all I agree with you.
That in my independent opinion that it's undervalued.
Tractive investment.
As a public company, we're always open for all options and we have a rule out anything we're not actively shopping as the company evolves. We think that we have as you said are heading in the right direction, but a lot of indications that we're doing the right thing.
Sometimes it's a matter of timing.
And it happened to be that our discovery of the multi year <unk>, China happens at the time, where the market was rallying and so we didnt enjoy it as much of that rally and now a recovery recovery is happening at a time, where the market is down in a bear market. So sometimes it's just as simple as that.
So I guess my last question for a moment, so others can come on with might be.
If you have a lot of experience in China, you turned around and built a big company there.
Earlier life and <unk>.
Wonder, whether you envision growing China or nationally with this new focus with the Navy and so on and on Freeform optics and I enjoyed your discussion which is on Youtube.
In Washington, I Wonder, whether you would eventually drop China spend.
It off somehow and concentrate on the domestic scene, which seems to be doing better for the company.
Yes definitely.
Investment approach has changed considerably in the last two years since I joined we stopped investing in China, even before all of those events, we rerouted really all of our investments due to the lottery operation, which serves the U S by being a nice facility and now it's all under where we are.
Actually doubling our manufacturing space and bringing manufacturing back.
That said the <unk>.
We have in China, it's still very important it's a good cash generator for us.
Our core technology, which we wouldn't spinoff because that would essentially include giving away the technology.
We still see it as a valuable piece of the company just not our strategic long term focus as much.
Do you have a timeline in.
And I'll, let you go.
Timeline on when you envision.
New licenses with the Navy and so on.
And we are actually and you talked about some of that give a timeline. When do you think this will crystallize into bookable business.
Yes.
Separate things right.
The Navy the licensing of the Navy.
Materials as I mentioned really.
One thing we've seen from the discussions I've had in Washington, and with different government officials and such is that we're really a perfect timing for that.
The U S through the defense production Act and through.
The executive order of debate and administration on the resilient supply chain is heavily investing in developing a manufacturing base in the U S and accelerating readiness of new technology is increasing local capacity and such so the U S. Currently imports as I meant.
<unk>, 95% of its Joe Mania.
It is $2 7 billion roughly of germanium a year a quarter of that goes into optics down six $700 million.
Joe Mania goes into optics in the U S.
Telco generators, I think perfect spot to substitute that we cannot it's not a one to one substitution and youll not completely eliminate germanium, but we are definitely the best option at this point for the U S in terms of reducing the dependence on China and Russia.
Period.
So I think so.
<unk> that is a key element of many state.
Holders, including some of our <unk> customers who are seeking.
Seeking to be involved in helping us accelerate that and bring those materials to market. What we're anticipating is that in the next few months the first material nicely already.
<unk> released we're currently already working on pulp of pipes and we are working with some of the declines also on designing the material in seeing the intelligent results that we have.
But it's really a key element to it I think in much of what the U S looking at.
In terms of the.
Free form optics of it.
Different play in a sense that this is a technology that we've already developed and matured enough now is the time for the customers to take that in and to utilize it.
You mentioned the last month that the Tullow Engineering for example has already adopted free form uptick into lidar products.
And it looks very promising and successful that you have some very unique products in the sense of being able to very quickly monitor the location of drones of fully autonomous drones, making sure. They don't collide with upwards and so on and the free form optics really a key element there.
In other places we've shipped prototypes already to our companies for example have already our three form optics in pulp a pipe.
It's different stages of it light of it's becoming a bigger piece.
Take longer because most of those.
It's a free form optics is enabling a cutting edge application to such a degree that set application needs to first be adopted and when its own commercial success before the free form can scale up with it.
And it looks very encouraging.
I don't want it.
If you have time for one quick you didn't give any color.
On two areas that I was interested in in the past one was lower orbiting satellites such as.
Spacex system.
Yeah.
There is even talk about.
China wanted to intercept that and so on and I am wondering speaking of intercepting whether you are involved in that and whether you are involved with the new laser interception systems, and Israel, which use infrared and laser to try to intercept.
Enemy rockets.
Yeah, Yeah, obviously and someone who grew up in Israel.
The houses that since the end of saying it I can't I can't comment on specific systems and technologies of course, I can say our business with Venezuela has grown.
Exponentially.
In the last half a year or so and I feel very good about that in a great part of it is because of the investments we made in the luxury observation, enabling them to really service customers from there.
Our better than we could before.
We are involved in multiple lower orbiting based project all the way from optical communication project to thermal cameras and for detection cameras.
Currently mid wave cameras are playing a major role today in detecting supersonic midsized through lower forward Inc.
The government and the Pentagon has decided to leave <unk>. Just recently it was in the news to deploy a whole satellite network related does that.
And that's a very exciting applications that we see for mid wave another place where chalcogenide glass plays a major role, it's really being a fair model.
And very low weight compared to alternatives makes it a great grade material for any space applications, especially lower orbiting camera systems.
Thank you I appreciate the Enlightenment I haven't heard anything lately from you about that.
Absolutely.
Yes, and we also just.
To close the loop on that we have.
Previously that we have gone from space, Florida from European space agencies, and a couple of other projects and such all related to accelerating our technologies for use in space.
Specially all of the chalcogenide material.
To replace germanium to be used in very specifically lower orbiting.
Satellite.
As opposed to the footnote to that could mentioned weather ISP optics year, Latvia operation is involved with the drones that are going to.
Ukraine, now or coming from jerky, and whether or not you see a surge in business in Europe as a result of this.
I can say is that.
We don't know where our products end up always I can definitely say is that we proudly.
Deliver products to multiple UAV and joined the company as that hopefully make good use of it.
Then stays at that way expansion and last we are adding the optical coatings, they're making it vertically integrated.
Independent of U S manufacturing for that.
Aligns perfectly and timing to all of the increases in defense budgets in Europe , now and do a increase in demand that we're seeing already in terms of designing our products into.
Defense applications.
The lottery operation declines being in light of operation can also serve European defense companies now by being completely vertically integrated having coating and assembly capability, there, which is something that we're confident it's going to deliver significant growth in Europe for us.
The infrared imaging.
Thank you Sir.
Absolutely good to hear from Eugene.
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