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Edited Transcript of LPTH earnings conference call or presentation 14-May-18 8:30pm GMT

Q3 2018 LightPath Technologies Inc Earnings Call

Orlando May 16, 2018 (Thomson StreetEvents) -- Edited Transcript of LightPath Technologies Inc earnings conference call or presentation Monday, May 14, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dorothy M. Cipolla

LightPath Technologies, Inc. - CFO, Treasurer & Secretary

* J. James Gaynor

LightPath Technologies, Inc. - CEO, President & Director

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Conference Call Participants

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* Bradley D. Noss

Roth Capital Partners, LLC, Research Division - Research Associate

* Gene Inger

* Marc Wiesenberger

B. Riley FBR, Inc., Research Division - Associate

* Zack Turcotte

* Michael Dyett

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Presentation

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Operator [1]

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Good afternoon, and welcome to the LightPath Technologies Third Quarter 2018 Results Conference Call. (Operator Instructions) Please also note, today's event is being recorded.

I would now like to turn the conference over to Dorothy Cipolla, LightPath's CFO. Please go ahead.

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Dorothy M. Cipolla, LightPath Technologies, Inc. - CFO, Treasurer & Secretary [2]

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Thank you, and good afternoon. Welcome to LightPath Technologies Fiscal 2018 Third Quarter Financial Results Conference Call. Our financial results press release was issued after the market closed today and posted on our corporate website. Today's conference call will be hosted by Mr. Jim Gaynor, President and Chief Executive Officer. Following management's discussion, there will be a formal Q&A session open to participants on the call.

Before we get started, I'd like to remind you that during the course of this conference call, we will be making a number of forward-looking statements that are based on our current expectations and involve various risks and uncertainties that are discussed in our periodic SEC filings. Although we believe that the assumptions underlying these statements are reasonable, any of them can prove to be inaccurate and there can be no assurance that the results will be realized. In addition, we will also make a reference to certain non-generally Accepted Accounting Principles, or non-GAAP measures, for which you should refer to the appropriate disclaimers and reconciliations in our SEC filings and press releases.

With that out of the way, it's now my pleasure to introduce Mr. Jim Gaynor, President and CEO of LightPath.

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [3]

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Thank you, Dorothy, and welcome to everyone who has joined us on the call today. We appreciate your continued interest in LightPath. I will open with an overview of operational results, highlights and recent developments, and then we will turn the call over to Dorothy for a more in-depth review of our financials. Following that, we'll open the call to your questions.

Now onto my remarks and perspectives on our fiscal 2018 third quarter. Our results demonstrate the success achieved in our efforts to diversify our business in the areas where we can expect to deliver meaningful growth going forward. As we planned, our visible precision molded optics product revenue has been surpassed by our infrared product revenue. Our intent for targeting the infrared market was to further diversify our revenue streams in a larger and faster-growing market. Revenues grew on a sequential basis from the second quarter, although, it remained flat with the third quarter of fiscal 2017 due to softness in the telecommunications sector. As we have previously reported, our telecom business has been weak for several quarters, yet this is only one of several market verticals that LightPath enjoys. Although we have recently seen a strengthening of this market from our perspective with orders returning from our key customers and several new nonrecurring engineering orders just in the last month. This assessment of the telecom sector was confirmed when I visited China just 2 weeks ago and also at some very large trade shows we attended this quarter. Here are a few specifics on this point as it relates to telecom. A leading China-based telecom equipment OEM has increased their activity with us by about 30% in the last month, with 6 new lenses under development and 2 more under discussion. One of our largest publicly-traded optical tech companies based in the U.S. with major selling activity in China and elsewhere with which we generally do custom lens design and production has 5 new lenses under development and 2 more under discussion. And for a large telecom customer whose business with us had come to a full stop, has now just placed orders that recover about 2/3 of the volume we previously enjoyed. In addition, we are quoting a new lens that has almost twice the volume of the previous business. All of these are large customers, who, I believe, view LightPath as having the most extensive and comprehensive product families of anyone in our industry -- anyone in the world. Equally important is that, I believe, we have proven that we also have the world's most advanced design and production capabilities. Whether we talk about visible light or infrared technology, this industry is moving fast and we are very well positioned, and importantly, we continue to invest in our diversified platforms, which should enhance our growth projects for both top and bottom lines. In terms of the investments being made in our business, we spent approximately $2.5 million for capital expenditures in the first 3 quarters of fiscal 2018 in global growth initiatives and product development to address the expansion of our infrared business, which is our fastest-growing family of products. These investments will enable us to lower the cost of producing our infrared products and will provide redundancies to prevent capacity constrain issues as the infrared business continues to grow. From an operating expense standpoint, we expect future selling, general and administrative expenses and new product development cost to remain at similar levels during the remainder of fiscal 2018, which includes spending in growth and profitability initiatives to ensure we have the capacity in place to support our growth for all products. Another key element of our strategic positioning is that we have a very diversified product lineup and address many end markets. Telecom is only 1 of 7 market verticals we currently see as driving our growth. The other vertical markets are industrial, which is our largest market and includes commercial and residential tools, among some other end products. This also includes thermal sight optics, oil and gas monitoring, power generation controls, HVAC and firefighter cameras. Defense is the next with the sequester ending. The major defense contractors are again spending, so we see this as a recovering market. Medical, medical instruments such as spectrographic microscopes and endoscopes and cytometers are gaining traction. In public safety, thermal camera optics for border security is an exciting area for us. Mobility and auto safety, which includes LIDAR for autonomous vehicles, public and industrial applications and laser-assisted headlamps and drones, for which we provide infrared optics. Progress with our diversified product platforms and end-market targeting is evident in our bookings in the third quarter. Overall, bookings increased 50% to $9.2 million in the third quarter from $6.1 million in the prior year period. Strength in the industrial market is leading the way of our 7 vertical end markets.

Of these 7 markets, the largest in terms of third quarter bookings was industrial with $4 million in contracts followed by defense with over $1.3 million in contracts. It also appears the telecom -- the telecommunications sector may be rebounding for LightPath based on bookings with contracts from this market increasing from the second quarter, the first such increase in the past 4 quarters. The industrial and medical sectors showed significant growth in bookings from the second quarter to the third quarter.

Excluding a 1-year supply agreement for $5 million with a single customer booked in the second quarter of fiscal 2018, total bookings have increased 30% sequentially from $7.1 million in the second quarter of fiscal 2018. As a result of our strong bookings performance in the third quarter, our 12-month backlog was approximately $12.9 million in March 31, 2018, an improvement from $12.3 million at the end of the second quarter and $9.3 million from the beginning of the fiscal year. We also advanced our efforts to improve profitability and cash flow measures. With our infrared revenues, which were at lower margins than our PMO revenue and which have now overtaken PMOs as our largest revenue source, we are setting our sights to improve margins here. We are making investments at our manufacturing facilities in Zhenjiang, China, Riga, Latvia and Orlando, Florida for lower cost production of infrared optics, which also gives us redundancies to handle the anticipated growth as we look forward. We recently leased an additional 12,000 square feet of space in Orlando, where we will be able to expand our staff and engineering needs. From 2014 through 2016, we successfully increased gross margins for our PMO products, which remain in excess of 50% today, while expanding production capacities and volumes for that platform. Now we are addressing the margins and production capacities of our infrared products, while margins have been in the 30% to 40% range since the acquisition of ISP. On other areas of operational and financial performance, in the third quarter, we reduced our debt, which will further enhance future cash flows from the reduction in interest service. Total debt was reduced by $3.6 million or 34% during the third quarter from the beginning of the fiscal year, including elimination of a portion of the financing incurred in conjunction with the ISP acquisition in exchange for shares of our common stock and cash. The company's cash position remains strong at $6.4 million at the end of the fiscal third quarter. Through investments in fiscal 2018, our consolidated production capacity increased by approximately 60%, depending on product mix to support the planned growth in infrared and specialty products, including light distance and ranging, or LIDAR applications and the 5G network conversion. This means that with minimal staffing and operating expense adjustments, we can continue our significant growth. As such, there remains significant operating leverage in our model. Our end markets are indeed looking vibrant. We exhibited at the SPIE Photonics West 2018 Exhibits, with hundreds of exhibiting companies and thousands of attendees. The show took place from January 27 through February 1, 2018. We have large booth and provided separate guest lectures and presentations from our Executive Vice President of Operation, Alan Symmons on molded optics and by one of our optical engineering managers, Jeremy Huddleston, on precision optical, components for LIDAR systems developed for autonomous vehicles as part of SPIE OPTO. We put a lot of emphasis on the event and it is already starting to deliver the intended results. Many leads were originated and about 20% have converted to project discussions thus far with a good number turning into request for proposals. LightPath also sponsored the evening event at the expo and a job fair table as well. Through the first 3 quarters of fiscal 2018, we markedly strengthened our global presence from a product development and capacity standpoint, while bolstering our financial position. We continue to emphasize and execute upon strategies to deliver on our mission of top line growth and enjoy the benefits from the leverage in our operating model. We are encouraged by the progress in our business from the second quarter to the third quarter of this year as well as the strong backlog in booking achievements that bode well for the near term. In the long term, our overall objectives remain constant in delivering global diversified growth and solid cash flow generation. To this end, both the near-term and long-term outlooks are aligned. I'll now turn the call over to CFO, Dorothy Cipolla, to provide additional detail on our financial results for the third quarter of fiscal 2018

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Dorothy M. Cipolla, LightPath Technologies, Inc. - CFO, Treasurer & Secretary [4]

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Thank you, Jim. First, I'd like to mention that much of the information we're discussing during this call is also included in the press release issued earlier today, and in our quarterly report on Form 10-Q. I encourage you to visit our website at lightpath.com and specifically the section titled Investor Relations.

Now onto the results for the third quarter of fiscal 2018. Our revenue for the third quarter was $8.5 million, flat as compared with the third quarter of last year and up 2% from $8.4 million in the second quarter this year. Revenues generated by infrared products increased approximately $383,000 or 10% to $4.2 million in the third quarter this year from $3.8 million in the same period last year.

Infrared product revenue has surpassed PMO revenue for the third quarter in a row as our largest product family in terms of revenue. Industrial applications, firefighting cameras and other public safety purposes are the primary drivers of the increased demand for infrared products. Total PMO product revenue was $3.6 million for the third quarter, increased as compared with $3.3 million in the second quarter this year, but decreased from $4.0 million in the third quarter last year.

Revenues from sales of low volume PMO products, those generally lower quantities at higher selling prices, increased by approximately 231,000 or 13% to $2.1 million in the third quarter from $1.8 million in the prior year period and up 6% from $2.0 million in the second quarter of this year. This was primarily attributable to higher sales to customers in the medical entity.

Sales of high-volume PMO lenses, those generally higher quantities sold at lower selling prices were $1.5 million in the third quarter, a decline of $612,000 or 29% from $2.1 million in the prior year period and up 13% from $1.4 million in the second quarter of this year. This is primarily attributable to continued soft demand from the telecommunications industry.

Specialty product revenue was $628,000 in the third quarter, fairly consistent with the second quarter of this year and up from $516,000 in the third quarter of last year. Growth in the product category was led by demands from the defense industry, automotive industry and for collimators used in a variety of end markets, including LIDAR sensing and auto safety. This is relatively a new area of focus for LightPath given that we expect these projects to deliver a future stream of larger production quantities.

Moving to our geographic revenue mix, 43% was from the U.S.; 18% was from Asia; 30% was from Europe; and 9% was from rest of world. Our overall geographic mix remains fairly consistent with approximately 57% international sales for the third quarter compared to 55% in the second quarter and 60% for the third quarter of this year.

In terms of sales channels, 18% of sales were from distribution and catalog customers, while 82% resulted from direct sales efforts. This is consistent with the second quarter of this year and compares to 23% from distribution and catalog and 77% from direct sales for the third quarter last year. The shift away from distribution quarter-over-quarter is the result of a strategic decision to pursue more direct sales in lieu of utilizing distributors.

Now for our vertical market sales review. In the third quarter, as I mentioned, 18% of our sales were from distribution and catalog customers, which are generated from a variety of end markets; 39% of our sales are generated from customers in the industrial markets; 13% from government and defense; 12% from telecom and wireless; 6% from medical; and 12% from instrumentation and other. Our vertical market orientation is fairly consistent quarter-over-quarter. In comparison to the second quarter of this year, the most notable shift was the increase in telecom from 8% to 12% of sales for the third quarter.

In terms of bookings, as Jim mentioned, we took in orders during the third quarter of fiscal 2018 valued at $9.2 million, an increase of 50% as compared to $6.1 million in the prior year period. We added $12.1 million in orders in the second quarter of this year, which included a renewal of a 1-year supply agreement for an infrared product valued at $5 million. Excluding this single contract renewal, second quarter bookings would have been $7.1 million, which showed strong bookings growth of 30% for our other business as compared with the third quarter of last year. While we do not disclose bookings by vertical markets, some interesting insights can be offered when looking at the results from select markets in the third quarter as compared to the second quarter this year. Industrial orders were significantly higher, even excluding the single infrared contract renewal. Orders for defense-related products remained strong and telecommunications and medical were up nicely.

In terms of backlog at March 31, 2018, the primary product category of PMO represents 42% of backlog and infrared was 58% of backlog. As of March 31, LightPath's 12 months backlog increased 38% to $12.9 million as compared to $9.3 million as of June 30, 2017, which reflect strong bookings for most of the company's product lines and the booking of a large infrared annual contract during the second quarter. Previously, we were explaining the decline of our backlog as we shipped against the large contracts. Now we're seeing an increase in backlogs as we ship against this large contract.

Gross margin in the third quarter was approximately $3.3 million, a decrease of 22% as compared to approximately $4.2 million in the same quarter last year. Gross margin as a percentage of revenue was 39% for the third quarter this year compared to 50% for the third quarter last year. The change in gross margin as a percentage of revenue is primarily attributable to 3 factors: foreign exchange currency issues with the weaker dollar, higher germanium prices and product mix.

We have experienced the shift in sales mix with more infrared products versus PMO products, and within infrared products, a higher percentage of sales derived from contract sales and a smaller percentage of sales derived from custom products. This combined with fewer sales of higher margin, high-value, high-volume PMO product to the telecom industry.

Next, as most of our sales are in U.S. dollars and a majority of our products are manufactured overseas, foreign exchange rates as the dollar weakens, raised our manufacturing cost.

And finally, the cost of germanium, a key component in many of the infrared lenses, have increased by 28% over the last 12 months. While this cost increase has been accounted for in our custom products, it has raised our cost of our products sold under a long-term contract. Almost half or 5 of the 11 points of margin change are attributable to the germanium material cost and foreign exchange currency issues.

Total cost of sales was approximately $5.2 million for the third quarter of this year, an increase of approximately $944,000 from $4.3 million for the same period of last year. Third quarter total operating cost and expenses were approximately $3.1 million, an increase of $133,000 compared to the same period last year and consistent with the second quarter this year. This includes new product development costs, which increased by approximately $73,000 compared to the same period last year. Total operating cost and expenses also include the amortization of intangibles related to the acquisition of ISP.

Moving down to the income statement. Our financial results were impacted by a few onetime nonrecurring or noncash items. In the third quarter, we recognized net interest income of approximately $343,000, primarily due to the satisfaction of the sellers note in full and the related fair value adjustment liability, which resulted in the gain of approximately $467,000. Excluding the impact of this gain, interest expense was approximately $124,000 in the third quarter this year compared to approximately $193,000 in the third quarter last year. This decrease is primarily due to the full satisfaction of the sellers note during the third quarter this year. We expect future interest expense to remain at similar levels during the remainder of fiscal 2018, excluding the gain associated with the settlements of the sellers note.

Also in the third quarter this year, we recorded an income tax benefit of approximately $183,000 compared to income tax expense of approximately $266,000 for the third quarter last year. This decrease in income tax expense and the effective income tax rate were primarily attributable to the mix of taxable income and losses generated in various tax jurisdictions. The benefit in the third quarter this year is primarily due to the tax law changes enacted in the Republic of Latvia, which were effective January 1, 2018. As a result of the U.S. tax law change, the company expects significant adjustments to its gross deferred tax assets and liabilities. However, the company also expects to record a corresponding offset to its estimated full valuation allowance against its net deferred tax assets, which should result in minimal net effect to the provision for income taxes.

At March 31, we had net operating loss carryforwards of approximately $84 million to offset net income as reported on a consolidated basis in U.S. Further discussions on these tax issues are in our press release and SEC filings.

Net income for the third quarter was approximately $1.2 million or $0.05 basic and $0.04 diluted earnings per share compared to net income of approximately $101,000 or 0% basic and diluted earnings per share for the third quarter last year. The increase in net income was primarily due to the aforementioned gain associated with the satisfaction of the sellers note, the absence of $748,000 in expenses associated with the change in the fair value of the warrant liability, which did not impact the third quarter this year, as the warrants had expired within December 2017 and the aforementioned income tax benefit. Also included in the third quarter net income is foreign currency exchange income due to changes in the value of the Chinese yuan and euro in the amount of approximately $446,000. This had a $0.02 impact on basic and diluted earnings per share compared to a gain of $18,000, which had no impact on basic and diluted earnings per share last year.

Weighted average basic and diluted common shares outstanding increased to $25.5 million and $27.3 million, respectively, in the third quarter this year, up from $23.8 million and $25.6 million, respectively, in the third quarter last year. The increase was primarily due to the 967,208 shares of Class A common stock issued in connection with the satisfaction of the sellers note and shares of Class A common stock issued under the 2014 Employee Stock Purchase Plan and shares of Class A common stock issued as a result of the exercise of stock options and warrants.

EBITDA for the third quarter this year was approximately $1.6 million compared to approximately $1.3 million in the third quarter last year. Adjusted EBITDA, which eliminates the noncash income or expense related to the change in the fair value of the June 2012 warrant liability was $1.6 million in the third quarter this year, down from $2.0 million for the same period last year. The difference in adjusted EBITDA between the periods was principally caused by our lower gross margin as infrared products had become the largest revenue component, partially offset by foreign currency gains.

Finally, I'll discuss some balance sheet items and cash flow. Cash and cash equivalents totaled approximately $6.4 million at March 31, down from $8.1 million at the beginning of the fiscal year. Cash flow provided by operations was approximately $1 million in the third quarter this year as compared to $1.4 million in the third quarter last year. For the first 9 months of fiscal 2018, cash flow from operations was $2.7 million compared to $2.9 million last year. During the first 9 months of this year, we expended approximately $2.5 million for capital equipment as compared to $1.4 million in the same period last year. The current ratio as of March 31 and June 30, 2017, was 3.7:1 and 3.4:1, respectively. Total stockholder's equity as of March 31 was approximately $36 million, a 21% increase compared to approximately $29.7 million as of June 30, 2017. The increase is largely due to the Class A common stock equal to approximately $2.2 million issued in conjunction with the satisfaction of the sellers note and net income of $1.9 million for the first 9 months of fiscal 2018.

With this review of our financial highlights concluded, I will turn the call back to the operator, so we may begin with question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Matt Koranda with Roth Capital.

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Bradley D. Noss, Roth Capital Partners, LLC, Research Division - Research Associate [2]

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This is Brad Noss on for Matt. I just wanted to go, first, obviously, you had some strong bookings in orders this quarter, but specifically, looking at the bookings you're seeing in the telecom sector, I think, you said that they increased for the first time for the past few quarters here, but just how do they compare to some of your prior level from a year ago? And how much do they still have to go to really reach some of those prior highs? And then is this sort of the strength that you'd referenced last quarter that you expected to see in the second half of '18? Is it sort of playing out to what you had expected?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [3]

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Brad, I think, in the telecom sector what we're seeing is some renewed life for the first time. So it's not quite back to where it was in 2017, which was a very strong year. But I think the thing that's most encouraging to me is the fact that we're seeing a lot of -- we're seeing some increase in existing products, but even more importantly than that, we're seeing a lot of new product activity in terms of the new lenses and those kinds of things, which tells me that the 5G implementation is starting. These guys are getting ready for that. And it's been pretty much across-the-board with the major customers that we deal with in the sector. So I think it's the beginning of some recovery in that sector, which is good news for us, as that's a very -- has a high contribution margin in that product line for us. So I think, that's good news. But I would like to emphasize that, as I was trying to do is, LightPath is no longer just a telecom company. I mean, telecom is one of the verticals that we participate in and the other activity that we outlined, I think, really speaks to where the company is moving and to the strength of our business. So that diversification, I think, is extremely powerful in this market space and that's where, I think, people should really be focused.

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Bradley D. Noss, Roth Capital Partners, LLC, Research Division - Research Associate [4]

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That's helpful. And then just, I guess, you'd referenced seeing some new product development activity. Can you sort of touch on the timing there? And when, I guess, what that sort of sales and development process kind of how long that takes when you'd really expect to see some of that flowing through the income statement?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [5]

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Well, I mean, that's an ongoing process. Depending on the complexity of what we're doing, it can -- we've turned some products in as little as 6 weeks for some of these new jobs, others take quite a bit longer to do. I think we're pretty excited about the kinds of things that we're seeing in the infrared space and those kinds of things, particularly in the firefighting cameras and then some of the defense stuff that is starting to come online. And we're continuing to work in the mobility sector in developing those products that fall into these sensing applications, and in particular, LIDAR. It's pretty hard to put a timetable on those things. But as you see, these bookings start to roll in at the rate that we're seeing. Those are all within 12 to 18 months of being in production. So I think that kind of gives you the time frame.

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Bradley D. Noss, Roth Capital Partners, LLC, Research Division - Research Associate [6]

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That's helpful. Just looking at the gross margins, I was just hoping to maybe get a little bit more detail on the quantification of the different drags that you had mentioned. I guess, just starting with sort of the mix within infrared between custom and, I think, it was a contract sort of offsetting that, but just how much of a drag was that specific infrared mix to gross margin for the quarter?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [7]

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The mix is always a difficult one to try and figure out specifically. But we thought like it was about 6 points in the change in total, but that includes mix between the visible and the infrared as well as the mix within the infrared segment itself. For example, that contract -- that large contract that we ship against has 6 different products in it and that mix changes on a quarter-to-quarter basis. So that has an impact. The contribution margins of these different verticals and these different product lines are all different. So you get a -- we had a revenue mix change that depending on what it is, it's very difficult to forecast where it's going to fit on the margin line because it depends on which sectors are up and which ones are down. So that's a really tough question to answer, Brad. I know it doesn't help a lot, but that's the thing we struggle with every day.

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Bradley D. Noss, Roth Capital Partners, LLC, Research Division - Research Associate [8]

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Yes, no problem. And then, I guess, just shifting to sort of the currency and germanium impact, you mentioned about 5 points, sort of between the 2. I guess, first, are they relatively equal in magnitude between the 2? And then what are you able to do in the short term to kind of get your margins back up? Are you able to offset that with pricing? Or what kind of lag would that -- would you have if you are able to do that?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [9]

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The thing with germanium price increase, that's actually going to turn out to be a positive for LightPath because that is accelerating the move in the marketplace away from germanium and towards our chalcogenide glass, which is -- where we -- that's our main material that we use in infrared and it's a much lower cost material and we produce it ourselves so we have quite a few advantages to using it. So we're pretty excited about that. So I mean, germanium is a standard material. It's a good material for where it needs to be used. But we offer an alternative and it happens to be a lower cost alternative and that should be very good for business for us going forward. In this particular quarter, the germanium price impact was about a little under 2% or 2 points in the margin, I think, 1.76, 1.8 or something like that. So the other part of that 5 points was all in the foreign exchange, which neither of those 2 things, do we be much control over? So we're subject to that. In terms of the foreign exchange, we're looking at evaluating, matching our cost versus the revenue in the country in the local currency. And perhaps when we finish that analysis, we could do a better job of balancing that and that will take some of the sting out of that.

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Bradley D. Noss, Roth Capital Partners, LLC, Research Division - Research Associate [10]

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Okay. I think just one more for me, I guess, just with germanium and some of the FX being kind of difficult to really hedge against, how should we think about that continued pressure on margins and, I guess, on what you're seeing so far through Q4 and what your expectations are there?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [11]

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Well, I mean, I don't know. I mean, there's a little bit that I see. The dollar doesn't look like it's getting any weaker, maybe it's even strengthening a little. So I don't think the foreign exchange is going to have a much -- I mean, that's not something that we can control. I mean, all we can do is try to match those things in the currency and make sure that we try to minimize that. But I'd say we're not in a position to hedge nor do I think, well, that would be a smart thing for a company of our resources to do. So that's about all I can do with foreign exchange. It has, I said germanium -- as far as I'm concerned, I hope it continues to rise and that will be good for business. So...

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Operator [12]

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Our next question comes from Marc Wiesenberger with B. Riley FBR.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [13]

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Regards to your long-term contracts, are those any pricing formulas that can be kind of reset throughout the length of the contract? Are those completely fixed?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [14]

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Look, the current ones that we have are fixed-price contracts, but as things continue, we probably won't do that in the future. We'll probably put some ability to adjust prices for material fluctuation.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [15]

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And so then with regards to the new products that are coming online, you'd expect, hopefully, some of the increased cost can be passed along and we can expect margins to be better than what was in the last quarter?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [16]

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Well, in terms of the custom products, those are quoted individually, so we take that into account. So those are -- those won't be an issue from material cost variations like that, they'll be taken into account, at least, at the time that we put the quote out.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [17]

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Got it. You mentioned a number of times, capacity constraints and you're expanding to relieve pressure in the future. In the quarter, what was your -- what were you running at your utilization rate? Did you experience any constraints? Or is this purely to be prepared for future opportunities?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [18]

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No, we haven't experienced any significant capacity constraints at this point. And what we're really doing is trying to stay ahead of the curve with the investments we're making as we see this growth and where we anticipate this growth coming in. So I think, we're in good shape. It's always a challenge. It depends on how fast the business develops. But right now, we're trying to stay ahead of the curve.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [19]

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Can you talk about the assembly business? I know that's been a focus on some of the other calls, I didn't hear any mention of that. How is that progressing?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [20]

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Well, it's continuing. That's -- it's in infancy as far as we're concerned and we're developing those opportunities. So it really hasn't been an impact at this point, and it was not in this particular quarter. But I think, we'll see that's an area, our focus hasn't changed. We believe that's an area for us to add value and we'll continue to do that.

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Operator [21]

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Our next question comes from Zack Turcotte with Dougherty & Company.

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Zack Turcotte, [22]

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Zack Turcotte on for Catharine Trebnick. Just a couple of things. So first, clarification, -- sorry, if I missed the number, but what -- or how much of the IRR revenue was ISP?

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Dorothy M. Cipolla, LightPath Technologies, Inc. - CFO, Treasurer & Secretary [23]

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The ISP revenue was $3.8 million.

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Zack Turcotte, [24]

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$3.8 million, okay. So we've seen the ZTE situation had a pretty big impact on our lot of firms within your space. What impact, if any, do you see this having on LightPath?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [25]

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Well, I mean, ZTE is a -- they purchase modules, not so much components. So we've never had much direct sales or any to ZTE. A couple of our customers do. And so far, the impact to us other than the general telecom reduction that was well in place before that happened has -- and we haven't seen any impact. Now a couple of years ago, when they first sanctioned ZTE, which this is a follow-up to because they felt like they were following the -- weren't doing what they were supposed to do. It actually drove business to us because the market share that they gave up went to others like Huawei and others and we actually picked up business as a result of it. So we'll see if that kind of thing happens again. But right now, I mean, just this morning I heard that there's a lot of trade talks going on and there's some work going on to allow ZTE to come out of the situation intact. So we'll see where that goes. But again, that's certainly not within our ballpark and the impact was currently has been almost nothing.

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Zack Turcotte, [26]

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Got it. And we hear a lot about the upcoming 5G kind of sort of revolution in telecom and how that's going to impact that the down stack for you guys? So what impacts have you seen so far of 5G in telecom producing a bigger percentage of your revenue?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [27]

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Well, I think where we see 5G is in the new products that are under development. I mean, we're doing quite a bit of work with Huawei. As I said, we just signed 6 new lenses, NREs for 6 new designs for them. There's 2 more that we're in discussions with. Guys like Lumentum, where we've got 5 new lenses in development with them. NeoPhotonics, we've got a new lens in development for them. I suspect, although, I don't know for 100% fact that the majority of these are associated with the equipment changes that are required for 5G. So there's a lot of activity that's coming down the pipe for us as well as the volumes of some of the existing products have begun to pick up as we mentioned in our prepared comments.

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Operator [28]

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Our next question comes from Michael Dyett with Dyett Capital.

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Michael Dyett, [29]

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Jim, Michael, I just wondered whether in downplaying the distributor, do you still see something out of the European distributors that you've been trying to build up?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [30]

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Well, I mean, yes, it's -- I don't mean to say that we're downplaying distribution. What we're trying to do is develop a lot more longer-term business so that we have better forecast on the short term and better insight as to what's coming. And I think we're being very successful with that. The distribution business, particularly in Europe, and in particular, on the visible side of our business has been quite strong and continues to grow. The infrared side of it has been a little bit slower. We're not completely satisfied with the rate with which that business has been developed, particularly in Europe through our master distributor. But I think, there's progress being made there. So I think, like all the -- it's a very good channel for us. It's been -- it was very strong. Overall, distribution catalog as a category has been a strong market vertical for us and it continues to be.

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Michael Dyett, [31]

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Great. Just a second question, thinking back about the problems that you'd mentioned hit a factory in Southeast Asia, I think, it was in Vietnam, have those fully -- have they recovered? And is that sales opportunity back on track?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [32]

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I think -- that's kind of an old thing, right, that was when...

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Michael Dyett, [33]

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Yes, yes, and then you said...

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [34]

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Oh, Fabrinet, yes, that's pretty much back on track. That business is strong and that's one of the areas we did have a distributor there that wasn't performing, which we terminated and took that business direct. And so that's been very well received by that contract manufacturer. I think it's Fabrinet. And we've seen that we have even better line of sight to what's going on there with one less middleman and that business is growing.

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Operator [35]

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Our next question comes from Gene Inger with ingerletter.com.

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Gene Inger, [36]

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Jim and Dorothy, I'm in Las Vegas today and there is a small possibility a few investors might ask me about LightPath. And it's good to see the earnings report. Congratulations on good forward -- on good revenue increases, which is why the stock's up in the aftermarket, as you may know. I might actually mention to Dorothy, and you touched on it, Jim. The dollar has been improving and the dollar index is back. And if China does anything, it would be devalue, so though that is definitely not the core of your business now you would think that would help the exchange ratio this year, but that's really not what I wanted to touch on. I was going to mention ZTE and the quid-pro-quo trade. You already know about that. But let me ask you rather about the module that I saw at the SPIE Photonic show, where you pointed out, Jim, the high-resolution in the corners. And I wonder you didn't clarify exactly why, but does that relate in particularly to things like LIDAR, where you're sweeping from side to side and that resolution can make the difference to a correct identification of what an object is or not?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [37]

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No, I think, that's more indication of the superior design quality we have in our optical designers that they're able to take these lenses and design the aperture such that, not only do you get a really good picture in the center of the lens, it extends all the way out to the corners of the picture. That was a 19-millimeter, I think, assembly that we were looking at, that's used in these scopes and rifle sites. And it's just -- it's a really good picture. It's also those are the kinds of things that we put into the firefighting cameras, the optics that we make for those, so that you get a really high-resolution picture. So I think, that's just more, Gene, a representation of the very high-quality product that LightPath makes and the design capabilities and optical design capabilities that we have that may be better than some others.

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Gene Inger, [38]

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You're very proud that, that's an assembled module and I'm curious if this relates or it's similar to a new product that's going to be in a larger scale production, presumably that the Pentagon wants, which relates to the look around, see around goggles that soldiers will be able to wear and they can point their weapon around the corner without sticking their neck out, save our lives, keep our troops safe. And it uses a thermal imaging and they can actually fire the weapon without ever -- at a target without seeing it, identifying it and firing without sticking their neck out, are you familiar with that?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [39]

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Yes, we are. And that's a product line that has opportunity for us. We're in on the visible side of that type of sight. And we think we have some ability to get in on the infrared side, but that's a future program.

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Gene Inger, [40]

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No, I know and it's an expensive one. I hope -- I wish you good fortune with that. May I just briefly on LIDAR, again, because at the photonic show down the road was Lumina and that's why we're thinking about the resolution. And I happen to notice that you took a lease on space that you may not want me to identify that or not, but it's a matter of record that it's in the same complex at research partner near your primary facility, but also near UCF, where Lumina is located, which -- and I wonder if your collegial relationship is expanded there? Or can you reflect on that at all?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [41]

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Well, you're absolutely correct, we're neighbors and we operate in a lot of the same spaces and there's a lot of things we could do for those guys. And we do talk to them frequently. Let me leave it at that.

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Gene Inger, [42]

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I absolutely will leave it at that. And could you also comment whether -- because I understand it's a plus. There's $1 billion or $100 million committed by a Belgian company and also [Harris] to build in which is now almost finished. I think, they opened at a new high-tech center down towards Kissimmee, Florida, which said it would be of advantage to local sensor providers, have you any reflections on that project?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [43]

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Yes, that's referred to here locally as bridge. It's a sensing research and development center, which I think it has all kinds of advantages that brings a lot of high-tech and a lot of talented people to the area that we can certainly leverage from. And as it continues to move forward, I'm sure there will be some opportunities for us with them as well.

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Gene Inger, [44]

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I was thinking that. And finally, I might say I noticed some institutions increase and some institutions decrease positions in the -- at the last calendar quarter of 2017 in your shares. And I wondered you want to comment or not? And yet the institutional holdings appear to be about the same percentage. I'm curious about that because it's unusual to see some of the big funds that are in a low price stock, usually, it's when the stock becomes more expensive that their investment committees let them look at it.

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [45]

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Was there a question there, Gene?

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Gene Inger, [46]

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Yes, do you see any overhanging supply of stock that's remaining to be absorbed? Or do you see new institutional interest?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [47]

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I think when we did the acquisition of ISP, we were -- we got involved with some very high-quality institutions. They made significant investments during the deal and subsequent to the deal. And those appear to be long-term holders. And we're very happy to have them. And it should continue. I think it's a testament to the quality of LightPath and the potential that the company has and the execution that it has done over the last 4 years or so. So I think we should be an attractive stock for those kinds of holders, even though we're about to fall.

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Gene Inger, [48]

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Great. I look forward to your progress. I see all kinds of development for sensors even that people transporting pods out in California that Musk is trying to develop. I see what's going on and you're certainly near Cape Canaveral. I don't know if you're involved in any of these new projects or not. You may or may not want to elaborate it, if you are, but I -- and obviously, you are in the right areas.

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [49]

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Yes. I think sensing technology in terms of how it relates to control all those Internet of Things and smart appliances and smart -- and all this interconnectivity is a spot, that we believe we can exploit as we go forward. We think we're in the right position with the right kind of products to do it. So we're very excited about that potential.

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Operator [50]

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I would like to turn the floor over to Dorothy for closing comments.

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [51]

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I'll take that anyway since I'm already talking. So I want to thank everyone for participating in the call. And in conclusion, we appreciate the support of our shareholders, the dedication of our global and expanding team at LightPath. With our strength and presence around the world, we remain focused on our efforts to drive top line, bottom line and cash flow growth. We're also very excited by our growth prospects, and we'll be sharing our story with current followers and prospective shareholders later this month at the B. Riley FBR Annual Investor Conference in Los Angeles. Thanks, again, for participating on today's conference call. And we look forward to speaking with you next quarter.

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Operator [52]

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This concludes today's teleconference. You may disconnect your lines at this time.