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Edited Transcript of LPTH.OQ earnings conference call or presentation 5-Nov-20 9:30pm GMT

·41 min read

Q1 2021 LightPath Technologies Inc Earnings Call Orlando Nov 12, 2020 (Thomson StreetEvents) -- Edited Transcript of LightPath Technologies Inc earnings conference call or presentation Thursday, November 5, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Donald O'connor Retreage LightPath Technologies, Inc. - Senior VP & CFO * Shmuel Rubin LightPath Technologies, Inc. - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Brian David Kinstlinger Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst * Gene Inger The Inger Letter - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon and welcome to the LightPath Technologies Fiscal 2021 First Quarter Financial Results Conference Call. (Operator Instructions) Please note, today's event is being recorded. I will now pass the call off to Don Retreage, Chief Financial Officer, LightPath Technologies. -------------------------------------------------------------------------------- Donald O'connor Retreage, LightPath Technologies, Inc. - Senior VP & CFO [2] -------------------------------------------------------------------------------- Thank you. Good afternoon. Before we get started, I would 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 and involve various risks and uncertainties, including the impact of COVID-19 pandemic that are discussed in the periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can prove to be inaccurate and therefore, there can be no assurance 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 management's discussion, there will be a formal Q&A session open to participants on the call. I would now like to turn the conference call over to Sam Rubin, LightPath's President and Chief Executive Officer. Please go ahead. -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, and good afternoon. Welcome to LightPath Technologies Fiscal 2021 First Quarter Financial Results Conference Call. Our financial results press release was issued after the market closed today and posted to our corporate website. Following my remarks, our CFO Donald Retreage will further review our financial results and provide more perspective on key areas. We will then conduct a Q&A session. Now on to my remarks. Strong sales performance in the first quarter of fiscal 2021 reflects our continued trajectory of growth and performance improvements as well as initial impact or the strategic review we presented when addressing our year-end financial results. Our growth and strong performance can be seen both sequentially compared to the fourth quarter of fiscal 2020 as well as compared to the first quarter of last fiscal year, a quarter in which we suffered from significant operational challenges which impacted results in that quarter. Despite the coronavirus pandemic, which has disrupted supply chains and cost and economic upheaval, as an essential manufacturer we have been able to deliver strong results and have positioned the company for more profitable and long-term growth. Against the backdrop of the pandemic and other socioeconomical issues, there have been many challenges. I would like to commend our global staff for their resilience, commitment and continued effort to support our customers while adhering to the health and safety protocols to protect our coworkers and their families. Sales of all major product groups increased from the first -- in the first quarter 2021 on prior year period. Most notable has been the demand for our PMO lenses for the 5G infrastructure buildout and from our vertically integrated manufacturing platform for optics and optical assemblies made with our own BD6 material. We shipped approximately 1.3 million lenses in the first quarter, another record for the company, which is an increase of 105% from 600,000 lenses in the first quarter of last year and 9% increase from 1.2 million lenses in the previous quarter. To meet the increasing demand for optics, we have been adding capacity through investments in equipment and process improvements in different areas. Demand-based capacity constraints began to be revealed in the third quarter and continued in the fourth and first quarter, which is why we had front-loaded investments in our manufacturing for this year. Capital expenditure in first quarter 2021 were $1.2 million, nearly 4x the amount spent in prior year period and more than 25% greater than in the fourth quarter. It's important to note, however, that reporting on capital expenditure is based on dates of invoices. And often there is a delay between the timing of decision and order, and the actual expenditure as booked. The additional investments in machinery and related operating personnel typically take several months until achieving full scale output, where we see more meaningful margin contribution. As such, some of the growth in capacity and some of the expenditures are still related to investments initiated in fiscal 2020. For the time being, although we have added a production capacity into fiscal year-to-date, we remain constrained on certain product lines, amid the growth in both revenue and total backlog. And we intend to continue to invest in areas we believe we can get suitable returns. Both revenue and total backlog increased 26% as of September 30, 2020 as compared to the same time last year. While our capital expenditures in recent quarters have been focused on capacity increase, as we roll out our new strategic direction and as we continue to evaluate opportunities for improvements in the organization, we are likely to identify areas for investments that will yield improvements to our operations and hence to our margins as well as allow us to attract new business that will help shape our future and yield higher returns. As we are still experiencing growth in demand for our core products, such as molded optics as well as the desire to address the future direction and operational improvements, we might choose to invest at a somewhat higher rate than we had in previous years. This is also aligned to the improvement in our capital management and hence, the growth in our capital position -- in our cash position, which we are focused on and will continue to focus on. I would like to now pivot and provide an update on our new strategic direction and company transformation. In this call and in subsequent quarterly calls, I plan to provide updates on activities we are taking and outcomes of to align the organization to our new direction and execute on this strategic direction. As mentioned on our previous call and in our latest 10-K, we have identified that while we have served our customers exceptionally well as a component company, the world around us is changing, and photonics as a technology is being integrated into more and more industries and applications. This leads to the change in the typical customer profile with an opportunity to create and capture more value if we focus on solving the customers' optical problems and the needs rather than being a supplier of components. This is made possible, not only because of this change -- changes unrolling in our markets, but also because of LightPath's unique positioning as an innovative optics company with strong capabilities in both design and manufacturing of optics. To deliver on this, there are some activities and changes we are implementing. First, the sales process. Along the lines of what I had just discussed and for the purpose of context, in the components business, we engage with the customers once they have a complete optical system design such that the customers engage with us at the point in which they need to procure the component. In the solutions oriented business, which we are moving towards, the process is different. We would ideally engage with the customers at an earlier stage, so that we are part of the design process. In other words, instead of receiving an optical design from the customer and fabricating the individual components for them, we are going to design the optical systems for the customers' systems and procure the entire optical -- and produce the entire optical assembly. To achieve this, we are implementing some changes in our sales process and structure, although we will continue to work with and pursue business through our traditional processes that have been successful to date. We have created a new role of business development, whose responsibility is to engage with customers early on and begin our interaction with the system specification stage. We have also established an internal rapid response team that is able to work with customers on their need and turnaround designs for solutions quickly. Lastly, our sales team is switching from a product-based focus to an account-based focus, thus making the customers need the center of attention as opposed to product or technology. Secondly, to be able to offer unique capabilities to our customers and to be able to design and deliver great solutions, our product development is now focusing on adding products and capabilities that will allow us to enhance the performance of the customers' system. One such recent example is the addition of a new high indexed multiple glass in our product offering. Such a glass allows achieving higher numerical aperture, which in turn translates to better light collection efficiencies for phytooptical focus, all of which are in very important specs in optical design. Third, as we focus on solutions that naturally mean focusing on higher value contracts with longer durations, as seen in the nearly $2.7 million contract we announced last February, which we will soon commence delivery against, often since contracts are multiyear contracts. In the past, we have disclosed at the end of each quarter our backlog for the forward 12-month period. This view did not include any longer-term supply agreements that extended beyond a 1-year period and that we expect now to see more of. As such and to be able to provide a more complete picture of the outcome of those efforts, we will now be reporting our complete backlog and not a 12-month backlog we previously reported. It is our belief that this will allow investors to have a better picture as to our progress with the new strategic direction. Additionally, as expected, we are also engaging into more solution-based opportunities with customers that have a higher unit value and longer-term engagement. Though we are early on in this new strategic path, we currently have in our pipeline a number of early-stage opportunities. Each has the potential of being a multiyear engagement with over $1 million of annual spend for each of them, which we see as a positive sign for the potential of this strategy. Finally, I would like to address the recent global developments related to COVID-19. While we have been lucky enough to not be significantly impacted by the situation, as I mentioned in previous calls, the dynamic nature of the situation leads to changing conditions and significant uncertainty. In the previous "wave", we have seen some customers defer taking delivery of products, whether due to change in demand or due to physical closure of their facilities. In this time around, we have not yet experienced such situations. However, we are seeing signs from some of our customers in Europe with potential reductions or order postponements pertaining to some demand during the time of this wave, which may impact for future quarters. At the same time, sales to academic customers, which were significantly impacted in the previous wave are now not showing the same pattern. Additionally, as we did 6 months ago, our teams are evaluating potential impact to our supply chain and will be adjusting our inventory levels for raw materials to ensure business continuity in our manufacturing. The results today -- the results announced today reflect continued sales growth, improving manufacturing efficiencies and ongoing management of expenses. Our disciplined cash management has allowed us to hold a consistent cash balance at the end of the quarter from beginning of fiscal year at $5.4 million despite the substantial increase in capital expenditures while further reducing our total debt. Don will review our cash flow and investment in greater detail during his remarks. We are very pleased with the progress made in the first quarter of fiscal 2021 and our upbeat about future results and the implementation of our strategy based on our strength and our core capabilities to address the largest and fastest growing trends in our industry for visible and infrared solutions. Now I will pass the call over to our CFO, Donald Retreage, to provide more details on our first quarter of fiscal 2021. -------------------------------------------------------------------------------- Donald O'connor Retreage, LightPath Technologies, Inc. - Senior VP & CFO [4] -------------------------------------------------------------------------------- Thank you, Sam. First, I would like to mention that much of the information we are discussing during this call is also included in the press release issued earlier today and in our 10-Q filed with the SEC. I encourage you to visit our website at lightpath.com and specifically the section titled Investor Relations. Now onto my remarks pertaining to the fiscal 2021 first quarter ended September 30, 2020. Sam's remark covered a lot of our financial performance. So I will be specifically discussing some of the key performance areas. Revenue for the first quarter of fiscal 2021 was approximately $9.5 million, up from $7.6 million in the first quarter of fiscal '20 and $9.1 million in the fourth quarter of fiscal '20. This marks the highest level of the first quarter revenue in the company's history. IR product revenue was $4.7 million in the first quarter of fiscal '21 or 50% of the total revenue, up from $4 million or 52% in the first quarter of fiscal '20. Visible precision molded outfits or PMO products' revenue in first quarter of fiscal '21 was $4.3 million or 45% of the total, up from $3.2 million or 42% of the total in the first quarter of fiscal 2020. The balance of our revenues for the first quarter was $491,000 from specialty products and nonrecurring engineering projects, which vary greatly from quarter-to-quarter, but are substantially smaller contributors to the consolidated revenue. Revenues from this group in the prior year period was $408,000. So we realized a 20% improvement. With respect to our margin profile, generally speaking, PMO products is smaller and almost entirely molded. So we have faster turnaround time, higher volume applications and more automated processing. These products also are generally lower in price. We historically have a margin averaging in the 40s to 50% range. Of our 2 primary revenue reporting segments, PMO is the smaller group with a higher margin. The IR product group represents a larger and faster growing market opportunity. IR margins have historically been in the 20% to 30% range. Our molded IR lens, which use our proprietary internally developed BD6 material will come in on the higher end of the margin range and we foresee further increases to our margins within this category as volumes grow and efficiencies improve. As part of our gross margin improvement strategies, we have been more aggressively working at marketing new products and targeting new customers using our line of innovative BD6 lenses, while attempting to convert existing customers to the extent possible from using our germanium lenses for our BD6 lenses. As Sam discussed, we have been making in rolls with new and differential products, such as KP SFN 202, which offers a high index rating for a visible to near infrared spectrum that is very hard to achieve at a scale. So this will be a premium product group. For first quarter of fiscal 2021, gross margins were $3.9 million, an increase of 61% as compared to approximately $2.4 million in the same quarter of prior fiscal year. Total cost of sales was $5.7 million for the first quarter '21, up from $5.2 million in the prior year. So as the cost of sales were up 10% on a 25% improvement in sales, this is the result from some of our operating leveraging strength. While impressive, we did benefit from certain operational challenges that impact results in the prior year period, which we estimate at approximately 2.5% increase in cost of sales and a 1.6% decrease in gross margin. Gross margin as a percentage of revenue was 40% for the first quarter of fiscal '21 as compared to 32% in the first quarter fiscal '20. On the fourth quarter, we improved by 1 point. The increase in gross margin from prior year period was primarily driven due to higher revenue and volumes across all product groups. In addition, there was several factors that negatively impacted the first quarter of fiscal 2020, such as increase in tariffs, the impact of which have since been mitigated. From the first quarter of last fiscal year and the fourth quarter, we are experiencing benefits from yield, improvements and efficiency measures, which are all further magnified as the volume of lenses produced continues to increase. In fiscal 2021, we shipped 1.3 million lenses, up from the fourth quarter of fiscal '21, we shipped 1.2 million lenses; 905,000 total lenses in third quarter compared to 643,000 lenses in the first quarter of fiscal '20. During the first quarter of fiscal 2021, total operating expenses were approximately $3.2 million, an increase of about a $168,000 or 6% as compared to the $3 million in the same period of the prior fiscal year. Selling, general and administrative costs increased by approximately 4% as compared to the same period of the prior fiscal year due to personnel related costs associated with a moderate increase in headcount, particularly in filling positions that have been outstanding as well as additional outside consulting services for projects related to operational improvements. Research and development related to new product development costs increased by 5%, which was needed to address the demand for advanced optical designs. Partially offsetting these increases for limited travel and marketing expenses from the COVID-19 restrictions, net of pandemic related increased cleaning and safety expenses. Our consolidated corporate income tax in the U.S. is shield by our net operating loss carryforward benefits of approximately $74 million at September 30, '20, but we have to pay income tax to the countries of certain foreign subsidiaries. Income tax expense for the first quarter of fiscal 2021 was $435,000 as compared to $148,000 in the same period of the prior fiscal year. Factors in both periods are primarily related to income generated by one of the company's Chinese subsidiaries. First quarter 2021 income tax also include Chinese withholding taxes of $300,000 associated with the intercompany dividend declared through the refractory cash from China into the U.S. Only a $100,000 of this tax has been paid as of September 30, 2020, with the remainder accrued. It should also be noted that while intercompany dividends are subject to withhold impacts, the total income tax on the earnings of this subsidiary was still lower than it would have been using the normal income tax rate since this subsidiary currently qualifies for a lower Chinese income tax rate. Net foreign currency transaction losses due to changes in the value of the Chinese yuan and the euro against the U.S. dollar was $98,000 in the first quarter of fiscal '21, with no impact on the earnings per share compared to net foreign currency transaction losses of $497,000 in the first quarter of fiscal 2020 for a reduction of $0.02 to the earnings per share. Net income for the fiscal '21 was $97,000, which was breakeven on a per share basis compared to a net loss of $1.4 million or $0.05 per share for the first quarter of fiscal '20. For the second consecutive sequential quarter, we had higher revenues, stronger margins and controlled management of expenses. Income tax expense from the repatriation of cash from China resulted in a meaningful nonrecurring impact on earnings in the first quarter of fiscal '21. This was not experienced early. For better comparability, we look at the EBITDA to provide important insight into our performance and progress. EBITDA of $1.4 million set a company record for the first quarter and compares to a loss of $236,000 in the same period of fiscal 2020. In addition to the operational progress that drove the improvement in EBITDA for the first quarter, there was also a favorable difference of approximately $400,000 in foreign currency transaction losses. Moving to the balance sheet and cash flow related items. Capital expenditures was $1.2 million in the first quarter of fiscal '21, up from $257,000 in the prior year period. Given that we have been running at near capacity, we intend to continue to invest on for debt capital expenditures for the year to be in the vicinity of $2.5 million for the year. Meanwhile, net cash provided by operations was $662,000 for the first quarter of fiscal '21, up from $450,000 in the prior year period. Total debt including finance leases was $5.7 million, which was reduced approximately by $308,000 in the first quarter of fiscal '21 from $6 million at the beginning of the fiscal year. This represents a 5% reduction since June 30, 2020, and it's nearly half the amount of the debt reduction of all of last fiscal year. Our cash balance at September 30 was $5.4 million consistent with the June 30, 2020 balance, even though we reduced debt and made significant investment to increase our production capacity to deliver future revenue growth and increased cash flow. Finally, on to our backlog. As Sam mentioned, in accordance with our new strategic directives, we have taken a refreshed view of our key performance indicators. For backlog, we have modified our disclosure from providing a 12-month order outlook to one that emphasizes our focus on long-term customer orders such that we now provide total backlog for all firm orders. As of September 30, 2020, LightPath's total backlog was $20.9 million, an increase of 26% from $16.6 million as of September 30, 2019. It should be noted that it is natural for our backlog to fluctuate during the year as a result of the timing of such bookings of large orders and annual renewals. With this review of our financial highlights and recent developments concluded, I will now turn the call over to the operator so that we may begin with our question-and-answer session. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Today's first question comes from Brian Kinstlinger with Alliance Global Partners. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [2] -------------------------------------------------------------------------------- Can you talk about -- I think last quarter, you gave a manufacturing capacity number. Can you talk about where you are today? And with the investments you're talking about for the rest of the year, where will that be? Say mid-2021 or at the end of 2021, what's your goal to get to? -------------------------------------------------------------------------------- Donald O'connor Retreage, LightPath Technologies, Inc. - Senior VP & CFO [3] -------------------------------------------------------------------------------- Our goal for the entire year as I mentioned is 2.5 as a firm number. However, we will adjust accordingly based on the continuous flexibility of the -- of where logistically we need to adjust, number one, to choose for COVID-19; and number two, how we can better collaborate with our manufacturing processes. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [4] -------------------------------------------------------------------------------- $2.5 million was the CapEx number, right? -------------------------------------------------------------------------------- Donald O'connor Retreage, LightPath Technologies, Inc. - Senior VP & CFO [5] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [6] -------------------------------------------------------------------------------- What about in terms of units? Sorry, I should have stated that more clearly. Where are you today in terms of capacity, your ability to the number of units you can manufacture? And where do you hope to get to a year from now? -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- A year from now, I mean on speculation, this will probably be closer to double, okay, with our capacity unit based on our PMO. And again, on the IR, it's not going to be as much even though we are increasing. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [8] -------------------------------------------------------------------------------- Got it. That's helpful. And then in terms of the DLC coating on BDC, as I understand, it's important for exterior facing IR lenses. Do you know roughly what percentage of IR lens sales maybe that you have or in general are exterior facing lenses that need that DLC coating? -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [9] -------------------------------------------------------------------------------- Yes, typically, a minimum design of an optical system would be 2 lenses. So in the most basic optical system, one lens would be facing outside, one lens internally. Then all internal services are coated with a different coating, a much more standard film coating called AR anti-reflective. In more complex systems, if you're talking about static systems without the dynamic zoom or change, it could be 3 or 4 lenses. In much more complex systems, it can be up to 7 lenses or 8 lenses. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [10] -------------------------------------------------------------------------------- Got it. That's great. So and there's competitors I take it that are going through the process of selling a similar version of what you're selling in terms of a generic germanium. Are customers -- are they generally being as successful as you? Are you taking much more market share given this DLC, I would think, given how would they handle those exterior facing issues that the generic has? -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [11] -------------------------------------------------------------------------------- The DLC is definitely an advantage. To my knowledge in the U.S., there's 2 other companies that can do DLC on chalchogenide, some material like our BD6, probably another couple outside the U.S., so there's definitely an advantage there. What is really unique in terms of LightPath and their advantages, and this comes from the integration of ISP and LightPath is our ability to combine the molding technology with standard fabrication technology for large lenses. Typically, one can mold lens up to a diameter of 1 inch about. Above that is difficult to mold the lens and get consistent results. So above that, usually what one would need to do is to fabricate the lens using other techniques, which are far less cost-effective than molding. What we have developed and patented, and I think we issued a press release from that patent about half a year ago is a technology that allows us to mold the lens into a near shape. So very, very close to the final lens. And then only touch it really with a fabrication equipment at the very end just to get the final result to be a perfect optical surface. So it's really combining the both -- the best of both worlds. And as far as I know, that is one of our biggest advantages and allows us to offer cost effective, large diameter chalcogenide lenses. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [12] -------------------------------------------------------------------------------- Great. Two more questions I have. The first is, within the current situation of where we are with the pandemic coupled with the U.S.- China tensions, has there been any change to the pace or expected pace of the 5G rollout in China? -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [13] -------------------------------------------------------------------------------- We have not seen any change in that. We monitor it regularly, and we also raised the question every time we hear about any updates from other companies. As far as we know, any changes that other companies have seen are mostly related to other elements of the 5G and not the optical infrastructure. We have not seen any change in the demand. Now it could be that there is a change in the demand, and it hasn't yet reached us or that it is impacting more of our competitors because there's multiple vendors often providing to the same customer. But as of now, we have not seen a change for the demand, and we keep receiving orders from 5G related customers in China on a very regular basis. -------------------------------------------------------------------------------- Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [14] -------------------------------------------------------------------------------- Great. That's helpful. Last question I have, which is related to the 5G rollout in China. Well, during the Chinese New Year, as I think about seasonality, will that be impacted? Will you see lower volumes? Or will you be able to replace that demand with other customers? -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [15] -------------------------------------------------------------------------------- Yes. Well, what happens there and I reflect back on the 6 years I lived in China and have been through that is in preparation of the Chinese New Year holiday, typically, companies or employees work weekends and companies operate over the weekends and far more than usual in order to build up the inventory and whatever is needed in anticipation of the downtime during Chinese New Year. The Chinese government even mandate that while the holiday formerly is only 4 days, if companies want to give a 7-day holidays, they have to substitute those additional days with days over weekends and that's how output isn't impacted. So I've lived through that and seen it, and our operations have and other operations, both foreign and domestic live by that and have really built the, I think, a base stable flow during such time. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- And our next question today comes from Gene Inger with ingerletter.com. -------------------------------------------------------------------------------- Gene Inger, The Inger Letter - Research Analyst [17] -------------------------------------------------------------------------------- It's the ingerletter, not injure, and we hope to not injure investors. So let's start with China. So Sam, you were talking about China. And when I look through the report and listen to what you said, it looks like you had the majority of the increase that's 4% sequential, which is not that impressive. The year-over-year, it's another world we're in right now, I understand. But it looks like business perked up in China from 5G and contracted with infrared or contracted other than in China. Is that correct basically? -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [18] -------------------------------------------------------------------------------- So Gene, in our record and our track that we have right here for the past 1, 2, 3, 4 quarters including this one, the telecom increased for us from 12% to 21% of our income. Sequentially, 12% to 19% to 22%, and this quarter was down just a little bit because of capacity constraint. It has been increasing ever since as far as telecom is concerned and China is concerned. -------------------------------------------------------------------------------- Gene Inger, The Inger Letter - Research Analyst [19] -------------------------------------------------------------------------------- And as far as Europe, I know it's in the side. But just today, the United Kingdom talked about starting to vaccinate probably the Oxford vaccine everybody in England starting next month. So if you're envisioning a slowdown in Europe, I guess you're also envisioning that that would pick up and give you sort of a compounded growth from both areas, Europe and China, not just North America, if we get through COVID, which ultimately we must? -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [20] -------------------------------------------------------------------------------- Well, we're not envisioning a slowdown in Europe as much as we are relaying information we've received from customers about possible impact from the stay at home orders or closures that they see in Europe. And hopefully, everything gets resolved quickly everywhere, and we can all go back to normal. -------------------------------------------------------------------------------- Gene Inger, The Inger Letter - Research Analyst [21] -------------------------------------------------------------------------------- Well, from the standpoint of investors, I think -- because I heard somebody, unless I misunderstood, maybe Don has kiddingly suggested PMO business might double in a year. So I could see, and I've referred to -- for the LightPath's stock as a speculative long-term investment with not too much risk as a growth stock, but what would you say to traders are shorter-term oriented people that really have a 3 to 6-month visibility because the volume has been low? It ran up at one point in the summer. Is there a short-term reason for a player in the market to be interested in this company or only for long-term growth? -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [22] -------------------------------------------------------------------------------- First, let me clarify, Gene. The question I understood it was to ask about the units. And based on our run rate, we see we're increasing. I mean 25%, 30% every quarter. So my answer to that was that the PMO could easily double within a year unit wise. Remember, these are billion lens. It could, based on our capacity constraint, but the run rate that we're using, that would be that, providing nothing else happens and telecom continues. -------------------------------------------------------------------------------- Gene Inger, The Inger Letter - Research Analyst [23] -------------------------------------------------------------------------------- Okay. This may all be fine, but I see by the relatively steady growth since the company really turned around more than a year ago digested the cost of ISP, divesting New York and so on, and that's all great. But I think the new direction that Sam refers to, I don't know if it involves autonomous driving modules for different companies or devices for companies like SpaceX or Velodyne or others you might be working with. But I would hope that you're not concentrating on only for your core customers that make up a big portion of the business as I think was the case in the past. Could you guys reflect on that perhaps? -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [24] -------------------------------------------------------------------------------- Absolutely right. We are diversifying both in customers and industry is something we see as important. And something that really almost comes naturally from the fact that the optics get integrated into many different technologies and industries. So I don't think we have any specific industry today that accounts for more than 20% of our revenue. That third -- to answer your earlier question about timing, I think it's important to note that we are in here for the long game. Investments we're making, decisions we're making, the path we're thinking are all because we believe there is tremendous value for us to create in the long term for shareholders and have -- while we always try to improve everything as quickly as possible as we can, we are not doing this to achieve quarter-to-quarter big bangs necessarily as much as we're focusing on building something stable and strong that can grow further. -------------------------------------------------------------------------------- Gene Inger, The Inger Letter - Research Analyst [25] -------------------------------------------------------------------------------- Sam, if I might ask one more thought. Is this a little bit as you're transitioning even further and your business looks promising, especially as we get through COVID, it's infrared and so on. Does this give you this integration and devices almost like a little -- it's not Taiwan semiconductor or a little Foxconn, where you have a core business, but they expand that in doing work for others. So you end up perhaps assembling devices? I don't mean to put words in your mouth; I'm just asking. And you're actually bringing in components from other vendors in order to do assembly works, not just design? -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [26] -------------------------------------------------------------------------------- Yes. So that's a very interesting point because very often in our world, the optics are one of the most sensitive parts of assembly, given the sensitivity to dust and such. So it would not be completely unheard of a customer wanting us to do more than just the optical assembly since people do not want to touch such part of their system too many times. So it could be in the long term, but it wouldn't be out of an attempt to be a contract manufacturer as much as it would be a service to the customer that can just enhance our offering and services in optics. -------------------------------------------------------------------------------- Gene Inger, The Inger Letter - Research Analyst [27] -------------------------------------------------------------------------------- Well, I sort of asked this because what you're talking about with design goes beyond even a Foxconn because what -- and you know them from China because what I sense is you're talking about being more -- almost an integrated manufacturer, which would really elevate the perception of the company. If you're doing that because you're not just talking about design. Let's say, well, we use Apple. They design something and they give it to Foxconn or they design an arms chip and they give it to TSC in Taiwan. But they are the designers. You're talking about doing the design to meet the customer designer. I think it's a really good idea and obviously creates residual or annuity style income, which I'm guessing is what you're shooting for. -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [28] -------------------------------------------------------------------------------- Yes, that would definitely be a nice outcome. I'd say that also optics had someone different -- well, has many, but one very important difference compared to say electronics and PCB, and that is the uniqueness of the knowledge and that the transfer from the design to the manufacturing is not as straightforward as sending prints or feeding into an SMT machines' program and just letting it to run. And I think that uniqueness and that very particular expertise needed in optics is the reason why our customers entrust us with such parts of their business and why they also believe and sort of do we that we can create a unique value compared to them doing it in-house or giving it to their contract manufacturer to do. -------------------------------------------------------------------------------- Gene Inger, The Inger Letter - Research Analyst [29] -------------------------------------------------------------------------------- That's helpful. First of all, I like the vision, Sam. And I think if the performance is delivered, I suspect that the market cap of the stock will reflect that eventually. But basically, I'll let you go with a last thought and congratulate you on the work you guys are doing. But the last thought might be a question if you could expand a little bit more on how your linkage comes into some of the new technologies, AI, AR, autonomous driving, even the safe program, which you're somewhat connected with? -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [30] -------------------------------------------------------------------------------- Sure. I mean that's something probably I can talk quite a bit at length about and bore everyone. But photonics is an incredible technology. It's something that's enabling so many places. And 20, 30 years ago, photonics had some applications. Today, the number of applications and uses for photonics have grown exponentially and continue to grow. And that's part of the beauty of what we do. We are enabling other technologies, other industries to make use of this technology by providing this expertise. And I've seen that throughout my career how this is growing, and I continue to see it. And to me, it's an exciting thing because it's living up to the potential of a life changing technology. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- (Operator Instructions) Our next question today comes from [Jeff Peterson with Ridgefield Capital]. -------------------------------------------------------------------------------- Unidentified Analyst, [32] -------------------------------------------------------------------------------- Can you talk about the gross margins of the BD6 molded lenses versus diamond-turned infrared lenses? And what are the differences between the manufacturing processes? -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [33] -------------------------------------------------------------------------------- Yes. Go ahead. -------------------------------------------------------------------------------- Donald O'connor Retreage, LightPath Technologies, Inc. - Senior VP & CFO [34] -------------------------------------------------------------------------------- The difference between the BD6 lenses, which is still a new product for us is that the range could be from 17% to 23% on the gross margin range. That's getting better as our yield comes up and as raw material goes up. On the IRDT, it could be a bit higher because they're bigger and it's -- the average selling price is also higher. -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [35] -------------------------------------------------------------------------------- Maybe just to add to that. From a technical point of view, in the IRDT, the material is one of the main drivers of the price, and it's outside of our control. So the material is a naturally occurring material. It's not synthetic, cannot be produced. And so the price of it really depends on the availability of the material from mines in Russia and China. And any fluctuations there greatly impacts gross margin. In our molded BD6, really what our technology and our innovation, similar to what PMO was in the earlier years is something that really scales with volume. So fairly a high investment at the beginning, if you are only making very low volumes, but really grows to substantially better margins over time when volumes increases. We are early on in the adaptation of molded BD6 in the customers' designs. It's naturally going to happen this way because many of the designs have a long life cycle, and you cannot replace existing designs in aerospace and defense. So we work today on designs that will become production maybe 2 years from now. And so we're not really fully absorbing the costs of the BD6 molding and the production of the BD6 glass until we reach certain volumes. But when we do, there's no reason why the margin in the long term of molded BD6 would not be similar to PMO. -------------------------------------------------------------------------------- Unidentified Analyst, [36] -------------------------------------------------------------------------------- That's very helpful. Who is your largest infrared customer? And can you discuss the various products they buy from you and the size of these contracts or expected renewals? -------------------------------------------------------------------------------- Donald O'connor Retreage, LightPath Technologies, Inc. - Senior VP & CFO [37] -------------------------------------------------------------------------------- And our largest infrared customers is -- you're not going to look at our vertical. First of all, for most of our customers in this area, we have NDAs where we cannot disclose their name. But in our verticals, I mean, we're covering defense, industrial, medical. And in those areas, I mean, for example, in the defense industry, we have grown with average of our total revenue between 39% and -- 34% and 39% in our industrial area -- in the defense, sorry, were between 4% to 10% of our revenue. I mean industrial is about 34% to 43%. I mean those mixture of infrared and the commercial is also a mixture because of the lens, the riflescopes are used both in defense. They are used both in some industrial and qualify also in commercial. -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [38] -------------------------------------------------------------------------------- And annual contract. -------------------------------------------------------------------------------- Donald O'connor Retreage, LightPath Technologies, Inc. - Senior VP & CFO [39] -------------------------------------------------------------------------------- And we have an annual contract with one of our biggest customers, which is between $5 million to $6 million a year, and that is mostly the telescopic lens that they use for rifles, I mean hunting and also some of it, I think is defense. -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [40] -------------------------------------------------------------------------------- And that comes up for renewal in the current quarter period. -------------------------------------------------------------------------------- Donald O'connor Retreage, LightPath Technologies, Inc. - Senior VP & CFO [41] -------------------------------------------------------------------------------- Yes. The February -- November - December. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- And our next question today comes from [Brian Paragamian], a private investor. -------------------------------------------------------------------------------- Unidentified Participant, [43] -------------------------------------------------------------------------------- I have a question with regards to -- with you being an essential business and being able to have operations up and running in China basically saying, giving you the go ahead to run your operations. Considering you're running at full capacity and basically 24*7, I'm a little perplexed with that as to how earnings weren't better than what they were. It's -- I understand the 26% year-over-year. Gene touched on the 4% sequential. It's perplexing how earnings aren't better, revenues aren't better when you've expanded operations. So I guess my question is, had you not expanded operation and you weren't running at full capacity as you are, would we be looking at a significant loss or a loss at least we could say in earnings? -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [44] -------------------------------------------------------------------------------- No, I don't think we'd be looking at the loss. I think we have a stable, consistent operation now, and we've done quite a bit in the last half a year to achieve that. I think what you're seeing is 2 different things. Like I break it out into 2 different things. One is we have in our molded optics, in our PMO, we have really what I'd call 2 very different price ranges. And one is the telecom, which is the lowest price range and single bottles, a fairly good margins. And the other is the medical and others, which are higher unit plays and a different type of margins, 2 so. When we added capacity, we added it because at that time, we had large telecom orders which again are the lower unit size. And so it is not as visible in the dollar amount of revenue, but you can see it very clearly in the number of units we produce. And a very nice consistent growth in that. This is not to say that it would remain forever like this. Our product mix changes and there were orders from different industry change. And we also navigate that knowing what capacity we have and what orders we want to win. It's very possible and expected that some of that capacity that we added at some point down the road, and again, telecom -- usually a rollout like this 5G last for 3, 4 years. So at some point down the road, some of that capacity that we added is going to switch over to products with higher average sale prices, and we'll see the impact from the revenue. On the bottom line, I think this quarter specifically, we had a few expenses. One of them is the $300,000 tax to China for the dividend, which really impacted our earnings per share. Otherwise, we would have expected our earnings per share without that expense and a couple of other onetime expenses that are important for us for the long run, but really, we don't expect them to occur every quarter. Then we expect our results, our bottom line results continue to be as strong as we've had in the last couple of quarters. -------------------------------------------------------------------------------- Unidentified Participant, [45] -------------------------------------------------------------------------------- Okay. So without those couple of expenses you referenced, you would have seen several cent per share in earnings? -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [46] -------------------------------------------------------------------------------- Yes. $0.02 or $0.03 probably. -------------------------------------------------------------------------------- Unidentified Participant, [47] -------------------------------------------------------------------------------- Okay. What would you say to investors from the standpoint of the lack of insider buying? Because I know you guys have this vision. And we saw, as Gene had mentioned, your run up in the summer in the stock, and it basically pulled back some 50% to 60% in price. And I know if there has been a -- you had a recent insider purchase of -- I forget what it was 3,000 or 4,000 shares. But what would you say to investors to the point where there's very little insight or buying? And I know there is some options based on -- incentive options based on the price of the stock, but nothing gives investors more confidence than seeing true meaningful insider buying as opposed to a token of several thousand shares. -------------------------------------------------------------------------------- Shmuel Rubin, LightPath Technologies, Inc. - President, CEO & Director [48] -------------------------------------------------------------------------------- Yes. I think we do -- I cannot speak for others. I can speak for myself that I buy as possible and when possible, depending obviously on our blackout and different personal cash flows. But I would also remind that we just -- that our fiscal year ends on June 30. And from that period until early recently, we were in a very extended long blackout period in which we obviously could not trade anything as much as we would have loved to because we all felt the share prices be low and a very good buy. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- That's all the questions we have. We will now pass the call back to management for closing remarks. -------------------------------------------------------------------------------- Donald O'connor Retreage, LightPath Technologies, Inc. - Senior VP & CFO [50] -------------------------------------------------------------------------------- Thank you for participating on today's conference call. We look forward to speaking with you next quarter. But until then, we encourage our shareholders to join us as we conduct our virtual annual meeting on November 12. We also will be participating in the Diamond Equity Research virtual conference on December 1 and the 23rd Annual Needham Conference in January. We hope you join us to continue first to follow our progress. Thank you again, and goodbye. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Thank you. This concludes today's conference call. You may now disconnect your lines, and have a wonderful day.