LightPath Technologies, Inc. (NASDAQ:LPTH) Q2 2024 Earnings Call Transcript
LightPath Technologies, Inc. (NASDAQ:LPTH) Q2 2024 Earnings Call Transcript February 8, 2024
LightPath Technologies, Inc. misses on earnings expectations. Reported EPS is $-0.05 EPS, expectations were $-0.03. LightPath Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, everyone. And welcome to the LightPath Technologies Fiscal Second Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. At this time, I’d like to turn the conference over to Al Miranda, LightPath’s Chief Financial Officer. Please go ahead, Al.
Al Miranda: Thank you. Good afternoon, everyone. Before we get started, I’d like to remind you that during the course of this conference call, the company will be making a number of forward-looking statements that are based on our current expectations, involve various risks and uncertainties, as discussed in its periodic SEC filings. The company believes that the assumptions underlying these statements are reasonable, any of them can be proven to be inaccurate and there can be no assurances that the projected results would be realized. In addition, references may be made to certain financial measures that are not in accordance with Generally Accepted Accounting Principles. We refer to these as non-GAAP financial measures. Please refer to our SEC reports and certain of our press releases, which include reconciliations of non-GAAP financial measures and associated disclaimers.
Sam will begin today’s call with an overview of the business and recent developments for the company. I will then review financial results for the quarter. Following our prepared remarks, there will be a formal question-and-answer session. I would now like to turn the conference over to Sam Rubin, LightPath’s President and Chief Executive Officer.
Sam Rubin: Thank you, Al. Good afternoon to everyone and welcome to LightPath Technologies’ fiscal quarter 2024 financial results conference call. Our financial results press release was issued after the market closed today and posted on our corporate website. First, I’d like to apologize for any coughing or horsey sound. My throat is still recovering from COVID I had recently. Second quarter was underscored by a key first order in our partnership with Lockheed Martin for an imaging engineered solution. The ongoing integration of Visimid acquisition and progress with customers transitioning from the use of Germanium to the use of our BlackDiamond material. All these developments continue to highlight our strategic shift from a component manufacturer to a value-added solutions provider.
To recap for our investors, LightPath has been transitioning in the last few years from a pure component manufacturer focused on being the lowest cost provider to value-added partner for complete solutions based on optical technologies, whose differentiators are mostly technological. Along those lines, we have been focusing on three pillars of growth; imaging solutions, such as cameras; growth in new markets, such as automotive; and growth specifically of our market share in the defense business. All of which are driven by unique technologies -- by our unique technologies and materials. All three pillars of growth tie and support our transition from a component manufacturer to a provider of engineered solutions based on our proprietary technologies.
This transition began a couple of years ago, starting from customized lens assemblies, which are what we call LightPath 2.0, through camera solutions. The first of which was our innovative Mantis broadband infrared camera, which enables both new applications and capabilities for our customers and significant growth in that direction coming from the Visimid acquisition. Visimid Technologies, a small engineering firm based out of Dallas, Texas, does to the back end of thermal cameras what LightPath has been doing for the front end of those cameras. LightPath has been tailoring and customizing the optics for cameras based on our base optical technologies, and Visimid customizes and tailors the video processing engine and support electronics for the same cameras.
Like LightPath’s business model for customizing optical assemblies to be used in infrared cameras, Visimid established itself as a go-to for customize elect -- for customizing the electronics and software part of uncooled infrared cameras. In fact, Visimid has customized for LightPath’s electronics and software of our Mantis camera. Together with Visimid, we now extend our offering to customize imaging solutions to include wholly integrated camera modules, increasing the offering to existing customers and providing us a bigger share of those customers’ spend. During the second quarter, we continued the integration of Visimid with a focus on new products in fire, safety and defense. This acquisition added the capability to produce end-to-end custom imaging cores and the new engineering capabilities that allow us to be involved earlier with our customers’ design cycle and increase our likelihood of servicing those designs through to manufacturing.
We are integrating Visimid’s custom imaging cores into new camera products, several of which demonstrated at the recent SHOT Show in Las Vegas and some we are working to customers -- with customers to develop customized solutions. All of these products are utilize Visimid’s unique video engine in conjunction with our optics to develop low weight, high efficiency solutions for drones, UAV, as well as industrial applications such as gas sensing, process control and early fire detection. Shortly after the acquisition of Visimid, Lockheed Martin awarded Visimid and LightPath a major project for the design, development and later on the manufacturing of a complete imaging system for a new project in their Missile division. With the award came what will be up to $7.5 million for the development money.
$4.7 million of that was already in a formal purchase order and is now part of our backlog. In this project, Lockheed Martin is competing against another prime defense contractor to develop a new missile system. At first, the development portion of this project was expected to last until 2028, at which point the end customer would decide if the production is awarded to Lockheed Martin or its competitor. However, there is significant pressure now to shorten this timeline as much as possible, and as such, the decision point has recently been pulled in and we now expect that the decision regarding the production award will be as early as 2026, two years ahead of the schedule we shared during the announcement of our initial award. If Lockheed Martin is selected for the production, we expect an initial production order for around 10,000 units.
Our ASP per unit is between $5,000 to $10,000. That will put the initial expected production order to be north of $50 million. That is the production order to LightPath. Additionally, the volumes for follow-up production have also increased, with the potential now for tens of thousands of units. The demand and shortened timeline for the project are being impacted by recent geopolitical escalations. Results so far are very positive and our customers are in fact very confident and so confident about their solution that they’re looking to begin investing in production of the units even before an official decision is made. As such, we expect that LightPath might start building up the production line this year already. The basic infrastructure for this production line has already been prepared and paid for as part of our recent expansion of our Orlando facility and the specific equipment that will be needed is expected to be paid for by Department of Defense.
Once in production, we will be delivering this assembly in volume, estimated tens of thousands of assemblies over the program lifetime and again with ASPs for LightPath between $5,000 to $10,000 per system. With thousands of dollars per unit and tens of thousands of units expected in that program, the ultimate selection of Light -- of Lockheed Martin by the military would likely result in a substantial revenue opportunity for us. This is exactly the direction we’ve been looking to transform the company to with the new strategy and it is now happening. Lockheed’s decision to outsource the development of such an important part of their system is due to -- was due to Visimid’s technical capabilities. Yet the decision to then further engage with us at the scale they’re now engaging and the potential manufacturing of this is due to the combination of LightPath and Visimid, with our manufacturing capabilities, capacities and most important, the ability to integrate the entire system.
And while our strategy for having three pillars of growth are designed such that we don’t put all our eggs in one basket or one product for that matter, this award by a major prime with the massive potential for revenue on the manufacturing side is seen by us as a big win to our strategy and the execution of that through the acquisition of Visimid and our own investment in expansion in the U.S. and development of camera technologies. I could probably spend this entire call only on this specific project and activity, given that we expect it to lead to tens of millions of dollars in annual revenue. But this is only one of multiple projects and multiple opportunities we have going on, all of which are in similar scale. So I will talk briefly about some of the rest.
Turning to the automotive market, as previously mentioned, our lens assembly system has already been qualified by one of the largest car companies. Since then we have shipped samples for qualification by another large Tier 1 and began the qualification process that is expected to take a few months. Last call we shared that the first company was re-evaluating their timeline in light of recent changes to the EV market. While our technology is not specific to EV, we found that most of our automotive Tier 1 customers were looking to roll out this technology in their EVs, as that was their main focus at the time. With dynamics of the market now changing, we expect that some of our Tier 1 customers will begin rolling out this technology in more traditional vehicles.
We’re also seeing signs from the market that automotive companies are waiting for further development in the Department of Transportation’s announcement from May on their intention of mandating emergency braking system and mandating improvement of that -- for that technology in nighttime operation. We don’t expect any major developments in the very short-term, but we’re still confident that this technology is going to be implemented in the automotive space and that we’re one of the leaders in this technology and use cases. Therefore, we will still see this as something that would lead to the same volumes we spoke about before, which are over 1 million assemblies a year for each one of the car companies with ASPs up to $50 per vehicle for LightPath.
Last thing, I will update on infrared materials and replacing Germanium. To recap, LightPath has developed over the years and mainly over the last two years some exclusive unique materials that can be used instead of Germanium in infrared imaging systems. China announced on July 4th export restrictions on Germanium and with China being the largest exporter of this material, this has become a big deal. Since then, and even prior to that, actually, we’ve been working diligently with customers to have their systems redesigned to use our materials instead of Germanium. We even took the step a few months ago of proactively canceling some customer orders for Germanium optics to free up our capacity for making optics from these new materials. This has paid off well, with customers now fully engaged in the process and focused on redesign of their systems, testing our prototypes and starting to order systems with new optics.
Two specific examples I’d like to share. One includes our largest customer, which makes imaging devices for sporting. This customer began by evaluating the use of our material in only one of their products and has recently let us know that they would like to now work with us on all their products. Another customer, who is in the defense business, has announced in the recent SHOT Show a new gun sight product that is using only our BlackDiamond glass in it with no Germanium. And they have even gone as far as saying publicly that going forward, all new products are going to be designed only with BlackDiamond material. A major win for our directions. All of this -- all of these have so far been using mainly our existing BD6 material. In December, we finally took delivery of a piece of equipment called a refractometer, a measurement system for optical glass.
This will now enable us to speed up the manufacturing readiness of some of the new materials we licensed from NRL. We expect the first material, BDNL-4 to be formally released later this month. BDNL-4 is an example of a material that not only replaces Germanium, but actually offers advantages versus Germanium. By having a negative thermo-optic coefficient, that is the change of the optical index as a function of temperature, BDNL-4 enables optical designers to design optical systems that are optically and passively compensated for changes in temperature. This is a big deal for airborne systems, for example, where today changes in ambient temperature at different altitudes require refocusing the cameras to compensate for this. BDNL-4 is expected to become an important material for thermal cameras in drones and other airborne systems.
Experience a large range of temperatures. To conclude, our shift in strategic direction is beginning to show the results we were looking for, both in winning some major programs and in revenue growth in that area. At the same time, our three separate areas of growth, solutions, defense and automotive continue to generate multiple independent opportunities, that many of them have the potential for tens of millions of dollars of new revenue per opportunity, resulting in a healthy pipeline of large-scale opportunities that any of them alone can be transformative to our business. Last, I would like to welcome Kim Crider, who joined our Board of Directors last week as an independent director, replacing Lou Leeburg, that had retired after 25 years with the company.
I would like to thank Mr. Leeburg for his diligent work over the years and welcome Ms. Crider. Kim was formerly the Chief Technology Officer for the U.S. Space Force and has retired as a two-star general. Having a person as Ms. Crider on our Board of Directors is important as we continue to move forward with our focus on becoming a systems company with a strong focus on defense. And as always, I would like to focus our employees -- to thank our employees and stakeholders who have continued to work diligently through the various transitions and hurdles we have endured. We see a bright future and a growing company because of their dedication, patience and hard work. Now, I will return the call to our CFO, Al Miranda, to review second quarter financial results.
Al?
Al Miranda: Thank you, Sam. You can rest your voice for a little bit.
Sam Rubin: Thank you.
Al Miranda: I’d like to remind everyone that much of the information we’re discussing during this call is also included in our press release issued earlier today and will be included in the 10-Q for the period. I encourage everyone to visit our website, lightpath.com, to access these documents and to see some of our new products. I will discuss some of the primary financial performance metrics and provide additional color on them to better assist investors in analyzing the company. On a consolidated basis, revenue for the fiscal second quarter were $7.3 million, compared to $8.5 million in the year ago period. Sales of infrared components were $3.6 million or 49% of the company’s consolidated revenue in the fiscal second quarter.
Revenue from visible components was $2.7 million or 37% of consolidated revenue. Revenue from assemblies and solutions were $1 million or 13% of total company revenue. Revenue from engineering services was $0.1 million or 1% of total company revenue. Infrared component sales increased approximately $283,000 or 9%, primarily due to an increase in shipments against an annual contract for an international military program. This contract was also renewed during the first quarter of fiscal 2024 for a higher dollar value than in the previous year. Visible components sales decreased approximately $1.2 million or 31%. All this is primarily due to the ongoing trend in China, excuse me, and the telecom industry in general. This quarter we also experienced declines in Europe due to recessionary conditions, particularly in Germany and in the U.S. due to the timing of defense contract deliveries.
Assembly solutions revenue decreased approximately $241,000 or 20% and that’s primarily due to timing of shipments against a multiyear contract with a defense customer. That was partially offset by the addition of Visimid revenue. Gross margin in the second quarter of fiscal 2024 was approximately $2.2 million, a decrease of $1.1 million or 33% as compared to the same quarter of the prior fiscal year. Total cost of sales was approximately $5.1 million for the second quarter of fiscal 2024, compared to approximately $5.2 million for the same quarter of the prior fiscal year. Gross margin as a percentage of revenue was 30% for the second quarter of fiscal 2024, compared to 38% for the same quarter of the prior fiscal year. The decrease in gross margin as a percentage of revenue is due to the decrease in visible component sales, which typically have higher margins than our IR components product group, which comprised a greater portion of our sales for the second quarter of fiscal 2024.
Selling, general and administrative costs were approximately $2.9 million for the second quarter of fiscal 2024, a decrease of approximately $172,000 or 6% as compared to approximately $3 million in the same quarter of the fiscal year. The decrease in SG&A costs is primarily due to a decrease in stock-based compensation, partially offset by an increase in wages. Net loss for the second quarter of fiscal 2024 was approximately $1.7 million or $0.05 basic and diluted loss per share, compared to $0.7 million or $0.03 basic and diluted loss per share for the same quarter of the prior fiscal year. The increase in net loss of approximately $1 million for the second quarter of fiscal 2024 as compared to the same quarter of the prior fiscal year was primarily due to the decrease in revenue and gross margin, partially offset by other income of approximately $190,000 from our Chinese subsidiary for the return of funds previously misappropriated by our former Chinese management team as a result of the ongoing legal proceedings.
This is the last bit of activity that we expect to have related to that situation. Our EBITDA for the quarter ended December 31, 2023 was a loss of approximately $454,000, compared to an income of $207,000 for the same quarter of the prior fiscal year. The decrease in EBITDA in the second quarter of fiscal 2024 was primarily due to lower sales and gross margin, again partially offset by the mentioned Chinese subsidiary. Turning to the results for the first half of fiscal 2024, revenue was $15.4 million, only a 3% decrease from $15.8 million in the same period of the prior fiscal year. Sales of infrared components were $7.4 million or 48% of the company’s consolidated revenue for the first half of fiscal 2024. Revenue from visible components was $5.4 million or 35% of consolidated revenue.
Revenue from assemblies and solutions were $2.2 million or 15% of the total company revenue. And revenue from engineering services was $0.4 million or 2% of total company revenue. In the first half of the fiscal year, infrared component sales increased almost $1 million or 14%. That’s primarily due to an increase in shipments against an annual contract for an international military program. Visible component revenue decreased approximately $1.8 million or 25%. Again, this is primarily due to the ongoing trend in China and the telecom industry in general. However, we also experienced declines in Europe due to recessionary conditions and in the U.S. due to timing of defense contract shipments. Assembly solutions revenue increased approximately $150,000 or 7%, primarily due to the addition of Visimid revenue, which was partially offset by a decrease in shipments against the multiyear contract that I mentioned regarding the quarter.
If I take a step back and look at revenue, our visible components are declining. However, in the first half, revenue increased in infrared components, assemblies and solutions, and engineering services, which aligns well with our strategic plans. As of December 31, 2023, we had working capital of approximately $9.1 million and total cash, cash equivalents and restricted cash of approximately $5.9 million, of which greater than 25% of our cash and cash equivalents was held by our former subsidiaries. Cash provided by operations was approximately $851,000 for the first half of fiscal 2024, compared to cash used in operations of approximately $751,000 for the same period of the prior fiscal year. Cash provided by operations for the first half of fiscal 2024 was largely driven by a decrease in accounts receivable as sales were higher in the fourth quarter of fiscal 2023 than each of the first two quarters of fiscal 2024.
Cash used in operations in the first half of fiscal 2023 reflected a decrease in accounts payable and accrued liabilities during that period resulting from the payment of certain expenses related to previously disclosed events that occurred at our Chinese subsidiaries. Capital expenditures were approximately $1.5 million for the first half of fiscal 2024, compared to approximately $412,000 in the same period of the prior fiscal year. The spending in the first half of fiscal 2024 is largely driven by the Orlando facility expansion, excuse me, where we constructed additional tenant improvements in our Orlando facility subject to our continuing lease, of which the landlord agreed to provide $2.4 million in tenant improvement allowances. The balance of the tenant improvement cost is estimated to be $3.7 million.
During the first half of fiscal 2024, we expended $994,000 towards this project, with the remaining estimated $380,000 expected to be expended during the second half of fiscal 2024, pending the final construction invoices. We also expended approximately $722,000 net of cash acquired to acquire Visimid during the first half of fiscal 2024. Our total backlog at December 31, 2023 was approximately $21.2 million, a decrease of 28%, as compared to $29.4 million as of December 31, 2022. Compared to the end of fiscal 2023, our total backlog decreased by 2% during the first half of fiscal 2024. The decrease in backlog during the first half of fiscal 2024 is primarily due to shipments of several annual and multiyear contract renewals, which orders were added to the backlog in prior periods.
In the second quarter of previous years, we have typically received a contract renewal from our largest customer for infrared products made of Germanium. However, as previously discussed, we’ve decided to reduce the amount of optics we produce from Germanium, both to reduce our risk of supply chain disruption, and more importantly, to work with customers to convert their systems to use optics made of our own BlackDiamond materials. As such, in the second quarter of fiscal 2024, we did not book our typical annual renewal order for Germanium optics for this customer. Instead, we continue to work with this customer, as well as other customers, to convert their systems to use BlackDiamond optics. With this review of our financial highlights and recent developments concluded, I’ll now turn the call over to the Operator to begin the question-and-answer session.
Operator: [Operator Instructions] Our first question is from Jaeson Schmidt with Lake Street. Please go ahead.
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