LightPath Conference Call Transcript Fiscal 2022 Q1

LightPath Technologies, Inc.

Fiscal 2022 First Quarter Financial Results

Conference Call

Thursday, November 04, 2021, 5:00 PM

Eastern

CORPORATE PARTICIPANTS

Sam Rubin - President, Chief Executive Officer

Al Miranda - Chief Financial Officer

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PRESENTATION

Operator

Good afternoon everyone, and welcome to the LightPath Technologies Fiscal 2022 First Quarter Financial Results Conference Call. Please note this event is being recorded.

At this time, I'd like to turn the conference call over to Al Miranda, Chief Financial Officer at LightPath Technologies. Please go ahead.

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 current expectations, involve various risks and uncertainties, including the impact of COVID-19 pandemic that are discussed in its periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can be proven to be inaccurate, and there can be no assurances that the 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 questions and answer session open to participants on the call.

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 2022 first quarter financial results conference call. Our financial results press release was issued after the market closed today, and posted to our corporate website. Before I begin my remarks, our new followers and shareholders, I would like to begin with a short recap of the last 18 months. In late 2019, the Board of Directors had decided that it is time to refresh and revitalize the company, and began the search for a new CEO.

As such, I joined as CEO in March 2020, following a career in building and growing companies in the photonics industry in the US, China and Israel. I had come to LightPath after 15 years at Thorlabs where we grew the company over that period of time from $30 million to $500 million in sales, through a combination of organic growth and acquisitions. Shortly after I joined LightPath, I recruited Mark Palvino, another industry veteran at the position of Vice President, of Global sales and marketing. Mark's focus on aligning and building our global sales teams was the major contributor in the 17% year-over-year growth we experienced in the first three quarters of fiscal 2021.

Also, during the first few quarters of fiscal '21, we focused on organizational alignment, and development of our new strategy which I will discuss in more detail shortly. It was during those efforts that we discovered irregularities in our China operation, which after a closer look turned out to be illegal activities by management of that subsidiary, misappropriating company money and re-routing customer orders to third party entities owned by them, thus effectively helping themselves to the company money. Activities that we now know has been ongoing for a very long period of time.

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Following this, following these discoveries, we had immediately discontinued the work of those individuals, and began rebuilding the new management team in China. Around the same time in the spring of 2021, we had also recruited two other key members needed to round off our senior management team. Members who are accomplished executives with pedigrees from hyper-growth companies in the optical and electronics industries.

We added a new CFO Al Miranda, who was previously the President and CFO of Jenoptik, USA and VP Operations, Peter Greif, who joined us from a senior operations position in Jabil, where he managed operations of over 400 million dollars of their business. With these two senior executives on board, we have now turned our focus to recovering from the episode in China, and focusing on delivering on our new strategic direction. One that takes us from being a components manufacturer to a solutions provider, which will be the preferred partner for industries and customers looking to integrate photonics into their products.

With this overview, I believe the balance of our comments today will provide you with greater perspective on our progress and opportunities. LightPath's strategy, as we have developed over the last 12 months identifies that photonics as a technology is becoming widely adopted. LightPath is positioning itself to be the partner for such companies that look to use photonics in their products by being the main expert on subject matter. This change in direction takes LightPath from being a component supplier to a solutions partner, providing the design and manufacturing of complete optical subsystems based on our unique and strong design and manufacturing capabilities of optics.

Since the strategy is centered around the value creation for the customer, through domain expertise and capabilities, our technologists both in design and production become differentiators. Owning key technologies and design capabilities that utilize those unique technologies, allows us to design and deliver optical systems with overall lower cost of ownership, whether by being lighter, smaller or having better optical performance.

As such, we have been focusing our development effort on expanding our capabilities by building on our core capabilities and creating new differentiating technologies such that allow us to both deliver better systems and be known as a partner to go to, for the most advanced optical technologies. One such exciting capability which we announced a couple of weeks ago is the ability to use our molding technology for high volume production of freeform optics. Freeform optics as the name implies, are optical components that have significantly less constraint in shapes and dimensions and can therefore expand the range of what can be designed, also drastically reducing the size and weight of an optical system.

We'll illustrate with an example. Free lens is an optical element that can focus light, and the prism is an element that can combine beams of light. If freeform optical element could theoretically be one element that performs both functions of focusing light and combining light in one element, it's easy to see this way what an impact this can happen on optical systems.

Freeform optics had been a promising technology for a long time. One can find demonstrations of how freeform optics can potentially minimize the size of consumer products, such as augmented reality glasses, and laser projectors, taking all the way back as much as 10 years. However, as is often the case, the implementation of this in real life has been constrained by manufacturing technologies.

Making a freeform element could previously be done only by individually machining a piece of glass, one at a time on an extremely accurate CNC machine such as those called diamond

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turning lathes or alternatively by producing it by molding plastic into shape. The first in machining one by one is a very expensive technology and it's not scalable for consumer level volume. The second molding plastic is an inferior quality product that cannot transmit an image as a desired quality or withstand the requirements of durability and stability.

By extending our molding technology into molding high precision freeform glass optics, we are now enabling a slew of new applications and miniaturization of existing optical systems to a level that the optical community has been wishing for, for a long time. To see what impact this might be, it is enough to just Google the words freeform and AR glasses and read through some of the results to understand what people have been hoping for, for a long time. This is also evident by the multiple development contracts we have signed in recent months for development of freeform optics as well as optical assemblies based on freeform optics for customers in AR and LiDAR industries.

Overall, we're currently working on three major development projects in the AR and LiDAR space that include NOEs in hundreds of thousands of dollars to develop to those customers, smaller and lighter optical solutions for their next generation products. While each one of those customers has the potential of having annual sales anywhere from $1 million to $10 million a year, it's important to remember that the actual materialization of such contracts depends not only on our success with the technology, but also on the customer's product success. And most of those customers are in new fields that are just beginning to develop into commercial markets.

In addition to commercializing this very exciting technology and very cutting-edge, our team has also been developing other differentiating technologies, some of them in the materials side of the business, expanding our glass manufacturing capabilities into more areas, others in the field of optical coating by developing unique, highly durable coatings that can either protect the optical system better or also perform functions that currently are very challenging to perform.

One such example is heating the front element of any infrared camera in a system in order to defrost any ice on it. We're all familiar with heating the back window to defrost ice, but for the infrared part, there isn't actually any viable solution today. So, in this case, if an automotive…automotive is working in a below freezing temperature, such a unique coating as the one we're developing can provide a very affordable solution for heating that element and allowing it to operate below freezing temperatures.

Many of those technologies are the basis for some of the more promising projects we are working on in our Engineered Solutions Group, a growing part of the business, including, for example, a thermal imaging assembly for an automotive manufacturer, an optical communication assembly for a major satellite company, and more exciting projects which I hope to talk about in coming months.

All of those developments and more that we expect to announce in coming months are important differentiators that will bring more customers to us for our optical system business and allow us to design and deliver better optical solutions than what is available elsewhere, all of which translates to better margins, larger orders, and longer-term relationship with customers in comparison to what we have experienced in our historical component business. Needless to say, that wherever possible, we apply for patents to protect our technology and IT, in the last 12 months we have applied for three new patents on those new technologies.

Now, from the macro of strategy, I will switch to the micro of operations. As you all know, the previous quarter was incredibly challenging, as it was when we incurred the majority of the hits

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related to the changes we needed to do in China. Although we have taken steps to minimize the business impact from the termination of the management employees over there and transitioned to the new management personnel, we experienced some short-term adverse impact on domestic sales and operating expenses in China in the fourth quarter and somewhat also in the first quarter of this fiscal year.

We anticipate the impact on sales may continue for the next one to two quarters. Nevertheless, we are on track with our recovery in performance on a consolidated basis as revenues improve to the greater than $9 million in this first quarter, a nearly 10% improvement from the previous fourth quarter, while our gross margin as a percentage of sales increased by 10 points sequentially, hence expenses in China have also significantly declined. Overall, I would say that we are pretty much where we thought we could be in terms of recovery from those events and see things continuing to improve in coming quarters.

Our addition of coating capabilities to the facility in Riga, Latvia, which we talked about a few quarters ago, is now complete, allowing for cost savings that will flow to the bottom line, as well as enabling us to tap into the defense market in Europe, a market which we could not sell into prior to that.

Before passing the call to our CFO, Al Miranda, I'd like to remind the shareholders of records that our annual meeting will be taking place virtually on November 11, exactly one week from today. In addition, for all our followers and prospective investors, we will be presenting at the Ladenburg Thalmann Virtual Technology Expo, on November 18, and the Benchmark company discovery one on one conference on December 2.

Now, Al, If you could please walk us through the financial results in the first quarter.

Al Miranda

Thank you Sam. I'd like to remind everyone that much of the information we're discussing during this call is also included in our press release issued earlier today and will be included in the 10Q. I encourage you to visit our website at lightpath.com. So, Sam just covered the highlights of our strategy, new management team, the market opportunities, and how we are progressing. I will discuss some of the primary financial performance metrics and provide additional color on them to better assist investors in analyzing the company.

As a short reminder in Q4 '21, we had been significantly impacted by the transition of business conditions in China, and some of the financial impact was also felt as we indicated it would last quarter, as Sam just said. Revenue for the first quarter of fiscal 2022 was $9.1 million, that's down 4% from the same period of the prior fiscal year, but up almost 10% from the fourth quarter of fiscal 2021.

Sales of infrared products comprised 54% of the company's consolidated revenue in the first quarter of fiscal 2022 as compared to 50% of consolidated revenue in the same period of the prior fiscal year. Visible Precision Molded Optics, PMO, product sales represented 42% of consolidated revenues in the first quarter of fiscal 2022 as compared to 45% in the same period of the prior fiscal year. Specialty products continue to be a small component of the company's business, representing 4% of the consolidated revenues in the first quarter of fiscal 2022, as compared to 5% in the same period of the prior fiscal year.

IR revenue represents the largest component of our sales. Revenue generated by IR products was approximately $4.9 million in the first quarter of fiscal 2022, an increase of approximately

LightPath Technologies, Inc.

Thursday, November 04, 2021, 5:00 PM Eastern