LightPath Technologies : Conference Call Transcript Fiscal 2020 Q4

LightPath Technologies

Fourth Quarter and Year-End 2020 Financial

Results 2017 Conference Call

Thursday, September 10, 2020, 4:30 PM

Eastern

CORPORATE PARTICIPANTS

Sam Rubin - President, Chief Executive Officer

Don Retreage - Chief Financial Officer

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PRESENTATION

Operator

Good afternoon, and welcome to the LightPath Technologies Fiscal Fourth Quarter and Year- End 2020 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal the conference specialist by pressing the * key, followed by

0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press *, then 1 on your touchtone phone, and to withdraw your question, please press *, then 2. Please also note today's event is being recorded.

I will now pass the call off to Don Retreage, Chief Financial Officer of LightPath Technologies. Please go ahead.

Don Retreage

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 that are discussed in this 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 will 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 discussions, there will be a formal Q&A 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, please go ahead.

Sam Rubin

Thank you, and good afternoon. Welcome to LightPath Technologies' fiscal 2020 fourth 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. Our fiscal 2020 fourth quarter and full year results reflect a consistent and continuing improvement and growth of our business, while at the same time navigating the dynamic and changing conditions caused by the effects of COVID-19 style of business, our customers, and our supply chain.

Classified as an essential business, we remained open and operating to the extent possible. We continued to take all precautions to ensure that our employees remain safe and that our business operations continue. Through the fall, we are very encouraged to have ended the year by delivering growth in revenue, backlog, gross margin, gross profit, net income, EBITDA, and the cash balance, while reducing our total debt and financial lease balance and improving our cost structure with a reduction in operating expenses. All of this was achieved despite nearly six months of the fiscal year being impacted by COVID-19.

Similar to our results in the previous quarters, our fourth quarter results continued to show consistent improvement year-over-year and consistent results throughout our fiscal year. The

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gross margin for the quarter ended at 39%, up from 32% in Q4 2019, while the EBITDA margin grew to 19%, up from negative 3% the same period the previous year.

These results reflect savings from the integration of the ISP acquisition and other efficiency- related activities, as well as the favorable product mix in our PMO business. Additionally, our backlog grew to $19.1 million, up from $17.1 million at the end of fiscal 2019 but down from $20 million the previous quarter. The sequential decline and backlog are attributed primarily to the annual blanket quarter from our largest customer, which typically is renewed in our fiscal second quarter, ending December 31.

While the 4% growth in revenue year-over-year is definitely a positive outcome, our actual shipments during the quarter varied compared to plan due to unexpected rescheduling requests by some customers as a consequence of the impact of COVID-19. As we have mentioned in earlier communications over the last few months, we have been capacity constraint in some parts of our business since February, primarily due to the demand from 5G infrastructure development deployment, a trend that we see continuing. We have been addressing those capacity constraints through the use of overtime, through acceleration of investments in production equipment, and through careful scheduling and planning of our production capacity to address all sales orders, requiring a very focused effort on both our internal and external supply chain.

However, due to COVID-19, some customers have experienced either fluctuating demand or some unexpected impact to the operations or other parts of the supply chain. Given the nature of the manufacturing process and added complexity of being capacity constrained, our manufacturing schedule cannot always adjust fast enough to such unexpected changes, leading to temporary increase in our inventory as seen in our inventory levels growing to $8.9 million. While we strive to be agile and adjust quickly to changes in demand, we expect for some of these variations to continue in the coming months until demand and supply chain return to a steady state.

In parallel to navigating the COVID-19-impacted economy and supply chain, our team has worked on developing a new strategic direction for LightPath that was initiated following my appointment as CEO in March 2020. This strategy has now been developed, and this is one based on our strengths and our core capabilities to address the largest and fastest growing trends in our industry for visible and infrared optics.

I'd now like to discuss some key elements of this strategy. First, addressing support by diversified photonics market, we're going to lead the efforts to capitalize on optics as an enabling technology. We recognize that the opportunity for optics and optical assemblies has changed over the past several years. Now, optics or more generally photonics and optical technologies are increasingly pervasive across industries and markets. Optics is not an industry vertical in itself, but an enabling technology which spans industries well beyond telecommunication, for which we are seemingly known. Optics are the key technology in industries from automotive, defense, medical, surveillance, industrial equipment, telecommunication, and consumer products, just to name a few, all of which are industries we already serve. As such, the market opportunity for what we do at LightPath is enormous and global and is constantly expanding, as other industries and companies find applications for optics in their products and industry.

Second, we're going to be focusing on our competitive anchors, including our differentiated design capabilities, molding IP, reality of manufacturing technologies, and low-cost vertically

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integrated global manufacturing. We will prioritize our efforts around the differentiation we bring to the markets and our customers and others that others cannot offer. And we will constantly seek to add to those capabilities as needed.

Third, we will be centered around continuous improvement through operational excellence, leading to margin and possibility optimization and strengthening of our overall financial position. This will encompass both short-term and long-term initiatives throughout the organization and be supported by a culture which values results and accountability.

Fourth, we will make investments that improve capacity and factory floor efficiency, engineering expertise, and leverage our human capital. We will make the necessary investments in our people to enable our strategy with world-class optical design and engineering talent, including a salesforce that can focus and prioritize customer opportunities, which supports our strategic goals.

Finally, and perhaps most important strategic directive is to mobilize around the integrated solutions orientation for high-value customers. In doing so, we will leverage our expertise to focus on client opportunities that are in line with our new strategic direction and ultimately improve our financial performance. We will leverage our unique capability, using our expertise in optical design and manufacturing to create solutions for customers rather than components. Over time, this will promote a richer business model supported by longer-term partnership with our customers.

In the coming weeks, we will begin a comprehensive alignment of the organization to our new strategic direction, including a review of our capabilities, structure, processes, and all other aspects required by our team to be positioned to execute on this direction. Some of those opportunities for improvement and operational excellence have already been identified shortly after I joined the company, and we began executing upon them immediately. One such area, for example, includes our cash management, where through the implementation of lesser processes and controls we have been able to increase our cash position to $5.4 million, while at the same time continuing to invest in capacity expansion, while utilizing our line of credit for financial flexibility and reducing our total debt and operating lease obligations.

Strategic priorities evolve, and this is the beginning of the process. LightPath will change the operations and execution culture to be best-in-class, and we will choose the highest-value OEM customers and business opportunities to invest in. The enhanced approach will provide even more value to our customers, great opportunities to our employees, and better financial returns to our shareholders. As we continue to implement operational improvements throughout our organization and fully execute upon the outcomes of our comprehensive strategic review, we expect both near-term and long-term impact towards further improving upon our growth and key financial indicators beyond what we have achieved to date.

Now, I'll pass the call over to our CFO, Don Retreage, to provide more detail on some of the other aspects of our fourth quarter and full year 2020 financial results. Don?

Don Retreage

Thank you, Sam. First, I would like to mention and remind all that much about the information we're discussing during this call is also included in press release issued earlier today and in our 10-K filed with the SEC. I encourage you to visit our website at lightpath.com and specifically the section titled, "Investor Relations."

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Now, on to my remarks pertaining to the fourth quarter and year-end fiscal 2020. Sam's remark covered some of our financial performance along with key elements of our strategic direction. So, I will be specifically discussing key financial areas.

Revenue for the first quarter of fiscal 2020 was approximately $9.1 million, up from $8.7 million in both third quarter 2020 and fourth quarter 2019. For the year, revenues were $35 million, up from $33.7 million in fiscal 2019. IR product revenue was $4.8 million in Q4 2020 or 53% of total revenue, up from $4.3 million or 50% in the third quarter 2020 and $4.7 million or 54% of the total in the prior-year period. Visible precision molded optics or PMO products revenue in fourth quarter 2020 was $3.9 million or 43% of the total, same as third quarter 2020 or 44% of the total in third quarter 2020 and $3.5 million or 40% of the total in the fourth quarter 2019. For the year, IR product revenues were $18.1 million or 52% of the total, up 5% from about $17.2 million or 51% of the total in the fiscal 2019. PMO revenues were $14.6 million or 42% of the total in fiscal 2020 and up 4% from about $14 million or 42% of the total prior year.

Demands of our revenue for the fourth quarter and full year in respective periods were from specialty products and non-recurring engineering products, which varied greatly from quarter-to- quarter and were substantially smaller contributors to the consolidated revenue. With respect to our margin profile, generally speaking, PMO products are smaller and almost entirely molded. So, we have faster turnaround times, higher volume applications, and more automated processing. These products are also generally low in price. We historically have had margins averaging in the 40% to 50% range. This group represents about 42% of our total revenue in fiscal 2020. You can see that of the two primary segments, PMO is a small group with the higher margin.

The IR product group represents a larger and faster growing market opportunity. IR margins have historically been in the 20% to 35% range with our new molded IR lenses which use our proprietary internally developed BD6 material on the top side, if not able to go higher with efficiencies. As part of our gross margin improvement strategies, we have been aggressively working at marketing new products and targeting new customers, using line of innovative BD6 while attempting to convert existing customers to the extent possible from using our germanium lenses to our BD6 lenses.

Moving on, gross margin in the fourth quarter of fiscal 2020 was $3.5 million, an increase of 24% as compared to approximately $2.8 million in the same quarter of prior fiscal year. Total cost of sales was $5.6 million for the fourth quarter 2020, down from $5.9 million in the prior year, although our total cost of sales is meaningful when you consider that the total sales increased 4%. Gross margin under the percentage of revenue was 39% for the fourth quarter 2020, as compared to 32% in the fourth quarter 2019. The increase in gross margin and down as a percentage of revenues is primarily driven by the increase in sales and an improved cost structure, along with elimination of elevated costs, including labor, manufacturing, inefficiencies, and increased overhead expenses associated with the relocation of our New York facility in the prior-year period.

For the year, gross margin for fiscal 2020 was $13.8 million, an increase of 11% from $12.5 million in fiscal 2019. The total cost of sales was approximately $21.1 million in fiscal 2020, slightly lower than $21.2 million in the prior year. Gross margin as a percentage of revenue was 40% for the 2020 compared to 37% for fiscal 2019. The increase in gross margin reflects the changes to our cost structure, as well as improvements made in the second, third, and fourth quarters of fiscal 2020 after several factors negatively impacted the first quarter of fiscal 2020. As in the fiscal third quarter, demand in aggregate has been strong. Although there are pockets

LightPath Technologies Thursday, September 10, 2020, 4:30 PM Eastern