LightPath Technologies : Conference Call Transcript Fiscal 2021 Q2

LightPath Technologies, Inc.

Fiscal 2021 Q2 Financial Results Conference

Call

Wednesday, February 3, 2021, 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 2021 Second Quarter Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a 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, to withdraw your question, please press "*", then "2." Please also note, today's event is being recorded.

I would 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, 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 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 over to Sam Rubin, LightPath's President and Chief Executive Officer. Sam.

Sam Rubin

Thank you and good afternoon. Welcome to LightPath Technologies Fiscal 2021 second 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. I'd like to start out by expressing my encouragement from the progress we are making on driving our top line growth and growing the organization amid the limitations imposed on all of us by the COVID-19 pandemic. We have made significant strides with advancements on our long term strategic growth initiatives in the first half of fiscal 2021, which was underscored by achieving record levels for consolidated quarterly revenues and total backlog at the end of the fiscal second quarter. Although, with lower margins than we targeted, which I will address shortly in my comments.

While the growth drivers of our business remain intact and relatively insulated from the coronavirus pandemic, we have been hitting some roadblocks caused by it. This has primarily been in the aspects of the business that require travel, such as, recruiting of senior level employees from out of town, as well as, service of some of our manufacturing equipment, which has been impacted by limitations on travel of service staff. Those limitations primarily impact the operation side, and in particular our ability to implement some of the efficiencies and changes we would like to make, and at the rate we would like to see those changes happened.

LightPath Technologies, Inc. Wednesday, February 03, 2021, 4:30 PM Eastern

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We are still very proud of our team to be able to implement the improvements we have and grow the business at a double-digit rate in spite of those challenges and limitations.

On an operational basis, we also took important steps in terms of scaling and diversifying our production facilities, enhancing our global distribution, expanding our international sales presence, and strengthening our product portfolio. However, as pleased as we are with improving our growth rate, and initiating deliveries on some key contracts, we are not satisfied with our performance in terms of gross margins this quarter, and we're taking active steps to remedy this and return to our previous margins.

The growth achieved this quarter and in the first half of fiscal year has resulted both from the capacity we have added in the last 12 months, as well as, the commencement of high volume deliveries on two key BD6 accounts. BD6 is a reminder of being our internally developed infrared glass material. Both of those customer accounts relate to contract from BD6 to replace previously used germanium material. However, as can be the case when beginning to deliver initial production quantities of a new product or a new technology, during this phase-in period of a new product, the margins of those products are impacted by stage production in efficiencies and the learning curve of some new processes and technologies.

In this case, the main contributors to the lower gross margin has been inefficiencies in a stage of the glass production, as well as, low yield in the final coating of the lens. Those issues are being addressed through a concentrated effort by our engineering groups worldwide, supplemented with hiring an industry veteran for the position of Global Coating Manager, a position that has been vacant for over two years.

Additionally, we have put in place a strong review process for any new quotes to ensure our pricing methodology meets our corporate standards and target margins. While we have been focusing on identifying and correcting those issues, it is important to mention that we do not accept those margins and inefficiencies as they are now, and we're placing significant effort and resources to repair the issues we identify, so that within a few months, we will see an impact on our margins in the infrared business.

That said, we have been seeing positive momentum in many areas, including revenue for the first half of fiscal 2021 of $19.4 million, which is an increase of 13% compared to the same period last year. Second quarter revenue of $9.9 million, which marks the highest level of any quarter in the company's history.

EBITDA for the first half of fiscal 2021 was approximately $2.4 million, which is up 33% from prior periods. Cash flow from operations in the first half was up 64% from prior year and final, record level benchmark was achieved with our total backlog increasing to $23.8 million at the end of the second quarter.

Also, during the second quarter we were awarded the renewal of an annual infrared supply agreement valued at over $5.8 million, which is a 16% increase over prior year contracts. This renewal has since been supplemented with two…with additional orders from this customer, bringing the annual growth from this customer to over 20%. Our success with this customer's representative of this strategy, we are deploying globally, where we have been leveraging initial entry points, in order to provide a more comprehensive solution approach to all our customers optical and photonics needs.

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I'd like to now switch gears and provide an update on the efforts around our new strategic direction and the transformation of the organization. In our previous quarterly call, I have provided an update on changes we have done to our sales process, new products and technologies we were working on, operational improvements and large contracts in the pipeline. Along the same line, our team's…team has focused and continuing to position us to provide more value-added solutions, while growing the organization and improving the operation as a whole.

Some of those activities include, on the sales side, we have recently announced the opening of our sales office in Germany for coverage of the entire continent of Europe, the Middle East, and other close by regions. We're excited to welcome to our team Dr. Thanassis Kokorakis, who will manage the direct sales interactions and be responsible for driving revenue growth in this territory. Thanassis comes to LightPath with over 20 years of sales experience, including time with companies like Ocean Optics, Newport Spectra Physics and Lightwave Electronics.

Secondly, on the technical capabilities and products front. Our team has continued to focus on developing both unique technologies, such as for example, Freeform Optics, a component that as the name indicates, has a form or shape that is free from constraints that are typical in optics, such as symmetrical constraints.

This unique new technology requires very careful machining of each piece on a multi-axis optical CNC or diamond-turning machine. This has been prohibiting the adaptation of this technology in any applications that require mass production, and therefore, makes it a perfect fit for our own optical molding technology, which can replicate items in mass production. We expect to begin to take orders using this technology within the next few quarters.

In the last call, I had mentioned some high value longer term contracts we're working on. While many of those opportunities have a lengthy proposal and prototype process, we have had satisfactory results already with some of those. One such customer has recently decided to adopt the use of our new 75 millimeter lens assembly, which we've announced through a press release a few days ago in lieu of the optical systems they had previously used. That same customer further went and requested us to design the optical system for their next two future products.

Additionally, one of our largest customers for discrete infrared components has recently accepted prototypes for a complete optical assembly, designed and produced by LightPath, which will replace their own designed optical assembly. Those types of wins, while still relatively small in terms of value of initial orders, paves the way for more multiyear orders for complete assembly and brings us a step closer to our new strategic path.

Lastly, in terms of updates on…of transformation of the organization, I will provide an update on our operational improvements. After the end of the fiscal second quarter, we announced the completion of the first phase of our facility expansion in Riga, Latvia, adding new infrared coating capabilities as part of our operational improvement plans, as well as, our global production capacity expansion. This expansion will enable our facility in Riga to coat all infrared components produced at this location.

For reference, in the world of optics, each optical component needs to be coated from both sides with different coatings, depending on the customer's application. Being able to do this last step at the component production in same and the component production in same site will lead to an increase in margins, shorter lead time and improved customer service overall. This also

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will free up some of our coating capacity in Orlando and China to develop new products and capabilities. This is the beginning of an effort that will take about a year to complete, at which point the Riga facility will be fully integrated, such that we can improve the margins on our infrared products.

I would also like to thank the LightPath team that, in spite of the significant constraints due to the COVID travel restrictions, have been able to develop this new technical capability in Riga, as well as, many other achievements that would typically require significant travel and on-site presence.

In conclusion, we're seeing the impact of our sales efforts and improvements to customer service, driving the growth to double-digits, something we had set as a goal for this fiscal year. We're seeing our investments and focus on differentiating technology and value-added solutions, result in both new customers, as well as converting component customers into solutions customers.

And lastly, we are successfully implementing some of the operational elements required to execute on our strategy. With our expanding product platforms and global team in pursuit of a solutions oriented approach for our customers, we believe will ultimately deliver greater sales and improved consolidated margins and profitability.

However, as we've noted previously, and as certain of our second quarter results bear out, the additional capacity…the additional investments in machinery capacity and improvements related this operational…operating personnel, typically takes several months until achieving full scale output and productivity, where we see more meaningful margin contributions.

Now, I'll pass the call over to our CFO, Don Retreage, to provide more details on our recent financial performance.

Don Retreage

Thank you, Sam. First, I'd like to mention that much of the information we're discussing during this call is also included in our 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, on to my remarks pertaining to the fiscal 2021 second quarter and half year ended December 31st, 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 second quarter of fiscal 2021 was approximately $9.9 million, up 4% sequentially from $9.5 million in the first quarter of 2021, and up 3% from $9.6 million in the second quarter of fiscal 2020, when we had about $0.5 million in holdover revenue on the first quarter 2020. Revenue for the first half of fiscal 2021 was approximately $19.4 million, an increase of $2.3 million, or 13%, as compared to $17.2 million in the same period of prior fiscal year.

Infrared product revenue was $4.8 million in the second quarter of fiscal '21, or 48% of the total revenue, down from $5 million, or 52% in the second quarter of fiscal 2020. Visible Precision Molded Optics or PMO products revenue in the second quarter of fiscal 2021 was $4.7 million, or 48% of the total, up from $7.7 million, or 39% of the total in the second quarter of fiscal 2020.

LightPath Technologies, Inc. Wednesday, February 03, 2021, 4:30 PM Eastern