LightPath Technologies' (LPTH) CEO Jim Gaynor on Q4 2014 Results - Earnings Call Transcript

Sep. 4.14 | About: LightPath Technologies, (LPTH)

LightPath Technologies, Inc. (NASDAQ:LPTH)

Q4 2014 Earnings Conference Call

September 3, 2014 4:30 PM ET

Executives

Jim Gaynor – President and Chief Executive Officer

Dorothy Cipolla – Corporate Vice President and Chief Financial Officer

Analysts

John Nobile – Taglich Brothers

Vesselin Mihaylov – Newport Coast Securities, Inc.

Dave Kang – B. Riley & Co.

Steven Donovan – Donovan Associates

Operator

Good afternoon, and welcome to the LightPath Technologies Fiscal 2014 Fourth Quarter 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.

I would now like to turn the conference over to Dorothy Cipolla, Chief Financial Officer and Corporate Vice President. Please go ahead.

Dorothy Cipolla

Thank you and good afternoon. Welcome to the LightPath Technologies’ fiscal 2014 fourth quarter financial results conference call. Our call today will be hosted by Mr. Jim Gaynor, President and CEO.

Following management's discussion, there will be a formal Q&A session open to participants on the call. Before we get started, I would like to remind you that during the course of this conference call, we will be making a number of forward-looking statements that are based on our current expectations and involve various risks and uncertainties that are discussed in our periodic SEC filings. Although we believe that the assumptions underlying these statements are reasonable, any of them can prove to be inaccurate and there can be no assurance that the results will be realized.

With that out of the way, it's now my pleasure to introduce Mr. Jim Gaynor, President and Chief Executive Officer of LightPath.

Jim Gaynor

Thank you, Dorothy, and welcome to everyone who has joined us on the call today. We appreciate your interest in LightPath. I will open with an overview of operational results, highlights and recent developments and then we will turn the call over to Dorothy for a more in-depth review of our financials. After some closing remarks, we will open the call to your questions.

With the closing of fiscal year 2014, I’m pleased to share review some of the many positive developments that have culminated in making this one of the most important years of progress for LightPath. First, I would like to speak to some of the highlights and then I’ll go into more detail on our execution.

The key achievement on technology in products is the significant commercial development of our Infrared line, which is very exciting given its outlook for rapid growth. Within sales and marketing, we continue to gain share in Asian markets particularly with increasing interest in digital projection projects, fiber laser delivery systems and some significant enquiries for high volume industrial tool programs.

On the manufacturing front we not only opened a second location in China, but got that new site up in running in a very short period of time. The new site is needed to add manufacturing capacity as demand grows for our optical lenses and assemblies. Importantly, our cost base at the new site is lower than our other locations in Orlando, Florida and Shanghai, China and is projected to help boost our margins and profitability.

On our financial results, performance excluding the one-time impact of the DARPA Low Cost Thermal Imaging Manufacturing Program in the prior fiscal year, revenues increased 4% and our backlog is up 5% when compared to fiscal year 2013. We anticipate our revenue to continue to grow and to support that growth we have increased our volume production capability for lenses by 94%.

And finally for our shareholders, our stockholders equity increased by nearly 35% from last year, our market capitalization is up by about 10% from this time last year and we expect an investment of more than $1 million through a private placement with one of our major shareholders. This speaks to their confidence in our future.

Certainly the management team at LightPath echoes at settlement of confidence in the growth outlook for the company. This is in part the result of our successful efforts in fiscal 2014, which is best characterize is a year of growth and investment in the future.

We had a very successful start-up of our new Zhenjiang, China factory, producing just under 100,000 lenses in the first three-months of operations and yields greater than 96%, who are more established line of aspheric optical lenses. This facility occupies 26,000 square feet, increasing our global occupancy by 67%. In the past year we have gone from an annual production capacity of $3.2 million lenses to $6.2 million lenses.

As we’ve stated, a primary catalyst driving in this growth, it is growing lenses production is the company’s proprietary technology and manufacturing processes which have lower the cost of lenses we provide to our customers. The new China factory in Zhenjiang comes with very favorable terms from the Economic Development Committee of Zhenjiang Science & Technology New City.

From this facility, we have a location it provides access to excellent infrastructure, high-speed rail service or well educated technical workforce and proximity to the highly acclaimed Optical College at the University of Zhenjiang. The low rental rates and wages in Zhenjiang will give us a solid platform to continue growing our high-volume business for precision molded optics. We estimate our manufacturing costs could be up to 30% lower at this new facility once we are at full production levels presently projected for late calendar 2015.

For our new line of infrared lenses, we are converting from development or prototype production to a full production ramp in Orlando. With significant shipments to begin in September through $2 million capital spending plan completed in fiscal year 2014. We continue to invest and expanding our manufacturing capacity and improving our efficiencies.

We invested in more efficient equipment with new press stations in China and the U.S., additional anti-reflective coating capacity, increased our infrared glass preparation capacity, upgraded metrology equipment for our tooling operation and expanded high-end CNC machining equipment to lower our cost of housings and other mechanical parts used in our assemblies. All of these investments support the growth opportunities that we see in both the visible lens and infrared product businesses.

More specifically these investments paved away for securing new orders from laser component manufacture HDOEI for approximately 500,000 molded aspheric lenses, these lenses will be delivered over a 12-month period and this customer is utilizing LightPath's molded aspheres to replace traditional spherical lenses, which allows our customer to replace component count or reduce component count and assembly labor time or building more compact and higher performance laser modules to serve these customers.

Another example of our growing strategies reaching provision would be awarded a multiyear contract to supply precision molded aspheric lenses for UK-based Renishaw through our European master distributor AMS Technologies AG. The lenses will be used in Renishaw's state-of-the-art optical encoder product line. This purchase order which demonstrates our technical capability, quality products and high level partnerships with our customers enable with us to expand our presence in Europe. While taking advantage of our added manufacturing capacity. Among other investments in our future we negotiated a new lease for the Orlando operation that expands our space necessary for the increased production levels needed to support the infrared product line and at the same time lowers our overall lease costs by 25%.

Including the cost associated with the start-up activities capacity increases in cost reduction investments we were able to maintain our gross margins at 46%. Maintain our cash at acceptable levels and improve our competitive position in all the markets we serve. The successful implementation of our growth initiatives in fiscal 2014, enabled us to increase our backlog by 5% at the end of the year.

As a result of our endeavors is that we are now very well positioned with our major product lines, a growing backlog, strong margins and significant opportunity for further expansion in the sales.

Now one other thing I would like to address is the previously disclosed stock purchase agreement with Pudong Science & Technology. The technology investment funds sponsored by the Chinese government. We have continued to work with the U.S. government concerning the proposed investment by Pudong Science & Technology and we remain optimistic that we will receive the necessary governmental approvals to close the proposed transaction.

The proceeds from the sale of common stock are intended to provide working capitals to support our continued growth through global expansion, which includes organic initiatives as well as opportunistic acquisitions.

We’ll now turn the call over to our CFO, Dorothy Cipolla provide additional detail on our fourth quarter and full year results.

Dorothy Cipolla

Thank you, Jim. First, I would like to mention much of the information we are discussing during this call is also included in the press release issued earlier today, and on Form 10-K, which we will be filing tomorrow. I encourage you to visit our website at lightpath.com and specifically the section titled Investor Information where we’ve included the presentations that we’ve made at recent investor conferences.

I’ll now review financial performance and operational details from our 2014 fourth quarter, which ended on June 30. Revenue for the fourth quarter totaled 3.1 million, which was flat as compared to the fourth quarter of last year. While there continue to be growing unit demand for our precision molded lenses with the laser tool in other markets. We’ve also been able to benefit from increased demand through our efforts to reduce our cost, allowing us to expand to larger lower price point market opportunity.

Growth in sales for the next several quarters is expected to be derived from the precision molded lens product line driven by the telecom sector’s need for expanded infrastructures to support mobile Internet usage. The industrial tool sector and increasing utilization of fiber laser delivery systems, and our entry into the consumer electronics market. Our infrared product line will begin to delivering increasing contribution to revenue.

Our gross margin percentage for the fourth quarter was 44% as compared to 45% last year. Total manufacturing costs of $1.75 million increased by approximately $26,000 in the fourth quarter as compared to the fourth quarter last year. This increase in manufacturing costs as compared to last year is primarily result of higher rent and electricity expenses. The company increased its global occupancy by 67% with most of the incremental space used for manufacturing. We anticipate our margin to improve as we take advantage of the leverage in our model of this increased revenue as applied against our current cost based structure.

Selling, general and administrative expenses were just under $1.2 million for the fourth quarter, an increase of $333,000. The higher SG&A in the current quarter is attributable to an increase of $109,000 in wages due to the production ramp up for our infrared lenses. $21,000 in start-up costs for the new Zhenjiang facility, an increase of $91,000 in professional service expenses, an increase of $40,000 in rent and property taxes, an increase of $40,000 in sales taxes associated with the investments made in new equipment for the cost reductions and an increase of $32,000 for other miscellaneous expenses.

Net income for the fourth quarter of fiscal 2014 was $102,000, including the $278,000 non-cash income for the change in the value of our warrant liability or $0.01 per basic and diluted common share, compared with a net loss of $244,000, which includes the $503,000 non-cash expense for the change in the value of the warrant liability or $0.02 per basic and diluted common share for the same period last year.

I will now review financial performance and operation details for the full year, the 12 months ended June 30, 2014. Revenue for fiscal 2014 totaled over $11.8 million a slight increase from just under $11.8 million last year. Revenue last year included $481,000 for a large purchase order from a customer in connection with the DARPA Low Cost Thermal Imaging Manufacturing Program. This one time development revenue was replaced by an increase in sales of our ongoing lens business.

Therefore excluding the one-time in nature DARPA revenue, our 2014 revenue increased by 4% from the prior year.

Our gross margin percentage in fiscal 2014 was 46%, up from 44% last year. Total manufacturing costs of $6.4 million in 2014 decreased by approximately $162,000 from last year. The lower cost were the result of our ongoing cost reduction efforts including the effect of our expanded in house coating capability giving us lower coating cost from molded optics.

A decrease in manufacturing cost resulted from a decrease of $267,000 in project cost on the DARPA program last year, offset by an increase of $103,000 in rents and electric expenses for this year.

Direct costs, which include material, labor and services, were 25% of revenue this year, as compared to 24% of revenue last year. SG&A expenses were $4.5 million for fiscal 2014, an increase of approximately 12% from $4 million for 2013. This increase was due to the increase of $83,000 in a non-recurring stock compensation expense due to accelerated vesting of restricted stock units, an increase of $39,000 in wages and an increase of $114,000 in higher taxes and fees.

An increase of $57,000 for rent and electricity and an increase of $29,000 in commissions at an increase of $150,000 for outside services associated with legal services that we put on investments. Establishment of the Zhenjiang subsidiary and other investment activity.

During fiscal year 2014, total cost and expenses increased $811,000 to approximately $5.8 million, compared to approximately $5 million for the last year. This increase in total cost and expenses from fiscal 2014 to 2013 is due to our investment in several growth oriented initiative.

For example, we increased our research and development expenses by 29% in fiscal 2014 as compared to last year, primarily to further develop our infrared product line. We increased our selling, general and administrative expense by 13% this year to enhance our sales and marketing group. Another part of this increase of spending was invested in the start-up cost associated with our Zhenjiang facility. A facility we believe to be crucial in increasing our production capacity and lowering our costs.

We invested approximately $2 million this year in expanding our manufacturing capacity and purchasing new equipment. We continue to invest in growth and cost reduction. We believe that in order for the Company to continue to grow in the future it is necessary to make these investments in our products, facilities and people.

Total operating loss for fiscal 2014 was approximately $376,000 compared to a gain of $210,000 last year. In fiscal 2014, the Company recognized income of approximately $94,000 related to the change in the fair value of derivative warrants issued in connection with the June 2012 private placement.

Last year, the Company recognized a loss of approximately $15,000 related to the change in the fair value of these warrants. The warrants have a five-year life and this fair value will be re-measured and reported at each reporting period until the warrants are exercised or expire.

Net loss for fiscal 2014 was approximately $313,000 or $0.02 per basic and diluted common share, compared with net income of approximately $215,000 or $0.02 per basic and diluted common share for last year.

Moving to the balance sheet. During fiscal 2014, the Company received $1.5 million in net proceeds from the exercise of warrants. 1.3 million previously issued warrants were exercised and converted into common shares in connection with these exercises. The exercise prices ranged from $0.87 to $1.89 per common share.

Cash and cash equivalents totaled approximately $1.2 million as of June 30, 2014. This is a decrease from $1.6 million at June 30, 2013. The change reflects the capital investments in fiscal 2014 primarily offset by cash received from warrant exercises.

The Company’s current ratio as of June 30, 2014 was 2.99 to 1 as compared to 3.75 to 1 as of June 30 last year. Total stockholders’ equity as of June 30 was approximately $7.2 million compared to $5.4 million last year. As of June 30, the Company’s 12-month backlog grew $4.3 million compared to $4.1 million one year earlier. This is an improvement of approximately 5%.

With this review of our financial highlights concluded, I will turn the call back to the operator so that we can begin the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question will come from John Nobile with Taglich Brothers. Please go ahead.

John Nobile – Taglich Brothers

Hi, good afternoon, gentlemen, Dorothy. Just a couple of questions. The first one, I was hoping that you could quantify in terms of the revenue the result from the new facility in China? And is there anything to report regarding the sales pipeline in that area?

Jim Gaynor

Well, I mean the new facility initially is set up, John, to be a manufacturing facility. So it’s basically going to be a lower cost facility than even our Shanghai facility. So we will be just be transferring product that we’re currently manufacturing in Shanghai there to start with, and then as that builds up then there could be some direct sales out of that. But the same direct sales that we’re doing out of Shanghai, out of China basically continue and that runs with about 20% to 25% of our overall revenue right now.

John Nobile – Taglich Brothers

Okay and earlier you mentioned that you anticipate up to 30% lower cost from this facility that’s assuming full production and did you say that you’ll expect full production at the end of 2015 or is that fiscal or calendar 2015?

Dorothy Cipolla

We expect to have that running in a very good rate pretty much where we what the business will support by the end of calendar 2015.

John Nobile – Taglich Brothers

Okay, so it’s not necessarily full production, but it’s a good – I mean do you quantify in terms of volume what you expect at the end of 2015 calendar 2015 from that facility?

Dorothy Cipolla

Well, I think between the two facilities here just way to think about it is the capability over there now is a little over 6 million lens of the year which is almost double the run rates that we’ve been doing. So right now we’re running close to 3 million lens of the year out of those facilities. I mean so in Zhenjiang the labor rates are lower than Shanghai, the utility costs are lower the ramp is much lower. So I mean it’s just a lower operating facilities and has we will be transferring as much that is possible from Shanghai to there.

John Nobile – Taglich Brothers

Yes, so 30% lower cost compared to Shanghai?

Dorothy Cipolla

Yes.

John Nobile – Taglich Brothers

Okay. And some of the stuff will also be shift to Orlando I believe?

Dorothy Cipolla

Yes, I mean yes, as the majority of what we produce there comes back to Orlando and then its distributed other than that 20% to 25% that they shift direct, which is currently being shifted to Shanghai right now.

John Nobile – Taglich Brothers

And we got to Pudong's investment I was hoping you could clarify what exactly is the whole up I mean because I think this was announced April I have to look back, but it was announced quite a while ago about this investments I’m hoping to get some of more specifics on what exactly is delaying that and you have any forecast or internal estimates of when you believe this by close.

Jim Gaynor

Yes, you’re frustrated is I’m John – this investment became subject to CPAs approval which is the government over site committee on foreign investor investing in the U.S. Public Company as relates to any concerns of security or being be able to takeover the company. The government has to review it we put in an application they did so and at this point we’re waiting for response they did come back to us and give us some recommendations as to what they would like to see and request a bunch of information that we provided. We believe we complied with recommendations that they’ve made and now we’re waiting just to get that approval from the government once we have that approval the deal will close and we expect to get that approval.

John Nobile – Taglich Brothers

Maybe I timeframe go for that?

Jim Gaynor

No, you really didn’t I really expect it should happen in the next I mean might this is speculation of our part, but I would certainly hope that we will get done in a next month or to.

John Nobile – Taglich Brothers

Okay and obviously no guarantee due to.

Jim Gaynor

No.

John Nobile – Taglich Brothers

Okay.

Jim Gaynor

No, I think we have they had a certain amount of time they have to review these savings based on the application because they were expiring all the time on that application they have to – we had a choice we could either let them – their only choice would have been to reject it, or we could pull the application, make the changes to the deal that they recommended and then resubmit.

So what we did is we pulled it, we’ve made the changes, Pudong and us have agreed to those changes, and now we’re at the point where we’re waiting to get the government to tell us that yes that’s what we wanted and then we will resubmit and it should be automatically approved from that point.

John Nobile – Taglich Brothers

Yes. hopefully like you say we’ll see this soon within a month throughput?

Jim Gaynor

Yes we would hope so.

John Nobile – Taglich Brothers

If I could just ask Dorothy a question, I know that let’s see in the fourth quarter your gross margin was 43.8%, down a little bit from last where the comparable fourth quarter in 2013, but I’m looking at it compared to your March quarter, which was actually 48.8% gross margin now. I don’t if that was have to look back at the queue to see if that in a normally to have it that hike, or was that on this 49%, now you’re down to about 44%. I was hoping you could just explain what that gross margin is sequentially compared to your third quarter?

Dorothy Cipolla

You’re correct in the percentages that you’re stating, the 48% to the 44%, the big change is between Q3 and Q4 came into the facility and utility cost and start-up cost in Zhenjiang facility and wages.

John Nobile – Taglich Brothers

Okay start-up costs were – I anticipated that would have been something in there. In regard to start-up cost that affected the quarter margins to some degree. I don’t know if you can actually quantify what the start-up costs were for this particular quarter, but going forward have we basically really exhausted all the start-up cost or are we going to see some of this into the first quarter that we’re in now?

Jim Gaynor

John I think the majority of them have been exhausted, obviously we’re continuing to move equipment from on one location to the other. And we’re still hiring people so there’s still some training cost, but I think the those should be mitigated now as we have a critical mass operating in that facility. So I think the majority of them have been – the effect has been see, but I wouldn’t go all the way and say that there are no more, there will be a few more and I think they will be huge.

John Nobile – Taglich Brothers

Okay, I mean it could be some that trickle into the quarter, but could you quantify do we have anything as far as what the start-up cost did affect the fourth quarter margins by?

Dorothy Cipolla

No.

Jim Gaynor

I don’t think we want to break that out John.

John Nobile – Taglich Brothers

Okay. Just one further question, obviously the area of growth that I think is the most exciting for your company, the strong growth projected for infrared cameras, I was wondering if you could talk a little about your prospects in this market and what do you expect in fiscal year 2015?

Jim Gaynor

I think the infrared line as I said; we are going through a major ramp up currently with that product line in Orlando, which means we’re moving from where we’ve been operating which were mostly development and prototype type production levels, to full commercial production. We’re currently running right now greater than 3,000 units a month. We’ve shipments of those things to start in late September. So I think that means there’s going to be a significant growth there, I would say that, that means from current infrared product shipment levels we probably will be seeing a doubling of that number going forward into the next couple of quarters.

John Nobile – Taglich Brothers

Okay. But not necessarily in the September quarter, because that that would be the last month of that quarter.

Jim Gaynor

Correct, correct. But and that would the actual production shipments are slated to start in September.

John Nobile – Taglich Brothers

Correct, okay. So basically a doubling in that market from where you want now in your second fiscal quarter.

Jim Gaynor

Yes.

John Nobile – Taglich Brothers

Okay, great. Thank you.

Operator

Our next question will come from Michael Diet, a private investor. Please go ahead.

Unidentified Analyst

Hi, Jim and Dorothy, these are great results and you’re all to be commended. I have just a couple of questions, which I usually ask in these calls, guess a little bit more on Europe and whether you’re also seen interest out of the Munich fairs and may be a Northern Europe or related to the car dealers, who were using infrared for some of there sensing lenses Mercedes, BMW.

Jim Gaynor

We have seen increased interest from the European market I think we’ve seen some increased business through our master distributor there AMS and actually they’ve had some very good booking quarters in the last couple of quarters compared to historical rates. So we have seen some strengthening of that business albeit at that’s getting a little cloud at looking forward with what’s going on in Europe right now, but from the visible side we’ve seen some gains there. The infrared is just beginning to get some interest from our perspective into that market.

So I expect that – it is going to be a good market for that product line, but we haven’t really got it has heavily launch their as we’ve had at this point very targeted customer specific strategy to get started with the development of the infrared product line.

Having said that, I think it’s a great opportunity the automated market and sensor market I think are things for our future and that to distance future I hope, but we are more into some imaging type cameras things that are associated with the fire-fighting type equipment and that type of parameters sensing type equipment those kinds of things currently more so than the automotive step, which will take our longer – has a much longer just station period I thing.

Unidentified Analyst

In the prior calls you’ve talked about the digital projector market and I recall one of the customers had some financial difficulties, but then you mentioned I think that you were in contact with some other manufactures of digital projectors. Is that growing at all into something specific and it is particularly in China, we’ve got one large customer over there that we’ve been we started out selling him lenses associated with the red lasers, but now we are doing blue and green as well. And he’s just built a new factory, which is slated to open up in October and we are having a – we will be – we are his sole source for OpEx into those projectors and he is a major player, and actually I have a trip planned in September and one of my meetings is with the CEO of that company and we hope to sign a partnership type agreement. So that’s very good progress.

Unidentified Analyst

That’s very exciting and I just recall over the years you have mentioned the customer in Thailand was affected by the flooding and I think the last call you said, he seemed to build back-end business, I wonder how that’s coming?

Jim Gaynor

We are seeing some increased activity there as well Michael, that customer is back in business and we are also anticipating some increased business coming from him actually we have already seen some but we think it’s going to start to accelerate.

Unidentified Analyst

Great. Well, this is very exciting and I look forward to more news over the coming quarters and a great trip on your behalf.

Jim Gaynor

All right, thank you.

Operator

The next question will come from [David Moyer] (ph) of Alexander Capital. Please go ahead.

Unidentified Analyst

I am sorry, Jim. This Brett Moyer, so the one question so you had this growth initiative in 2014. When does it hit the top line and what do you think 2015 revenue is going to be?

Jim Gaynor

Well, Brett, we don’t have – I don’t intend to start giving forward-looking forecast like that, but I do expect us to continue to ramp our revenue, expect to see growth in 2015, more substantial nature than we saw in 2014 as a result of some of these projects that are, either we are working on in the visible side and more protected early with the move to a full production mode of the infrared product line.

Unidentified Analyst

So if you sold 3 million more optical lenses, what would that revenue be?

Jim Gaynor

Well, I mean that’s a hard question to answer because it depends on whether they would be into the industrial tool market which are low priced optics below around $2 on average or in the infrared where the average selling price we anticipate is going to be greater than the $50 a lens…

Unidentified Analyst

So what would fill up 3 million units of capacity I doubt it’s the $50 million lens?

Jim Gaynor

$50 lens

Unidentified Analyst

Yeah

Jim Gaynor

Well I think we have some opportunities that are I am not ready to talk about that are very high volume in the lower cost that would be take a part of that capacity, but I really have we are kind of reserved in terms of we don’t want to fill that with the lowest priced product. We want to make sure that we have opportunities for higher priced typed ups o I think that we can see substantial growth from the mix that we think we can put in place this coming year.

Unidentified Analyst

The lower price would be $2 times $3 million it would be your incremental upside?

Jim Gaynor

Well, I mean if we resolve the lower price stuff yes but it won’t be.

Unidentified Analyst

Yeah okay

Jim Gaynor

Thanks.

Operator

(Operator Instructions) The next question will come from Vesselin Mihaylov of Newport Coast Securities. Please go ahead.

Vesselin Mihaylov – Newport Coast Securities, Inc.

Hi, Jim. Hi, Dorothy. How are you?

Jim Gaynor

Hi, Ves.

Vesselin Mihaylov – Newport Coast Securities, Inc.

Hi, so Jim can you hear me well?

Jim Gaynor

Yes I can thank you.

Vesselin Mihaylov – Newport Coast Securities, Inc.

Very well, thanks. So right now to me the company looks like a beautiful bright [daughter] (ph) with a $3 million dowry, I'm talking about the inventory. And the new spacious house in Zhenjiang, so we are waiting for the wedding part to start. My first question is this, the massive build up in inventory, inventory went from about $1.7 million to about $3.3 million. So, nobody builds this kind of inventory if you don’t expect significant sales going forward. Can you comment on that?

Jim Gaynor

Well, yes, but I’m going to let Dorothy to answer that question, because there is more to it than miss there.

Vesselin Mihaylov – Newport Coast Securities, Inc.

I would appreciate that.

Dorothy Cipolla

Right. In December we had a change in accounting estimate on how we handled our tools inventory and prior to December it was in fixed assets in the amortized it into our P&L and it became part of our overhead rate. We made a conscious decision to move it into a direct material cost. So the tooling was reclassified from fixed assets into inventory. So that $1.5 million change in inventory from last year, a little bit over $900,000 is tooling and $460,000 of that difference was just tooling that moved from fixed assets or prepaid expenses into inventories. And the remainder of the increase in tooling was due to decisions to the purchase blanks, raw materials for tooling. We have some issues with suppliers, we wanted to make sure we add our source and our raw material set and we also are in also a conscious decision to increase tools due to production plan.

Vesselin Mihaylov – Newport Coast Securities, Inc.

Okay. So I shouldn’t read like you really tied up in additional $1.5 million into new finish product?

Dorothy Cipolla

Correct.

Vesselin Mihaylov – Newport Coast Securities, Inc.

And at the same time having sales increase only 4%?

Dorothy Cipolla

Correct.

Jim Gaynor

That is correct.

Vesselin Mihaylov – Newport Coast Securities, Inc.

Okay. So then the startup, I heard the plenty of details here about the infrared production in Orlando. And my question is this, as you ramp up the run rate from 3000 to 6000, was it a months or a quarter?

Jim Gaynor

In the infrared we are talking – we’re currently running at a rate of about 3000 units a month.

Vesselin Mihaylov – Newport Coast Securities, Inc.

3000 a month, so 3000 you said you expect it to go to 6000. My question is this, I mean should we assume that this will be lead to incrementally higher gross margins; clearly you just mentioned these are average $0.50 sales prices and you already have existing shipments out of that facility. So this is not “start-up call” started ramping by this, you should immediately be accretive to gross margins specifically for that product line. Am I right?

Jim Gaynor

Well, I mean it has a gross margin that is similar in nature to our gross margin levels, because remember infrared stuff as a much higher material content given that its got mirrors the glasses significantly more expensive than the visible glass. So that it also has a different tooling structure, which is another significant cost drivers. So the margins when things are running correctly are similar to the gross margins that we’ve had in the past, but it will be additional revenue growth and new business.

Vesselin Mihaylov – Newport Coast Securities, Inc.

Okay. At this time, could you give me percentage wise of the overall revenue? So actually let me start with another question first of all, this quarter was purely optical revenues there was no DARPA development revenue and it correct the 3.1 million was all optics.

Jim Gaynor

Correct.

Vesselin Mihaylov – Newport Coast Securities, Inc.

Okay. And so what percentage of that would you say was infrared and what percentage of that immediately addressed fiber optics. So I’m not asking about digital projectors, industrial or I think after top of your head readily addressable the infrared market and readily addressable fiber optic components have going to fiber optic communications equipment.

Jim Gaynor

Right, I think currently the infrared business is about 9% of sales.

Vesselin Mihaylov – Newport Coast Securities, Inc.

Okay.

Jim Gaynor

Okay?

Vesselin Mihaylov – Newport Coast Securities, Inc.

Yes.

Jim Gaynor

And then what was the other part of your question.

Vesselin Mihaylov – Newport Coast Securities, Inc.

Fiber optic.

Jim Gaynor

Fiber optic, I’m not quite sure what’s you mean by that?

Vesselin Mihaylov – Newport Coast Securities, Inc.

Well, fiber optic communications you didn’t have to call the matters...

Jim Gaynor

I mean the telecom as we have talked telecommunication by start.

Vesselin Mihaylov – Newport Coast Securities, Inc.

Yes, telecommunication.

Jim Gaynor

Typically that’s been about 5% recently as lots of room to grow given what’s going on in the mobile internet. So what we’re seeing there as we spend we got about 10 lenses qualified now with all the way and they keep saying that they’re going to start moving that into the production mode for us which will you start to see volume there. So I expect that to grow, we have another Emcore business which falls into that category as well its coming back through fiber net in Thailand. So I think we’ll see some significant growth in that market segment.

Vesselin Mihaylov – Newport Coast Securities, Inc.

All right that’s a great to hear because we started back in the United States, well the late 90s where we’re primarily fiber optic Telecom Company.

Jim Gaynor

Yes, I mean we diversified a way from it mainly because of its cyclical nature, but that business is one of the areas currently we have some nice longer-term growth prospects in the market, due to the mobile internet and bandwidth demand that are being put out there and so that should be good business for us going forward for the next several years.

Dorothy Cipolla

Wonderful, I mean I have seen staffs positively respond to announce the growth in their telecom optics business I can name names but we’ve talked about this in the past. So going forward this business becomes significantly materially know 7%, 10% or above I will be a great idea to really dedicate a paragraph to the Telecom business at LightPath.

Vesselin Mihaylov – Newport Coast Securities, Inc.

Okay.

Dorothy Cipolla

I think we can bring additional visibility to the company. So another question here just a little bit of follow-up. Your definition of significant shipments for – increase was about going from 3000 components or lenses per month in infrared I’m talking about to 6000 run rate which is great.

Now do you expect that to continue accelerating can further quarters out where it just at the beginning of the fiscal year. So we’re looking to growth of probably 6000 run rate in the December quarter, but how about the margin June quarter do we expect this regard from 6,000 to 7,000 to 8,000 to 10,000 and so forth.

Jim Gaynor

Well, we certainly expect growth that I don’t know that will continue I mean we kind of the building up this path I would think that that growth will continue I guess it depends on the phase that our customers complete their qualifications and their program and the success they have, but I do believe that business is now often running at the level then we’ve started at now becomes a real business for us. Before it’s been development and prototyping and trying to get it’s started. So I’m pretty excited about the fact that we got this run rate going and I do expect it to accelerate going forward.

Vesselin Mihaylov – Newport Coast Securities, Inc.

Okay, great. Now a little bit of a follow-up on another question, the Shanghai facility. Once this facility in Zhenjiang becomes fully staffed you move as much as you possibly can. What happens with the Shanghai facility? Is it just like an extra facility that spare part – just to have additional capacity, or do you plan on selling it and may be monetizing? How does that look?

Jim Gaynor

Well, there are leased facilities. So, from that standpoint we don’t have to worry about the real estate so much. But what are important to us are the people. We’ve built a great organization of people, particularly the professional people, the engineering, sales organization, that kind of stuff. So what I would anticipate longer term is that we downsized the Shanghai operation. But if we focused on some engineering sales and infrastructure type support more than manufacturing we’d probably do some development work there, given the quality of the technical staff and those types of things. I mean, that’s the plan.

So the majority of the manufacturing, I think, will eventually move to Zhenjiang, but we have to work through the organization in Shanghai. So I think it will change its character and it will be a similar strategy to what we did when we moved operations from Orlando to Shanghai. And then we took Orlando and turned it into more of a development shop, which now has some manufacturing coming back to it.

Vesselin Mihaylov – Newport Coast Securities, Inc.

Okay. And so, one other question here. We talked on this exactly about a year ago – but fiscal year 2014. And under Safe Harbor and everything, I think, it was part of the press release that we were looking to do 10% to 15% revenue growth. From what I see here, we had a flat year. So this is not a loaded question, but looking back on the year, what do you think happened? Where did we fail in executing a 10% revenue growth target and we ended up with a flat year? What are we doing to change this going forward to start improving the top line better than twice inflation, for example? Again, I know your feelings here. Just let’s recap – we were looking to do 10%, 15% growth, we ended up flat. What happened and how is this going to change?

Jim Gaynor

Well, I think we had a higher percentage of what I’ll call program well off than we typically experienced in 2014. And what I mean by program well off, business matures, programs get completed, customer projects fail, those kinds of things. And then large chunks of business go away. It has to be replaced. And so what we were successful doing in 2014 was replacing that loss business, but that did impact our ability to grow. And one example of that was this program that we had with Red Digital where we brought significant hundreds of thousands of lenses.

And then they canceled their program due to some technical failures. They didn’t have anything to do with the optics. And all of a sudden we saw ourselves with a huge gap that had to be refilled. That and then another example would be the DARPA program where we had this large development program, was almost $0.5 million that went through the revenue line that we replaced with product business.

I mean so the good news is, we didn’t go backwards, we were able to keep our head above water and grow slightly, but those were big chunks of business that had to be replaced. I think that was the major thing. I don’t foresee that happening over and over again. And particularly this year, we have a more diverse customer. We don’t have the same concentration of programs that we had last year, if something have failed it’s not quite as big an impact plus. Again, we iterate, we finally reach the point where I believe the infrared business is starting to – move into full production mode.

Vesselin Mihaylov – Newport Coast Securities, Inc.

All right, sounds great. So looks like, we have the production facilities we have the equipment, we do have some cash, we’re expecting some cash from a strategic investor. All the stars are aligned – last question here, the sales force I saw a couple of snippets here about the new west coast manager or new distributor then of course forgive me for not remembering the name the gentlemen you hired from Newport Optical Corporation.

Are we staffed at the sales level approximately, can you make any additional strategic hires to people would be rolled access and open the doors really wide here. Because you have the capacity, you’re not cash hungry. Totally I mean the margins are very, very enviable compared to some of the other optical guys. You were open for business and the business is only – right now has been growing only 4% or 5%. Can we hire some people in sales, some closures so to speak and get this business growing from sales perspective? If you now hire some people would that that will hit the phones and get sales going?

Jim Gaynor

Well, I think we’ve done some of that, I mean Mr. Breeze is the guy we hired from Ophir and he is focused on the infrared business, he is having an impact in that very subject. The new west coast sales manager is a guy with about 25, 30 years experience, and has a big rolodex and he’s also become very, very effective. We’ve got to give him another month or two to really solidify his position, but he is very encouraging what we’ve seen so far, and one of these been able to do. And I do believe that to be a target rich region.

We also changed from the rep distributor we had on the west coast it was not really the right person, the right company given their background that we thought they were going to be to a more optical focused guy who just started recently, and I think he is showing very promise.

So, we’ve already done a couple of those things in west and as the right opportunities present themselves we will continue to do that and make sure that we do open up that sales funneling and keep it top form.

Vesselin Mihaylov – Newport Coast Securities, Inc.

Very well, Jim and Dorothy. Thank you very much for taking my questions, I really appreciate it.

Jim Gaynor

No problem.

Dorothy Cipolla

All right.

Operator

The next question will come from Dave Kang of B. Riley. Please go ahead.

Dave Kang – B. Riley & Co.

Thank you. Hi Jim.

Jim Gaynor

Hi David, nice to talk to you again.

Dave Kang – B. Riley & Co.

Yes, like wise. Few questions, so you gave about 15% – 5% telecom, 10% or 9% to 10% IR. So what’s the rest 85% as far as our mix is concerned?

Jim Gaynor

Our biggest market distributions what we call industrial and it’s about 29% last year, which is basically these high volume lower cost point stuff in these laser modules, laser type barcode scanners, pointers that kind of stuff, gun sites. The next biggest segment is our catalog distribution business which is about 27%. We have another one we call laser business which is not too dissimilar from the industrial tools about 13% market – of our market and then the instrumentation business is about 16% and this tends to be mostly medical instruments and something to that nature.

Dave Kang – B. Riley & Co.

Got it, got it. Now where does the fiber laser fitting with among these four segments?

Jim Gaynor

The fiber laser…

Dave Kang – B. Riley & Co.

Laser aided IR

Jim Gaynor

When that laser segment I think

Dave Kang – B. Riley & Co.

Laser segment, okay.

Jim Gaynor

Or in that it’s either there are in the industrial tool depending on it could be some low cost stuff in there?

Dave Kang – B. Riley & Co.

Got it, got it. And then did you give the timeframe for the 300 to 600 per month, what’s the timeframe are we looking it I think…

Jim Gaynor

Well, I think what I said was 3,000 units a month for infrared which starts in the – we are starting shipments of that we are producing at that rate now and we are starting shipments in September, late September.

Dave Kang – B. Riley & Co.

Late September got it

Jim Gaynor

And then it should grow from there.

Dave Kang – B. Riley & Co.

Okay. And then I think you gave the examples of you know $2 parts versus $50 parts can you repeat what which our $2 versus $50?

Jim Gaynor

The $2 stuff tends to be more in the industrial tool, market segment that’s for that in the Asian market.

Dave Kang – B. Riley & Co.

Got it.

Jim Gaynor

Those kinds of things that’s the kind of the average pricing it’s going on over there. The $50 type average prices in the infrared market segment.

Dave Kang – B. Riley & Co.

Got it

Jim Gaynor

If there are prices run the full game at within that $50 ASP I mean you could have some very small lenses that are associated with the gas cable laser stuff, that maybe in the $20 and then you have thermal imaging type stuff that’s in the several $100 a lens or the assembly we have multiple own that’s it could be a couple $100.

Dave Kang – B. Riley & Co.

And at this point, I mean you having kind of clueless as far as our expectation what the mix might look like, I mean can we – should we expect maybe 50:50 to versus 50 or it will be more like 80:20 some any kind of guess at this point?

Jim Gaynor

Well, I think it’s going to change so it’s pretty hard to do that Dave I mean our focus in that business is really to push on the thermal imaging type product line more than the QCLs. QCLs are I think relatively small niche market where we have pretty good share already, but the imaging side of the business I think as where the growth is kind of the come from and I think where we expect to see there is about four markets and that has to do with automotive, surveillance, low end thermography type stuff.

And then this one that still mystify me this IR Smartphone application or personal infrared thermal imaging type camera. But they will probably big, that’s those four key markets are there some market forecast out there lets say they will go at about 23% a year.

Dave Kang – B. Riley & Co.

Got it.

Jim Gaynor

And we should grow with them and I think and to me our entry into that market is twofold one were low, we are offering a lower cost optic than the typical Germanium diamond turned optic, prices are entry. And then in addition to that as these commercial applications take off then the molding is going to be the only way to keep up with the volumes that are going to be required going forward. There has been some articles in the Wall Street Journal and other places that are now echoing the things that we’ve been talking about for the last year or two.

Dave Kang – B. Riley & Co.

Right, because the reason I asked was, I was wondering obviously going from 3,000 to 6,000 I was wondering, if there were any kind of particular program or programs that’s kind of driving the doubling production?

Jim Gaynor

The answer to that is yes, but I’m not at liberty to divulge what they are.

Dave Kang – B. Riley & Co.

Okay, good enough, good enough and then last question is you sound it pretty optimistic about your growth opportunities in telecom, but some of your optical component customers like Oclaro and JDSU they sound pretty cautious these days I was just wondering where you’re getting all these optimism from?

Jim Gaynor

Well, it’s coming out of the Asian market part of it is customers.

Dave Kang – B. Riley & Co.

China.

Jim Gaynor

China and Huawei is where these guys are little bit afraid of Huawei, you should be.

Dave Kang – B. Riley & Co.

Sure.

Jim Gaynor

We’re doing quite a bit of business. I understand the caution there, now there is – was typical in that market, but I think two things from where we’re in the products that we’re being asked to design and qualify. It has been over the last six, nine months are starting to move towards production levels.

Dave Kang – B. Riley & Co.

Sure.

Jim Gaynor

We believe the overall theme that’s driving the market has not changed, that’s the bandwidth demand in the mobile Internet, the mobility thing is going to continue to drive demand, so those networks got to demand, it’s just a matter of who gets the business and from our perspective we really don’t care because I’m trying to keep my fingers in the all the pies.

Dave Kang – B. Riley & Co.

Right, but the question is by dealing with Huawei, I mean does your margin suffer like some of your customer domestic transceiver customers obviously they grumble about tough pricing with the Chinese customers like Huawei and ZTE. Do you go through the similar challenging economics with those guys?

Jim Gaynor

Well, they are very price conscious, but our focus has been and over the last several years has been to continue to do very significant cost reduction in our process, and so we’ve been able to keep ahead of that curve and maintain the margins. As well as from our perspective we haven’t yet seen the significant price pressure from our ASPs.

Dave Kang – B. Riley & Co.

I got it.

Jim Gaynor

And I understand the 100G guys and those guys are starting to see that when I was at JDSU I certainly understand that price pressure and what happens there. But from the component the optic point of view our pricing has been stable and we see – if we haven’t seen declines in the volumes yet. I mean it’s been a little up and down, but it’s moving in it’s generally moving up.

Dave Kang – B. Riley & Co.

Now so your product for transceivers I assumed what kind of transceivers are we talking about, are they for like something like backhaul, wireless backhaul applications or are we talking which obviously would be a lot of volume or even better would be data center type of transceivers. What type of products or applications are we talking about here in China?

Jim Gaynor

The answer to that is on both, but some of it’s been backhaul stuff. So we are doing some toss and stuff as well. We’ve got some – we’re still source and there are a couple of those guys for the optic.

Dave Kang – B. Riley & Co.

Got it, all right, sounds good. Thank you.

Jim Gaynor

Thank you, Dave.

Operator

And the next question will come from Steven Donovan with Donovan Associates. Please go ahead.

Steven Donovan – Donovan Associates

Hi, there Jim and Dorothy. Thank you for the great report and all the detail. I’m really appreciative.

Jim Gaynor

Thanks, Dave. Good to hear from you.

Steven Donovan – Donovan Associates

I want to review Pudong possibility. I will get on Pudong and when they get involved with a company, they are very much activist investors. They are represented on the Board and there’s the chance that they would be in a position to open the door to many other marketing opportunities for LightPath in China. Can you say something about Pudong in its totality rather than, in addition to just being a 20% investor in the company?

Jim Gaynor

Yes, I think currently he’s about 9% investor, Steve. He probably won’t be able to get to 20% based on what the government has asked us to do. But he does have some room to grow and he wants to. And the reason that we’re interested in aligning with him is exactly what you said, is the opportunities that he can bring to the company particularly from the China area for opportunities for growth whether that would be through acquisition or just knowledge of where we should be focused.

So I think that’s a very positive thing for LightPath. I think his reasoning for getting – he’s decided that optics is a good place to invest. He didn’t really know a lot about LightPath. He had a consultant that did some research for him that introduced us to him. And he thought that this was a real opportunity for growth and that he could help. And I believe that to be his motivation at this point. I’ve met with him several times, and actually I will meet with him again in September. And so I think and hopefully we can get our government to give us a decision and then we can move forward and close this deal.

Steven Donovan – Donovan Associates

And (indiscernible) they possibly had representation on the LightPath Board?

Jim Gaynor

That is not a requirement in the SPA, but it is a possibility.

Steven Donovan – Donovan Associates

Okay. Thank you. And one more question. Have you targeted any hiring positions? Are you seeking any new people that you can tell us about?

Jim Gaynor

We have strengthened our technical force in Orlando. We did hire really a top rate optical designer and some mechanical people in the engineering force and I think we’ve also put on some laser expertise that, I think are being very helpful to our design team. And they are cranking up the designs and so I think those type of hires have occurred that’s part of the – when we said the wages went up a little bit that’s part of it. We did increase our investment in the engineering side, particularly in the development and design function, because in most of our products go through some level of design and that’s just the process of the sale process that we work through. So, I think we add those, beyond that I don’t have anything I mean we did target and we did add very experienced person on the west coast, which I think will pay a big dividend to us, but beyond that I think we’re staffed appropriately at the moment.

Steven Donovan – Donovan Associates

And what is the total employee count for the whole company?

Jim Gaynor

I think it’s 179 including all people in China is that – I’m sorry Steve.

Steven Donovan – Donovan Associates

It’s pretty much stayed flat over the last couple of years?

Jim Gaynor

Yes. Although, the character of it is changed a quite a bit.

Steven Donovan – Donovan Associates

Okay, well, thank you guys. Keep up the good work.

Jim Gaynor

All right. Thank you.

Operator

And ladies and gentlemen that will conclude our question-and-answer session. I would like to turn the conference back over to Jim Gaynor for his closing remarks.

Jim Gaynor

Thank you, Dennis. In conclusion, I would like reiterate our focus on accelerating our top line growth, while effectively managing our cost structure. We are rigorously pursuing opportunities to further expand our current accounts and developed new wins. And in addition, we are aggressively launching our infrared product line and we see meaningful growth coming from this business. These opportunities for bulk of our product lines are broad based across several large market segments and not limited to any specific industry, market for geographic locations. We believe the company is well positioned to capitalize on the many opportunities we see ahead. And I would like to thank everybody today for joining us and I particularly want to congratulate our employees for the hard work that’s resulted in our continued success, which has positioned us for future growth. Thanks again and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.

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