LightPath Technologies, Inc
CEO and President: Jim Gaynor
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WSA: Good day from Wall Street. This is Juan Costello senior analyst with The Wall Street Analyzer. Joining us today is Jim Gaynor, the President and CEO for LightPath Technologies. The company trades on NASDAQ, ticker symbol is LTPH. Thanks for joining us today there, Jim.
Jim Gaynor: Well Juan I am very glad to be here. I appreciate getting the opportunity.
WSA: Certainly any time, so starting off please give us a history and overview of the company for some of our listeners that are new to your story?
Jim Gaynor: Sure, LightPath is a design and manufacturing company that produces products that are used to manage light and then allow that light to do useful work. So we make lenses and optical subassemblies, which are essential components to optical systems. Our lenses are primarily used in laser-based applications, typical applications are such things as gun sights, saw guides, laser levels, missile target systems, optical transceivers used in telecommunication and data communication networks, medical instruments like endoscopes or flow cytometers which are basically cell counters. They are used in metal fabrication that uses laser cutting or welding. They are used in laser light boxes that are used in commercial projectors to replace things like Xeon bulbs. And we also produce infrared optics, that are used in infrared thermal imagers, that are used by police and firefighters. So as you can see very diverse applications in the market space that we operate in. We have facilities in the US and China. We sell worldwide to a blue chip customer base.
WSA: Great and so what were some of the key drivers that are behind the recently announced Q2 results?
Jim Gaynor: We recently reported our results of fiscal second quarter for 2016. And what we saw was that revenue was up 26% compared to the same period last year at $4.2 million. Our gross margin came in at 56% compared to 38% in the prior period last year. And operating income was $607,000 versus a loss of $405,000 the prior year. So our backlog grew up to 6.4 million at the end of December from 5.1 million at the end of September. In the one quarter we grew that much and our cash increased to 2.5 million from 1.6 million over the last six months. So all in all an excellent performance that is a continuation of what we’ve been doing for about the last five quarters.
WSA: Great, what are some of the key trends that you are focusing right now in the sector and how are you positioning the company to capitalize?
Jim Gaynor: Well what we see as catalysts in our markets are, first in our base business which is predominantly visible optics. With the bandwidth demand increasing worldwide, that’s a driver for us and that’s been driven by the mobile internet phenomena and machine to machine communication type applications, cloud computing, Internet of Things. All of those things are driving an increased need for bandwidth which is driving the growth in optical networks and that’s a big market theme for us that we see continuing for the next several years actually. We also have seen where video distribution is moving to digital technology, and so that means that commercial projectors are moving to digital type projectors.
And many of those type of projectors use laser light boxes for illumination versus bulbs and they have multiple diodes in them. Some of them have up to 200 different diodes. I mean 200 opportunities for our lenses in each device. And that technology is being driven because of supply chain logistics where you are using digital technology, you no longer have to ship or store film. It can’t be stolen. So they just download movies directly into the projector at the theatres. So that’s a real nice niche market for us that we see some growth in. And then there is — we’ve got a market that we call industrial tools. So these are the things like barcode scanners or laser levels or saw guides, anywhere you take a laser diode and make a line or a point out of the light.
We’ve seen there is some recovery in that market in Asia and emerging markets as well as in North America. So all those things are driving our business, so I think we are well positioned to do that. And then from a strategic growth point of view our infrared is a developing product segment for us. The growth of commercial applications in using that technology is underway. And we see five areas where we see this growth occurring, automotive, surveillance applications, low-end thermography, which are like maintenance devices where you are scanning buildings for moisture or heat loss and sensors. And then one that’s interesting to me and could be very huge. putting capability in your smartphone to have it turn it into a thermal imager so that you have a personal thermal scanner available.
What’s happening here is the technology for these thermal imagers is advancing and driving the cost down. So the sensors, which for a long time had to be cooled to operate properly, now there are uncooled versions. So just like when lasers came out with uncooled lasers, the cost came way down. And then the size of sensor is decreasing and this is a wafer-based technology. So the size is moving from 25 µm to 12, so it’s half the size so you get twice as many sensors per wafer so the cost is half. So all of those things are bringing the cost of these things down which is enabling the commercialization of the technology. All of the elements of these devices have been cost reduced with the exception of the optics and that’s where we come into play.
So if we think about what’s going on here if you think about GPS systems for example as an analogy when it first came out, only governments could afford them. And they came down a cost curve so when they got down to around a $1000 it became prevalent in automotive applications. Today they are free essentially in your smart phone right.
Jim Gaynor: We see the same type of thing happening in the infrared with these thermal imagers. And as that occurs the commercial applications will expand. And what we’re doing is we’re coming to market with a product that is lower cost than the current optics today and it’s also with our process, which is a molding process as opposed to a high end CNC type processes typically used to produce these optics. You know molding is a mass producible, high-volume type process, which would be required for commercial. So since cost is key to making this happen, that’s what we believe — we’re positioned well to take advantage of this and participate in a very high growth expanding market.
WSA: Well great and what are some of the key factors Jim that you feel will make LightPath and your technologies unique from that of some of the other players in the sector?
Jim Gaynor: LightPath is a technology-driven manufacturing company. We have a unique low-cost molding process that produces high-performance aspheric lenses and aspheric lenses are non-spherical. So they correct for some of the, what are called aberrations in spherical lenses. So what it means if we could take an asphere you can usually do the job with a single asphere that may take two or even three spherical lenses to accomplish the same result. So we’ve got that processand global reach from our distribution of our lenses. We service worldwide and with a customer base that’s blue chip and high end. And then we have our low-cost operating platform in China and this site is giving us the low cost advantages of operating in China.
It also gives us direct access into the Asian markets, which are even in spite of all the negativity you hear, those markets are still growing. And in optics they are doing very well. So then beyond that we are a well-established public company that’s traded on the NASDAQ.
WSA: Certainly and what are some of the key goals and milestones that you are hoping to accomplish over the course of the next twelve months?
Jim Gaynor: We have set several goals that we are trying to reach. We went out into the marketplace and we did some benchmarking of companies that we felt were high quality optics companies. And what we saw was their growth rate was between 3% and 6% and the return on assets was between 7% and 11%. We looked at what we saw we could do with our business and we’ve set the following milestones. We think we can grow our revenue between 12 and 16% a year and within that our strategic revenue growth which in this case in the near term is associated around our infrared products. We can grow that greater than 30%. Our EBITDA margin is greater than 13% and our return on assets we believe we can do 12 to 15%. So we’re going to outperform the market with our performance. And I think we’ve got ourselves well positioned with some very good growth opportunities in the markets that we serve.
WSA: Great and perhaps you can walk us through your background experience, Jim and go over a little bit about the management at LPTH?
Jim Gaynor: Sure. My background is I am a mechanical engineer by education. I went to Georgia Tech. I’ve got over 30 years of operating and engineering experience in volume component manufacturing and electronics and optics. And I’ve held executive positions in a number of companies, both small and large in Puradyn Filter Technologies, which was a micro-filtration company for large diesel engines, JDS Uniphase, Spectrum Control, which was an EMI filter company and Rockwell International. And I actually began my career with Corning Glass, which is the company that actually developed the technology, the base technology that LightPath uses. So I am well seasoned with my background in operations.
And I think I’ve a very good global experience and good strategic development as well as cost conscious management. I’ve got an excellent team that reports to me. Alan Symmons is my Executive VP of operations. He has got over 16 years of highly technical experience in the optics and in manufacturing. He has held some previous positions in LightPath in the engineering field, and prior to LightPath he was an engineering manager at Aurora Optical, which was involved with the manufacture of cell phone cameras. He also worked at Applied Image Group Optics, which was an injection molding technology company in high-volume plastic optics. He has also worked for Ryobi, SatCon Technology and General Dynamics. So a very good excellent technical background in our field and he is a great leader.
He has a BS in mechanical engineering from Rensselaer Polytechnic and an MBA out of the University of Arizona. And our Chief Financial Officer has been with us since 2006, has excellent public accounting and finance and also what I consider a rare experience and that she is also very good at cost accounting. She has been the CFO in several other companies, LaserSight Technology, Goliath Networks and she was controller in some companies prior to that. So she has over 14 years of experience with a BS in accounting out of Northeastern University and a CPA. So that’s the management team. So I think we have got great experience and we have done an excellent job with the execution of the plans that we have put in place.
WSA: Right and as far as investors and the financial community are concerned Jim what are some of the key drivers that you wish you perhaps they better understood about your company or your sector?
Jim Gaynor: Well LightPath is kind of a complex company. It works in a very technical field. And we are component manufacturers that go across very diverse markets. But as a result, we have large growth opportunities as these markets develop. You know our financials are a little bit complicated. And there is one item that we’ve tried to explain which is a little complicated and requires people to look a little deeper than just the surface numbers. We have this one little overhang that I would like people to understand where we have an accounting requirement to recalculate the face value of some warrants that we issued back in 2012.
And so these warrants have an anti-dilution component to them that is required to be mark to market each quarter. And we have to recalculate the value based on the main driver of that calculation which is the stock price. So what happens is when the stock price appreciates, the accounting liability increases and we have to run that through the P&L and/or if the stock price decreases then we have to run through the P&L again. It’s a very unusual event that’s probably never going to happen that actually would cause these warrants to be revalued, but we have to account for that. So you have to look beyond that. For example in the last quarter that we reported our stocks appreciated about 90% during the quarter, which was a very good thing. But that created an increase in the value of the liability of these warrants of $1.1 million. So the difference between our operating income, which was a positive 607 to our net income turned out to be a negative 500,000 plus. But it’s a non-cash event and it would only be triggered by some fundamental transaction which probably — it’s like you’ve to win the lottery to have that kind of odds for that to happen. So that’s a little complicated, that’s why we — when we report we talk about it, so we try to explain what the numbers mean. And I think it’s just one of those things that we have to live with until those warrants either get exercised or expire.
WSA: Sure and so once again joining us today Jim Gaynor, the President and CEO for LightPath Technologies. The company trades on NASDAQ ticker symbol LTPH, currently trading at $2.57 a share, market cap is around 37 million. And before we conclude here Jim to recap some of your key points, why do you believe investors should consider the company as a good investment opportunity today?
Jim Gaynor: Well I think the company is a growing company that’s well positioned to take advantage of some expanding optical markets. We have some strategic growth opportunities in the infrared products sector. And we have some near-term catalysts that are allowing the base business to grow with the optical network growth. So we’re a growing company. We’ve got good revenue opportunities and in addition to that, you can see that our margins are expanding. Those improving margins will continue as we bring in that volume and get the benefit from increased overhead leverage as that volume grows. And I think we’ve demonstrated a successful performance over the last five reporting quarters. So I think it’s an excellent opportunity from where we’re in the marketplace and what we bring to market.
WSA: Well we certainly look forward to continuing to track the company’s growth and report on your upcoming progress. And we would like to thank you for taking the time to join us today Jim and update our investor audience on LightPath Technologies. It was great having you on.
Jim Gaynor: That was my pleasure. Thank you very much.