CEO Sam Rubin on the “Galaxies Aligning”: Defense, and U.S.-Made Optics ($LPTH Impact Stock}

I... yeah, lost track. Yeah.

Yeah. Well, it's not my place to comment on stock price, on what it should be or where it should be, right? So, I'll focus on the business side because that's what I know how to do. And, yeah, I mean, five years ago, LightPath when I took over was in very bad shape, was stagnant, was not growing, had some interesting technologies that never managed to sort of leverage to make, you know, real money and growth. We took a very different direction, changed direction completely, identified that the area of infrared imaging is a growing area that we have some real impact to make there. And, you know, it's a lot of cleanup. Absolutely. And you've been following us from day one and, you know, there was fraud going on and there was cleanup and, you know, issues in the board of directors and whatever, right? And it's all behind us. It doesn't matter really. It took us a bit longer, a couple of years probably, and then we started going into infrared imaging and into cameras. And today, what once was a wishful thinking of being in the camera business and in infrared imaging is now, you know, well over 50% of the business, is growing like crazy. We're positioned in an incredible place because of the growth in defense, because of the issues with critical minerals from China. And now, you know, and it just keeps getting better, like even the last two weeks.

So, starting with the National Defense Act. So, it's a defense bill for this year passed. Thank God finally. And it included in it a paragraph that requires the Department of Defense to stop buying any optics or optical materials glass, like pure glass, coming from adversary countries like China and Russia and so on. That's a huge deal because over the last 20-something years most of the glass manufacturing, scientific glass and technical glass, has moved to China. So the Chinese company CDGM has basically taken over from Schott Materials, the German, and Corning here, the majority of the industry of technical glasses and those materials were no longer produced here. And so, you know, for us it's good news. We've been making glass here. We've been investing in glass. Just recently, we started investing to double our glass manufacturing capacity. And between you and I, it's not enough. I mean, we're doubling our capacity and it's all already called for. So, we're going to need to double again soon.

So NDAA essentially says, hey, you know, even if the glass is made in China and is exactly the same as the glass that someone makes here in the US, you can't buy it from China, and if you don't make it in the US, you better start making it in the US. So that is great, right? Perfectly aligned to exactly the direction we've been going. And then the real surprise has been the FCC. Everyone was expecting the DJI ban, as they call it, so the ban from specifically buying drones made in China and DJI, and the FCC expanded it well beyond that. So first of all, it expanded it to all countries. They will no longer give permission or approval to import into the US any drones made by any countries, friendly or not. And then they went a step further and expanded that to critical components and specifically calling the cameras by name on that. So while we never looked at the drone camera part as a major driver part in the short term, suddenly this is changing and we need to align. And this is great because we have everything that is needed, right? We make the glass here, we make the lenses here, we make the camera cores here. We just haven't been targeting the drone market because it is so price sensitive. It was buying cameras made in Taiwan or China or so on. But now, you know, the FCC and the government are essentially saying, 'Hey, we can't inject money into the industries the way the Chinese are subsidizing their industries. So instead, we're going to encourage domestic manufacturing by, you know, not allowing imports of certain components and materials.' And so, you know, what was an extremely price sensitive market for us because we would fight against the Chinese and Taiwanese, all of a sudden has the potential of being a real significant market. And here our relationship with companies like Andis and Unusual Machines, the investments they made in us, relationship with others in this industry, you know, comes into place. So let's say next week, come Monday when we're back at work, we're going to have some very interesting strategy to develop around this.

And I don't buy that for a minute. I do think that in the past we sent our intellectual property over there and I think they steal that intellectual property and immediately start to work on how they can make it better. Yeah. I mean, I think there's no doubt that there are some things that the Chinese do better than the US, but I think that there's a very different, very significant cultural difference that people aren't fully aware of. And that is the Chinese companies will build a small demo, will take, shoot a video of something doing something one time, a robot walking 10 feet, show a video of that. Now, you know this because you lived in China for six years. All they mean in that is, 'Here we built a robot that was able to walk 10 feet.' An American consumer looks at that and looks at it through the eyes of an American market. In the US, a robot company will not post a video of a robot walking 10 feet just for the sake of 10 feet. They would post that video when the product is ready to demonstrate it. But essentially by the time they do that, the product is great and good and ready for the market. So we look at the Chinese videos and we're seeing, 'Oh my god, they're so ahead of us,' and we don't understand really. Maybe they are, I'm not taking it from them. But in many, many cases, all what we're seeing is a small demonstration of something very short term. And, you know, we're assuming because we're built to look that way at marketing videos and things like that in the West, we're assuming it means the product is ready and they have like a humanoid robot and it can do all of that. And it's like, yeah, that's not the case.

You know, time will tell. I more lean towards the latter, right? I mean, do it right and it will last long. But again, it's an example of where, you know, we misunderstand what we're seeing, I think.

Yeah. Really to join in hands, right? And, yeah, and there's a lot still that can happen. I mean, look, these new regulations from NDAA and FCC are going to require a lot of us to work together, all together. I mean, it might be joint ventures, it might be just collaborative work. But, you know, we're all in it together and we all understand, I think, that we can definitely together achieve far better and faster than individually and better be a part of something much bigger than own completely something much smaller.

Yeah. And for a long time, at least as of the last several years, it really felt like we're dividing in a big way. And that's how empires fall, is when you don't fall from typically outside forces. You fall from within.

I don't want to go there. What doesn't it work? And, you know, what's the drawbacks of it? It doesn't matter. The bottom line is, you know, from my point of view, from my business, this is a great time. You know, I couldn't be prouder to be the CEO of LightPath for what the team achieved and couldn't be more excited to be the CEO knowing what we have coming ahead of us.

Yeah. Back then, when I took over in 2020, more than 50, probably 55% of the manufacturing of the company was in China. Now, it's below 5%. So, you know, it's drastically changed, right? And we've consolidated the China operation down. It's small. It only serves the Chinese market pretty much. It's just part of the change. But it also comes from, you know, we've gone from making lenses that were extremely price sensitive to now systems which are, you know, less price sensitive or significantly more value add to them in the software and in the engineering, so that we're less cost sensitive and we can produce it in the US. And that's why we could do that change. If LightPath would have continued doing what it did five years ago, just making the individual lenses, it would still be very cost sensitive and it would still have to constantly look for ways to cut the cost down and such. But we went to a much more value added approach. We took a strategic approach that says we need to create significant value in our product to be able to capture significant value. And when you're making components, you're not creating that much value in the immediate product. You're creating it downstream. A really good component will make the imaging system be better, but the component company doesn't make money from that because they're just way down there. Very rarely do they make money. And so you have to go upstream to capture that value and that's where we are. And once we are there, then, okay, you know, we can afford the manufacturing to be more expensive. It actually, you know, it's now required manufacturing to be here. So it worked out perfectly well.

Our margins are just improving and the higher up we go, right? Which is almost the opposite of what one would expect. You go to higher price items, you expect the margin of the percentage to be lower. But to us it's not that way because we went to the camera level, the system level, because we knew that our core technologies, the black diamond glass, the lens fabrication, the optical coating, create value there in that spot. And so we knew that we have to get to that spot to be able to capture the rest of that value, meaning to improve our margins. And so yeah, it looks like, 'Oh my god, they went upstream and the margins go up,' you know, maybe they should keep going upstream. Maybe LightPath should start building planes, you know, and we'll make even better margins. But no, right? We found our sweet spot where we can make the most out of the value we create in the black diamond, in the cameras, even in software. I mean, we are doing much more software now than before.

So even in there, and, you know, we just know that landing here at making subsystems, cameras, maybe a bit higher up, we can capture much more of the value. So yeah, it created this funny situation where our unit prices are increasing and our margin is increasing.

No, no. I mean, you have to write that in the things. Lawyers require you to write that, right? I mean, if you write anything more specific than that, then you get into trouble, I guess. Look, it was a humbling experience. We went out to raise $40 million. That's what we felt like we needed. We wanted to, you know, we have an earnout to pay the G5 guys. We have a small debt we wanted to pay off of $5 million. We wanted to have a small war chest for acquisitions, right? We've shown great discipline, I think, at choosing the right acquisitions that are very accretive to us and we think there's more opportunities like that and I can talk a bit more about that. But we went out to raise 40. We got offers after we did the marketing of it for $250 million. And so, you know, we realized we should increase the size a bit more, both because we can, we were at a much better place, but also because some very large investors, you know, they just won't participate if they can't build a meaningful stake. And there were some great names, I mean, the next few weeks the SEC filings will come out and you'll see who invested and who's done, and there's some great names there, right? And we wanted...

Them in, so we needed to give a bit more, so we increased it to 60. Now, when you have a demand of 250 and you increase from 40 to 60, even that is not enough. So I'm pretty confident—we'll see about it very soon—but I'm pretty confident that many of those players have been out in the market buying more shares for the last week or so. And we see it in the volumes, we see it in the stock price.

Well, I think someone said to me, 'Whenever stock price goes up after you did a raise, that's a damn good sign.'

So, you know, we've shown discipline around the M&A. We know the marketplace, the industry very, very well. So first of all, we buy companies that we know, that we bring to the table something that either we can make those companies far more successful or they can make us far more successful by giving us a shortcut. So there's some things that are obvious that we need to do. We need to increase capacity, increase capabilities around the Black Diamond glass. We need to make larger-size Black Diamond lenses to be able to enter markets of long-range imaging, space, all the Golden Dome missile detection, all of that, right? So some capabilities that we'll develop, some capabilities that we'll acquire. We need more software. We're making more and more cameras. We're making heat seekers. We're making cameras for detecting drones. Counter-UAS has become an enormous driver for us. Enormous. I mean, we haven't announced any major orders recently because they've been coming in in like chunks of two, three, five million, and at our size now that is no longer significant enough to announce, let's say. But the counter-UAS is coming in huge. I mean, the US Air Force has three systems for detecting small drones—they call them the SEWER systems, three versions of them. Every one of those systems uses only LightPath cameras. We're the sole-source provider of the thermal cameras to all counter-UAS systems of the US Air Force. That's huge. We're only getting started there. The 15 million or so that I talked about recently in counter-UAS—that's just for protecting a few bases in Europe. It's not even starting to cover globally what the US Air Force is planning to deploy. So counter-UAS is taking off huge. We're doing that. It makes sense that we'll get into more software related to that. Customers want more integration. They want more offering. We like it. I would not go and develop software from scratch. That's an endless pit, and that's a very, very different business. But I could see us acquiring into that at some level. I could see us maybe acquiring directly, maybe doing some strategic agreements or strategic relationships with some companies. But there's just so much to do right now. The whole NDAA and FCC and counter-UAS and all of that—there's so much to do. No one can do it all alone. So we're going to start seeing much more relationships, I think, within the industry of companies collaborating to co-develop things. You can see that with our friends at Anduril. You can see that at others. There's more and more of that happening. Having a war chest allows us now to go and do that and not worry about, okay, if a great acquisition comes, is it the right time in the market to go and raise money or not. A year ago when we did G5, it wasn't a great time. There's the saying: you don't raise money when you need to raise money. You raise money when you can raise money. So am I going to go and spend 60 million now? Absolutely not. We lived—you talked about the four-year transition—in that four-year transition, we lived with no cash. We were not generating cash. We didn't go to the market to raise cash to burn it. We were living from hand to mouth. So we have that discipline. My CFO's nickname is 'Cash' because he's so obsessed about it. So we have that discipline. We're not going to go and pour that money down. Do we have some acquisitions in the pipeline? Hell yeah. We always said we're going to have one a year roughly. Some of them are going to be really small ones, like a few million dollars, and some of them are going to be big ones like G5. The small ones add technology and capabilities. Big ones add product lines and backlog and the team. And they're going to be different ones. So will I do more than one a year, which is roughly what we've been targeting? Maybe down the road. My team is growing now, so we have more internal resources, more talent. We could possibly integrate more than one a year. But when we acquire a company, we acquire it to integrate it. We're not a holding company, right? So we buy companies to integrate them because one plus one equals three through the integration, through the operations. And so we have to continue to be disciplined at doing it at the rate that we can swallow what we—or chew what we bite off, right?