Interview with Don Lawson....Don Lawson, President and CEO
LightPath Technologies, Inc.
RCG: Don, give us a brief overview of LightPath Technologies, its business and some of the history behind the Company?
Lawson: Thanks, Joe, it is a pleasure to talk to you today. I think that LightPath is a unique story and I am very pleased to discuss it with you today. Let me start by saying that what was created by the founder of the Company, Leslie Danziger, was no small feat. The research and development that took place over a ten-year period created the process and ability to produce a totally new and unique optical material. While a number of companies had made attempts over the years, no one was able to achieve a repeatable, cost effective manufacturing methodology that could yield the results of an axial gradient index material. Many different groups tried and gave up. While this material, which we call GRADIUMr glass, is a breakthrough in its own right, it is the full range of the proprietary technology that we have developed that is now beginning, and will continue to enhance light-based technologies and industries. At the time of the Initial Public Offering (February 1996), our manufacturing process yielded material based only upon the flint glass family. We have since added, to meet specific customer needs, follow-on breakthroughs with crown glasses, titania silicate glasses, polymer material and specialized glass fusion techniques. This is the beauty of our patented technology; it can be adapted to process any number of different types of materials, which gives us and the customer a high level of flexibility in integrating functionality into product solutions. It is even more significant when you roll in the fact that we have now proven that our materials can be scaled up to high volumes and with increased manufacturing efficiencies.
"The most significant way to bring increased value to all classes of shareholders is to ensure that the Company becomes profitable and to establish a market position conducive to long term, sustainable growth."
RCG: Don, your company seems to be in the transition from a research and development shop to a fully operating manufacturing and marketing company. At this early stage in the development of the company, what strategic direction are you looking to take the company in? How do you plan to increase your revenue base?
Lawson: I realize that the most significant way to bring increased value to all classes of shareholders is to ensure that the Company becomes profitable and to establish a market position conducive to long term, sustainable growth. I believe that this is the pathway that the Company is on and that we have taken a number of steps over the past six months that will prove this out. The most significant of the steps taken was to shift our sales, marketing and product development focus away from the general optics markets to the markets of optical telecommunication components and modules. While GRADIUM lenses will continue to be sold into the laser markets with good margins, it is clear that telecommunication products that enhance the bandwidth shortage currently being driven by Internet growth are very much in demand. I believe that when you hear terms and phrases such as bandwidth demand, all optical network, short haul WDM, and optical cross connects, you should keep in mind one key common denominator - the manipulation of light. This is what our proprietary material and technology does so very well, and this is where I believe our resources are best focused to increase the revenue base, achieve profitability and bring increased value to our shareholders.
RCG: I see that in your first two years of operations, the Company's product shipments have started to grow. What's your sense of what it's going to take to get the Company to the next level of its development?
Lawson: Joe, I think the key for LightPath at this stage is to ensure that the resources of the Company remain focused to achieve the strategic objective of positioning the company as an optical telecommunications components company as opposed to just an optical materials company. We will release a steady stream of new products into the component and module levels of these telecommunications markets. Each of those new products must be value-added and able to appropriately address the market's demand for increased bandwidth and efficiency as well as price pressures. I also see the need to actively pursue strategic alliances to supplement our internal product development programs.
"Targeted customers are currently testing the collimator products and the first scale-up production orders are expected over the August to September time period."
RCG: What are your initial product offerings in the telecommunications field?
Lawson: Our first value-added optical telecommunications product is a Single Mode Fiber (SMF) Collimator. The collimator is a logical starting point for us because it is a "common-denominator" in the assembly of higher value devices. Not only will it lead to a sustainable market position for the Company; it can be used as a significant "calling card" to get into every telecommunications OEM in the world. This will set the stage well for follow-on products now in our plan. Targeted customers are currently testing the collimator products and the first scale-up production orders are expected over the August to September time period. To target this specific telecommunications market, which is conservatively estimated at $65 million today, the LightPath collimator offers superior performance in the areas of back reflection and insertion loss, it is 50% to 67% smaller and we are manufacturing it at a cost that will allow for breakthrough price reductions. In getting this product to market, we have also developed and expanded our GRADIUM technology with a unique glass fusion process that we have patent protected.
"We estimate that the collimator line has the potential to be a $20 million business for us in a three year time period. But, whether or not we attain that goal, of key importance to us is that it will position us to become profitable and open the door for subsequent new products."
RCG: What do you see as potential application opportunities for the collimator product line and the revenue potential?
Lawson: The collimator is a primary component of most of the modules that make up a telecommunications system level product. Examples include isolators, circulators and wavelength division multiplexing systems. The collimators are used anytime that you need to take light out of the fiber and then re-insert it back into the fiber. The objective of the unit is to collimate the light beam symmetrically and minimize insertion loss and back reflection. I said earlier that the $65 million market estimate is conservative primarily because we are still researching the impact of the emergence of telecommunication systems in the Asian markets. We estimate that the collimator line has the potential to be a $20 million business for us in a three year time period. But, whether or not we attain that goal, of key importance to us is that it will position us to become profitable and open the door for subsequent new products.
"The general optics area that continues to move forward for us, is that of medical endoscopes where we have an exclusive licensing arrangement with the German manufacturer, Karl Storz GmbH. Storz has recently moved out of the start-up phase of our contract into the first production year."
RCG: Don, you mentioned earlier that you have shifted your focus away from the general optics area. Why has this not worked out for you as well as you initially thought?
Lawson: With the exception of sales into the YAG laser markets, which have done very well, the conversion of the general optics areas to GRADIUM glass has been slow. However, the general optics area that continues to move forward for us, is that of medical endoscopes where we have an exclusive licensing arrangement with the German manufacturer, Karl Storz GmbH. Storz has recently moved out of the start-up phase of our contract into the first production year. While I cannot talk about the specifics of the contract, the production phase is highlighted by royalty payments to LightPath based on the conversion of various endoscope product lines to incorporate GRADIUM glass. As I mentioned, the general optics areas, which I define as cameras, microscopes. riflescopes, endoscopes and binoculars, have been slow to convert. We targeted those areas initially because we believed that it coincided with the existing stage of development of our technology coming out of the lab environment. While we learned that many of these applications immediately required the development of the crown glass families, they also proved out to be predominantly a "blank" business that is centered in Japan, Taiwan and China. A "blank" type of business is where the customer is interested in buying only the base GRADIUM raw material and then they put the balance of the finishing labor into it themselves. This is obviously the lowest level of entry and one with the least value-added. The time that it has taken for us to work through the development of GRADIUM glass into products of Fuji Photo Optical Co. is a good example of this. While this is still moving along in a positive manner and we obviously want to close this deal, we have been at it with them for about eighteen months. For these reasons, the Company will put minimum effort into expansion of the blank type of business associated with these consumer optics products. I will rely on our existing strategic alliance in place with Hikari Glass Company in Japan to facilitate this business in Asia. Accordingly, as we have a better understanding of our technology as it expands into new materials and processes, we will be directing it at telecommunications products further up the value chain where they can have the greatest impact.
RCG: You mentioned a couple of times about your first telecommunications product being the catalyst toward getting the Company to profitability. What type of time frame do you see?
Lawson: The collimator market size and the penetration that I anticipate in the first year will get us to a profitable status. Our sales into the laser markets continue to grow and these are at excellent margins. The Company's cash position remains solid as reflected in our last quarterly filing where we had a little over $5 million in cash. While we are bringing the collimator and follow-on products to the market place, I have also initiated a level of expense trimming. My objective has been to scale back on various administrative areas and ensure that the nuts and bolts of the organization, Sales, Product Development and Manufacturing, are appropriately staffed and funded to bring these telecommunications products to market. All of these steps have been taken to ensure that the Company becomes profitable and to establish a sustainable, long-term position in key optical telecommunications markets.
RCG: Along the line of our discussion about the telecommunication market, can you talk for a minute about the subsidiary that you set up last year called LightChip? How do you see this impacting shareholder value?
Lawson: I would be happy to. LightChip was set up to target the WDM market for the metro or short-haul market. Many people may be aware of the success that Ciena (Nasdaq: CIEN) has had in a relatively short period of time in the WDM area for the long haul market. We believed that GRADIUM glass will enable these short haul products, and that the most aggressive way in which we could get a system level product to market in the fastest possible time frame would be to have a totally separate and singularly focused management team. Because of our equity ownership position in the subsidiary, we also felt that this strategy would bring significant value to the LightPath shareholders if LightChip proved out to be successful. In addition, at the time it was set-up, we were not in a position financially to fund it ourselves, but we did not want to lose out on the timing of this market opportunity. So, we hired an excellent management team and gave them the keys to the car, so to speak, and sent them out to find fuel. They have responded by raising $1.0 million in seed money, which they have used to build the first demonstration models and create an outstanding business and product strategy which will soon result in the closure of its first round of equity financing. I believe that LightChip's exclusive access to GRADIUM glass gives them a sustainable advantage over other methodologies that are racing to get into this emerging market of short haul WDM systems, which is one of the hottest growth markets in telecommunications today.
RCG: The explosive growth of the Internet has fueled a need for significant bandwidth expansion. It would seem that the company that comes to market with an effective solution first will be king. Tell us about LightPath's bandwidth expansion strategy and timeline?
Lawson: The truth is that Ciena got to the market first in the long haul area before many people even understood what WDM meant. It is also interesting to understand that they originally began their business to be focused into the cable industry but made a shift at an opportune time. While it will be hard for anyone to duplicate that accomplishment because of the attention the industry is currently drawing, clearly the race is on for products that facilitate the migration down from the long haul markets to the metro and local area network markets. Products that work in long haul do not necessarily work in the local markets because they cost too much and are too large and bulky. They have been built with a brute force type of technical solution that will not work in the local markets. A good correlation is that of the personal computer as it moved from the main frame type of systems to lap tops and from the office to the home. Quality and efficiency kept increasing while cost was going down. Bandwidth demands are being driven in a similar manner and therein is our strategy. What is needed is the ability to solve optical packaging problems by integrating functions in a more elegant way and at the same time reduce part count and complexity. That is how you get the cost down and this is what our technology provides. Joe, you also asked about timing and I can tell you that LightChip will have its 33 channel mux/demux product on the market in 1999 and the first basic switching products from LightPath will come around the same time.
RCG: How does the spate of recent M&A activity, and all of its implications, in other words greater financial resources, expanded R&D capabilities and compressed time to market, impact your bandwidth strategy and your relative position within the industry?
Lawson: When I was invited to present our Company at the Soundview Photonics Conference two months ago, it was alongside of the largest players in the telecommunications market today. The messages that came out loud and clear is that the influence of the Internet on bandwidth demands is larger rather than smaller than what most analysts predict. Also, that product offerings that will prove out to be successful are those that provide increased capabilities allowing systems to move closer toward truly being "all optical", smaller packaging and, of course, cost reductions by orders of magnitude. These attributes and characteristics are the cornerstone of our proprietary body of technology and the key to our entry into these markets. The deals and mergers that have been taking place caught a number of people off guard. Ciena's $7 billion valuation only eighteen months after its IPO is staggering. Obviously, first the technical community and now the financial community has sat up and taken notice of the significance of systems that can expand the efficiency of fiber optic cable to handle the growing bandwidth needs. I think for LightPath, our opportunity beyond collimators and LightChip, with its WDM product, lies in jumping up the product development chain to the next critical bottleneck of switches, or more specifically optical cross connects (OXC). Just like the short haul WDM discussions that were taking place twelve months ago, companies are already in disagreement over the timing and capability of new product releases. Early releases are already predicted to be coarse, limited in capability, and expensive. But as volumes go up and users start looking at different switch matrices, the successful product entries will be those that bring enhanced capability and push down the costs. Ultimately, these cross connects will be incorporated into the short haul WDM products themselves. This is where I then believe the synergy between the product offerings of both LightPath and LightChip will come into play in a large way as these systems are merged together.
RCG: Don, the situation with the investment banking firm that brought your company public, has been a bit rocky in the last 12 months. Clearly, it's had a negative impact on your stock price. Update us if you will on the situation surrounding the market-making and trading in your stock?
Lawson: It is unfortunate that one of our market-makers was sold but business still goes on. Ever since the IPO was completed, we have worked diligently to get our story out to market-makers and institutional buyers. While we have some levels of success to-date, I am not satisfied with our overall performance. One draw back that we constantly run into is our own capitalization structure. While it is not overly complicated, the fact that we have two classes of warrants does stop many groups from becoming more active with the trading of our stock. We continue to work to improve this situation. As our stock remains thinly traded, it does leave it open to swings in both directions. Clearly, the Company's communication of material news influences that. I believe that delivering on the strategic directions that I have spoken to today will most influence our price and value to all our shareholders.
RCG: Don, thanks for your time and insights on the progress of LightPath. We'll look forward to checking in with you later in the year. If any of our readers would like to communicate with you, how can they do so?
Lawson: The best way to contact us is via e-mail. I would appreciate any comments to be emailed to me at dlawson@light.net . I appreciated the opportunity to talk with you Joe, and your readers. Thank you.
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