Good afternoon and welcome to the LightPath Technologies quarterly 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 that this event is being recorded. I would now like to turn the conference over to Ms. Dorothy Cipolla, Chief Financial Officer and Corporate Vice President. Please go ahead.

Thank you and good afternoon. Welcome to the LightPath Technologies' fiscal 2015 second quarter financial results conference call. Our call today will be hosted by Mr. Jim Gaynor, President and Chief Executive Officer. Following our 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 CEO of LightPath.

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. In the second quarter, we made significant progress in the growth of our business and also spent considerable time for longer term and more profitable growth planning. The highlight of our second quarter growth is order bookings, which continued to improve broadly across our business. Backlog for our products was up 8% in the second quarter of fiscal 2015, compared to the second quarter of last year and up 5% quarter-to-quarter. Some of these bookings contributed to our growth in second quarter revenues. Revenue for the second quarter of fiscal 2015 increased 15% to approximately $3.4 million compared to approximately $2.9 million for the second quarter of fiscal 2014 and up 29% as compared to the first quarter of fiscal 2015. The balance of our second quarter bookings with added to our 12-month backlog, which increased approximately 5% to $5.6 million at December 31, 2014, in just the last three months. This backlog, in large part, applies to our aspheric lenses. However, we are now seeing material contributions from our infrared product line. This growth in our infrared product is very exciting measure of our success. Infrared revenues increased by more than 180% year-over-year. Bookings also increased significantly, up 563% in the second quarter of fiscal 2015, compared to the second quarter of last year and up 31% from the first quarter of 2015. These results reflect the ongoing momentum that commenced from the first quarter…

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-Q, which was filed today. I encourage you to visit our website at lightpath.com and specifically the section entitled Investor Relations where we have included the preparations that we have made at recent investor conferences and our annual shareholders meetings. I will now review financial performance and operational detail for our fiscal 2015 second quarter which December 31. Revenue for the second quarter totaled approximately $3.4 million which is an increase of $445,000 or 51% as compared to the same period last year. The increase from the second quarter of last year is attributable to increase in sales of precision molded lenses and an increase of sales of infrared products which Jim addressed earlier in the call. The gross margin as a percentage of revenue in the second quarter was 38% compared to 43% in the second quarter last year. Total manufacturing costs of $2.1 million increased by approximately $415,000 in the second quarter compared to the last year, primarily given the higher revenue level. We also incurred additional cost due to higher wages associated with the overlapping manufacturing workforces during the transition of production between the company's two facilities in China, including seven of our terminated Shanghai staff as the production was moved to Zhenjiang. As we noted in prior calls, the addition of a second manufacturing facility in China increased our global occupancy by 67%, with commensurate increases in rents, electricity and overhead expenses. Beginning in n the first quarter, we felt the impact of the newly added manufacturing personnel. While we are transitioning work to the new facility, margins have been temporarily pressured. Gross margin…

[Operator Instructions]. Our first question comes from John Nobile of Taglich Brothers. Please go ahead.

Hi. Good afternoon Jim and Dorothy. Good topline numbers. That was good to see. And actually if I factor out the change in the fair value warrant liability, it was still profitable, I believe, by a little bit, but you still made a profit, which was a nice turnaround. But anyway, I wanted to get to the second quarter sales to China. If you could maybe breakdown what that was specifically? In that area, how does it look in Q3, given all the news I have been seeing about reduced economic growth in that region?

Well, we have done fairly well in China and continue to be. I think our sales directly into the Chinese market, they are running a little bit below our expectations, but they are still growing. We probably booked close to $800,000 which was a pretty decent number, given what's going on over there and we shipped most of that. And I think we see that number growing slightly in this current quarter, even though we are going to experience their Chinese New Year. So everything will be shut down for a week officially and you have the before-and-after affect around that week. So it tends to be one of the slower quarters over there. But I think we see good progress. And I think it has to do with the quality of the customers we have in China which we have a lot of customers like Huawei and people of that nature whose business is expanding and we have done quite a bit of design work. With Huawei, for example, we have probably done somewhere between, I can't remember exactly, but it is between nine and 15 new designs with some of those starting to go into production. We expect to see a full-blown production level with that particular customer going, starting in May. It has actually started now, but we think the volume stuff will pick up and be running full tilt by May. So that continues to be driven by the telecom infrastructure, driven by the bandwidth demand and those themes that are requiring expanding optical networks. So I think that's good news from that standpoint. We expect to see that. The industrial tool stuff, we have some good customers there. We booked some very large orders the previous quarter. We expect to see that stuff start to build in volume. We have seen some of that. We are seeing some other inquiries where the business is starting to grow a little bit for us. In the optical world, John. I think we are fortunate from that standpoint and the kinds of market themes that are out there that are driving that business.

So that's good. So only because, especially in the industrial area, I figured things could be pretty tight there.

Plus, the Chinese government is starting to stimulate again. So we will see what pertains. That's usually a good sign in the short term anyway.

Okay. You had mentioned about upcoming reduction in operating expenses of 5% to 10%. Is that going to be strictly on the SG&A line? Or do you also plan to reduce R&D?

Well that reduction is through the whole P&L. So there is a significant portion of it that's the cost of goods and that relates to this change in workforce that was implemented in China where we have transitioned out of Shanghai and moved the vast majority of our manufacturing to our Zhenjiang plant. Partly because of the slowdown, there is fewer people hired back in Zhenjiang than we had in Shanghai. But more importantly, the cost of the people in the interior of China is significantly less than they were in Shanghai. So we made that transition. And as we said, we went from about 120 people six to nine months ago down to 29 left in Shanghai, who are professional skilled people. They represent our development engineers and some very excellent administrative people in the personnel and customer support and purchasing as well as our sales organization in China. It could be anywhere. So that's what's going to be left in Shanghai. So we will take advantage of that. So most of that change has occurred and the benefit of that is all at the cost of goods. The other changes that we did is where we combine our -- we had initially set up a separate organization in Orlando to set up and start up the infrared development and production. We have accomplished that purpose. And now we have combine those two organizations together and we have been able to reduce some of the overhead costs that were associated with that. And that represents a few hundred thousand dollars of savings that's in the SG&A area.

Okay. So a few hundred thousand in SG&A.

Well, I think net of everything, as we said, is going to be approximately somewhere between $200,000 and $375,000 to $400,000 a year of savings.

Okay. But I was looking to break it down. It looks like it's shared between cost of goods sold and SG&A, not really touching R&D, but with SG&A you figure a few hundred thousand on a yearly basis savings?

I think that's correct. Yes.

Okay.

It's almost 50/50. If you wanted to split it, John, I would split it 50/50 between cost of goods and SG&A.

Okay. Well, that's good to note and you mentioned a lot of these have happened. I am just curious if there is any reduction in both operating expenses on the cost of goods sold and SG&A. They are going to show up also in Q3. Like are we going to see, well if I factor out SG&A, which I had $1.3 million but you had onetime items in there. So it was about the $1 million or $1.1 million without that onetime nonrecurring item. So at that level, can we expect that to still drop a little bit further going forward?

Yes. I would think so. It's hard to figure that one out, specifically because I will give an example. Our electric cost in Shanghai where we are running all of this, we were spending probably RMB100,000, what was it, a month?

Month.

A month. And running that same level of operation in Zhenjiang now, it's about a third of that. I wasn't expecting electricity to cost so much less by moving in the interior. But it does. So there are some -- the general operating expenses, I think associated with things like that just tend to be cheaper in the new location. So I think we will enjoy some benefits from that perspective. But the major one is the cost of the labor and the professional people that we have hired in Zhenjiang will be a lot lower cost.

And I just want two quick questions I want to throw at you and thank you for taking these questions. In September you received, there was the $1 million aspheric lens order. How many have been shipped in Q2, the quarter you just reported? And what can we expect in Q3 and beyond in regards of that order?

Well, I think that's an order that's still ramping up. I don't have a good breakdown of what we shipped in Q2, but I don't think it was very much. I have to dig into that to give you a decent answer. But we do expect that to start going into production. But it has been minimal up to this point as this is the side of the slowdown in China that we are seeing some impact there.

So that's kind of encouraging to some degree that Q2 didn't really show much of that order but in Q3 and beyond is when we should see it ramping up, selling it to [indiscernible].

Right.

All right. Just one more quick one.

But I will add this John. We had business with that customer prior to that order, a different level of business. When I say different level, it's a higher end type product. We did receive a couple of significant orders for that business going in the several hundred thousand dollars range of business that was growing. So the existing business we had initially is continuing and ongoing and that business, he seems to be doing pretty well with that. This newer business has taken a little longer to get started than he was hoping and again obviously they were hoping. But it's still coming.

Okay. That's great. And just one more quick question in regards to the gross margins and severance costs were a big component of that. Could you safely say that all of those severance cost have been expended or is there a little bit more we can see in Q3? And do you expect, actually in Q3 for gross margins to return to the mid-40% range, low to mid-40% range? Is that a safe bet to say?

I would say, yes. As to the future severance, I don't see it coming on the cost of goods line. I think there might be a little bit more on the SG&A line. But that wouldn't impact the margins.

Okay. That wouldn't impact the margin, but severance could still happen in the SG&A line? To give you that, I know what you were talking about 50/50 mix, probably Jim you had mentioned a few hundred thousand in the outlying, so we can see that reduction going forward in Q3?

John, just so people understand, in China, you pay the severance when you let the people go in total and those people are gone. The only time it doesn't get paid right away is if you get into a dispute. In other words, a person decides he wants a better package than you offered him, which is all defined by their labor laws. So it's kind of a funny situation. But they can go to the labor board and dispute it. And if they don't get a favorable ruling there, they can then take it to the next step, which is a civil court. Out of the roughly 80 people that we let go, we have one person who is in that situation. The labor board has denied his claim. So now whether he is going to go to the next step or not, we don't know. But that's the only one that hasn't been paid out of the Chinese severance, which is all covered.

Okay. So in that region, obviously, it looks like all the severance cost have been expended.

Yes. So the majority of this cost has been recognized and run through the P&L already.

Okay. Great. Well, listen, thanks for taking my questions. That's all I have. I will leave it open for anybody else. Thank you.

Okay. Thank you.

[Operator Instructions]. At this time, it appears that there are no further questions. I would like to turn the conference back over to Jim Gaynor for any closing remarks.

All right. Thank you. In conclusion, I guess we appreciate the support of our shareholders and the dedication of our global team at LightPath. We remain focused our efforts to drive revenues for our product lines and in particular our precision molded optics and our infrared product lines. And ultimately benefit the leverage in our business to improve our profitability. With the progress that has been made and our plans for continued execution, we look forward to delivering long-term profitable growth, which may deliver meaningful returns for the benefit of our shareholders. Thanks again and we look forward to speaking to you with the next quarter report.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.