Good afternoon and welcome to the LightPath Technologies Fiscal 2021 First 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, today's event is being recorded. I will now pass the call off to Don Retreage, Chief Financial Officer, LightPath Technologies.

Thank you. Good afternoon. Before we get started, I would like to remind you that during the course of this conference call, the company will be making a number of forward-looking statements that are based on current expectations and involve various risks and uncertainties, including the impact of COVID-19 pandemic that are discussed in the periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable. Any of them can prove to be inaccurate, and therefore, there can be no assurance that the results would be realized. In addition, references may be made to certain non-generally accepted accounting principles or non-GAAP measures, for which you should refer to the appropriate disclaimers and reconciliations in the company's SEC filings and press releases. Following management's discussion, there will be a formal Q&A session open to participants on the call. I would now like to turn the conference call over to Sam Rubin, LightPath's President and Chief Executive Officer. Please go ahead.

Thank you and good afternoon. Welcome to LightPath Technologies fiscal 2021 first quarter financial results conference call. Our financial results press release was issued after the market closed today and posted to our corporate website. Following my remarks, our CFO Donald Retreage will further review our financial results and provide more perspective on key areas. We will then conduct a Q&A session. Now, on to my remarks. Strong sales performance in the first quarter of fiscal 2021 reflects our continued trajectory of growth and performance improvements as well as initial impact of the strategic review we presented when addressing our yearend financial results. Our growth and strong performance can be seen both sequentially compared to the fourth quarter of fiscal 2020 as well as compared to the first quarter of last fiscal year, a quarter in which we suffered from significant operational challenges which impacted results in that quarter. Despite the coronavirus pandemic, which has disrupted supply chains and caused an economic upheaval, as an essential manufacturer we have been able to deliver strong results and have positioned the company for more profitable and long-term growth. Against the backdrop of the pandemic and other socio-economical issues, there have been many challenges. I would like to commend our global staff for their resilience, commitment and continued effort to support our customers while adhering to the health and safety protocols to protect our coworkers and their families. Sales of all major product groups increased in the first quarter 2021 on prior-year period. Most notable has been the demand for our PMO lenses for the 5G infrastructure buildout and from our vertically integrated manufacturing platform for optics and optical assemblies made with our own BD6 material. We shipped approximately 1.3 million lenses in the first quarter, another record for the company, which is…

Thank you, Sam. First, I'd like to mention that much of the information we are discussing during this call is also included in the press release issued earlier today and in our 10-Q filed with the SEC. I encourage you to visit our website at lightpath.com and specifically the section titled Investor Relations. Now onto my remarks pertaining to the fiscal 2021 first quarter ended September 30, 2020. Sam's remark covered a lot of our financial performance. So I will be specifically discussing some of the key performance areas. Revenue for the first quarter of fiscal 2021 was approximately $9.5 million, up from $7.6 million in the first quarter of fiscal 2020 and $9.1 million in the fourth quarter of fiscal 2020. This marks the highest level of the first quarter revenue in the company's history. IR product revenue was $4.7 million in the first quarter of fiscal 2021 or 50% of the total revenue, up from $4 million or 52% in the first quarter of fiscal 2020. Visible precision molded outfits or PMO products' revenue in first quarter of fiscal 2021 was $4.3 million or 45% of the total, up from $3.2 million or 42% of the total in the first quarter of fiscal 2020. The balance of our revenues for the first quarter was $491,000 from specialty products and nonrecurring engineering projects, which vary greatly from quarter-to-quarter, but are substantially smaller contributors to the consolidated revenue. Revenues from this group in the prior year period was $408,000, so we realized a 20% improvement. With respect to our margin profile, generally speaking, PMO products is smaller and almost entirely molded. So we have faster turnaround time, higher volume applications and more automated processing. These products also are generally lower in price. We historically have a margin averaging in the…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Hi, good evening. Great results.

Thank you.

Can you talk about - I think last quarter you gave a manufacturing capacity number? Can you talk about where you are today? And with the investments you're talking about for the rest of the year, where will that be, say mid-2021 or at the end of 2021? What's your goal to get to?

Well, our goal for the entire year as I mentioned is $2.5 million as a firm number. However, we will adjust accordingly based on the continuous flexibility of where logistically we need to adjust, number 1, to choose for COVID-19; and number 2, how we can better collaborate with our manufacturing processes.

$2.5 million was a CapEx number, right?

Correct.

Yeah, what about in terms of unit? Sorry, I should have stated that more clearly. Where are you today in terms of capacity, your ability to - the number of units you can manufacture? And where do you hope to get to a year from now?

A year from now, I mean, our speculation is that it will probably be closer to double, okay, with our capacity unit based on our PMO. And again, on the IR, it's not going to be as much even though we are increasing.

Got it. That's helpful. And then in terms of the DLC coating on BDC, as I understand, it's important exterior facing IR lenses. Do you know roughly what percentage of IR lens sales maybe that you have or in general are exterior facing lenses that need that DLC coating?

Yeah, typically a minimum design of an optical system would be 2 lenses. So in the most basic optical system, 1 lens would be facing outside, 1 lens internally, then all internal surfaces are coated with a different coating, a much more standard thin film coating called AR, anti-reflective. In more complex systems, if you're talking about static systems without the dynamic zoom or change, it could be 3 or 4 lenses. In much more complex systems, it can be up to 7 lenses or 8 lenses.

Got it. It's great. So as competitors I take it that are going through the process of selling a similar version of what you're selling in terms of a generic germanium. Are customers, are they generally being as successful as you? Are you taking much more market share given this DLC, I would think, given how would they handle those exterior facing issues that the generic has?

The DLC is definitely an advantage. To my knowledge in the U.S., there's 2 other companies that can do DLC on chalchogenide, some material like our BD6, probably another couple outside the U.S., so there's definitely an advantage there. What is really unique in terms of LightPath and our advantage is, when this comes from the integration of ISP and LightPath is our ability to combine the molding technology with standard fabrication technology for large lenses. Typically, one can mold lens up to a diameter of 1-inch about. Above that is difficult to mold the lens and get consistent results. So above that, usually what one would need to do is to fabricate the lens using other techniques which are far less cost-effective than molding. What we have developed and patented, and I think we issued a press release on that patent about half a year ago, is a technology that allows us to mold the lens into near shape, so very, very close to the final lens, and then on the cut shift, where our fabrication equipment at the very end just to get the final result to be a perfect optical surface. So it's really combining the best of both worlds. And as far as I know, that is one of our biggest advantages and allows us to offer cost effective, large diameter chalcogenide lenses.

Great. 2 more questions I have. The first is within the current situation of where we are with the pandemic coupled with the U.S./China tensions, has there been any change to the pace or expected pace of the 5G roll out in China?

We have not seen any change in that. We monitor it regularly and we also raised the question every time we hear about any updates from other companies. As far as we know, any changes that other companies have seen are mostly related to other elements of the 5G and not the optical infrastructure. We have not seen any change in the demand. Now, it could be that there is a change in the demand and it hasn't yet reached us or that it is impacting more of our competitors because there's multiple vendors often providing to the same customer. As of now, we have not seen a change for the demand, and we keep receiving orders from 5G related customers in China on very regular basis.

Great. That's helpful. Last question I have, which is related to the 5G rollout in China. Well, during the Chinese New Year as I think about seasonality, will that be impacted? Will you see lower volumes? Or will you be able to replace that demand with other customers?

Yeah, well, what happens there and I reflect back on the 6 years I lived in China and have been through that is in preparation of the Chinese New Year holiday, typically, companies or employees work weekends and companies operate over the weekends and far more than usual in order to build up the inventory and whatever is needed in anticipation of the downtime during Chinese New Year. The Chinese government even mandates that while the holiday formerly is only 4 days, if companies want to give a 7-day holiday, they have to substitute those additional days with days over weekends and that's how output isn't impacted. So I've lived through that and seen it, and our operations have and other operations both foreign and domestic live by that and have really built I think a very stable flow during that time.

Great. Thanks for answering my questions.

Our next question today comes from Gene Inger with IngerLetter.com. Please go ahead.

Hi, Sam and Don. It's The Inger Letter, not injure, and we hope to not injure investors. But guys, it was an interesting quarter, interesting comments that have been made. So let's with China. So Sam, you were talking about China. And when I look through the report and listen to what you said, it looks like you had the majority of the increase that's 4% sequential, which is not that impressive. The year-over-year it's another world we're in right now, I understand. But it looks like business perked up in China from 5G and contracted with infrared or contracted other than in China. Is that correct basically?

So, Gene, in our record and our track that we have right here for the past 1, 2, 3, 4 quarters including this one, the telecom increased for us from 12% to 21% of our income. Sequentially, 12% to 19% to 22%, and this quarter was down just a little bit, because of capacity constraint. It has been increasing ever since as far as telecom is concerned and China is concerned.

And as far as Europe, I know it's in the side. But just today, the United Kingdom talked about starting to vaccinate probably the Oxford vaccine everybody in England starting next month. So if you're envisioning a slowdown in Europe, I guess you're also envisioning that that would pick up and give you sort of a compounded growth from both areas, Europe and China, not just North America, if we get through COVID, which ultimately, we must?

Well, we're not envisioning a slowdown in Europe as much as we are relaying information, we've received from customers about possible impact from the stay at home orders or closures that they see in Europe. And hopefully, everything gets resolved quickly everywhere, and we can all go back to normal.

Well, from the standpoint of investors, I think - because I heard somebody, unless I misunderstood, maybe Don have kiddingly suggested top PMO business might double in a year. So I could see, and I've referred to - for the LightPath's stock as a speculative long-term investment with not too much risk as a growth stock, but what would you say to traders are shorter-term oriented people that really have a 3 to 6 month visibility, because the volume has been low? It ran up at 1 point in the summer. Is there a short-term reason for a player in the market to be interested in this company or only for long term growth?

First, let me clarify, Gene. The question I understood it was to ask about the units. And based on our run rate, we see we're increasing, I mean, 25%, 30% every quarter. So my answer to that was that the PMO could easily double within a year unit wise. Remember, these are billion lens. It could based on our capacity constraint, but the run rate that we're using, that would be that, providing nothing else happens and telecom continues.

Okay. This may all be fine, but I see by the relatively steady growth since the company really turned around more than a year ago digested the cost of ISP, divesting New York and so on, and that's all great. But I think the new direction that Sam refers to, I don't know if it involves autonomous driving modules for different companies or devices for companies like SpaceX or Velodyne or others you might be working with. But I would hope that you're not concentrating on only for your core customers that make up a big portion of the business as I think was the case in the past. Could you guys reflect on that perhaps?

Absolutely, right. We're diversifying both in customers and industry is something we see as important. And something that really almost comes naturally from the fact that the optics get integrated into many different technologies and industries. So I don't think we have any specific industry today that accounts for more than 20% of our revenue. That third - to answer your earlier question about timing, I think it's important to note that we are in here for the long game. Investments we're making, decisions we're making, the path we're taking are all because we believe there is tremendous value for us to create in the long-term for shareholders and have - while we always try to improve everything as quickly as possible as we can, we are not doing this to achieve quarter-to-quarter big bangs necessarily as much as we're focusing on building something stable and strong that can grow further.

Okay. Sam, if I might ask one more thought. Is this a little bit as you're transitioning even further and your business looks promising, especially as we get through COVID, it's infrared and so on. Does this give you this integration and devices almost like a little - it's not Taiwan Semiconductor or a little Foxconn, where you have a core business, but they expand that in doing work for others. So you end up perhaps assembling devices? I don't mean to put words in your mouth, I'm just asking. And you're actually bringing in components from other vendors in order to do assembly works, not just design?

Yeah. So that's a very interesting point, because very often in our world, the optics are one of the most sensitive parts of assembly, given the sensitivity to dust and such. So it would not be completely unheard of a customer wanting us to do more than just the optical assembly, since people do not want to touch such part of the system too many times. So it could be in the long-term, but it wouldn't be out of an attempt to be a contract manufacturer as much as it would be a service to the customer that can just enhance our offering and services in optics.

Well, I sort of asked this because what you're talking about with design goes beyond even a Foxconn because what - and you know them from China, because what I sense is you're talking about being more - almost an integrated manufacturer, which would really elevate the perception of the company, if you're doing that because you're not just talking about design. Let's say, well, we use Apple. They design something and they give it to Foxconn or they design an arms chip and they give it to TSC in Taiwan. But they are the designers. You're talking about doing the design to meet the customer designer. I think it's a really good idea and obviously creates residual or annuity style income, which I'm guessing is what you're shooting for.

Yeah. That would definitely be a nice outcome. I'd say that also optics had someone different - well, has many, but one very important difference compared to say electronics and PCB, and that is the uniqueness of the knowledge and that the transfer from the design to the manufacturing is not as straightforward as sending prints or feeding into an SMT machines' program and just letting it to run. And I think that uniqueness and that very particular expertise needed in optics is the reason why our customers entrust us with such parts of their business, and why they also believe and sort of do that we can create a unique value compared to them doing it in-house or giving it to their contract manufacturer to do.

That's helpful. First of all, I like the vision, Sam. And I think if the performance is delivered, I suspect that the market cap of the stock will reflect that eventually. But basically, I'll let you go with a last thought and congratulate you on the work you guys are doing. But the last thought might be a question, if you could expand a little bit more on how your linkage comes into some of the new technologies, AI, AR, autonomous driving, even the safe program, which you're somewhat connected with?

Sure. I mean, that's something probably I can talk quite a bit at length about and bore everyone. But photonics is an incredible technology. It's something that's enabling so many places. And 20, 30 years ago, photonics had some applications. Today, the number of applications and uses for photonics have grown exponentially and continue to grow. And that's part of the beauty of what we do. We are enabling other technologies, other industries to make use of this technology by providing this expertise. And I've seen that throughout my career how this is growing, and I continue to see it. And to me, it's an exciting thing because it's living up to the potential of a life changing technology.

Thank you, Sam. I appreciate it. I'll let somebody else ask questions.

Thank you, Gene.

[Operator Instructions] Our next today comes from Jeff Peterson with [Ridge Furrow] [ph] Capital. Please go ahead.

Thanks, guys, for taking my question. Can you talk about the gross margins of the BD6 molded lenses versus diamond-turned infrared lenses? And what are the differences between the manufacturing processes?

The difference between the BD6 lenses, which is still a new product for us is that the range could be from 17% to 23% on the gross margin range. That's getting better as our yield comes up and as raw material goes up. On the IRDT, it could be a bit higher because they're bigger and it's - the average selling price is also higher.

So maybe just to add to that for me. From a technical point of view in the IRDT, the material is one of the main drivers of the price, and it's outside of our control. So the material is naturally occurring material. It's not synthetic, cannot be produced. And so the price of it really depends on the availability of the material from mines in Russia and China. And any fluctuations there greatly impacts gross margin. In our molded BD6, really what our technology and our innovation, similar to what PMO was in the earlier years is something that really scales with volume. So fairly a high investment at the beginning, if you are only making very low volumes but really grows to substantially better margins over time when volumes increases. We are early on in the adaptation of molded BD6 into customers' designs. It's naturally going to happen this way because many of the designs have a long-life cycle, and you cannot replace existing designs in aerospace and defense. So we work today on designs that will become production maybe 2 years from now. And so we're not really fully absorbing the costs of the BD6 molding and the production of the BD6 glass until we reach certain volumes. But when we do, there's no reason, why the margin and the long-term of molded BD6 would not be similar to PMO.

That's very helpful. Thanks. Who is your largest infrared customer? And can you discuss the various products they buy from you and the size of these contracts or expected renewals?

Our largest infrared customers' is - you're not going to look at our vertical. First of all, for most of our customers in this area, we have NDAs where we cannot disclose their name. But in our verticals, I mean, we're covering defense, industrial, medical. And in those areas, I mean, for example, in the defense industry, we have grown with average of our total revenue between 39% and - 34% and 39% in our industrial area - in the defense, sorry, between 4% to 10% of our revenue. I mean, industrial is about 34% to 43%. I mean those mixture of infrared and the commercial is also a mixture because of the lens, the riflescopes are used both in defense. They are used both in some industrial and qualify also in commercial.

Annual contract?

And we have an annual contract with one of our biggest customers, which is between $5 million to $6 million a year, and that is mostly the telescopic lens that they use for rifles, I mean hunting and also some of it, I think is defense.

That comes up for renewal in the current quarter with it.

Yes, that's every November/December.

Okay, thanks. That is all my questions at this time.

Hey, thank you.

And our next question today comes from [Brian Perganin] [ph], a private investor. Please go ahead.

Hi, guys. I appreciate you taking my call.

Absolutely.

I have a question with regards to, with you being an essential business and being able to have operations up and running in China basically saying, giving you the go ahead to run your operations. Considering you're running at full capacity and basically 24/7, I'm a little perplexed with that as to how earnings weren't better than what they were. I understand the 26% year-over-year. Gene touched on the 4% sequential. It's perplexing how earnings aren't better, revenues aren't better when you've expanded operations. So I guess my question is, had you not expanded operation and you weren't running at full capacity as you are, would we be looking at a significant loss or a loss at least we could say in earnings?

No, I don't think we'd be looking at the loss. I think we have a stable, consistent operation now. And we've done quite a bit in the last half a year to achieve that. I think what you're seeing is 2 different things, like I break it out into 2 different things. One is we have in our molded optics, in our PMO, we have really what I'd call 2 very different price ranges. And one the telecom, which is the lowest price range and single [dollars] [ph], but fairly good margin. And the other is the medical and others, which are higher unit plays and a different type of margins to them. When we added capacity, we added it because at that time, we had large telecom orders, which again are the lower unit size. And so, it is not as visible in the dollar of revenue. But you can see it very clearly in the number of units we produce, and the very nice consistent growth in that. This is not to say that it would remain forever like this. Our product mix changes and there were orders from different industry change. And we also navigate that knowing what capacity we have and what orders we want to win. It's very possible and expected that some of that capacity that we added at some point down the road, and again, telecom, usually a rollout like this 5G last for 3, 4 years. So at some point down the road, some of that capacity that we added is going to switch over to products with higher average sale prices, and we'll see the impact from the revenue. On the bottom line, I think this quarter specifically, we had a few expenses. One of them is the $300,000 tax to China for the dividend, which really impacted our earnings per share. Otherwise we would have expected our earnings per share without that expense and the couple of other onetime expenses that are important for us for the long run, but really, we don't expect them to occur every quarter. Then we expect our results, our bottom-line results continue to be as strong as we've had in the last couple of quarters.

Okay. So without those couple of expenses you referenced, you would have seen several cents per share in earnings?

Yeah, yeah, $0.02, $0.03 probably.

Okay, what would you say to investors from the standpoint of the lack of insider buying, because I know you guys have this vision, and we saw, as Gene had mentioned, your run up in the summer in the stock and it - you basically pulled back some 50% to 60% in price? And I know if there has been a - you had a recent insider purchase of - I forget what it was, 3,000 or 4,000 shares. But what would you say to investors to the point where there is very little insider buying? And I know there is some option based on - incentive options based on the price of the stock. But nothing gives investors more confidence than seeing true meaningful insider buying as opposed to a token several thousand shares.

Yeah, I think we do - I cannot speak for others, I can speak for myself that I buy if possible and when possible depending obviously on our blackout and different personal cash flows. But I would also remind that we just - that our fiscal year ends on June 30. And from that period until early recently, we were in a very extended long blackout period, in which we obviously could not trade anything as much as we would have loved to because we all felt the share prices be low and a very good buy.

Okay.

That's all the questions we have. We will now pass the call back to management for closing remarks.

Thank you for participating on today's conference call. We look forward to speaking with you next quarter. But until then, we encourage our shareholders to join us as we conduct our virtual annual meeting on November 12. We also will be participating in the Diamond Equity Research Virtual Conference on December 1 and the 23rd Annual Needham Conference in January. We hope you join us to continue to follow our progress. Thank you again, and goodbye.

Thank you. This concludes today's conference call. You may now disconnect your lines and have a wonderful day. 1