Good afternoon, and welcome to the LightPath Technologies Fiscal 2021 Second Quarter Financial Results Conference Call. [Operator Instructions] Please also note today's event is being recorded. I will now pass the call off to Don Retreage, Chief Financial Officer of LightPath Technologies. Please go ahead.

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 its periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can be proven to be inaccurate, and there can be no assurance that the results will 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 over to Sam Rubin, LightPath's President and Chief Operating Officer -- Chief Executive Officer. Sam?

Thank you, and good afternoon. Welcome to LightPath Technologies' fiscal 2021 second quarter financial results conference call. Our financial results press release was issued after the market close 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. I'd like to start out by expressing my encouragement from the progress we are making on driving our top line growth and growing the organization amid the limitations imposed on all of us by the COVID-19 pandemic. We have made significant strides with advancements on our longer-term strategic growth initiatives in the first half of fiscal 2021, which was underscored by achieving record levels for consolidated quarterly revenues and total backlog at the end of the fiscal second quarter, although with lower margins than we targeted, which I will address shortly in my comments. While the growth drivers of our business remain intact and relatively insulated from the coronavirus pandemic, we have been hitting some roadblocks caused by it. This has primarily been in the aspects of the business that require travel, such as recruiting of senior-level employees from out of town, as well as service of some of our manufacturing equipment, which has been impacted by limitations on travel of service staff. Those limitations primarily impact the operations side, and in particular, our ability to implement some of the efficiencies and changes we would like to make, and at the rate we would like to see those changes happen. We're still very proud of our team to be able to implement the improvements they have and grow the business at a double-digit rate in spite of those challenges and limitations. On an…

Thank you, Sam. First, I would like to mention that much of the information we are discussing during this call is also included in a 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 on to my remarks pertaining to the fiscal 2021 second quarter and half year ended December 31, 2020. Sam's remarks covered a lot of our financial performance, so I will be specifically discussing some of the key performance areas. Revenue for the second quarter of fiscal 2021 was approximately $9.9 million, up 4% sequentially from $9.5 million in the first quarter of 2021 and up 3% from $9.6 million in the second quarter of fiscal 2020, when we had about $0.5 million in holdover revenue from the first quarter 2020. Revenue for the first half of fiscal 2021 was approximately $19.4 million, an increase of $2.3 million or 13% as compared to $17.2 million in the same period of the prior fiscal year. Infrared product revenue was $4.8 million in the second quarter of fiscal '21 or 48% of the total revenue, down from $5 million or 52% in the second quarter of fiscal 2020. Visible precision molded optics, or PMO products, revenue in the second quarter of fiscal 2021 was $4.7 million or 48% of the total, up from $7.7 million or 39% of the total in the second quarter of fiscal 2020. The balance of our revenues for the second quarter was $372,000 from specialty products and nonrecurring engineering projects, which vary greatly from quarter-to-quarter, but are substantially smaller contributors to the consolidated revenue. Revenue from this group in the prior year were $885,000. With respect to our margin profile, generally speaking, PMO…

[Operator Instructions] Our first question comes from Brian Kinstlinger with Alliance Global Partners.

Can you talk about the outlook for the 5G build-out in China? And based on your capacity and with the recent investments you've made to capacity, do you expect supply will catch up to demand this year? Or will it be more like next year in terms of the PMO side of the business?

Well, we're seeing a continued demand for 5G in China and a recent growing demand for 5G outside of China. Now as a reminder, oftentimes, we provide the components to suppliers that could be 2 or 3 tiers removed from the final deployment of 5G. And therefore, we do not always have the visibility onto where physically or geographically the 5G equipment ends up and to the demand for that end 5G equipment. As of now, we continue to see similar demand from our customers for 5G inside China, and growing demand for our customers for 5G-related lenses outside of China. Nothing is indicating any of that is going to change in the near future. And as we noted previously, we typically see such rollout of a new technology in optical communication to last about 4 to 5 years, and we're now about at the beginning of the second year of that rollout.

The second part of that question is, I mean, let's assume or hypothesize that there could be a 30% increase in unit demand for the number of units. Do you have the capacity to meet that? Do you not? I guess, from a capacity standpoint, where are you in terms of your investments and need to build out?

Yes. So definitely -- so we've been investing in capacity growth, and we're seeing that in the growth of our top line right now. At -- earlier, about a year ago, the constraint in capacity was on the molding equipment itself, the machines which we use to make the molding -- molded lenses. Later on, it was on some auxiliary equipment, such as sorbs and coating and dicing machines. We've been investing in both of those. As of now, while we were able to catch up with the demand at that point from the 5G customers, demand in other areas has been growing again, thankfully, and we're still running at capacity in our molded optics. We're not turning down any orders, but our lead times for some of the orders that we're delivering on are longer than what we and our customers would want. We've revisited that recently and started to invest another set of investments into molding machines, which will go into effect next quarter or maybe beginning of this quarter we're in now and into next quarter. And then will take a few months until it is actually fully in place and operational.

And then on the infrared side of the business. Do the continuing resolution in the government impact order timing on the defense side? And while the December quarter was a difficult comparison you highlighted, given the delays last year that moved in from the first quarter to the second, is this segment a double-digit grower in the near term? Or is it going to grow a bit slower than that in the near term?

Well, the defense is not a fast-growing because of the turnaround. You recall, most of the defense lenses, which are large lenses, which are CNC per se, those are 6 to 9 months at least. So the growth double digit, I think yes, because we have some of the -- we have some good things in the pipeline, but that turn we will not see until probably a year from now, if we should succeed with it.

I get it. I'm going to ask one more question. I'll get back in the queue because I have a few more, but I'm sure others have some questions. Regarding the lower yield, how long do you think it will take for the changes you've made to repair the issues and then return to the stronger gross margins in that business? And will the March quarter gross margins look stronger, given you highlighted the BD6 materials contributing a higher gross margin?

Yes. So as I mentioned in my notes, there's at least 2 areas where we're seeing those yields, 2 areas that are significant enough to easily identify, probably a few more that we haven't reached yet. In those 2 areas, one of those areas, the team feels fairly confident we will resolve within the next 2 to 3 months. With the second area, we're not yet down the path enough to know when the solution will be. In either case, it would not be more than a few months. Keep in mind also that some of those products have a production cycle that can last as much as 6 weeks from beginning to end. And with FIFO kind of set up in production, even an impact on solving the problem on the root cause of glass production, for example, won't actually show up in the cost of materials until at least 6 weeks later. So the short answer is, possibly we're aiming for some of that to impact in the quarter ending in March, but definitely, by the quarter after that, we should have this under control.

[Operator Instructions] The next question is from Marc Wiesenberger with B. Riley FBR.

I believe the company might have had yield issues with IR molding in fiscal -- late fiscal '19 or maybe early fiscal '20. Are these the same issues that you previously had before? And maybe could you quantify the impact the yield had on COGS this quarter?

Yes. So good to hear you, Marc. The issues are not the same one as the company had a year or so, 1.5 years ago. Back then, it was a step called annealing, which is a step early on in the process of the glass production. Right now, the issues we're having are -- part of them are in the glass production in a slightly different step than the annealing, and the most significant ones have been in the coating. And significant ones, the reason why I say significant in coating because that is really the very last step. It's the entire length of production. So anything that reaches that step and then gets disqualified because of a damage or yield issue or so on, the entire value of the production effort -- all the label, all the material and everything that went into that -- gets scrapped with it. Other parts, like annealing and like the problem we're having right now in the preform production of glass, are much earlier on, and so the financial impact of them is lesser, while the impact of being able to deliver could be higher. And that's why last year, the annealing issue impacted the Q1 deliveries much more significantly. But those deliveries then moved into Q2 but did not have as much of a financial impact. With the coating issues we've been experiencing, those have a bigger financial impact, because you're essentially throwing away a nearly ready product.

Understood. That's really helpful. And just would you be able to quantify, was it a 200 or 300 basis point hit to gross margins? Or where does that -- where does it stand there?

I mean it's around anywhere from 2.5% to 3% on the margin. I mean roughly for the infrared, roughly.

Understood. You noted in the press release and earlier in the call that the 5G demand remains steady and growing in some other places. So I'm wondering if you could kind of lay out the demand and growth expectations we should see in the fiscal third quarter and maybe for fiscal '21 in aggregate.

Yes. So I think several times, I mentioned in the past, I believe, or at least I wanted to mention if I haven't, that our goal is to get to double-digit growth. That's what we would consider a sustainable growth, and is a sort of almost minimum that we expect from the company in a growing segment and growing market such as photonics. We're right now with a -- as of now for the first 2 quarters, we're at a 13% growth compared to the first 2 quarters in the last fiscal year. And that definitely is a place we're, I wouldn't say content with, but we're satisfied reaching this within a fairly short period of time. And I'd want it to stay at least in this level of above 10%.

Very helpful. And I guess, as you look at the business, what parts have gotten back to pre-pandemic levels? What parts are still lagging? And kind of what are some of the expectations for when it will catch up?

I'd say items related to some consumer products, but it's very sporadic. It's not systematic in any way, where some customers are still lagging and those customers are still hurting. For example, one customer in which our parts go into products used in elective surgeries, that has not gone back to the levels pre-pandemic. In many other places, it had gone back or remained fairly steady. In some places, like the contact temperature measurement, we could see once in a -- sometimes some spikes or some demand, such as recently in China. When the number of cases went up, there was another wave of demand for contactless temperature measurements, but nothing anywhere near to what we had a year ago. So I'd say we're fairly steady for the most part.

Great. And then last one for me. You talked about that this was the initial phase of the facility expansion in Riga and also got some other CapEx plans as well. I think you had mentioned at one point doubling the molding capacity. I guess, are we still on track for that and in what time period there? And if the initial phase has been done in Riga, what are some of the subsequent steps? And where should we look to see some of the most proximate CapEx dollars going to?

Yes. So in terms of Riga facility, I'd say the initial phase is adding in about roughly half of the capabilities they need in order to satisfy all of their needs for coating. The second half of it is in progress, and some of that equipment is on order, that we can see that actually in our higher CapEx numbers this quarter. But unfortunately, that equipment can -- has a very long lead time, where some pieces of it are as long as a year lead time from the moment of order. And that's why we have large prepayments for that equipment. I'd say that probably from the moment that equipment arrives until it's fully functional, we'd expect the Riga facility to be fully in place in terms of coating by the beginning of our next fiscal year, so meaning end of summer. In terms of CapEx altogether, Don, do you want to...

Yes. In CapEx altogether, some, as we stated earlier, the -- we -- the increase -- meeting the demands and increasing the capacity to meet the demands and also to meet the lagging because of some of the issues that we're having on the yield. So now that delays the product, so we definitely need more machines. As was mentioned also, we're putting online new molding machines coming up in the next quarter or two. This will not double the capacity in molding, but it will increase the capacity and trying to meet the demand. And again, it's varied because of the varied size of the lenses. If you're looking at the $1 lenses, we could easily double those, but as you go up the line, we can't double them, but we're definitely increasing the machines. And we see probably an extra $0.5 million to $600,000 compared to the prior years, where we were at the 2.5 level.

Next question is a follow-up from Brian Kinstlinger with Alliance Global Partners.

Can you talk about how customers are responding or receiving LightPath's message to become an engineering solution partner instead of a supplier? Is there pushback? Is there excitement? Is there some of both?

Yes. So I think one of the -- one good example for that is the 75-millimeter assembly I mentioned in my remarks. And that is a U.S. customer that serves the defense industry that came over, has been buying individual components from us, came for a site visit and inspection. During that visit, saw and noticed some of the assemblies we're putting together, a dialogue started around that. We happened to have a few ready that they could take a look at and measure, and that wowed them enough to decide to replace the existing assemblies they have with our assembly and to proactively reach out to us and ask if we would design the assemblies for the optical part of their next 2 systems. And I think that to me is a great example. It wasn't -- it was very subtle in terms of the sales team and the message. No one was pushing it down their throats in the sense of, start buying components from us and you have to start buying solutions, but more of a, the customer got to see the value created through that and chose to go down that path. We believe there's far more to do in that direction, although it can be slower in terms of adaptation. And so in parallel to that, we're also developing our sales capabilities to proactively go out to customers and offer our engineered solutions path, and they will be more selective towards customers that we think we can create value towards them. We're not going to go to a customer that, I'd say, knows optics inside out and doesn't need our help in designing. There, there would be probably a pushback. We would go to the customers that we believe optics is something that they could use better knowledge and experience with, and there our offering will be accepted.

Lastly, before Don responded and gave about 2.5 to 3 points in the margin, is the impact of the issues on the yields. Can you quantify for the first half of the year on revenue, if you had unlimited capacity, if you will, and the yield issues didn't exist, how much revenue was left on the table?

It's hard to give you a number. And the reason for that is, remember, these components, you have a lens that's germanium and a lens that's the new BD6. So that's kind of hard to split out.

I see. Without going to specific numbers, would you have shipped materially more lenses?

Yes, for sure.

Yes. So there is an impact on both revenue and margin, correct?

That's correct.

Yes. And we definitely believe that, one, the more efficiencies we put in the operation, just as we saw now by growing to $9.9 million in revenue this quarter, those efficiencies are not only on the costs and bottom line, they also enable us to ship more with the existing capacity and equipment and resources we have.

At this time, we show no additional questions. I'd like to turn the conference back over to Mr. Rubin for any closing remarks.

Thank you. Thank you for participating in today's conference call. We look forward to speaking with you next quarter. But until then, we're excited to be participating in tomorrow's Alliance Growth Partners' virtual Emerging Growth Technology Conference. We hope our institutional investors following us will join us at the conference, and that all of you continue to follow our progress. Thank you again, and goodbye.

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