Good afternoon and welcome to the LightPath Technologies Fiscal 2021 Fourth Quarter Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Al Miranda, Chief Financial Officer at LightPath Technologies.

Thank you. Good afternoon, everyone. This is my first time I am speaking on LightPath’s earnings call. I would like to thank Sam and the company’s Board of Directors for the opportunity to serve as CFO and I look forward to earning the trust of all our shareholders now and in the future. It has been an incredible pleasure to join LightPath and to participate in the development and execution of our exciting growth plans. For the benefit of our listeners today, I thought it would be helpful to share something about my prior professional endeavors that led me to LightPath. I joined LightPath in April of this year. Prior to that time, I was the President and Chief Financial Officer of the North American subsidiary of a publicly traded Germany-based Jenoptik AG, where I led their North American subsidiary in top and bottom line double-digit growth. During my tenure, sales went from $30 million to $220 million with a 20% EBITDA. Jenoptik is known globally for specializing in photonic-based technology across several markets. There, we transformed the company from a component manufacturer into providing solutions, which is something that LightPath is doing now. My career spans more than 25 years where I’ve held executive level positions and contributed to delivering high financial growth across a broad group of products and services in demanding and diverse industries, including health care, defense and security, consumer electronics, automotive and semiconductors. Before Jenoptik, I held executive level management, finance and operational positions in optical products groups within Carl Zeiss AG and the chemical manufacturer Basf. Now before we get started, I’d 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 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 question-and-answer session open to participants on the call. I would now like to turn the conference over to Sam Rubin, LightPath’s President and Chief Executive Officer. Sam?

Thank you, Al. Well done. Good afternoon to everyone, and welcome to LightPath Technologies fiscal 2021 fourth quarter and full year financial results conference call. Our financial results press release was issued after the market closed today and posted to our corporate website. I would like to begin my remarks by thanking and acknowledging our employees and team members around the world for their hard work, dedication and devotion to achieving and delivering results during these challenging times. The company and the business it conducts is defined by the efforts and execution of its employees and our 350 hard-working team members around the world for what makes all of this happen. This year has been very taxing in terms of pressure and personal toll, starting from the impact from COVID-19 on everyone’s life in and outside the workplace and continued in driving the growth and changes in the company this year. All of this further compounded by our discovery of years of illicit behaviors in our China operation and the efforts associated with the changes we have been implementing there. So above all, I would like to thank and acknowledge the efforts of the team. Now on to my remarks, this call concludes my first full fiscal year as CEO of LightPath. It has been a year characterized by change. This began with the process of changing the strategy and cost of the company from a purely component vendor to a solutions partner. Another important change was that of our growth trajectory from years of single-digit growth in the past to double-digit growth. Another critical change that impacted us in part in the past year and is expected to have an even greater effect in the years to come is our efforts in building a strong senior management, Board of…

Thank you, Sam. I’d like to remind everyone that much of the information we’re discussing during this call is also included in our press release issued earlier today and will also be included in the 10-K. I encourage you to visit our website at lightpath.com. Before I dive into the financials, I’d like to take a step back and categorize the major issues that have led to our results. First, our margins were 35% in fiscal 2021, off from last year of 40%. This was due to low coding yields in our IR products segment. The yield and cost issue was exasperated by the year-over-year revenue growth for our IR products of 16%. This is something Sam has talked about before, but really had a large impact in Q4 as we ramped up production. We estimate our cost basis to have experienced significant headwinds in the back end of fiscal 2021 with low yields, high scrap rates and production rework in the hundreds of thousands. It’s not just production inefficiencies and reduced operating leverage is a real cost in terms of material waste. Second, as we publicly discussed, we discovered in our China operation that there were key members of management and staff acting in their own self-interest, and we’re preparing to create a competitive company. As Sam has said, we saved the business from harm, but at a cost of $1.4 million in Q3 and Q4. Third, the transition of the former CEO, the transition of the CFO, the addition of the VP of Operation and changes to our Board had one-time cost of $550,000. As investors, you’re probably asking, what are we doing about it? Regarding revenue, we expanded our sales office in Europe, as Sam just said this past year. We’re replacing and expanding our sales office…

Thank you. [Operator Instructions] Today’s first question comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Great. Thanks so much for taking my questions. So clearly, the – and you addressed it a lot, the margins are what stick out in the fourth quarter. Can you tell us when exactly you were able to fix the yield issue? And then help us understand the expected recovery you expect in gross margin maybe in the first and the second quarter. And then you said you can get margins back to where they have been historically. Is that around 40%? I know there is a bunch of things that I just want to kind of focus on when and how you expect to recover that margin?

Yes, definitely. Good to hear from you, Brian. The yield issue was resolved early July. I think we mentioned it in another press release that we had at the beginning of July as a side note in that press release, that happened to be that both two yield issues, one from the coating and one from stains that we had, were resolved roughly around the same time. Now given that this is the pipeline of products and pipeline and manufacturing, so it takes time to flush it out. I would not expect the margin to be impacted instantly by that, but it could take, I would expect a couple of months, even a quarter for the – to go through a whole inventory cycle and such, and to see that improvement in the margin. In terms of where we see this in the longer term, I would say, inherently infrared always has a lower margin than in PMO. We have seen that in the past. That’s because of the mix of products in infrared that some of them are pure build to print as we call, where margins tend to be lower and some of them where we have more unique technology and our own advantages and therefore, some premiums to it. I would say that overall, we would be happier when the margins of the company towards the end of the year would have before the beginning of them. When exactly that will happen...

And you can get back there, you think? When everything gets corrected, do you think you can get back?

I believe so. It depends highly on the mix of products also. Not to forget that at the same time, it happened to be the sort of perfect storm where we also lost our biggest PMO customer, who was a high-margin telecom customer. And that customer while it’s starting to come back has himself lost his main contracts. So, it’s not going to come back at full speed with that one. And PMO being a higher margin did pick up margins last year in the two quarters where we were in the mid-40s. So, a lot of it depends on that mix. But all things considered, if it would be the same mix, we would definitely be in those same margins and in the 40% plus.

That brings me to my second question that was already there was maybe commenting on the PMO lenses, when you expect recovery there. First, telecom providers outside of China as it relates to 5G, talk about, I think it’s small, but how and when that starts to break out? But then on your Chinese telecom customer, should we not expect any material growth from where you were maybe recently over the remainder of the year, given what you just highlighted?

Yes, definitely. Good question. So first of all, in telecom outside of China, we are starting to see some positive activities there and some orders coming in from manufacturers that also provides for the 5G. There as we mentioned before, the supply chain is structured slightly differently so we don’t have as much visibility. Sometimes it comes through a contract manufacturer. But in general, the designs are also different. The telecom manufacturer in China, we had worked very closely with over the years to design specific lenses that had improved their efficiency in the next manufacturing process. And therefore, the price of the lenses and our margin was different. So, we would not expect necessarily the exact same margins from other telecom customers. That said, we are not sitting idle waiting for 5G to come back. We have had some very, very encouraging progress in other projects that utilize PMO. I mentioned briefly in my notes, the thing called Freeform Optics, which is really as a name implies, allows us to involve the lens. It doesn’t really look like a lens. Certainly, it’s no longer around symmetrical product that is actually has all sorts of odd shapes to it, sometimes sharp corners and so on. And we have at least three projects that include that every one of them has the potential of very nice volumes to it and much higher unit prices and later much higher margins. So, we are very positive about PMO coming back. We are looking for other places to utilize the technology and to continue to advance the technology. As a reminder, we make our own machines to make PMO lenses, that gives us great flexibility in being able to advance it further. We don’t want to get stuck in a more commoditized area and just be one of many. So, we are continuing to innovate there and push the boundaries to be able to charge premiums and therefore, be more profitable in that part.

Okay. I have a bunch more, but I am going to ask one more and then get back in the queue. Demand for your BD6 products, it looks like revenue was down year-over-year by a small amount. But maybe if you can comment on what’s happening there? And what you think needs to happen to drive greater adoption of that alternative?

Yes. That’s a great point. Definitely, some of the higher volume BD6 orders had less shipments in the past quarter. That was actually the biggest one was not related to us at all, it was related to a change internally at our customer, which changed teams and their strategy and therefore paused shipments for a while. They are back taking products, and it’s going very well with them. More generally, in terms of BD6 adoption, that’s – as you pointed out, that’s actually a very, very important element of our strategy. And as I mentioned in the strategic direction of being more the partner to the customer and being the one to design the optics for him or to design the complete optical solution, the more advantages we have technically the better we can differentiate our solution, we can design a better solution. So, we are investing a lot into creating sort of unique differentiators in that area. Some of them started with things like the DLC coated – coatings that we mentioned that we published a while ago and ship of that. Some of them are much more unique coatings. For some of them, we already applied for patents. So for example, coatings that reject water and that way, you can work in an environment where rain is coming down and the water doesn’t stain the lens, different advantages in materials and so on, all of those actually continue to provide BD6 and other chalcogenide glass like that, unique advantages that give it more than what can achieve elsewhere.

Okay. Thanks. I will get back in the queue.

Thank you.

Our next question will come from Gene Inger with ingerletter.com. Please go ahead.

Hi, Sam and Al. First, I would say kudos for your efforts of delving into this company. I think, Sam, when you got there, you thought it was a turnaround, and it looks like it’s still turning around.

Yes. Well, it’s surprises for sure, yes. But all good.

Yes. What I am going to say, I am just curious about something. I want to look to the future and optimism rather than the past, which you are sorting out. Do you think that so much of the expectations of LightPath that some of us have had for years would be eroded because of the fraud or the misallocation of components in China? And I know you are expanding your facilities in Orlando or consolidating. Is this an expansion or just consolidation? And are you preparing to increase production of BD6 and so on in Orlando, where you have absolute control on the spot?

Yes, absolutely. In regards to China, as I say, I need to tread delicately here because there is different activities we are doing legally in China. So, I can’t talk a great detail about it, but we are obviously pursuing every option we can. I would say that at the end of the day, it’s a zero-sum game. If someone did something wrong and benefited, someone else lost. And definitely, the company would have been better off if what happened there didn’t happen. And definitely, as you hinted, we realize now that bad things have been going on there for a while. This is actually very long time. So, we are pleased that we got to the bottom of it. Also the ripping the mandate was very painful in Q4 and very painful also emotionally, I think, to the team that has invested so much in the China observation and in the success there for years to find out that this was going on below the surface. That’s it in terms of the expansion in Orlando. So first of all, it’s a consolidation of the two business – two buildings for sure, and an expansion as well. The expansion was negotiated very well by Peter in a way that we actually are not going to start paying any additional rent or not going to have any additional expenses and until we start using the space there. So, although we announced this a few months ago, we are not yet incurring any additional costs related to that. In terms of the BD6 manufacturing in the U.S., we very, very strongly believe that being vertical and having control of the materials allows us to provide far better solutions in infrared imaging and we plan to continue to invest in that direction. We are actually working closely with some organizations in the U.S., which are not companies, academics and others, to develop new innovative materials and commercialize them. And I think that those will give us an enormous advantage in the long run.

That would be one of my questions. Partnerships, acquisitions, mergers, not sure what you are willing to entertain, but I wouldn’t be surprised. I do remember the first time I visited LightPath, I was told that you had many times the landscape of capacity in China that you did here, which is why I asked that question, if you are increasing the capacity here. And I know that American cuts. Do you have competition in the United States, or is most of your competition offshore giving you a better supply chain arrangement with customers here?

Yes. So first of all, we do have some competition in the U.S. It’s one small company in Rochester, New York, that competes in this area, but is very different, I think, in the direction they are going, and it’s not sort of designed for volume as much. We have been increasing volume of manufacturing in the U.S. and plan to do so as much as possible. Definitely, our growth in the infrared and infrared imaging solutions is such that it’s going to be driven significantly by the U.S., but not only and therefore, will require some expansion in the U.S., hence, our additional states. In terms of partnerships, acquisitions and so on, I tend to say yes to all, but we only do what makes sense and what we can afford to do. There are many, many great opportunities out there. There is many incredible things different companies and organizations have been working on, both in terms of technology and applications. And we look closely at that. And – but there is no doubt that some level of acquisitions will be part of our life in the future.

I might ask briefly if – and then I will get back in the queue if I have more.

Sure.

I would ask briefly about Riga, Latvia, I haven’t heard you mention Latvia and I would also have because they are so big in Photonics in general, whether there is more ties with companies or your own plants with – in Israel?

Yes, definitely. So, we have now a grant that we got from Space Florida in conjunction with the Ministry of Science in Israel, in which we received money together with Israeli partner, and we are developing a thermal camera, or thermal assemblies for space. And that’s going to be both a complete thermal camera as well as qualifying all our materials and processes for use in space and mostly in low earth orbit. And we have some other additional projects we are working on in Israel, which we hope to be able to announce in the near future. This is both from the U.S. and from Latvia. We have a great advantage of being able to both do U.S. defense work with ITAR as well as foreign defense work in some level through the Latvia operation and we want to make the most out of that. The Latvia operation, just as a reminder, we have expanded it in the last 12 months, added a coating facility there that next month I hope to be able to share that it’s complete and fully running. And we will have a, I think, also a great impact on both our performance, working capital and margins.

I hate to ask one more quick question. You have touched on it with space. A lot of – some people thought it was like when you talked about being in the Mars Rover. I think it’s significant. I don’t think they appreciate although your new video hinted at it, your extensive involvement. And I guess my specific question would be, are you involved with the low earth orbit communication satellites in terms of wireless infrared linkage maybe between the satellites? And is that a big business?

In short, yes, we are involved in it. Also in short, yes, we believe space is a big business. That’s why we have been investing in that and working in that direction. We have multiple projects. So the Mars, as you mentioned, is actually not much of a revenue driver as much as it is a very significant seal of approval from NASA. And allows us to now go and apply a lot of our technology to a lot of the nano satellites or satellite tubes and so on projects, and we have many of those in to work with customers. Thank you, Gene.

Thank you.

We show no additional questions. I would like to turn the conference back over to management for any closing remarks.

Thank you for participating in today’s conference call. As you have heard, we have been extremely busy implementing our new strategic plan and are encouraged by the favorable top line growth we have experienced in just a short time. We look forward to speaking with you next quarter to continue to share our progress. But until then, we have been invited to present at the H.C. Wainwright and the Taglich Brothers conferences, both of which take place on the coming Monday, September 13th. We hope you can join us. Thank you again, and goodbye.

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