Good afternoon, everyone, and welcome to the LightPath Technologies Fiscal 2022 First Quarter Financial Results Conference Call. Please note, this event is being recorded. At this time, I'd like to turn the conference call over to Al Miranda, Chief Financial Officer at LightPath Technologies. Please go ahead.

Thank you. Good afternoon, everyone. Before we get started, I'd like to remind you that during the course of the 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 they're reasonable, any of them can be proven to be inaccurate, and there can be no assurances 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 questions-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.

Thank you, Al. Good afternoon to everyone, and welcome to LightPath Technologies Fiscal 2022 First Quarter Financial Results Conference Call. Our financial results press release was issued after the market closed today and posted to our corporate website. Before I begin my remarks for our new followers and shareholders, I would like to begin with a short recap of the last 18 months. In late 2019, the Board of Directors had decided that it is time to refresh and revitalize the company and began the search for a new CEO. As such, I joined as CEO in March 2020, following a career in building and growing companies in the photonics industry in the U.S., China and Israel. I had come to LightPath after 15 years at, Thorlabs, where we grew the company over that period of time from $30 million to $500 million in sales through a combination of organic growth and acquisitions. Shortly after I joined LightPath, I recruited Mark Palvino. He's an industry veteran in the position of Vice President of Global Sales and Marketing. Mark's focus on aligning and building our global sales team was a major contributor in the 17% year-over-year growth we experienced in the first 3 quarters of fiscal 2021. Also during the first few quarters of fiscal '21, we focused on organizational alignment and development of our new strategy, which I will discuss in more detail shortly. It was during those efforts that we discovered irregularities in our China operation, which after a closer look, turned out to be illegal activities by management of that subsidiary, misappropriating company money and rerouting customer orders to third-party entities owned by them, thus effectively helping themselves to the company money, activities that we now know have been ongoing for a very long period of time. Following…

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 be included in the 10-Q. I encourage you to visit our website at lightpath.com. So Sam just covered the highlights of our strategy, new management team, the market opportunities and how we are progressing. I will discuss some of the primary financial performance metrics and provide additional color on them to better assist investors in analyzing the company. As a short reminder, in Q4 '21, we had been significantly impacted by the transition of business conditions in China. And some of the financial impact was also felt as we indicated it would last quarter, and as Sam just said. Revenue for the first quarter of fiscal 2022 was $9.1 million. That's down 4% from the same period of the prior fiscal year, but up almost 10% from the fourth quarter of fiscal 2021. Sales of infrared products comprised 54% of the company's consolidated revenue in the first quarter of fiscal 2022 as compared to 50% of consolidated revenue in the same period of the prior fiscal year. Visible precision molded optics, PMO product sales represented 42% of consolidated revenues in the first quarter of fiscal 2022 as compared to 45% in the same period of the prior fiscal year. Specialty products continue to be a small component of the company's business representing 4% of the consolidated revenues in the first quarter of fiscal 2022 as compared to 5% in the same period of the prior fiscal year. IR revenue represents the largest component of our sales. Revenue generated by IR products was approximately $4.9 million in the first quarter of fiscal 2022, an increase of approximately $163,000 or…

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

It's great to see the improvement on revenue and margins much faster on that recovery. In regards to the new freeform product, will there be any incremental expenses ahead of revenue? And then I think you intimated this, but are there going to be cases here where new products have early yield challenges until you get efficient? And when will we see that weigh on margins a little bit? Is that the back half of this fiscal year?

Yes. That's a good question. So freeform is going to be similar in mechanism of revenue and costs to the PMO, meaning most times, there isn't any standard freeform products. we want every product is going to be tailored for a customer's system or together with tailoring the entire system as we now do with some customers, which means that the NRV charge with it, and those net NRV charges in the tens of thousands and sometimes more dollars for the initial runs for developing the molds for customizing it. And then afterwards, there's production [ variance ]. Now given that currently, at least, most of the places where we're working on this are for customers that themselves are implementing new technologies such as LiDAR and augmented reality glasses, we don't expect very high volumes from it yet because they need to get market traction with their own product. We do have a couple of customers that are using it for more -- or looking into using freeform for more conventional products. And there, we will start seeing larger volumes sooner.

Great. And then how do you think about the addressable market? That's the first question. And then, is this made on the same production line as existing lines in the PMO or infrared side? Or is this incremental on production or capacity?

Yes, that's a great point. So as you might know, part of the uniqueness of LightPath is that we have developed our own production equipment in molding, and we have a few different versions of molding machines that we developed here and we built in-house. This allows us to make very slight modifications to existing molding machines to be able to use them for freeform optics. So capacity-wise, for the most part, this is going to use equipment that we have already for the PMO. The second half of the question, sorry.

It was on what's the addressable market, and just, I guess, if you say it's the same -- if it's the same line, the same equipment a year ago, maybe 2 years ago, you had capacity issues. Does this mean you need more capacity now?

Right. So we actually have capacity. That's not an issue at this point. So a lot of that capacity was then being constrained by telecom and by the urgent need for lenses for temperature -- contactless temperature measurement. Both of them were down significantly, so the capacity is there. In terms of addressable market, I'd look at it as components that, as I mentioned, performs a function of a few different components together. So typically, the unit price is going to be higher than our regular PMO, meaning these are going to be probably in the $10 to $30, $40 apiece for those. And then if you look at something like an application of a LiDAR, then every LiDAR head is going to need 1 if a customer is using those freeforms. If you look at the AR glasses, then typically, the projection in an ideal scenario is for both eyes, so there would be 2 in those. What is the possible market of LiDAR and AR? That's beyond me at this point.

Okay. Last one, and then I'll get back in the queue. I want to touch on margins. Again, you hit the 35% mark about a quarter earlier than I would have thought based on the need to turn over inventory before the margins improved. So there sounds like a few puts and takes, mostly benefits of product launch is becoming more efficient, the yield issues being a full quarter of benefit of -- sorry, the coating. So maybe talk about when you think you can hit that 40% range. Obviously, it's dependent on mix. But is that second quarter? Or is that third quarter? How should investors think about getting back to that high watermark that you guys have been targeting.

Brian, it's Al, We do forecast getting back to that 40% gross margin territory. And you hit the nail on the head with your own question by saying it's about mix. So that's sort of the piece that from a forecasting perspective, exactly precisely when it comes, not 100% sure. We think it comes sooner rather than later. But from the cost perspective, that's the part that we feel more comfortable managing. And if we get the right mix, we'll get there certainly in this fiscal.

Let me just make sure I understand and then I'll see the line. What you're saying is from a yield and production standpoint, you can get to 40%. You're going to have some quarters you're going to be below based on mix. Some quarters, you may be at or above depending on new products coming out, but everything is in place to get to 40% depending on mix now.

So the -- I want to not answer you. The new products like freeform, for example, Sam mentioned that the margins are better there. In our modeling, we're not baking a lot of revenue into our modeling there. So in our models, that's not really taken into consideration. So we're talking about being somewhat conservative and looking at our current products, our current business and thinking we get to 40%, how do we get to 40%? What's the cost situation and what's the mix? But to sort of support your answer without answering you is the yield issue was a bigger -- was a big factor, and it hasn't cycled through inventory. So it will continue to improve.

Our next question comes from Scott Buck from H.C. Wainwright.

First, I guess, I have a question on the labor side. How are you guys doing there? Having any challenges in hiring or maintaining personnel in the current environment?

Yes. That's a good question. Thanks. We -- there are some places where we're facing a bit more challenges in recruiting in the Orlando facility in the U.S. We do find that we need to reach out to other geographical areas in the U.S-located people probably more than -- well, definitely more than we would always like to, but more than we would have probably needed to do 2, 3 years ago. So that is a bit challenging, and some of the positions are a bit more competitive than others. But overall, on the production side, we don't have any major issues. And it is really on finding the talented people on the management side at reasonable cost. In China and in Latvia, we don't have too many issues. In Latvia, we have a very detailed training program since there isn't a massive high-tech industry in Latvia. It's a fairly small country. So we invest a lot in training. And over the years, our group has developed a very good training program. So overall, as long as we can plan for it, it's not an issue.

Great. That's really helpful, Sam. And then second one for me. I was hoping we could get an update around M&A. I know in the last quarter's call, it was kind of a focused item, if you will. So I just wanted to check in and see kind of where we are there.

Yes. Absolutely. We're definitely still very interested in that. It's going to be a good part of our growth, we believe. We have some good prospects. We wanted to focus also internally for a bit. The last quarter was a bit too much of a hit than what we wanted to in bottom line, and we felt like we needed to look inwards a bit. And size things up and improve. And I feel like we're actually right on track in terms of what we would have wanted to in terms of the improvement. So I'm hoping that we continue along this track, and we can go back to looking seriously at M&A. But we do want to make sure that we also deliver on our current operations and not just go and bite off something.

[Operator Instructions] Our next question comes from Gene Inger from ingerletter.com.

Sam and Al, I think you have done a pretty solid job and you needed to after the previous quarter you just alluded to in resetting expectations. And I wonder whether the shareholders appreciate that enough. Because I think obviously, as far as the stock, it's been dormant and hovers around $2. And people are wondering when things will become accretive to shareholders. And I think what you're saying is that's a ways out. But I have a specific question as a result of the discussion you just had about margins and yields, which might be whether we could have a surprise because you're talking about 40% margins on freeform. And while you discussed clientele maybe of $1 million to $10 million each order and that's being conservative, that doesn't sound like a lot of money until you look at the specialty product category if I've got this right, which is almost nothing now. And you can imagine you would have anywhere from 30% to 100% increase in gross revenues of the business. Am I missing something?

Well, I'd start by saying that 40% was an aggregate number we were talking about. The actual margin from freeforms, we would expect them to be more in line of the PMO, which is a strong margin. Now of course, some of our freeform customers might be listening, so we don't want to disclose the exact margin, but we do feel like it would be accretive and definitely help us. The specialty products group and the business defined now is -- it sort of is a catchall for other parts. So I don't know if that's a good indicator to what the growth in margins from PMO would be.

But this -- but such products would not take away from what we would call, let's say, the existing infrared business. They would constitute a new revenue segment.

Absolutely.

Right. Okay. And speaking of those segments, last call, you acknowledged that it's not just Mars Rover, but low earth orbiting satellites you're involved with. That's a form of telecom. That's obviously not the telecom that you said a customer reduced orders because their business was down. First of all, was that customer in China or the United States.

The satellite company, you mean, that I mentioned? Which customer? Sorry.

Well, the satellite company is going to be in the United States or Europe, I'm sure.

Yes.

No, no. You said the telecom orders were down from -- because 1 customer had lower business.

Oh, yes. That was in China. That was our lone -- has been for quite a few quarters that one.

Well, Huawei's down and China telecom is down because a lot of people died, seriously. They have a lot of people cancel accounts. That's one way people track their death toll. But anyway, my question might relate to the medical side of the coin, and there's a big movement to dramatically be disruptive with things like clinic on your wrist, and you know what I'm talking about.

Yes, of course.

The [ Dr. Wrist ] one, that's Rockley. I don't mean to mention another company, everybody knows it so. But Medtronic, Apple, they're all going in this direction, and it involves infrared. And I wonder if you're -- without compromising your relations with the customers, can you give us a better idea if you're involved in such things?

Yes, I'd say it is a very good question and a very good example of a place where there's a desire to miniaturize what otherwise could be much larger optical systems, And again, I go back to something like freeform optics where we can combine, basically, the function of a few elements into 1 or 2, and we can make those down to the size of a millimeter or 2 in size. So these kind of industries are exactly ones that would benefit from high-precision freeform glass optics.

And for those who are listening who don't know, I'm referring to Apple Watch 8.0, of course, which is supposed to basically -- and so will Medtronic. What they're going to do is glucose monitoring, sugar, which will, probably every diabetic in the world was going to want that instead of being -- the checking with needles. But in any event, no, no, I think that's important. So you guys are doing -- I'm sorry, I interrupted you.

Please. Go ahead. I think -- I appreciate the comments. They're very useful I'm sure other investors appreciate it, too. Thanks, Gene.

The -- do you know -- what you're working on is more -- is infrared, not laser. And I'm assuming there's no radiation involved in either. That would be detrimental in the medical -- in fact, the absence of radiation would make it advisable to go in that direction.

Yes. We work -- in the core of the business, the components of our historical business has been passive optical components, we have now projects such as the one with this major satellite company, where we are designing and building a complete optical transmitter for transmission, optically, between satellites, and that includes laser and receiver. And this is a great example of where we are taking the company, into much more of integrated solutions, designing a complete solution, utilizing our unique technology and know-how to design something better than what otherwise would be available.

So has Musk booked you on a flight into space yet, Sam?

He has not, but if you have a word with him, I'm waiting for my Tesla. And it's available in States now so. Thank you, Gene.

Our next question comes from Vishal Mishra from Mishra Capital.

Do you think you can provide some sort of a broad classification of your revenues? Like what percent is in like the defense, medical, auto, telecom, consumer? Is it already available somewhere in the presentation? Apologies if it's already there.

The industry segment breakdown?

Yes.

One second.

And non-U.S. and U.S. maybe sort of...

Yes. While -- I'll explain that number up, I'll mention in terms of U.S., non-U.S. in general, our sales are pretty much 1/3, 1/3, 1/3, meaning U.S. is probably stronger, so probably closer to 40% and other parts divided between Asia and to Europe. But when it comes to the actual sales, it is -- could be different -- the destination of shipment could be very different than the origin of the order. So many of our customers for the high volume have manufacturing and assembly in Asia, in different places, but the relationship and the entire design work and everything gets done here in the U.S.

We do have numbers. Our catalog is 20%, defense is 6%, industrial applications are 43, medical is 7, telecom is 7 and then commercial applications are 17. When it comes to that 20% regarding catalog and distribution, that could also be the other categories, right? Like, it doesn't always go through those -- we don't always capture the specific market.

Got it. And second question related to that was, like, Sam, you had mentioned that you want to, like -- to sort of transition from sort of the prior LightPath, which was mid- to low single digits to, like, high double digits. Is it -- will it come from, like, because you are in higher growth markets like LiDAR and AR/VR, et cetera? Or would it come from -- because you would transition from making components to subassemblies and solutions? How would that fire build rate -- what's the breakdown? Like, or...

Yes. Yes, great question. Yes, I think when we look -- and everything is based on value add, where can we add value and where can we bring some uniqueness to customers. We have very, very unique strengths when it comes to infrared optics. We make the materials ourselves. We have very unique capabilities in the fabrication and the coatings there. So most times, the easiest sort of path of least resistance for us to get into making a complete subassembly or even a system tends to be more in the infrared area, because that's where our advantages are. It doesn't mean that we say LiDAR and AR/VR that are visible. That would absolutely not be the case. We even have, actually, one case like that where we are making a complete assembly. We're looking into that. But the vast majority right now is that we're seeing where most of the activity on the more engineered solution and complex is in the infrared. And those oftentimes tend to be our space and defense.

Right. So I mean, like the overall photonics industry is forecast to grow at like mid- to high single digits, but you would like to grow slightly faster. So that's what I'm thinking. So is it coming from -- because you've got a faster growing end markets? Or is it -- will it come from because you are doing more solutions in the...

It will come a bit from eating other people's lunch. So it is, in a way, converting where customers from buying 1 component from us, 2 components from us to buying a complete assembly that we designed.

And our next question is a follow-up from Brian Kinstlinger.

I think we covered a lot of ground, but we really didn't cover the growth drivers for the 2 businesses in the near term. They -- the results to me, I would have expected the opposite based on your comments last quarter, a sequential improvement in infrared and more flatness in PMO. So first of all, I'm curious what drove, other than lumpiness, the changes quarter-to-quarter? But even a bigger picture and more important, as I think about both those segments, which are those industries that are going to drive it? I've heard defense, it's 7% of revenue. It's not that big. So what are the industries? And how do you go after them to drive better adoption and penetration?

Yes. So quickly on the part of where growth comes from, as people might recall, we mentioned all the way back in April, I think, already, but definitely in the Q4 results, that some of our hit to sales in China was because of the relationships with customers lost when we had to let go of the senior management, since both -- they own the relationships, and they were funneling sales through these straight shell companies. There was a hit to us, besides the telecom customer, of the customers in China that we sort of lost touch with for a short period of time. We anticipated that coming back, and we're seeing that coming back. And a lot of that growth that we saw now and I'm sure will continue to see also is from the focus of regaining back the PMO customers that we're sort of disconnected and lost for a while. In terms of where the growth comes from in industries, that's very -- I'd say it's very diverse and, in a way, difficult to predict. You have situations like a, say, automotive thermal camera that we're working on. It looks very promising. If it will be successful, it will be, overnight, a multimillion-dollar deal. It can also be not successful, nothing to do with us. It could be that the automotive company decides to postpone it because of the lack of other components that they have in delivering cars. So there are multiple industries where this can come from. Defense, you're right, is only 7%, but defense is actually a place where we need to work on contracts for a long time before we win them. And once we do it, sort of an overnight big hit, So we do expect defense to be quite a bit more in the future because we're winning designs there. We're winning contracts, and we know it will come. Other than that, it's really in places where new industries or new players want to adopt photonics and use it in their products, and that is where we work with them closely, sometimes for a couple of months, sometimes for half a year or even a year. And then it could be -- it could turn on the switch and suddenly, a $1 million to $5 million order.

Understood. So to the degree there's a component shortage for one of your customers, it's possible we see slower demand at times. But to the degree we have new product, new successful products, those will create spikes in revenue.

Yes, absolutely. I mean we've had situations where customers mentioned they might need to reschedule because of component shortage. Thankfully, that didn't actually happen. And we think it -- we feel it is getting better at least with those customers that work -- some developed it. But you're right, that's always a concern for us like any component manufacturer.

Ladies and gentlemen, at this time, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to management for any closing remarks.

Thank you for participating in today's conference call. We look forward to speaking with you again at our upcoming Annual Meeting of Shareholders and the investor conference next week. We hope you can join us. Thank you again, and goodbye.

Ladies and gentlemen, with that, we'll conclude today's conference. We do thank you for attending. You may now disconnect your lines.