Good afternoon everyone, and welcome to the LightPath Technologies Fiscal 2022 Second Quarter Financial Results Conference Call. Please note this event is being recorded. At this time, I’d like to turn the conference 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 this conference call, the company will be making a number of forward-looking statements that are based on current expectations, involve various risks and uncertainties, including the impact of COVID-19 pandemic there’s 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 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 reconciliation in the company’s SEC filings and press releases. Following the management’s discussion, there will be a formal question-and-answer session open to participate 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 second quarter financial results conference call. Our financial results press release was issued after the market closed today and posted at our corporate website. The company’s performance in the second quarter demonstrated significant progress in the expansion of our product portfolio and business development pipeline. As we have been successfully implementing our new strategic direction. Our new strategic direction, which we began rolling out approximately one year ago is delivering the intended results with the company transforming itself into a leading global partner for optical engineered solutions with a highly differentiated products platform as the foundation for the new LightPath. At the same time, we are delivering with operational discipline as we invest in new growth opportunities. While the financial recovery of – for our existing operation takes longer than anticipated following the transition of our business in China. This transition pertains to the discovery in our fiscal 2021 fourth quarter of irregularities in our China operation, which after closer look turned out to be illegal activities by the management of our subsidiaries in that country, including the misappropriation of company money and the revolting of customer orders to third parties, activities, which we now know had been going on for a very long time. We have eradicated the problem areas, replaced the management team and overhauled our control systems to avoid any recurrence of such events. But at the same time, we were also negatively impacted by a reduction in telecom revenues in China from a large customer who had lost its own contract and stopped issuing any new orders. Our revenues in totality from China remain below where we thought they would be in terms of recovery, which has had a corresponding impact on…

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 for the period. I encourage you to visit our website at lightpath.com to access these documents. Since Sam just covered the highlights of our strategy and our key accomplishments and business drivers, 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 reminder, we had been significantly impacted by the transition and business conditions in China during the fourth quarter of fiscal 2021 and to a lesser extent in the first and second quarters of the current fiscal year. At this juncture, all revenues have been recovering they still remain below the pre-transition level. LightPath’s second quarter financial results are also negatively impacted by expenses associated with the management and employee transition in our Chinese subsidiaries. On an expense basis, one-time cost charges and accruals were incurred in large part during Q4 of fiscal year 2021 with additional items in Q1 and Q2 of this year, all of these items are fully addressed in our earnings press releases and SEC filings. While certain civil legal proceedings or ongoing we are unawared any further expenses or charges to be incurred going forward. At the same time, we remain focused on our overall strategic plan and we are on a trajectory for longer term growth and profitability. On a consolidated basis revenue for the second quarter of fiscal 2022 was over $9.2 million. That’s up from the first and fourth quarters. So, we are seeing sales building back – we are down from prior year period of $9.9 million. Sales of…

Great. Thanks so much. First really easy one on the numbers. Your year-over-year trends have been marked by your large China telecom customer. Can you tell us what your year-over-year revenue growth would be without this customer during 2Q? So if you took it out of a year ago’s quarter and this quarter, what would the comparison year-over-year be for revenue?

We’ll pull up the number. Well, we’re speaking if you have a follow-up question and maybe we start with that while.

Yes. No worries. Yes, that’s fine. So, I wanted to talk about the eight – proof-of-concepts engineering programs, it’s helpful to get those details you gave, before they go to production I suspect you’re going to find out whether they’re going to move forward with your lenses as part of production. So what point – at what point do you expect an indication? Is that in calendar 2022 from any of these or a few of these, or is that too soon? And the second part of that question is of these eight programs. Are they also testing other optical providers lenses, or right now, are they exclusively testing yours?

Yes. Great question. I think as you indicated, the process between the moment we developed the initial items until we’re actually in production is fairly long. In most cases, it’s a very structured process, such as EVT, DVT, and steps like that and production readiness, especially in the automotive I’d also – and so the time we’re talking about delivering initial prototypes for almost all of those eight in the next three or four months, I believe. But from the initial prototypes, they need to go through extensive testings and in some cases, environmental testing. Then we need to do the transition into manufacturing, the DVT and low volume and so on. And that can take as much of the year until production actually scales, to the long term projection numbers we have from customers. At the same time, I mentioned it last quarter, and I want to emphasize it again, many of those customers are not established product lines if we’re stepping it. So, especially in LiDAR and in some of the AR and VR successor is not only our ability to develop a product and our product meeting the needs, but it is also the customer winning whatever they need to win downstream and down the vote. And there’s, obviously some uncertainty around that. In terms of competing with others, yes, so actually cases, at least a couple of the eight where the customers are being already serviced by another vendor out in Asia, and they’re coming to us because that vendor specifically cannot achieve the same optical performance that we can. So we still, we feel we even though there are companies working on the freeform and others wanting to go in there, we’re definitely, we’re confident that we have a significant advantage in that area.

The others, you’re the only one you stand on the hand for your they’re being Asian.

Statement, as strong as that. I would say that, yes, All in, in plastic, in polymer optics is definitely possibilities and don’t existed for a while, and some customers use them, and in some applications it’s very suitable. In low volumes and other capabilities, it also, some have used as far as I know, there is at least one molding company that I know of that is attempting to produce some freeform molded glass lenses. But so far, as far as I know, unsuccessfully.

Brian, the answer to your question is Q2 sales would have been up 8% comparatively,

Right. That’s helpful. That’s a better picture of demand outside of one customer. And then on that large Chinese customer, you said there were some small orders, but with that telecom provider no longer having that large 5G infrastructure build contract, at least that’s what I believe. Do you think going forward, we should still expect that customer to remain rather small or is there an opportunity to ramp up at some point for any reason that we might not be aware of?

Well, without touching on information as a customer might consider sensitive, I would say it’s that from what we understand, at least for the next two or three quarters, what we’re seeing now is what we should expect. But I don’t know what they’ll say have in the pipeline. I do know that from the work they have, they have actually given us a bigger share this year percentage wise compared to what they had in past years.

Okay. And then I wanted to touch on the gross margin. If I look at the – and you guys gave some detail, but if you look at the mix of your PMO infrared as a percentage of sales, they were about the same in December and September quarter. So each of the last two quarters yet, despite the yield issues being better in the December quarter, at least I assume, because you’ve talked about that last quarter being fixed, the gross margin dropped 450 basis points sequentially. So, what am I missing from this major drop is I thought we’d be recovering all year. Thank you.

Yes. So Brian, we would definitely have to get into the leads on sort of giving you the, maybe the full fledged answer you want. But in general, what we saw in this quarter was that the IR margins were lower in Q2 than in Q1. And there were some cost drivers behind that in particular, some of the things that Sam mentioned, which is, this unexpected energy price hike in mid-November and December, the fact that we instituted we put in place the coding facility in Latvia fully burdened costs went in the quarter, but they were still producing at low volume. So there’s a few factors that went in there, that were cost drivers that were a little bit different than what we saw in Q1. We also have energy cost increases in China, but not nearly as bad as what we’re seeing in Europe. And as Sam said, the correct, we thinking series of corrective actions, which we’ll see in Q3.

Okay. So help us because it’s my last question on gross margin. And my last question for now, I think the gross margin has fluctuated so much and clearly mixed drive that you can handle, and you can’t predict mixed just like, who can is my point. But how should we think about margin going forward? What is reasonable for this business that we should expect going forward, maybe could 50-50 or is that too unpredictable based on size and freeform? I just, I guess it’s been difficult to predict and it’s, and I’ve at least been very bad at, so maybe help us out understand how we should think about that going forward.

So, I think Brian, for us, what we saw in Q2 is on the low end of what we should, what our expectations are, what internally we model.

Right. What is your goal long term?

Our long-term goal is to get to 40% and hold it there.

And it cannot be in 18 months. Could that be sooner, with you bringing on freeform that will hurt yields? I mean.

I think a lot of it has to do with the ramp up of freeform and the sort of unique applications, the proprietary nature of the customer relationship that would change, the margins for us, and Sam is…

Yes. Sam is…

There’s a lot of variables that go into that, the customer, the LiDAR and those markets, right. When does that – when do those markets take off? And which one of those eight that we’re doing business with now, or the winners, which ones are the losers? What was the timing of that? Those are things that if you, as an analyst knew you would direct the rest of us, where to invest all our monies.

Yes. Okay. Thanks so much.

Thank you, Brian.

Our next question will come from Dave King with B. Riley FBR. Please go ahead with your question.

Thank you. Good afternoon. My first question is regarding NRE revenue. What is it now? And what do you think that will be when you’re from now?

So, we’re not giving that information out just yet. We’re not parsing that specialty group to what is NRE and what isn’t. And the reason why is because there’s not a direct correlation between a dollar of NRE that doesn’t directly correlate into a dollar of new revenue down the road. I think what Sam did is it says we had three projects, we moved it to eight. So if you think about NRE that way, that’s probably a better indicator. If we had three projects, the probability of getting one is 30%, but if you’ve got eight projects, the probability of getting two is greater than, the probability of getting six. So, I think for the time being, that’s a better indicator of the direction where NRE is going.

Yes, well, I don’t think we look at NRE as a major revenue stream or something sort of usually worth talking about, I brought it up in such an extent this time, because, the share of increase in how much interest we’re getting and the money customers are willing to put into sometimes accelerate the development or be a earlier in line is, I think a very good indicator to just how relevant the technology that we’ve been developing is. And I think it’s, in relative terms, we’re seeing far more NRE today than I think we’ve seen in as far as I know, a few years, but by itself, again, it’s not a financial measure such strong.

Got it. And regarding those eight projects you mentioned, I assume they include AR, LiDAR. And you mentioned that, once they go into production, they could be anywhere from $1 million to like $5 million is LiDAR or AR bigger than LiDAR and it like so should we be thinking about AR closer to $5 million and LiDAR closer to $1 million or vice versa, any more color on that?

Well, more vice versa. We’re seeing the LiDAR tends to be higher in terms of total dollar amount. First of all, more optical components in it. So it’s usually everything in that we’re doing in LiDAR is just set of optics that works together. I guess the car is less sensitive to weight than the person loads. And in the AR/VR, at least now the volumes that we’re seeing from customers are modest. And by modest, I mean, it’s still tens of thousands of units, but it’s not 500,000 units. So…

Got it. And then my next question is once all these projects, programs, ramp in the next couple of years, I mean, can you talk about the capacity situation? How are you – how much incremental capacity you need to add?

Absolutely. That’s actually a great question that we’re looking into as we’re speaking or these days. And the reason is, as I mentioned before, we are very lucky to be able to leverage the fact that we build our own molding equipment in such a way that all of these new freeforms and larger lenses and unique lenses we’re making. We can make them in our molding equipment, however the cycle time in them, and sometimes the cost of tooling is going to be different. And we’re only now starting to get our feet wet enough with some low volume production of some of those to know what it is. But definitely one word to look at, how much units are coming out of a specific molding machine. It would probably be lower, but how much dollar revenue is coming out, it would definitely be higher for those.

But I think the important part is we can retrofit existing equipment. We don’t have to build a whole new factory or buy all new capital equipment. We simply retrofit the existing.

It’s actually fairly low cost. It’s not very significance.

Our next question comes from Scott Buck with H.C. Wainwright. Please go ahead with your question.

Hi, good afternoon guys. I wanted to circle back on the gross margin conversation. First, what was the headwind on gross margins from the completion of the coding department in Latvia? I mean is that a 100 basis points, or is it something less than that?

Oh, sorry, Scott. I didn’t convert it into a basis point in my head. Yes, I think it’s probably one, right?

Yes. Two, yes,

Yes. One, one a little more than one, it’s not, like I said, it’s a common, to have the ramp up phase and start moving production work in there. So, I’m not concerned about it. I mean, other than it, it negatively impacts our financials, but I’m not concerned going forward.

Right. No, that’s helpful. And then given that, it seems like product mix is going to be kind of what it is for the foreseeable future, or at least the next few quarters. Is there anything proactive you guys can do to help give those gross margins a bump?

Yes, so that’s a great point because I wouldn’t quite say it’s necessarily going to be what it is. It always tends to be that infrared products and what we call the diamond turned and such have longer lead times. And so the time to turn from an order until a shipment is much longer where in molded optics because of the very large bank or selection of lenses and molds that we already have, we can actually turn around very quickly. And sometimes in a matter of a week or two, from the moment an order comes in, we can ship PMO lenses. So, we are very cautious, because of recovery in China is taking longer and the sales in China are of all PMO, 100%. We don’t have anything other than the molded IR and molded PMO in China, but they could, it could turn at any, I don’t want to say any day, because that sounds a bit extreme, but it can definitely that’s a ship that can turn around much faster than IR revenue can.

Okay. That that’s very helpful, Sam. And then I’m curious…

I just say on that, just to finish, we’re frustrated from the recoveries there, but we’re, and signs are not greater that it will accelerate very quickly, but we’re keeping hopeful about it.

Right. No, that’s fair. I appreciate that color. And then last for me, I was hoping you guys could kind of touch on M&A, I know it was a little more prominent in the last couple quarters calls, but what are you thinking there, are you still seeing, a fair number of potential opportunities or has that, kind of moved to the back burn as you work on some of these organic…

Yes, it’s a bit of though because some of those opportunities and such new development and nurturing over time. And so we continue with that and nothing drastic has changed in our thoughts about this meaning we still see it as a part of growing by engineered solution, more significantly. We’re still in touch with those companies. At the same time, we extend great discipline internally about where to focus. And so, as we mentioned, we were focusing on operational improvement. I think the results on inventory and cash are great from that point of view, but we’re also seeing slower recovery. So, we’re also trying evaluating where we are. We wouldn’t do something haste just to get going with M&A or so on. If we don’t think it’s right time for the company.

Our next question will come from Orin Hirschman with AIGH Investment Partners. Please go ahead with your question.

Hi, how are you?

Good.

In terms of the eight NRE projects, when do you think you have a first, even if it’s low volume, the first commercial volume order for the freeform optics you have to get benefits?

Absolutely. We have already one that is, we’ve shipped prototypes for, and it is going to be a lower volume one for sure. It’s not the consumer products and therefore the volume was – that actually to one of the companies that had financed the development of the freeform optics to [indiscernible]. So for a long time partner sort of has been waiting for this to mature in order to get what they’ve been financing. The second one is a shipment of items for a AR/VR related application, but we’re cautious there about volumes because we don’t have enough visibility into the customer’s pipeline and where those are going. So, I’d say within the next few weeks, we’re definitely going to ship at least two – the two customers a good amount of prototypes, but we don’t know yet the volume.

But is it clear that the projects are going into commercial shipment?

Yes.

Yes. Again, it just, I didn’t hear the first one is a consumer item or not a consumer item, first one?

Optics item, the first one is not consumer item, but it’s a actually extremely complex product that I think that delivering on that one is probably a much better and bigger indication of the matureness of the technology than some of their more consumer products.

Okay. But you’re saying that’s also a low dollar ones because, it’s not a lot of actual of product?

Yes. I mean, that is one that would be on the lower end of those opportunities.

Okay. In terms of the recovery in China, one of the metrics, we look at just to see what’s going on in the industrial in general and China, is the really two laser, three main laser makers here in the United States that compete head on of a handful of Chinese, copycats that have come up over the years. So, I guess the question is you ship into all of them, both the domestic ones selling to China, as well as the Chinese, is that area still growing? When you say recovery in China, do you meet just telecom part? So is ex-telecom, how is China doing? What’s going on in China?

Yes, So, when I talk about the recovery in China, I talk more about specific to us and macro economical events in China. And that is when we did the transition and we had to let go of the management that was doing the illegal activities. It actually included our entire sales team in China and with them, a lot of contacts and connections to customer. And so the recovery from our point of view, besides the financial impact of all of that in terms of expenses and costs and rebuild team, the recovery is rebuilding the sales pipeline. And it’s going well, but it’s – we were probably a bit too optimistic at how quickly that we.

Did you lose any major customers in the transition?

We’re selling less in China than we were selling before. So, I think the answer is yes, in a way, but as, was pointed in the first question of today, excluding the large telecom, we’re actually at the growth of 8% year-over-year, really that – hello?

On that note is that the type of growth rate that you’re hoping for without a telecom acceleration to the year, 8% or 10%?

Well, I don’t know for the year, I don’t want to make any forward looking statements or give any guidance on that. But I would say that repeatedly, I have said since I joined LightPath, that the double digit growth is what we should aspire to. And I still believe in that.

Ladies and gentlemen, that’s all the time we have for the Q&A segment. I will now pass the call back to management for closing remarks.

Thank you for participating in today’s conference call. We look forward to speaking with you again in the near future. In the meantime, we encourage any investor interested to contact management with any questions and welcome those visiting Orlando during the winter to schedule a tour or meeting at our headquarters, which can be arranged to accommodate health and safety concerns, concerns while being a productive and highly informative. We hope you can join us. Thank you again and goodbye.

Ladies and gentlemen, that concludes today’s conference. We thank you for attending. You may disconnect your lines.