Good afternoon, everyone, and welcome to the LightPath Technologies Fiscal Fourth Quarter and Full Year 2023 Financial Results Conference Call. All participants’ will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. At this time, I'd like to turn the conference over to Al Miranda, LightPath's Chief Financial Officer. Please go ahead, Al.

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 as 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 projected results would be realized. In addition, references may be made to certain financial measures that are not in accordance with generally accepted accounting principles or GAAP. We refer to these as non-GAAP financial measures. Please refer to our SEC reports and certain of our press releases, which include reconciliations of non-GAAP financial measures. Sam will begin today's call with an overview of the business and recent developments for the company. I will then review financial results for the quarter and fiscal year. Following our prepared remarks, there will be a formal question-and-answer session. I would now like to turn the conference over to Sam Rubin, LightPath's President and Chief Executive Officer. Sam?

Thank you, Al. Good afternoon to everyone, and welcome to LightPath Technologies' Fiscal 2023 Fourth Quarter and Full Year Financial Results Conference Call. Our financial results press release was issued after the market closed today and posted on our corporate website. The fourth quarter was highlighted by significant developments in several of our pillars of growth, which I have been discussing as part of our strategic shift from a component manufacturer to a value-added solutions provider. To recap for our investors, LightPath has been transitioning in the last few years from a pure component manufacturer focused on being the lowest cost provider to a value-added partner for complete solutions based on optical technologies whose differentiators are mostly technological. Along those lines, we have been focusing on three pillars of growth: imaging solutions, such as cameras; growth in new markets, such as automotive; and the defense business, all of those driven by our differentiating technologies such as our proprietary material. As previously outlined, one pillar of growth revolves around the defense business, increase, driven mainly by leveraging our unique infrared material. To achieve significant growth and market share in that established defense market while still commanding a premium, we're leveraging these exclusive materials for infrared imaging as an entry point into new programs and to become the supplier of choice for infrared optics in the aerospace and defense industry. One advantage of our materials is that they are an alternative to germanium, the dominant material used in lenses for infrared imaging. The DoD and the White House have identified germanium as a strategic vulnerability within the supply chain. With most of the germanium originating from China and Russia, alternatives are strategically important. China is the world's largest supplier and recently announced a limit on the exports of gallium and germanium. Our…

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 in the 10-K for the period. I encourage you to visit our website at lightpath.com to access the documents. I will discuss some of the primary financial performance metrics and provide additional color on them to better assist the investors. On a consolidated basis, revenues for the fiscal fourth quarter were $9.7 million, compared to $8.9 million in the year ago period. Sales of infrared products were $5.5 million or 56% of the company's consolidated revenue. Revenue from precision molded optics, or PMO products, was $3.2 million or 33% of consolidated revenue. Revenue from specialty products were $1 million or 11% of total company revenue. The increase in infrared product sales was primarily driven by sales of diamond-turned infrared products and is primarily attributable to customers in the defense and industrial markets. The decrease in PMO revenue is primarily attributed to a decrease in sales to customers in the telecom and commercial markets, which is partially offset by increases in defense and industrial customers. PMO sales in China continue to be soft across all industries. The increase in specialty optics during the quarter was a result of increased sales of custom visible lens assemblies to the medical industry. Gross margin in the fourth quarter of fiscal 2023 was approximately $3.1 million, an increase of 10%, as compared to approximately $2.8 million in the same period of the prior fiscal year. Total cost of sales was approximately $6.6 million for the fourth quarter of fiscal 2023, compared to approximately $6.1 million for the same period of the prior fiscal year. Gross margin as a percentage of revenue was 32% for both the…

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Brian Kinstlinger with Alliance Global Partners.

Hey, guys, this is Shervin on for Brian. Thanks for taking my questions and congrats on a good quarter.

Thank you.

I have a handful of questions. Starting off with Mantis. When do you expect the valuations to end and lead to production decisions? Do you have any greater visibility or confidence when production will start to ramp?

Yes. So to give a glimpse of the Visimid acquisition now, we're getting a bit of a boost since some of their customers have interest in Mantis or even activities around that. So I would say we expect this fiscal year to ship a couple of hundreds of those, whether in different forms, via Mantis or integrated into other Visimid products. I think the biggest application we're seeing now in terms of the most significant upside is a fire detection or flame detection in which is a $2 billion market of flame -- optical flame detectors that exist, and that Mantis can add a considerable value there in improving the sensitivity and adding more functionality. So it's a matter of teaming up with some of those -- one or more of those vendors of the existing flame detectors, and ideally one that has a large installed base that can roll out a Mantis-based flame detector quickly. But let's say, this year, probably a couple of hundreds.

Great. That's awesome to hear. So a similar question, but when it comes to supporting autonomous braking systems, are you working or looking to work directly with Tier 1s or the OEMs? And how long before significant adoption there? I know that the Department of Transportation made that announcement, but are you seeing demand start to move as suppliers get ready?

Yes. Yes. That's a great question. So at this point, we're not working directly with Tier 1. So we're working with integrators that then work with Tier 1 with the place we kind of like to be in terms of our exposure, our liability exposure, but also sort of the requirements needed from that. In terms of rolling out, we're -- the one company that we've mentioned a couple of times that we are already qualified into them, and we're now in negotiation of a supply agreement with them. And if that is the case, then this year -- this year, meaning this fiscal year, we'll start towards the end of it, we'll start seeing already shipments or product sales.

Great. Also awesome to hear. Last couple of questions. Like you mentioned, government tends to move pretty slow. I know you mentioned one opportunity already within the DoD, but how do you think about the adoption of BD6 and other materials to replace the dependence on germanium. Are there other opportunities that higher in the pipeline that are looking to replace germanium with BD6? And I have another follow-up.

Yes. So BD6 being already fully qualified and utilized is already embedded in quite a bit of systems. What -- the main interest right now is the new materials because since none of the materials is a one-to-one replacement for germanium, you need more than one material -- one type of material for that. Additionally, the new materials also offer advantages, compared to germanium. So smaller systems or better performance in extreme temperature conditions are two of the bigger -- the most important advantages we're seeing. I'd say that as far as I know, they are right now two major systems in the redesign process. With one of them, we're expecting to start receiving technical details in the next couple of months probably. So even though government does move slowly, there are cases where they're trying to accelerate it.

Speaking of one-to-one, you mentioned that right now, you guys have the production passage of 10 tons per year of the Black Diamond material versus currently 50 to 150 tons in germanium are consumed per year. Thinking about tons, if you're weighing them both, does 1 ton of BD replaced 1 ton of germanium?

Pretty much probably. Never thought about it that way. You'd probably need a bit more -- you need more of the Black Diamond to replace germanium simply because germanium today has an advantage where the scrap from it can be recycled and regrown into a new germanium ingot, where that technology does not exist today for the Black Diamond material. That is one of the projects we are reviewing with DoD for DoD to finance that because that will offer a substantial reduction in costs of the Black Diamond in the long-term. But right now, without that technology, you would need more Black Diamond material to begin with to achieve the same number of lenses like germanium.

That perfectly segues into my next question in terms of the DLA funding to qualify the other BD products. I know government, again, we said, moves slow. How soon are you expecting this first phase of funding? And then once you receive the funding, how long does it take to qualify the other BD products? And are there expanded use cases outside of BD6 with your other BD products?

Yes, absolutely. So the government does move slowly, like you said. The DLA project has been a year in the making. So it happens to be that it was signed and completed right around the time China made the announcement of germanium, but probably more coincidence than the government suddenly moving quickly. Based on that, we actually started working on that project already a few months ago. So we have a head start. I would say, by the end of this calendar year, meaning in the next three to four months, we expect to be very close to finishing the first phase of the DLA. Of course, their payment to us is gradual along the way, so we don't need to wait until the end of it to receive the actual dollars. But probably towards Q1 of next calendar year, our fiscal Q3, we will have already -- we will start shipping those materials out to customers to integrate into systems. That said, the urgency is very clear to a lot of customers, and we are working very closely with customers to enable them to start already redesigning or designing their systems with those materials now without waiting for the final sort of formal manufacturing readiness, MRL or TRL level that they need. And we do that by sharing with them data as we're measuring, as we're going through, as we're starting to produce small materials. And within reason, they can usually use that to already fine-tune or do 80% of their design work so that once the specs are locked in and everything gets done, they are already far advanced in the redesign costs.

Great, thank you for answering all my questions. Really, really excited to all these growth drivers kick in.

Same here, absolutely. Good to hear from you. Thank you.

Next question is from Glenn Mattson with Ladenburg Thalmann. Please go ahead.

Hey, guys. Thanks for taking the question. Sam, curious, the last time we spoke, I believe you kind of had -- you're talking about the export controls of germanium that have been placed by China and just the idea that it hasn't really kicked in yet or whatever. So you were still kind of in a wait-and-see mode to see like what kind of supply you could get or what kind of supply the market could get. Can you just give us an update on that? And also while you are doing so, I believe you had some long-term contracts in place, some future contracts on germanium and what not to kind of ensure your own supply for at least the medium kind of term? Can you give us an update on that as well?

Yes, sure. So to put it into perspective, we consume about 1 ton of germanium a year, which we buy from China, used to be some from Russia, from China in the form of what's called a pre-generated blank. So a raw material that is shaped close to the size of a finished lens, and then we process it into a finished lens, coat it, in times assemble it, but it's part of either components or subsystems that we set. So even in our own case, we're not completely switched over to BD6 and everything. There are some cases where germanium is still needed. At this point, we started submitting the different export licenses already in mid-July to our vendors in China for the next shipment of germanium. The end users that they then submitted to the government got kicked back a few times, went back and forth, different changes in that until everyone was clear on what information and format they want. And they currently believe that those shipments, which we started working on in mid-July, will ship out of China in mid-November. However, once they receive their export license, it is an export license for all shipments related to that order. And since we secure our supply of germanium for one year at a time, that means that at least for the next six months, six to eight months, we should be able to get shipments from China under those export licenses, assuming we do receive them by mid-November. I have not yet heard of anyone that has the export license that did not receive or had it denied. But yes, I've also not heard of anyone that actually got approved yet. So to the best of my knowledge, no germanium has shipped out of China, at least in the segments of optics and the people we speak to since that started and mid-November is probably the earliest it would be.

Okay. And then you have supply up until about that point or beyond that as of what you have?

We actually have enough to keep going beyond that point also.

Right, and can you just give investors kind of a sense of like what the backup plan would be if something like that were to get disrupted?

Yes. I mean, to us, it would mean working closer with the customers and it's an incentive to the customer to redesign their systems to use BD6. In a way, long-term, such a disruption is good for us. Short-term, it could mean a few million dollars of revenue in a given 12-month period for us. So probably around $4 million to $5 million, I would guess, something like that. But we -- there's a lot of effort going into and a lot of work going in to ensure that, that does not happen and there is a backup and it's BD6 or other Black Diamond work. There is also a stockpile of germanium at Defense Logistics Agency's strategic materials that in the cases of projects that are for the DoD end use, we could tap into that stockpile and purchase material from there.

Right, okay. Thanks for that. Is there -- I imagine the next round of germanium if it comes through would be -- which I'm sure it will, but if it does, it would be at a higher price, I imagine right now. So is there a possible to turn that price increase to pass it along? Or is that...

No, we lock in the place that's for a year. So we already at our price, given no change to that. We've seen a little bit of indications of price increase. What we really -- the most disturbing part we're seeing there is that when we ask for a quotation, the validity of the quotation is very short. So if in the past, you would get a quotation and you had a month to order at that point, the vendors are now giving quotations sometimes with a week of validity. One vendor gives it with three days' validity. So to me, it's an indication that they are seeing or expecting volatility in pricing and don't want to indicate -- and don't want to commit themselves to price lower than that.

Okay, great. That's great color. Al, I'm curious about the gross margin as I look at it kind of on a sequential basis? Because I know Q3 had the issue where some shipments got pushed out due to the finishing of the facilities revamped that you were doing? So one of the reasons that Q3 was viewed as a little lower was because of lower throughput through the facilities and whatnot and I'm just curious that PMO was flattish or first tier sequentially? So just maybe some color as the sequential rate of change as to why gross about -- just a little bit even given that the facilities are now up and running or maybe there's some time for them to ramp up or something like that. If you could give color would be great.

Yes. So most of what we ran into was that although the facility was shut down in Q3, we outsourced, and we outsourced the -- a lot of the infrared coating. And that just came with a high price, higher logistic costs, which flowed into Q4. So we pushed everything out in Q4. We nearly caught up from the shortfall in Q3, but we did it at a price, and we threw over time at it as well to catch up with customer orders. So it was a little disappointing for us, but we kind of knew that we were going to spend money to catch up and satisfy customer delivery dates.

Okay. And then going forward, you have an expectation on the gross margin side to kind of trend a little better given the move into more specialty products and as those facilities are more mature or whatever? And just what's the thought process for gross margins looking at that?

So margins should continue to tick up at this current Q4 mix. But to be honest, I'd like to see the Q4 mix also become more favorable. So in Q2, I think the mix looks similar. And our Q3, I think we'll get a more favorable mix. So higher expectations for margins in Q3 and Q4. So it's two things, it's the overall improvement and certainly, the Orlando construction now being done-done will improve our results, but it's also a little bit more of a favorable mix in the back half of the year.

Great. And last one for me. On the China side, do you think that you're at a base level now that that decline is complete? Or are you concerned that there can be more run off there?

I thought we were at a base level 12 months ago. Yes, where I still -- every time I say, it can't get worse, somehow -- I mean…

Unfortunately…

You'll read the news. I mean there was a Bloomberg article today that just is predicting a complete doom-and-gloom scenario in China. I find it hard to believe that I'm rooting for the Chinese government here.

Okay, great. Alright, well thanks for color, everybody and have a good night.

Thank you, Glenn.

Your next question is from Scott Buck with H.C. Wainwright. Please go ahead.

Hi, guys. I appreciate the time. Just kind of one for me at this point or maybe one and a half. On -- a follow-up on China. What does China represent now as a percentage of total revenue? And then the second-half part of that is, Sam, how do you view China as a longer-term target market?

Yes. I'll answer the second part while we go to pulling up detail for the first one. I'd say that given that China is -- even with the customers we have left -- tends to be at the lower end of the scale, meaning like commoditized parts, still some telecom there. It is probably not strategic for us in any significant way. I feel China at this point, the investments that we have in manufacturing, a facility that we have on the book that we're using to the most if we can. But strategically, I'm not expecting to see anything significant coming out there other than the regular flow of products to the extent of which we can use that facility.

Great. I appreciate that. And in terms of what China now represents as a percentage of revenue, do you have a ballpark?

Less than 10%, Scott.

Less than 10%, okay. That’s it from me, guys. I appreciate it. Thank you and congrats on the quarter.

Absolutely.

Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Sam Rubin for any closing remarks.

Thank you, everyone, for taking the time today to follow LightPath Technologies. We appreciate the trust placed with us by our stakeholders and look forward to future calls where we further discuss the fruits of our efforts to retool the business and move the company forward. Thank you, and good night.

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