Welcome to the LightPath Technologies' Fiscal Third Quarter 2024 Earnings. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. And I would like to now turn the call over to your host, Albert Miranda, Chief Financial Officer. You may begin.

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, and 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 and associated disclaimers. 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. 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. Welcome to LightPath Technology's Fiscal Third Quarter 2024 Financial Results Conference Call. Our financial results press release was issued after the market closed today and posted on our corporate website. Fiscal third quarter and additional developments in early 2024 continue to underscore our strategic shift from a component manufacturer, what we like to refer to as LightPath 1.0, to LightPath 2.0, a value-added provider of assemblies, and set the stage for LightPath 3.0, a custom infrared camera and subsystem manufacturer. 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 value-added partner for complete solutions based on optical technologies whose differentiators are mostly technological. As you likely recall, during our first fiscal quarter call six months ago, we stated that LightPath was making a strategic decision to move away from Germanium-based business, and that as a result of that, the company would likely see two slow quarters. The quarter we're reporting on today is the second of those two quarters, and as expected, we're now on a recovery trajectory and on track to return to profitability during the next fiscal year. Together with the recovery in sales, we have also been working on multiple tactical initiatives that will assist in our return to profitability. One such initiative has been to finally complete the full integration of ISP Optics, which was acquired in 2017, into LightPath's ERP system. I don't think I need to explain why that is needed and its impact on efficiency and operation. It did, however, create some short-term impact to our inventory value that also hit the cost of goods sold line for this quarter. I mentioned this just to provide the context…

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. I'll discuss some of the primary financial performance metrics and provide additional color on them to better assist investors in analyzing the company. On a consolidated basis, revenues for the fiscal third quarter were $7.7 million compared to $7.4 million in the year-ago period. Sales of infrared components were $3.6 million, or 47% of the company's revenue in the fiscal third quarter. Revenue from visible components was $2.7 million, or 35% of revenue. Revenue from assemblies and modules was $0.8 million, or 10% of total company revenue. Revenue from engineering services was $0.6 million, or 8% of total company revenue. Infrared component sales increased approximately $0.5 million, or 16%, primarily due to an increase in shipment against an annual contract for an international military program. This contract was also renewed during the first quarter of fiscal 2024 for a higher dollar value than the previous contract. Visible component sales decreased approximately $0.4 million, or 13%, primarily due to a decrease in sales to customers in the defense and medical industries, and sales to customers in the telecom industry in China. Assembly solutions revenue decreased approximately $0.2 million, or 16%, primarily due to timing of shipments against a multi-year contract with a defense customer, partially offset by the addition of Visimid revenue. Engineering services increased approximately $0.4 million or 211%, primarily driven by Visimid's contract with Lockheed Martin, where revenue is generally recognized based on the achievement of milestones. Gross margin in the third quarter of fiscal 2024 was approximately…

At this time, we will conduct the question-and-answer session. [Operator Instructions] We are now ready to begin. Our first question comes from Glenn with Ladenburg Thalmann. You may begin.

Yes. Thanks for taking the question. Congrats on all the progress. A lot going on, as you guys both referenced. I'm particularly interested in the second defense program for the new BDNL material. I know the press release, which came out, I guess, about a month ago, talked about 150,000 lenses in an existing program of record. Can you give us a little more detail as to what that is going into and maybe the timeframe of when you think that stuff might start and how long of a contract that might be?

Yes, absolutely. I think the number of 150,000 lenses is definitely correct, but things have changed a bit since then for the better in a sense that we're now going to build the complete system. So, we're not going to be selling them as 150,000 individual lenses, but rather build it into -- I think it's something like 30,000 systems, roughly five lenses system, something along that line. I don't know yet the price per unit for that, so I can't comment on that, but it's a pretty complex assembly, so it's not going to be insignificant, let's say. I do know that the development part of it is started now and it's going to be probably a year is what we're looking into. In a year's time or so, prototypes followed by LRIP, low rate production, and then if all successful, starting rolling out the 30,000 systems, which would probably take a few years, I'd say, most likely over a five to eight year period for the entire project, since this is an upgrade to existing aircraft and therefore needs to be done gradually as aircrafts come in for service. I think that's about what I can share at this point.

Yes, no, that's very helpful. Second, just quickly, I'll move on to the highway safety stuff.

Yes.

Since that came out, I realize it's really recent, but have you been back in touch with some of the automotive customers? And just what's your thought in terms of when they would have to sign on with projects in order to begin the ramp and all that stuff?

Yes.

Would you expect some people to kind of roll it out earlier than the mandated timeframe and all that kind of stuff would be great?

Yes, definitely, communication has picked back up, including the large customers that went into sort of hibernation for a while. I'd say that at first, the communication was mainly all of us high-fiving each other on the success of getting this in. I mean, we're all very excited, right? Besides the business prospect of it having better safety on the roads is something for all of us. I'm pretty sure that at least two companies that are already in a fairly advanced stage are not going to wait until then to start rolling it out. What is probably more likely, and this is just my assumption right now, not based on much, is that they will start rolling out some systems like that in a couple of selected models or so to start getting more data, more experience with it. And the five-year timeframe gives all of us in time to take that data, take that feedback, fine-tune it, fine-tune the system, and so that by the time it actually does hit the road on the mandated date, it's a far better system. And that's really the intention of DOT, I think. If you read through the rule, they very specifically call out what are the areas in terms of the nighttime performance that need to be improved. They even talk about the testing subjects need to now emit heat so that the thermal imaging cameras would see that, things like that. There's quite a bit of work to do that. For us, it's really good. A short timeframe means we would have to throw a lot at it now, and it would significantly distract us from many other areas of growth. The longer timeframe lets us do it right, lets us possibly look for a partner to work with on this. There's a lot of really good options going forward now.

Yes, that's great. Thanks for the update, Sam, and congrats again.

Thank you.

Our next question comes from Jaeson at Lake Street Capital.

Thanks for taking my questions. I just want to start with gross margin in the quarter. Appreciate all the color that you provided. I guess a two-part question. What would gross margin have been without that inventory write-down, and then how should we think about margin returning to a more normalized level going forward?

That's you, Al.

Sorry, Jaeson. Can I hear the second part of that question?

Just how we should think about gross margin going forward.

So, I guess, it was several hundred thousand was the adjustment. If you apply that to 7.7 million in sales, if we do the math on it, we get to around about 30% without the inventory cost adjustment. And margins should be in the low 30s the next couple of quarters. As we shift towards 2.0 and 3.0, we expect that to go up, but --

Okay, perfect. And then, following --

Then I would say I'm going to qualify that and say independent of non-recurring expenses, because I did give you a heads up that you're going to see some non-recurring expenses in Q4 as we drive more costs out of the organization. Jaeson, did we lose you?

All right. I think that's the end of that question. [Operator Instructions] All right, looks like there are no further questions. Jaeson is back. One second.

Hey, guys. Sorry about that.

Hey, Jaeson.

Hey, sorry about that. Just following up on the auto opportunity, just to clarify, you guys won't have to be requalified. It isn't a new SPAC. It sort of just progresses. Your current relationships just continue to progress. Is that fair?

Yes. I mean, with that specific customer, every design is different for every customer. Every customer does their qualification process, right? That's a given in the auto world. If that specific customer chooses to continue with the system that we're working in, that we're qualified in, then we do not need to get re-qualified. I don't know yet if that customer is simply going to brush off the dust now and go back to that exact same system, or if that customer will say, "Well, you know, what? This now gives me time to redesign my entire car, redesign everything," and therefore, we're back to square one. In any case, it does give us a tremendous advantage since we've already shipped a large number of those, had them in the field, have them tested, so there's quite a bit of credibility and learning curve behind this.

Got you. Now, that's really helpful. Then just the last one from me, and I'll jump back into queue. The European defense manufacturing license seems pretty significant. Just curious, the timeline you're thinking about as far as when it really will have an impact. I assume you've been assuming you would get this. And does this mean that you could see a quicker impact, or will this take some time as you start to negotiate with these agencies?

Yes, we applied for it exactly 12 months to the day almost from when we received it. And I guess everyone sort of knew it would take exactly 12 months to the day, something in the bureaucracy or whatever. So, to that extent, I know that we have at least two customers in Europe, two large defense companies in Europe that have started working with us in anticipation of us receiving it. So, at least from those two customers, I can say with a very high degree of confidence that this is coming shortly related to that. With others, it might take longer. The question is always like in those defense businesses, do we step into an existing program and get qualified as a vendor for something that was already designed and done? Or do they choose us for new programs and then a two-year cycle or whatever in those cases? I am pretty sure that it will be more of the first one. We're going to get stepped in and qualified into existing programs because the growth of the defense spending in Europe has been so tremendous and the supply chains are so, so strained that I think they're going to welcome having new suppliers for even existing programs, which works great for us.

It's very positive.

Okay. Now, that's really good to hear. Thanks a lot, guys.

Okay. Thank you.

Our last question comes from Gene with ingerletter.com. Please ask your question.

Yes. Hi, Sam and Al, and thanks for your continuing hard work to develop this company, big transformation. I hopped on the call a little bit late. I've been under the weather, but in any event, I don't know if you expanded much on the potential from the Lockheed situation. I realize there's a competing prime contractor there. If not, and the extent to which it at least introduces you to other projects in the realm, perhaps you can expand on that. And I'd also like you to update us, if you didn't already, on what's going on in the world of space communications.

Okay. Yes, definitely a lot there. And welcome, Gene. Sorry to hear you're feeling sick. On the Lockheed, we updated that we delivered on the first milestone on time, full performance, which is great. We didn't update much more after that since nothing has changed significantly. So, we're still looking at the same time frame. We're still looking at the same massive hundreds of millions of dollars in potential of production level sales. And it's all great. And as we indicated last time, Lockheed wants to start setting up production even within this year ahead of time here in Orlando. And that is something we started working on, but we don't have much to report on that yet. Asking about did it open up other opportunities, that's actually a pretty good question, because it did open up already for us additional programs in Lockheed. As expected, all the defense contractors tend to take a core technology that's developed and try and use this on multiple platforms. And this is no different. And we have some additional programs that we're in Lockheed that are in the R&D stage. And we're hoping that in the next six months, at least one or two of them transition to become program of records, and we'll be able to talk about it. But it's pretty similar in a sense of doing similar product, similar core technology of LightPath. The optical communication in space is going really well. Our prime customer there has, I think, increased their order. I'm assuming it means that they're delivering more satellites. We don't know exactly full details. Everyone is a bit tight-lipped and understandably on that. There's a couple of other projects. There's a small development project that we have that is more related to quantum encryption of optical communication, same free space optical communication and a few other things. But I'd say we are on a good steady rate of delivery and very good performance by our team on our biggest space program for optical communication.

Perhaps all you need to do is change the name of the company to LightPath AI and people will finally find you.

Yes, I can try that. That's like back in the dotcom area where everyone just added dotcom to their name, right?

Including Mr. Dotcom, the fat German guy.

Not familiar with that, yes.

Oh, it's true. And at one point, he controlled more domain names than anybody in the world.

All right. Yes.

In any event, no, I think what you're doing is great. I think it doesn't take a rocket scientist, which a friend of mine happens to be, but it doesn't take a rocket scientist to recognize what Lockheed does in Orlando. And it's basically one division, which is called Missile and Fire Control. So, I suppose you can't get more specific, but I have a rough idea of what they work on there. And certainly, there's a need and quantity for things like infrared camera modules and target acquisition sensors and what have you.

Yes, absolutely. I think one with a bit of diligence and digging in Google can also find what programs Lockheed got awarded and is working on to connect the dots.

On the space scenario, what I'm talking about is also the idea of whether there's any recurring annuity-style revenues from developing communications within a constellation, whether it's for cellular, whether it's for a defense network. Obviously, the encircling Starlink or anybody else, they're going to encircle the globe and they have to have downlinks to various points on Earth. And if you're doing a one-time sale of equipment, it's not the same as something that produces residual income.

Well, I can share with you that the positive thing here is that the lifetime of those satellites is pretty short. And I believe that those satellites, if you look at Starlink as an example, I think they publicly talked about the roughly two-year lifetime of a satellite. So, while it is not a recurring revenue as I would love to have, like a license and just a piece of software that you write once and keeps paying back, it is a recurring revenue in a sense that even when the constellation is fully deployed, we're going to need to provide optics and assemblies there and everything we provide on ongoing basis to replenish the satellites that burn out.

You're basically saying you're not in a position to provide man -- backspace management, if you will, of these systems, which would be a recurring revenue approach. And that is AI.

Yes. In this case specifically, in this program specifically, what we provide is a glass, it's a hardware.

Well, and I hope it develops very well.

Okay.

And by the way, one quick question which might be odd and then I'll jump off, which is I saw that there's a new photonics department created at UCF. When I logged in, I heard -- the first thing I heard was something about UCF and a joint project. Is that you? And I know that there was an electronics department, Eichenholz, whatever his name is, was the co-founder of Luminar, which you may have provided lenses to. And but is this the same thing or is this a whole separate department, which they and University of Arizona in Tucson appear to be the only places working on this.

Yes. Jason Eichenholz is a good friend, and is doing great things with UCF and with other organizations. This is not related to that. This is collaboration with Dr. Kathleen Richardson, who is part of Creol, the school of optics, and has been for so many years, and she is a well-renowned expert on the field of infrared glass. And it's a very important collaboration, which DoD spending $1.2 million with us and other members of that collaboration to develop this recycling technology, which down the road will help significantly reduce the cost of the materials. Germanium has an advantage, where 30% of the material roughly that gets scrapped or is leftover in production and so on, gets recycled. So, you can sell back the leftover germaniums that you have for cents on the dollar. And then, that gets thrown in and added into the next batch of germanium. We do pretty much do the same with chalcogenides with our BlackDiamond glass. And that means that down the road it would drive price down quite a bit.

While we're adding, could I quickly ask of whether you have any involvement and drives my channel laser systems, which were added about three years, never made progress. But supposedly, the military is not only making progress, it's starting to equip ships with it. And I wonder if you're involved?

It is possible. We honestly don’t know. We provide a lot of infrared optics to a lot of different players. I don’t keep track of every single project, if we do it from the level of the components. I'm not aware of involvement in the level of engineering or subsystems that we have in that. Our subsystem and the sort of solutions, product, all are sold around imaging.

So, you are not involved in, for example, even in Israel, in something like Iron Dome?

Maybe we, maybe we aren't. If we are, it's from the component levels.

Yes, I got you. I appreciate it. Good luck, guys. I know this is challenging times.

Thank you.

I appreciate it.

At this time, there are no further questions. I would like to turn it back over to our moderator, Albert Miranda for closing remarks.

Okay. Thank you everyone. It's Sam who is making the closing remarks. And thank you everyone for taking the time to follow LightPath Technologies. Really appreciate the continued trust you place with us. We are on a long journey, and we are making good progress, we are on the turning point right now, and the coming quarters are going to be critical, and we are going to be seeing some of the fruit of the efforts start to come to fruition and deliver results. Thank you, and goodnight.

This concludes today's conference call. Thank you for attending.