LightPath Technologies, Inc.

lens elements by a major commercial customer and demonstrates our ability to supply high-quality infrared optics on a commercial scale for an impactful OEM partner. More important is the future growth potential presented by recent achievements as we continue to execute against our strategic plan. Prior to the second quarter, management focused on executing on important changes necessary for our future growth and evolution as a company in terms of corporate governance and DSG, organizational leadership, and workforce alignment. Another critical phase was infrastructure investments to increase and align capacity and capabilities. Most recently, during the second quarter, we announced several technological and manufacturing process developments that create a basis for further differentiating the solutions we can offer as a partner to our customers. Such differentiating technologies are key in transitioning the company from a component provider, which produces items to the customer's specification, to a solution provider, which leverages those differentiating technologies to have an in-depth dialogue and involvement in the customer's design process. and captures some of the value created by owning the IP, which translates to premiums in pricing. LightPath is leveraging its legacy as a low-cost provider with some of the industry's best high-volume manufacturing capabilities to emerge as a partner for our customers on designing optical engineered solutions where we are adding value by offering the best solutions. As we had previously outlined, This moves us from being a component supplier, a reactive player, who focuses on being the lowest cost provider, to a partner that brings the domain expertise in optics to the table, a position that is naturally more proactive and value-added. This process is part of our strategic plan, which is driving our path forward, and it is now beginning to deliver the intended results, with our business development pipeline throttling forwards on the strength of our new free-form optics, infrared materials, and other technological innovations, particularly for LIDAR, ARVR, and space applications. Since introducing free-form optics in October 2021, we have been engaged in an increasing number of opportunities, which include non-recurring engineering projects, NREs, and other programs which could lead to valuable volume production orders. At present, we have a total of eight such high-value, high-volume projects in development, all going through the customer qualification process. This is an increase of five projects from the three that we discussed during our last quarterly report. Almost all of those programs are in the area of LIDAR and ARVR. and have all launched as a result of customers realizing the value of our new free-form technology and are now working closely with us to leverage those capabilities to deliver performance they could not previously achieve in their systems. Growth in these programs is a result of customers wanting priority access to free-form technology among our expanding platform of proprietary materials and manufacturing processes. Once in production, each of those opportunities ranges from 1 million to 5 million in annual revenue potential, with staggered production start dates over the next 24 months. In short, we can go from one 10% customer to many of them, where our operating and financial performance will benefit from leverage on the manufacturing floor and less commoditized solutions to gain pricing power and avoid margin compression. Aided by the substantial completion of investments in manufacturing, coating, and finishing that are integral to our strategic plan, we are excited for what may materialize for growth in revenues and profitability. We are now in the process of volume production readiness for our expanded coating facilities in Europe. With no major investment planned for the remainder of this fiscal year, our next focus on capital investments will be the expansion of our facility in Orlando in the next fiscal year. With vertically integrated manufacturing capabilities on three continents, we are increasingly being sought after by customers and industry partners alike. which positions us to broaden our product portfolio and address some of the most prominent growth sectors of the economy, including LIDAR, augmented reality, and space technologies. Large automotive-related customer relationships are being developed for LIDAR and thermal imaging to provide both autonomous driving and enhanced vision capabilities. Today, we are in a much better competitive position to access these large opportunities due to our differentiating technologies, and in particular, our award-winning free-form optics manufacturing technology. The industry's response to our introduction of free-form optics manufacturing technology with high-volume production has been nothing short of overwhelming. Freeform optics can potentially minimize the size of consumer products, such as augmented reality glasses and laser projectors. Additionally, the enhancements that freeform optics provide to optical design allow, for example, designing much wider field-of-view systems or better resolution and sensitivity for applications such as LiDAR. However, adoption has been constrained by volume manufacturing inefficiencies. By extending our molding technology into the production of high-precision free-form glass optics, we are now enabling myriad new applications and miniaturization of existing optical systems to a level that the optical community has been demanding for a long time. Two weeks ago, we announced that our new free-form optics technology had won the 2022 PRISM Award for Manufacturing. Winners were announced as part of the SPIE Photonics West trade show, one of the industry's most important events of the year. The PRISM award is an annual international competition that honors the best new optics and photonics products and technologies on the market. As mentioned, we now have underway a number of large NRE projects for the development of new custom freeform optics and and subsystems. Projects which represent revenue in the form of the work that is paid for by the customers with resulting intellectual property owned by Lightpath are expected to lead to production orders that require a series of lenses or assemblies, which would substantially increase the company's current manufacturing volume. Once in production, through separate contracts, the proprietary nature of such non-commoditized orders suggests that the higher revenue generation associated with the greater volumes also will deliver an improvement in gross margins as compared with the company's existing product lines. As such, we are delivering on this strategic objective of transitioning into a value-added engineered solutions partner for large global customers as they pursue next-generation technologies. While our product portfolio has made great strides and now addresses some very exciting growth markets, our spending on research and development remained at under $6,000 for the quarter. This spending has been supplemented by NRE projects, as well as grants and partnerships, which serve as a testament to our leading expertise in photonics. Furthermore, we're very pleased to have recently been funded by the European Space Agency and Space Florida to advance the commercialization of our infrared materials to be used for optics in space. A key objective of our strategic plan is to move up the value chain in targeted areas based on technology and engineering capabilities that we have today. To this end, we were honored to have been selected for an exclusive optical usage license to manufacture products using the infrared patent portfolio developed and owned by the United States Naval Research Laboratory. The agreement with NRL provides LightPath with access to an IP portfolio of unique chalcogenide glass compositions to develop more advanced optical systems targeting some of the fastest-growing biomaterial markets, including the infrared imaging market, which is expected to grow from 5.8 billion in 2022 to 8.3 billion by 2025, and the multispectral imaging market, which is estimated to grow from 10.9 billion in 2022 to 17.6 billion in 2025. I am pleased to report that we are receiving very strong market feedback on our NRL IP portfolio, which reaffirms our assumptions that such materials provide significant value. Another development that supports our better positioning is in the area of pricing. In recent months, like the rest of the world, we have experienced price increases on raw materials and energy. As Al will mention in his comments, This has also impacted our margins, in particular in infrared optics, which are mostly manufactured in Europe, where energy prices increase as much as three times prior rates. We are pleased to share that our stronger positioning allowed us to work closely with our customers, where we have been able to, for the most part, increase our prices to offset such increases in cost. Those price increases will start showing an impact in the middle of Q3, and we believe will offset what would otherwise have been eroding margins, something LightPath had experienced all too often in the past. While building for the future, we are not without discipline in the present. Looking at key performance measures, we ended the physical 2022 second quarter by increasing our cash balance, and reducing total debt and inventories as compared to the end of first quarter. Inventories are now at a four-year low, so we are demonstrating operational efficiencies as our backlog and revenues remain near historically high levels. Backlog grew to 21.9 million at the end of the second quarter, an increase of over 13% from the end of the first quarter. following a renewal of a large annual infrared optics supply agreement valued at $4.2 million. Capital investments were modest at about $118,000 for the second quarter, which is within our budget for the year, as we had completed a significant increase in manufacturing capacity expansion last year in accordance with our strategic plan. The impact of our technology development efforts Our partnership and our overall product and manufacturing expansion is a migration to higher-end engineered solutions that afford us with an exposure to large customers and accelerating growth markets, which are expected to lead to increased profitability, particularly since it is unlikely we would face the same commoditization and competitive issues of some of our more mature product lines. Reflecting this continued progress and outlook for growth, LightMap's leadership made open market purchases of Class A common stock during both the first fiscal and second quarter. I was among this group in the first half of the fiscal year and now stand even more aligned with all our shareholders. This concludes my formal remarks. Now I'll pass the call over to Al Miranda, our CFO, to review financial results for the second quarter.

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 10Q 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 have 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, while revenues have been recovering, they still remain below the pre-transition level. LightPath's second quarter financial results were also negatively impacted by expenses associated with the management and employee transition in our Chinese subsidiaries. On an expense basis, one-time costs, charges, and accruals were incurred in large part during Q4 of fiscal year 21, 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 are ongoing, we are unaware of 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 infrared products comprise 55% of the company's consolidated revenue in the second quarter of fiscal 22 as compared to 48% of consolidated revenue in the same period of the prior fiscal year. Visible Precision Molded Optics, or PMO, sales represented 41% of the consolidated revenues in the second quarter of fiscal 22, as compared to 48% in the same period of the prior fiscal year. PMO sales as a percent of overall sales is lower than optimum, as Sam has said, due to reduced sales to our major telecom customer in Asia. Specialty products continue to be a small component of the company's business, representing 4% of the consolidated revenues in the second quarter of fiscal 22 and 21. Revenue generated by IR products was approximately $5.1 million in the second quarter of fiscal 22, an increase of 4% sequentially from $4.9 million in Q1 of 22 and up 6% from $4.8 million into Q21. The increase in revenue is driven primarily by customers in the industrial and defense markets. PMO sales were 3.8 million in Q2, flat from Q1 and down 21% from 4.7 million in Q2 of fiscal year 21. Year-over-year decline is due to lower telecom sector revenues and other sales in China, as mentioned. Beyond these reductions, the company's PMO revenues have strengthened in the areas of sales through catalog and distribution channels, as well as increases in sales to customers in the industrial, commercial, and medical industries. Specialty revenue is sort of a catch-all for products or services that don't fit the other two categories, and they represent a small component of our consolidated revenues. Over the last few quarters, there has been a shift from one-off products towards more NRE projects. This is a different type of revenue altogether. As discussed last quarter, we expect to see an increase in NRE revenues this fiscal year, driven by the need to engineer solutions for new products like free-form molded lenses, as Sam has mentioned. These are one of our new key technologies that we're bringing to market. As we develop these types of products and deliver prototypes and they are accepted and qualified, we would then expect to receive production orders where we manufacture in quantity. In Q2-22, we handled a growing number of NRE projects for commercial and defense applications, again, as Sam mentioned earlier. Let's now move to discussion to margins. I'd first like to share some background that will be helpful for modeling purposes and in understanding the impact of our overall strategic directions. PMO margins are typically higher due to our molding, which enables mass production in a more automated machine process. IR, historically, was more manually produced. But with the growth in our molding technology as applied to IR products being made from our proprietary BD6 material, the margins will increase from both the advantages of the material cost and using the automated molding process. In addition, as we migrate towards engineered solutions, we expect margins to increase. This is due to several factors, including multiple lenses required for an assembly, both types of lenses used in a single solution, and custom-built solutions where our engineering and proprietary designs, along with our manufacturing and assembly, will dictate pricing and margins that may be more immune to industry trends. As a result, ASP, average selling price, which is often cited by analysts who cover us, may be rendered less relevant in the future. To this end, and for competitive reasons, we are going to speak to other metrics and not ASPs when addressing revenues, costing, and margins. Our consolidated gross margin as a percentage of revenue was 30% for the second quarter of fiscal 2022, compared to 37% in the same period of the prior fiscal. and 35% in the first quarter of fiscal 22. The decrease in gross margins as a percentage of revenue is primarily due to the mix of products sold in each respective period. While IR sales have increased, the majority was on a high volume contract. We also had a negative impact on margins as we expanded our coding capabilities in Europe. The ramp up in learning curve of coding in the quarter means fully burdened costs with low volume output. And this is typical for a new coding implementation. Moving on to operating expenses. During the second quarter of fiscal 2022, total operating expenses were 3.8 million, an increase of 206,000 or 6% as compared to 3.6 million in the same period of the prior fiscal year. SG&A costs increased by approximately 7% as compared to the same period of the prior fiscal year. Higher SG&A cost is primarily due to $153,000 of expenses incurred in Q2 associated with our transition in China, including legal and consulting fees. In addition, it was determined that one of the Chinese subsidiaries is obligated to pay $248,000 in VAT and related taxes from prior years. which was accrued during the three months ended December 31st. The remaining increase in SG&A expenses is due to increase in personnel-related costs and a moderate increase in travel expenses as COVID-19 restrictions are reduced. These increases were partially offset by the absence of approximately $400,000 of non-recurring additional compensation to the company's former CEO in the prior year period. In terms of total employees globally, we now have 15% fewer than we did a year ago. We hired senior executives to help with our strategic implementation, that including scaling of operations as we prepare for significant growth ahead. In addition, we replaced our temporary leadership in China with permanent hires that are more well-versed in the industry, as opposed to the fixers or crisis management experts we initially brought on. Several key roles throughout the global organization were filled by promoting from within, which is something we would like to emphasize. This approach also helped us realign our product groups in the direction of our new strategic plan. To this end, we created technical engineering sales leadership for select product groups, and we expect to add one more for this purpose. Otherwise, we are at an optimal workforce level at the present time. Moving on. Net loss for the second quarter of fiscal 2022 was 1.1 million or 4 cents per share compared to a net loss of 147,000 or 1 cent per share for the second quarter of fiscal 2021. The increase in net loss for the second quarter of fiscal 2022 was primarily attributable to lower revenues and gross margin and increased SG&A expenses, including the one-time expenses. The resulting decrease in operating income partially offset by a decrease in the provision for income taxes of approximately $206,000 as compared to the same period of the prior fiscal year. For modeling purposes, We have remaining NOLs to cover our profits on a consolidated basis in the US and pay only Chinese income tax. In Latvia, they level a distribution tax on distributed earnings, but we reallocate the profits to future growth activities. So we have not been accruing tax on earnings there. Cash was 5.1 million at the end of Q2 22, up from 4 million at the end of Q1. Cash flow provided by operations was 1.4 million in Q2 compared with the net cash used in operations of 157 for the first half of the year. This compares with cash provided by operations of 880,000 in Q2 21 and 1.5 million for the first half of last year. The second quarter differential in cash flow from operations is primarily due to changes in working capital items partially offset by the net loss. Cash invested was $118,000 for Q2 and over $1.3 million for the first half of this year. Cash used in financing activities was $192,000 for Q2, and the effects of exchange rates on cash was a negative $4,000. Therefore, the change in cash was positive $1.1 million for Q2 and negative $1.7 million from the end of the prior fiscal year to the end of the second quarter. of fiscal 22. At December 31, 2021, from the beginning of the fiscal year, receivables increased by 300,000, payables and accruals reduced by 653,000, and inventory declined by 1.4 million to 7.3 million in total. Our backlog as of December 31, 21, $21.9 million, up from $19.3 million at September 30th, 2021, and $21.3 million at the start of the fiscal year. The quarter-ended backlog is the highest level in a year, which accounts for new contracts signed and the renewal of our single largest contract valued at $4.2 million, which have been partially offset by the reduction of certain telecom business, as we've discussed. For our largest contractor, normal deliveries through the year to bring the backlog level down as the year progresses. This December's renewal of our largest contract marks the fifth consecutive year that we have won the high-volume order. In addition, from the same customer, we have expanded our relationship as a valued partner to provide other IR solutions under separate programs. As a reminder, it is customary for our backlog to fluctuate during the year because of the timing of bookings of orders and annual renewals from all of our customers. With this review of our financial highlights and recent developments concluded, I'll now turn the call over to the operator so we may begin the question and answer session.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star then one. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your question, you may press star then two. Once again, that is star then one to ask a question. We will pause momentarily to assemble the roster. The first question today comes from Brian Kintzlinger with Alliance Global Partners. Please go ahead with your question.