Good afternoon and welcome to the LightPath Fiscal 2016 Second Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Dorothy Cipolla, Chief Financial Officer. Please go ahead.

Thank you and good afternoon. Welcome to LightPath Technologies' fiscal 2016 second quarter financial results conference call. The call today will be hosted by Mr. Jim Gaynor, President and Chief Executive Officer. Following management's discussion, there will be a formal Q&A session open to participants on the call. Before we get started, I'd like to remind you that during the course of this conference call, we will be making a number of forward-looking statements that are based on our current expectations and involve various risks and uncertainties that are discussed in our periodic SEC filings. Although we believe that the assumptions underlying these statements are reasonable, any of them can prove to be inaccurate and there can be no assurance that the results will be realized. With that out of the way, it's now my pleasure to introduce Mr. Jim Gaynor, President and CEO of LightPath.

Thank you, Dorothy and welcome to everyone who has joined us on the call today. We appreciate your interest in LightPath. I will open with an overview of operational results, highlights and recent developments and then we'll turn the call over to Dorothy for a more in-depth review of our financials. After some closing remarks, we'll open the call to your questions. We had another great quarter with strong revenue and margin -- strong revenue growth and margin expansion. It really set us on the course for a record year. This marks our fifth consecutive quarter of strong fundamental performance since we implemented a series of new growth initiatives in early 2015. Here are the highlights for the second quarter of fiscal 2016. Revenue for the second quarter increased 26% to approximately $4.2 million compared to approximately $3.4 million for the second quarter of fiscal 2015. Among our previously disclosed operating performance objectives, annual revenue growth was set at 12% to 16%, so we have significantly exceeded our target year-to-date. Gross margin was 56% in the second quarter of fiscal 2016 compared to 38% in the quarter of -- the prior quarter of 2015. Operating income for the second quarter of fiscal 2016 was approximately $607,000, compared to an operating loss of approximately $405,000 for the second quarter of fiscal 2015. Adjusted EBITDA which excludes the change in the fair value of the company's warrant liability, which Dorothy will address later, was a positive of approximately $737,000 for the second quarter of fiscal 2016 compared to a negative EBITDA of approximately $240,000 for the second quarter of fiscal 2015. The fiscal 2016 second quarter adjusted EBITDA margin was 17%, well in excess of the annual operating performance objective which was set at greater than 13%. Our reported net income for…

Thank you, Jim. First I'd like to mention that much of the information we're discussing during this call is also included in the press release issued earlier today and on Form 10-Q which we filed today. I encourage you to visit our website at lightpath.com and specifically the section entitled Investor Relations. I'll now review financial performance and operational details for our fiscal 2016 second quarter which ended on December 31. Revenue for the second quarter was $4.2 million, an increase of 26% as compared to last year. The growth is attributable to 133% increase in sales of our specialty products, and a 234% increase in sales of non-recurring engineering projects of which 93% of these was reported infrared NRE projects. Precision molded optic revenues increased by 1% and infrared product revenues increased by 8% in the quarter as compared to the prior year. This marks the fifth consecutive quarter when we have experienced year-over-year increases in sales of both of our infrared and precision molded optics lines. In addition to these product groups, this is the second consecutive quarter in which our non-recurring engineering revenues increased by over 200%. In terms of geographic revenue mix 40% was from the U.S., 32% was from Asia, 24% was from Europe and 4% was from the rest of world. The gross margin as a percentage of revenue in the second quarter was 56%, this compared to 38% last year and 54% in first quarter of the current year. The improvement in gross margin as a percentage of sales on a quarter-over-quarter basis was driven by the favorable product mix with higher selling prices leveraged to the sales volumes against our manufacturing overhead costs and the realization of the full benefit of our lower cost manufacturing facility in Zhenjiang, and the elimination of…

Thank you very much. We will begin the question-and-answer session. [Operator Instructions] First question comes today from John Noble with Taglich Brothers. Please go ahead.

Hi, good morning Jim and Dorothy. Congratulations on a good quarter, excluding the warrant liability it was a nice bottom line. I wanted to ask in particular, the Q2 revenue, I mean obviously compared to last year it was nice but it was relatively flat with the first quarter, they were both at about $4.2 million. So I was hoping you might be able to break out which segments grew and which declined from Q1? I just wanted to see what the specifics were in those segments. I'm sure some improved and some didn't but -- and I'm just curious at this level here what do you think it's going to take to get you passed like a $4.2 million, $4.3 million range going forward?

Well, I think we will just continue to keep growing. The growth that were seeing I think is representative of the type of business and I think as we continue to exceed or be around $4 million of revenue a quarter with the kinds of margins that we're generating, it's pretty damn good performance. So I think it's -- if the business continues to grow like it is, that's going to be the natural course of things and we'll continue. As we have the NRE type things, we saw that those types of development money is coming in, those are all for new projects and that's the beginning. So as that -- as we continue to get those kinds of opportunities and do those design work for our customers, those generally will turn into business down the road. So I think the revenue growth will continue, we said we can grow between 12% and 16% -- those are our targets and we're exceeding those. So I don't look at it the way you're looking at it, I look at it as we are maintaining that level of growth and it's -- I think that's a good level.

And speaking of gross margins, because obviously the last quarters you did about 54% and now you just did a 56% gross margin on similar revenue of $4.2 million. So with an anticipated product mix you see going forward, where do you think gross margins would be good from modeling purpose right now, I mean you just came off a 56% quarter, prior was 53% on similar revenue. So I'm just trying to get a handle on this because I think I looked at it about 50% but I think I maybe a little bit conservative on that. You tell me if -- like lower 50s is more to look at your business going forward?

That's what I believe. I mean as we said, we expect that based on how the mix flows it will be in the upper 40s to mid-50s but I think the kinds of margins that we're generating in those lower to mid-50s is the right place for us and that's what we're trying to maintain. The reasons that we are hitting that level I think are going to continue, I mean, we're -- we have that lean overhead in place, we've got very good performance out of our Chinese facility as we moved to that new facility. So those kinds of changes are permanent, they should continue. The part of it that will fluctuate is the part that's affected by mix but the areas that were growing in the specialty products area and as we're continuing to build volume in the infrared, those are higher margin type opportunities and so I think that's about right where we should be in those low 50s.

Okay. And one more question, I mean, you mentioned the growth of specialty products and infrared, and if I could just pinpoint in particular the end markets that are primarily responsible for the growth in infrared sales, I mean -- I know that you're involved in a lot of areas but if we could just pinpoint maybe one or two end markets that you believe are really driving those sales?

I think right now the business that we're generating right now has to do with the safety equipment, particularly in firefighting type cameras, that's the stuff that's in production now. I think going forward we'll see more commercial applications in some of the low-end thermography stuff, as well as some surveillance security type stuff, and -- then I think the future type stuff that really hasn't shown itself in the production numbers yet and it will be down the road as we'll be in the sensing technology whether that's autonomous automobiles or driver safety type things or the smart home type -- home automation type things, I think that's where we'll see some good growth. And then longer term than that just because of the development cycles are so long, you'll start to see it come in the automotive sector; at least that's where we'll try to drive the business.

Okay but with what you currently have, the firefighting cameras -- you see that's still growing from the level that you're at right now.

I think that type of product, yes. Those kinds of thermal imaging type applications that should continue to grow.

Alright, that's all I have, thank you.

Thanks, John.

The next question is from Ronald Sprague with Roy Enterprises. Please go ahead.

Hi, one comment and two short questions. The comment, thank you very much as a shareholder for your very prompt, aggressive response to the recent street sweeper chart [ph], really makes me proud to be a shareholder to see how you handle that. The question, you mentioned the bolt was 80% plus as of January 28, do you anticipate any announcements before the AGM or you're just going to hold to the AGM before you announce the results?

I think we'll just hold to -- we have the meeting on February 25, I think the whole idea of the adjournment was to allow us to time to continue the solicitor proxies. I will say that we are having success, we are getting additional votes in and that's what it's all about.

Okay. The last comment, you opened your call expressing optimism with your business in China unlike many other companies that are reporting this period. Would you describe that to the market and the industry that you're in or to the specific LightPath products that you're selling?

I think it has to do with -- the two of that's gone on for us. First of all, we have a product line that fits into the telecom type space and that's very strong right now particularly and it's one of the areas the Chinese government is continuing to invest in infrastructure, as well as that's going on all around the world with the demand, so the bandwidth demand increases that continue. So I think that is a major market theme that's driving business and we're in the right market and China is part of that so we're benefiting there. The other part of it is, we compete against some Chinese competitors that -- they typically have run their business on very thin margins and as soon as volume drops they are hurt. So some of those guys have gone away and we've been able to pick up share as a result of that. And the third thing is as we deal with some very large OEM type guys that service all around the world but they do their business -- their production in China, in recent spam, so that's also very beneficial for us in our Chinese area. So it's a good market, it's slowing from where it's been but it's still growing. I think people sometimes get caught up in the press and they forget that it's still growing because it's all about how much slower it's growing as opposed to that. So I think those are the reasons that we're very optimistic. So we are at the right market, we're in a little bit of a unique space optics and the fact that we're so diverse across the different markets that we serve helps us, and we have a very strong customer base. And all of those things are working at our advantage, and in particular, in Asia.

Okay, thanks again, thank you very much, and thanks to your management team, good efforts.

You're very welcome, thank you for being a support -- shareholder.

The next question is from Bart Marcie [ph], a private investor. Please go ahead.

Hi Dorothy and Jim, thanks very much. I have one statement and then a question. I'm really impressed with the specialty products being up 133%. I'm particular interested is, you may gather from other conference calls in the laser projectors and the medical, and I certainly appreciate the efforts you're making to get that 85% because as you diversify and get more markets open like medical instruments and laser projectors there maybe an opportunity to strengthen the Board by adding some people with some relevant experience from those kinds of industries. On the specifics, I read a lot about Star Wars and I know that Christi's has opened up in a new theater in Spain and they also are South Korea's largest multiplex with 3D projectors. I know last year you were working with Christi and I'm curious as to whether you're continuing to work with them or converting them into customers. And anything you could tell me would be helpful.

Okay. Well, I will say Bart the laser projector business that we've had in the past got very weak because we were selling to some Chinese manufacturers who ran into some economic problems. The major guy has fixed his problem and he has come back, so that business is starting to pick up again, that doesn't address Christi's. Christi's uses a different kind of technology than what would use a typical lens, the type that we make, they use an excel laser and then they use a cylinder lens to distribute the optic -- the light through that -- those kinds of optics. In the past we didn't have the capability of making that type of lens but we do now. So we're going to re-approach that and see if we can do some business there. [Cross Talks]. Go ahead.

I just said in the medical instruments, can you elaborate little bit on the kind of instruments that you're seeing like path lenses?

Yes, I think that the kinds of things that we've been in the past, we've been in types of endoscopes and those kinds of things. And now there is some opportunities in that area again that we think could be quite exciting for us, it's still in a risk stage because it's development but there is a push to do some work with companies that are involved in disposable medical devices like disposable endoscopes which has tremendous market opportunity. There is like 45 million procedures done in the U.S. alone using endoscopes and currently -- the endoscopes that are currently used cost thousands of dollars and are reused, they have to be cleaned and that presents a cost as well as a liability for infection, by using a disposable one you eliminate that. So if those types of companies that are doing that type of work are successful, we're going to be very successful along with them. So it's kind of an exciting opportunity and could -- and it's a very large market opportunity.

Many thanks, carry on.

Yes, thank you.

Okay.

The next question comes from Robert Ainbinder with West Park Capital. Please go ahead.

Hi Jim, hi Dorothy, congratulations on another great quarter. I appreciate all the hard work to get here and I want to congratulate you, thank you so much, I appreciate your time [ph].

Thank you, Bob. I appreciate the comment.

Absolutely. So alluding to the first column, my colleague who was asking questions about revenues -- and revenues kind of driving higher, obviously we're at a good level here throwing off some nice cash. With the backlog sitting at $6.4 million, obviously we can expect to stock -- we can expect to see that, work its way into higher revenue growth as we go forward, can we not?

That's old idea. I mean, we're going to continue to grow and as we said we're trying to grow our business 12% and 16% a year, we're currently exceeding that. The only caution I would put out there is that as we all know things don't go in a straight line usually, so we expect to gift to the gold but sometimes these things don't happen and three months increment, right. We have to work towards it and fortunately we report every three months but some of this stuff takes longer than that to come to fruit as we're well aware. I'm very positive on what we're doing. I'm very pleased with the business we're able to generate, the order intake is strong and continues to be. And I think that's a remarkable situation in the uncertain economic environment that we're all operating in and I just think we're in a very good business, we're well positioned and I think we'll grow. This coming quarter is the quarter of the Chinese New Year so we have some effects from that which people should expect. There is some shutdowns in Chinese business in Asia that are protracted, the holiday is about a week, and then people leave early and come back late. And -- so there is a slowdown in business in Asia and in China in particular for this major holiday. It doesn't mean anything except people go on vacation but it does slow business, also we have to be cognizant of that. But even given that I think we're going to do fine and we're going to continue to grow.

And you alluded to some of the work that you're doing in the telecommunication space and you mentioned collimators, are we starting to see a pickup in some of the older business at LightPath? I call them older businesses because they've been around for quite some time prior to us, really ramping up the lens business but the isolator and collimator businesses, are we starting to see some of that really pick up in China?

There are some opportunities there but for us, we're only interested in some very high end type stuff, we're not participating nor do we want to participate in the very low price points and the isolator and collimator type opportunities. Our products have some unique capabilities in terms of reliability and those kinds of things that refer to some very special type application. So they tend to be more custom in nature, as well as higher ASPs and margins. So to say that business is coming back in those areas, I don't see that as a major business, I see it as a part of our specialty products business which includes anything that we do that's really, basically value-added.

Got it, got it, okay.

These are some of the very special.

Understood. And if you could just comment a little bit more, give us a little more color as to the type of opportunities that are coming down the road in the automotive sector, what type of applications and volumes that might come into play down the road as they start to come online?

I think Bob, the easiest way to explain that is to look at what we think is going to happen in the thermal imaging type area because most of this is related around infrared. As we started and as we are currently working on has to do with the building inspection from night vision type systems and firefighting safety type equipment. The next segment we believe will move into the home automation and smart building where you're now using sensors to control things like HVAC and lighting in rooms as they become more or less occupied by people, that type of stuff, as well as counting entrance and entry or exits through the building and doing that kind of stuff. And then there is a whole number of sensors, I mean, for example, in nursing homes and facilities you can monitor patient movement in beds and that kind of stuff. With these kinds of sensors in homes you can keep track of hotspots, for example, you put a sensor on the stove and if it gets abnormally hot then you can set that off much faster than a smoke alarm would. For example, in stadiums you can count people; in intersections, busy intersections, you can control the movement of vehicles as well as pedestrians by keeping track of where the low guard, how the traffic is moving. So these types of sensors I think is what's coming next. And then filling that you get into the automotive area with night vision systems and light odd systems where you're doing distance measuring and controlling that kind of stuff and other sensors, sensing applications that control the environment of the cabin or -- all of that kind of stuff are aged to the driver. And then you have the autonomous car, right. So I think all of those things come in the future. So you have traditional stuff that we've talked about that started in the early 2000. You've got the smart buildings which I think now are coming into fruition this year next. And then couple of years down the road from that you have the automotive. So we don't try and participate in that progression as it goes because what we bring to market is the capability to produce mass production, as well as a lower cost optic for these types of devices. So I think that's going to be a winner.

That sounds exciting, this is an exciting time for LightPath. I appreciate it. Thank you so much for all the hard work and I look forward to the next quarter.

Thanks, Bob.

The next question comes from Michael Dyer [ph], a private investor. Please go ahead.

First, my congratulations as well to everyone, terrific news. In past conference calls I've asked about Europe and I wondered maybe Jim you could just expand a little on that, I heard Dorothy talk about the sales over there and I know you -- I've gone to a larger distribution model, I wonder if that distributor is coming through and the trade shows there are paying off the way you wanted?

I think our business in Europe is doing quite well, it's about whether we say 24% of our business which is a pretty healthy piece. So the distribution network we have there through a master distributor who has 6 or 8 offices around the continent in different countries. He is headquartered in Germany which is really the hub for optics and he is doing a very good job. We keep working with them so that they continue to do more and more. And he is one of our largest customers, so -- he is doing a pretty good job and we're doing that. And in addition to that we have some house accounts where we've done some custom work and as the business opportunity has got large enough, it's now taken back and controlled through the house. So we have several of those and we continue to see some opportunities growing within those accounts. And now we will be doubling our efforts, particularly with the larger players over there, we have a piece of business with them to get the second and third opportunity. So that's what we expect to happen. So I see that opportunity, that area growing for us as a geographic area. And it's -- again, optics is a very good market product segment to be in because even -- it's growing in spite of whatever is happening with the macro economy.

Just a quick follow-up on the older fiber business, when I see that Google and the high frequency trading wants to go more into fiber networks for their -- some of their server firms, is that something that's a potential?

Well, I think datacenter interconnect is an area of interest to us and an area where we're going to try and do some better penetration going forward. So stay listening and we'll keep you posted of how much success we have there. But I do agree, that's an area of opportunity.

Thanks very much.

Thanks, Michael.

Our next question comes from Vesselin Mihaylov with Newport Coast Securities. Please go ahead.

Good evening Dorothy and Jim. Thank you for taking my call.

Hi, Vess.

And congratulations on a great quarter indeed. So I have few comments and questions mixed in as I wrote them down, I'll try to be brief. Number one, I've noticed in the last couple of weeks significant uptick in the price of infrared related optical components such as 2-6 systems coherent, as well as in pure cyber optic players like JDS Uniphase and Clarion [ph] which I know are your customers. My call to you going forward is to start breaking down to infrared business and the custom optics business. So people can see the growth in the revenue, not just the percentages. It's kind of hard to reconcile sometimes when you see those divisions growing at triple digits and the overall revenue 26% which I'm very happy with, but if people also see that these revision [ph] you're doing, couple of hundred thousand dollars, the high hundreds of dollars, I think that additional value in the stock price can be unlocked. So do you anticipate breaking our fiber optics and/or infrared going forward?

I'll consider it, I mean I think it has to be done at the appropriate time, I mean the infrared is a developing business so we keep track of it. But I just have to consider how much granularity we want to get into, as well as I don't want to give our customers, I mean our competitors too much information. But I'll take a look at that Vess and I will see what we can do with to make it little easier to understand.

Very well, okay. Number two, just -- I keep asking this question all the times to educate new investors that are reading transcripts and listen to the phone call. How many more warrants are left to be exercised and how many ears on them?

They expire, mature December 2017. There is basically two years left.

Yes, we are little under $1 million.

Yes, I think it's about $1 million.

Okay, very well. Because I get this question from new investors so it's nice to put it on the record. Net loss carry forwards, some of these were incurred as early as the mid-90s. Are any of them starting to expire or are they being utilized now that we're profitable?

We have some expired every year but we -- starting with this year we started using them. So we are using them. But we still have about just under $90 million of tax loss carry forward.

Just under $90 million you said?

Yes.

Okay. So, and they are expiring probably at the rate of couple of million a year, these are the oldest loss from the mid-90s, correct?

Correct.

Alright. So, hopefully they want to be expiring going forward as we will be even more profitable. Question number four, this was -- talking about expanding the Board of Directors, to some shareholders it looks like significant increase in the number of Board seats potentially from a company that -- well, two years ago we were doing about $11 million in revenues, now we're doing about $18 million, $19 million, annualized, hopefully we'll end with $20 million, annualized. So expanding the Board by a factor of 2X seems rather large. I was going to ask you, as a shareholder, what is the annual cost in cash to add a new director because I assume that you're paying people pretty much the same, only for director services, in cash.

The cash portion is about $30,000.

So -- okay. So $30,000 and usually what is the stock option package?

That is usually about $50,000.

Okay, alright. So I just wanted to be cautious of the potential additional cost that we maybe incurring if we doubled Board of Directors. Some people are asking why suddenly company hasn't grown that much in absolute numbers and could we really….

Well, I mean what we're asking for is to have -- this is a proactive move on the part of the company to be prepared to do things in the future. We don't have any -- there is no way that we're going to overnight increase the Board to 12 members, that's not the intention. The intention is to have room on the Board if we have a reason to increase it based on what we're trying to do, whether that will be an acquisition or those types of things in the future. We want to be able to do that and I don't want it as an impediment to our growth. There is no plan to have 12 directors next week. I think that's not the idea behind it. And if you read the -- both of these proposals, we want to remove the super majority and just want to have the ability to increase the size of the Board, I believe in the interest of our shareholders, it makes it easier for the shareholders to have a voice and be able to have that voice acted upon than what the current situation allows, just as it restricts us as a management of the company. So I think both of these things are; one, in the interest of the shareholders overall, and two, they are things that we are trying to be proactive to make sure we have the ability for the company to grow uninhibited by certain restrictions. And in addition to that, we did do some research and we said what I would like to do is not have a restriction of the size of the Board whatsoever but it's -- I mean, you get more other 12 people on the Board it becomes little unhealthy [ph]. Most people say a company our size with this market cap, 20 would be a good number but we think that's way too many. 12 is about the maximum that we could ever see we would need and only then if there is a particular need or if we would need to bring in some particular expertise, I want the ability for the company to have the ability to get that inside and have it available to us from a strategic point of view.

I'll welcome that. Maybe if vote for some reason fails here, you can come back with another proposal to increase it to 7 or 8, something that maybe more palatable to those that are opposed. But there is again, I believe you would disagree with me that going from 6 to 12 as this stage is too much. Potential acquisition, who knows maybe dilutive, maybe not -- it has to be considered but bringing so many new directors on this kind of revenue run rate probably not a great idea, in my judgment only. So I'm just speaking for myself.

But I'm just saying that is not the intention.

Not the intention, okay. And I was going to call on you to going forward increase, if possible, the rate of news dissemination per quarter. I would love to be able to see a few pieces of news per quarter, maybe once every three weeks on the average, clearly you don't put a press release for the sake of press release but compare to other similar companies there seems to be a dose of press release from LightPath from design wins, applications, distributors -- it just, you know, I follow many companies and companies of this size usually will put out a few press releases a quarter, specific to new design wins, new customers, new applications, new distributors, things like that. Are you under so many restrictions from your current customers that you cannot actually say anything?

Well, we do run into that situation where there are some things that we would love to put out but our customer doesn't want us to for whatever competitive reason. So we try to honor that. But I've noticed your suggestion and we will take some action on it.

Okay, thank you very much for great stewardship, great quarter, please keep the dilution to a minimum from stock options or other acquisitions. And let's grow this company even at a faster rate.

Okay, I agree.

Thank you.

The next question comes from Steven Donavan [ph], a private investor. Please go ahead.

Hi, Jim and Dorothy.

Hi Steve, how are you?

I'm good. I just have one question. About six months ago on your website under investor relations, there was a presentation, the LightPath presentation, and I don't know lots of customers with all those logos, there was the Apple logo and that was on there about six months and then it disappeared. And I talked to people who know LightPath and it was confirmed that there was solidity to the Apple logo being there, Apple was some kind of customer. Can you comment on this in anyway?

Yes, I think we do have done some work with them, it's preliminary type stuff. They generally don't like to have other companies use their logo etcetera as promotional in some respect. So we decided that just rather than to get on the wrong side of them, before it was a good thing to do, we would just take that off of there, Steve. But we're still working with them, kinds of companies and hopefully we'll -- one of these days do something significant with them.

Okay. And then you just don't want to comment anymore?

Correct.

Okay. Many, many thanks. I look forward to the next quarter.

Alright, thanks Steve. Thanks for your long time support as well.

Ladies and gentlemen, that concludes our question-and-answer session. I'd like to turn the conference back over to Jim Gaynor for any closing remarks.

Thank you. In conclusion, we appreciate the support of our shareholders and the dedication of our global team of LightPath. We remain focused on our efforts to drive diversified revenue and growth, and continue to deliver benefits from the leverage in our business as we improve our profitability and generation of cash flow. With the progress that's been made and our plans for continued execution, we look forward to delivering long-term profitable growth, which may deliver meaningful returns to the benefit of our shareholders. Thanks again, and we look forward to speaking with you next quarter.

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