Good afternoon, and welcome to the LightPath Technologies’ Third Quarter 2018 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. Please also note, today’s event is being recorded. I would now like to turn the conference over to Dorothy Cipolla, LightPath’s CFO. Please go ahead.

Thank you, and good afternoon. Welcome to LightPath Technologies’ Fiscal 2018 Third Quarter Financial Results Conference Call. Our financial results press release was issued after the market closed today, and posted on our corporate website. Today’s conference call 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. In addition, we will also be making a reference to certain non-Generally Accepted Accounting Principles, or non-GAAP measures, for which you should refer to the appropriate disclaimers and reconciliations in our SEC filings and press releases. With that out of the way, it’s my pleasure to introduce Mr. Jim Gaynor, President and CEO of LightPath.

Thank you, Dorothy, and welcome to everyone who’s joined us on the call today. We appreciate your continued 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 more in-depth review of our financials. Following that, we’ll open the call to your questions. Now, onto my remarks and perspectives on our fiscal 2018 third quarter. Our results demonstrate the success achieved and our efforts to diversify our business in the areas, where we can expect to deliver meaningful growth going forward. As we planned, our visible precision molded optics product revenue has been surpassed by our infrared product revenue. Our intent for targeting the infrared market was to further diversify our revenue streams in a larger and faster-growing market. Revenues grew on a sequential basis from the second quarter, although, remained flat with the third quarter of fiscal 2017 due to softness in the telecommunications sector. As we have previously reported, our telecom business has been weak for several quarters, yet this is only one of several market verticals that LightPath enjoys. Although, we have recently seen a strengthening of this market from our perspective with orders returning from our key customers and several new non-recurring engineering orders just in the last month. This assessment of the telecom sector was confirmed when I visited China just two weeks ago, and also at some very large trade shows we attended this quarter. Here are a few specifics on this point as it relates to telecom. A leading China-based telecom equipment OEM has increased their activity with us by about 30% in the last month with six new lenders underdevelopment, and two more under discussion. One of our largest publicly traded optical tech companies based in…

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 in our quarterly report on Form 10-Q. I encourage you to visit our website at lightpath.com and specifically, the section titled Investor Relations. Now, onto the results for the third quarter of fiscal 2018. Our revenue for the third quarter was $8.5 million, flat as compared with the third quarter last year and up 2% from $8.4 million in the second quarter of this year. Revenues generated by infrared products increased approximately $383,000 or 10% to $4.2 million in the third quarter of this year from $3.8 million in the same period last year. Infrared product revenue has surpassed PMO revenue for the third quarter in a row as our largest product family in terms of revenue. Industrial applications, firefighting cameras and other public safety purposes are the primary drivers of the increased demand for infrared products. Total PMO product revenue was $3.6 million for the third quarter, increased as compared with $3.3 million in the second quarter of this year, but decreased from $4.0 million in the third quarter of last year. Revenues from sales of low volume PMO products, those generally lower quantities at higher selling prices increased by approximately 231,000 or 13% to $2.1 million in the third quarter from $1.8 million in the prior year period and up 6% from $2.0 million in the second quarter of this year. This is primarily attributable to higher sales to customers in the medical entity. Sales of high-volume PMO lenses shows generally higher quantities sold at lower selling prices were $1.5 million in the third quarter, a decline of $612,000 or 29% from $2.1 million in the prior year period…

Thank you. [Operator Instructions] Our first question comes from Matt Koranda with Roth Capital. Please go ahead.

Hi, guys. This is Brad Noss on for Matt.

Hi, Brad.

I just wanted to go first obviously, you had some strong bookings in order to this quarter, but specifically looking at the bookings we’re seeing in the telecom sector, think, you said that the increase for first time in the past few quarters here, but just how do they compare to some of your prior levels from a year ago and how much do they still have to go to really read some of those prior highs, and then just sort of the strength you had referenced last quarter that you expected to see in the second half of 2018 as it is sort of playing out to what you had expected?

So, Brad, I think to telecom sector we’re seeing is some renewed life for the first time. So it’s not quite back to where it was in 2017, which was a very strong year. But I think the thing that’s most encouraging to me is the fact that we’re seeing a lot of – we’re seeing some increase in existing products, but even more importantly than that, we’re seeing a lot of new product activity in terms of the new lenses and those kind of things, which tells me that the 5G implementation is starting, these guys are getting ready for that. And it’s been pretty much across-the-board with the major customers that we deal with in the sector. So I think it’s the beginning, some recovery in that sector, which is good news for us as that’s a very – has a higher contribution margin in the product line for us. So I think, that’s good news. But I would like to emphasize that, as I was trying to do, LightPath is no longer just a telecom company. I mean, telecom is one of the verticals that we participate in and the other activity that we outlined, I think, really speaks to where the company is moving and to the strength of our business. So that diversification, I think, is extremely powerful in this market space and that’s where, I think, people should really be focused.

All right. That’s helpful. And then just I guess, you had referenced seeing some new product development activity, can you sort of touch on the timing there and when I guess what that sort of sales and development process – kind of how long that takes when you would really expect to see some of that flowing through the income statement?

Well, I mean, that’s an ongoing process, depending on the complexity of what we’re doing. It can – we’ve turned some products in nearly six weeks for some of these new jobs, others take quite a bit longer to do. I think we’re pretty excited about the kinds of things that we’re seeing in the infrared space and those kinds of things, particularly in the firefighting cameras and some of the defense stuff that is starting to come online. And we’re continuing to work in the mobility sector and developing those products fall into these sensing applications, and in particular, LIDAR. It’s pretty hard to put a timetable on those things. But as you see these bookings start to roll in at the rate that we’re seeing, those are all within 12 months to 18 months of being in production. I think that kind of gives you the timeframe.

Yes, that’s helpful. Just looking at the gross margins, I was just hoping to maybe get a little bit more detail on the quantification of the different tragedy you had mentioned. I guess, just starting with sort of the mix within infrared between custom and I think, it was a contract sort of offsetting that, but just how much of a drag was that specific infrared mix to gross margin for the quarter?

I mean the mix is always a difficult one to try and figure out specifically. But we thought like it was about six points in the change in total, but that includes mix between the visible and the infrared as well as the mix within the infrared segment itself. For example, that contract – that large contract that we ship against has six different products in it and that mix changes on a quarter-to-quarter basis. So that has an impact. The contribution margins of these different verticals and these different product lines are all different. So, you’ll get a revenue mix change that depending on what it is, it’s very difficult to forecast where it’s going to fit on the margin line because it depends on, which sectors are up and which ones are down. So, that’s a really tough question to answer. It doesn’t help a lot, but that’s the thing we struggle with every day.

Yeah, no problem. And then I guess, just shifting to sort of the currency in germanium impact, you mentioned about five points, sort of between the two. I guess, first, are they are relatively equal in magnitude between the two and then what are you able to do in the short-term to kind of get your margins back up, are you able to offset that with pricing or what kind of lag would that – would you have that you’re already able to do that?

The thing with germanium price increase, that’s actually going to turn out to be a positive for LightPath. Because that is accelerating the move in the marketplace away from germanium and towards our Chalcogenide Glass which is – that’s our main material that we use in infrared and it’s a much lower cost material and we produce it ourselves. So we have quite a few advantages to using it. So, we’re pretty excited about that. So, I mean germanium is a standard material; it’s a good material for where it needs to be used. But we offer an alternative and has to be a lower cost alternative and that should be very good for business for us going forward. In this particular quarter, the germanium price impact was a about little under 2% and there are two points in the margin, I think, 1.75, 1.8 or something like that. So the other part of that five points was all in the foreign exchange, which neither of those two things do we have much control over. So we’re subject to that. In terms of the foreign exchange, we’re looking at evaluating, matching our cost versus the revenue in the country in the local currency. And perhaps when we finish that analysis, we can do a better job of balancing that and that will take some of the sting out of that.

Okay. Thanks for the color there. And I think, just one more from me, I guess, just with germanium and some of the FX being kind of difficult to really hedge against, how should we think about that continued pressure on margins, and I guess, on what you’re seeing so far through Q4 and what your expectations are there?

Well, I mean I don’t know, I mean, a little bit that I see, the dollar doesn’t look like it’s getting any weaker or maybe it’s even strengthening a little. So, I don’t think the foreign exchange is going to have much – I mean that’s something that we can control. I mean, all we can do is try to match those things in the currency and make sure that we try to minimize that. But I – we’re not in a position to hedge nor do I think that would be a smart thing for a company of our resources to do. So, that’s about all I can do with foreign exchange. And as I said, germanium as far as I’m concerned, I hope it continues to rise and that will be good for business.

Got it. Thanks for the detail there. I’ll go back in queue.

Thank you. Our next question comes from Marc Wiesenberger with B. Riley FBR. Please go ahead.

Thank you very much. Regards to your long-term contracts, are those any pricing formulas that can be kind of reset throughout the length of the contract or those completely fixed?

The current ones that we have are fixed-price contracts, but things continue. We probably won’t do that in the future. We’ll probably put some ability to adjust prices for material fluctuation.

And so then with regards to the new products that are coming online, you’d expect, hopefully, some of the increased costs that we pass along and we can expect margins to be better than what was in the last quarter?

In terms of the custom products, those are quoted individually, so that we take that into account. So those are – those won’t be an issue from material cost variations like that, they’ll be taken into account, at least, at the time when we put the code out.

Got it. You’ve mentioned a number of times capacity constraints and you’re expanding to relieve pressure in the future. In the quarter, what was your – what were you running at utilization rate, did you experience any constraints or is this purely to be prepared for future opportunities?

We have an experience to any significant capacity constraints at this point and what we’re really doing is trying to stay ahead of the curve with the investments we’re making as we see this growth, where we anticipate this growth coming in. So I think we’re in good shape. It’s always a challenge; it depends on how fast the business develops. But right now, we’re trying to stay ahead of the curve.

Can you talk about the assembly business, I know that’s been a focus on some of the other calls, but didn’t hear mention how is that progressing?

Well, it’s continuing, it’s in its infancy as far as we’re concerned and we’re developing those opportunities. So, it really hasn’t been an impact at this point and it was not in this particular quarter. But I think we’ll see that’s an area. Our focus hasn’t changed. We believe that’s an area for us to add value and we’ll continue to do that.

Great. That’s it from me. Thank you very much.

Our next question comes from Zack Turcotte with Dougherty and Company. Please go ahead.

Hey guys, Zack Turcotte on for Catharine Trebnick. Just a couple of things. So first, clarification, – sorry, if I missed the number, but what was – how much of the IRR revenue from ISP?

The ISP revenue is $3.8 million.

$3.8 million, okay, thanks. So we’ve seen the ZTEsituation had a pretty big impact on a lot of firms within your space. What impact, if any, do you see on LightPath?

The ZTE is the module – purchase modules, not so much components. So we’ve never had much direct sales or any to ZTE. A couple of our customers do. And so far the impact to us other than general telecom reduction that was well in place before that happened has – we haven’t seen any impact. Now a couple of years ago, when they first sanctioned ZTE, which this is a follow-up to, because they felt like they were following the – were doing what they were supposed to do. It actually grows business to us, because the market share that they gave up went to others like Huawei and others, and we actually picked up business as a result of it. So, we’ll see if that kind of thing happens again. But right now, I mean, just this morning, I heard that there’s a lot of trade talks going on and there’s some work going on to allow ZTE to come out of the situation intact. So see where that goes, again that’s certainly not within our ballpark and the impact to us currently has been almost something.

Got it. And we hear a lot about the upcoming 5G kind of sort of revolution in telecom and how that’s going to impact the bounce back for you guys? So what impacts have you seen so far of 5G in telecom producing a bigger percentage of your revenue?

Well, I think where we see 5G is in the new products that are under development. I mean, we’re doing quite a bit of work with Huawei. As I said, we just signed six new lenses and NREs for six new designs for them. there’s two more that we’re in discussions with. Guys like Lumentum, where we’ve got five new lenses in development with them, NeoPhotonics, we got new lens and development for them I suspect although I don’t know for 100% fact that the majority of these are associated with the equipment changes that are required for 5G. So there’s a lot of activity, that’s coming down the pipe for us as well as the volumes of some of the existing products have begun to pick up as we mentioned in our prepared comments.

All right. Thanks. That’s all from me.

Our next question comes from Michael Dyett with Dyett Capital. Please go ahead.

Hey, Jim. Michael here. I just wondered whether in downplaying the distributor, do you still see something out of the European distributors that you’ve been trying to build up?

Well, I mean I guess it’s – I don’t mean to say that we’re downplaying distribution what we’re trying to do is develop our lot more longer-term business. So that we have better forecast on the short-term and better insight as to what’s coming. And I think we’ll be very successful with that. The distribution business particularly in Europe and in particular, on the visible side of our businesses have been quite strong and continues to grow. The infrared side of it has been a little bit slower. We’re not completely satisfied with the way with, which that business has been developed, particularly in Europe through our master distributor. But, I think, there’s progress being made there. So I think, like all the – it’s a very good channel for us, it was very strong overall distribution catalog as a category has been as strong market vertical for us and it continues to be.

Great. Just the second question, thinking back about the problems that you had mentioned hit the factory in Southeast Asia, I think, it was in Vietnam, have those fully – they were covered and that sales opportunity back on track?

I think, that’s kind of an old thing, right. There was when…

Yeah. Yeah.

Yeah. That’s pretty much back on track. That business is strong and that’s one of the areas that we did have a distributor there that wasn’t performing, which we terminated and took that business direct. And so that’s been very well received by that contract manufacturer. I think its fiber net. And we see that we have even better line of sight to what’s going on there with one last middleman and that business is growing.

Great. Well, thank you very much. And I’m really pleased to hear this report in the bookings and wish you the best for the next quarter in the future.

Thank you very much, Michael. Appreciate it.

Our next question comes from Gene Inger with IngerLetter.com. Please go ahead.

Hi, Jim and Dorothy. I’m in Las Vegas today, and there is a small possibility that few investors might ask me about LightPath. And it’s good to see the earnings report. Congratulations on good forward – on good revenue increases, which is why the stock is up in the aftermarket, as you may know. I might actually mentioned to Dorothy, you’ve talked on – the dollar has been improving and the dollar index is back and if China does anything, it would be devalue, so thought that is definitely not the core of your business now you would think that would help the exchange ratio this year, but there’s really not what I wanted to touch on. I was going to mention ZTE and quick-drawn portrait [ph] portrait you already know about that. But let me ask you rather about the modules that I saw at the SPIE Photonics show, where you pointed Jim, the high resolution in the corners and I wonder you didn’t clarify exactly why, but does that relate in particularly to things like LIDAR were used sweeping from side to side and that resolution to make the difference to a correct identification of what an object is or not?

Now I think that’s more indication of the superior design quality we have in our optical designers that they’re able to take these lenses and design the aperture such that, not only you get really good picture at the center of the lens, it extends all the way up to the corners of the picture. That was a 19-millimeter, I think, assembly that we were looking at, that’s used in these scopes and rifle sites. It’s just really good picture – also those are the kinds of things that we put into the firefighting cameras, though the optics that we make for those, so that you get a really high-resolution picture. So I think, that’s just more of Gene, a representation of the very high-quality product that LightPath makes and the design capabilities and optical design capabilities that we have that may be better than some others.

You’re very proud that that’s an assembled module, and I’m curious if this relates or it similar to a new product that’s going to be a larger scale production, presumably that the Pentagon wants, which relates to the look around, see around goggle that soldiers would be able to wear and they can point their weapon around the corner without picking their neck out, say our lives and people and it uses thermal imaging and they can actually fire the weapon without ever themselves had a target without seeing it, identifying it and firing without sticking their neck out, are you familiar with that?

Yes. We are and that’s a product line that has opportunity for us. We’re in on the visible side of that type of side and we think we have some ability to get in on the infrared side, but that’s a future program.

No. I know and it’s an expensive one. I wish you good fortune with that. May, I touch briefly on LIDAR, again, because at the Photonic show down the road was Luminor and that’s why we’re thinking about the resolution. And I happen to noticed that you took a lease on space, but you may not want me to identify that or not, but it’s a matter of record that’s in the same complex at research partner near your primary facility, but also near UCF, where Luminor is located, which – and I wonder if your collegial relationship has expanded there or can you reflect on that at all?

Well, you’re absolutely correct we’re neighbors. And we operate in a lot of the same spaces and there’s a lot of things we can do for those guys. And we do talk to them frequently, and I’ll leave it at that.

I absolutely would leave it at that. And could you also comment whether it’s because I understand it’s a plus to the $1 billion or $100 million committed by a Belgium company and also here to build in – which is now almost finished, I think, they opened in a new high tech center down towards Consemi, Florida, which that would be advantage to local sensor providers, have you any – reflections on that project?

Yeah. That’s referred to here locally as bridge.

Yeah.

It’s sensing research and development center, which I think it has all kinds of advantages, it brings a lot of high-tech and a lot of talented people with the area that we can certainly leverage from and as it continues to move forward, I’m sure there’s at least some opportunities for us with them.

I was thinking that. And finally, I know there’s some institutions increased and some institutions decreased positions in the last calendar quarter of 2017 in your shares and I wondered you want to comment or not any of the institutional holdings appear to be about the same percentage. I’m curious about that, because it’s unusual to see some of the big funds that are in a local price tag usually, when the stock becomes more expensive that their investment committees less than look at it?

Was there questionnaire Gene?

Yeah. Do you see any overhang to fly of stock that’s remaining to be absorbed or do you see new institutional interest?

I think when we did the acquisition of ISP, we got involved with some very high-quality institutions. They made significant investments during the deal and subsequent to the deal and those appeared to be long-term holders, and we’re very happy to have them, and it should continue. I think it’s a testament to the quality of LightPath and the potential that the company has and the execution that it has done over the last four years or so. So, I think we should be an attractive stock for those kinds of holders even though we’re…

Great. I look forward to your progress. I see all kinds of development for sensors even that people transporting [indiscernible] that trying to develop. I see what’s going on and you’re certainly near Cape Canaveral, I don’t know you are involved in any of these new projects or not, you may or may not want to elaborate it, if you are, but I, obviously, you are in the right areas.

Yeah. I think sensing technology in terms of how it relates to control of those Internet of Things and smart appliances and smart – and all interconnectivity is spot, that we believe, we can exploit as we go forward. We think we’re in the right position with the right kind of products to do it. So we’re very excited about that potential.

Thank you. I would like to turn the floor over to Dorothy for closing comments.

I’ll take that anyway since I’m already talking. So, I want to thank everyone for participating in the call and in conclusion, we appreciate the support of our shareholders and the dedication of our global and expanding team at LightPath. With our strength and presence around the world, we remain focused on our efforts to drive top-line, bottom-line and cash flow growth. We are also very excited by our growth prospects, and we’ll be sharing our story with current followers and prospective shareholders later this month, it’s a B. Riley FBR Annual Investor Conference in Los Angeles. Thanks, again, for participating on today’s conference call. And we look forward to speaking with you next quarter.

This concludes today’s teleconference. You may disconnect your lines at this time.