Good day everyone and welcome to the LightPath Fiscal 2018 Fourth Quarter Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] And please note, that today's event is being recorded. I would now like to turn the conference over to Dorothy Cipolla, please go ahead.

Thank you. Before we get started, I would 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 and involve various risks and uncertainties that are discussed in its periodic SEC filings. Although the company believes 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, references may be made 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. Following management discussions, there will be a formal Q&A session open to participants on the call. I would now like to turn the conference call over to Jim Gaynor, LightPath's President and Chief Executive Officer.

Thank you and good afternoon. And I apologize upfront for my scratchy voice. I'm suffering a little bit from some kind of cold or allergy infection. So -- but I'd like to welcome you to LightPath Technologies fiscal 2018 fourth quarter financial results conference call. Our financial results press release was issued after the market closed today and posted to our corporate website. Following my remarks, our CFO will provide a more comprehensive review of the numbers and then we'll turn and conduct a question-and-answer session. So, now onto my remarks. Fiscal 2018 marked a year of unprecedented change that has set the stage for our company's future. This followed the transformational acquisition of ISP Optics in fiscal 2017 to accelerate our path to becoming a leading global provider of infrared optics, while also possessing an impressive family of products for visible light. With the ISP acquisition, we gained the cornerstone of what we believe will be our primary long-term growth engine. During 2018, we commenced with a number of initiatives intended to strengthen our infrared business as well as our entire organization. Our year-end financial results demonstrate the significant progress we made and provide indications of the opportunities ahead for both top and bottom-line growth in fiscal 2019 and beyond. The highlight of our efforts in fiscal 2018 was the strong order bookings which gained momentum throughout the year. Our booking substantially increased despite the telecommunications sector into which we sell our higher margin precision molded optics products, reaching what appears to be the trough of its downward cycle, which adversely affected our unit volume by approximately 35% for this sector. Given that the segment of PMO market that LightPath serves, the laser diode segment, typically grows at 5% to 7% annually, we were not able to offset this…

Thank you, Jim. First, I'd like thank Jim, the rest of the executive team and LightPath's Board of Directors for entrusting me with taking all the role of CFO at LightPath Technologies. Since joining the company, in June, I have been thoroughly impressed with the integrity, professionalism, and dedication of the entire organization, as well as the collection of technologies and market opportunities. Next, getting on to the business of today's event, I would like to mention that much of this information we are discussing during this call is also included in the press release issued earlier today and in our annual report on Form 10-K to be filed with the SEC. I encourage you to visit our website at lightpath.com and specifically the section titled Investors Relationship. Now, onto the results for the fourth quarter of fiscal 2018. Our revenue for the fourth quarter was $8.1 million, down 10% from $9 million last year. Revenues generated by infrared or IR products were approximately $4.1 million in each of the four quarters for fiscal 2018 and 2017. In each of the past four quarters, infrared product revenue has surpassed PMO revenues, solidifying its position as our largest product category. Industrial applications, firefighting, cameras, and other public safety purposes are the primary drivers for the increased demand for IR products. Revenues and production volume will vary depending on the mix of the business. In the fourth quarter, we sold 46,000 IR lenses, a record for the company and up 12% from the third quarter of fiscal 2018 and 8% from the fourth quarter of last year. Total PMO product revenue was $3.4 million for the fourth quarter, down from $4.2 million in the fourth quarter of prior year. Revenues from the sales of low volume PMO products, generally lower quantities at…

And we will now begin the question-and-answer session. [Operator Instructions] And our first questioner today will be Matt Koranda with Roth Capital. Please go ahead.

Hey guys, good afternoon.

Hey Matt.

Just wanted to start out with the IR lens volumes. Looked like they were up, I think, according to your commentary, like 8% year-on-year, but with revenue kind of flattish I guess, that suggests lower ASPs. What's driving that? And should we anticipate a stable mix relative to this quarter here going forward? Or could there be a shift in mix that sort of drives ASPs back to their more historical levels?

Well, I think, that kind of pricing shift is really just associated with mix more than anything else for the products that we sell, Matt. So, it should, over a longer period of time, be kind of even to where it's been. So, I don't see that as anything other than that.

Got it. And then I guess, is there any way to quantify how much IR growth you guys gave up just given the capacity constraints during the quarter? And just to clarify, I mean, were you alluding to the fact that you were moving some production from Irvington during the quarter and that's why you had capacity constraints? Or you're just mentioning that you were running all out already and you just didn't have the ability within the quarter to kind of add capacity?

Yes, I think it's more that the volume became faster than we anticipated and we were up against the capacity constraint. So, I don't think in the quarter, we really had much as a result of the beginning of the transition impact. As I said, we took over ISP the full year before we acquired them they did about -- just about $12.3 million and the infrared business attributable to the ISP product in this fiscal year was just around $15 million. So, we had just increased that business substantially in a short period of time and we ran up against some capacity constraints. And now it depends on the mix of molded product versus diamond-turned product and those kinds of things where that capacity falls out. And we did have some coating issues. That is where some of the capacity constraints reside. And since then, we've added a big chamber in China that is -- so now we have the ability to coat both glass material systems in China. That moved the substantial load off the New York operation to China, so that increased that capacity and then, as we were transitioning the business during the course of this fiscal year from New York to Orlando and Riga, we have another -- we'll have another new coating device coming online about November 1st. So, that'll be another machine and then we'll be able to move the other machines one at a time. So, that should alleviate that type of capacity constraint. I think we've already alleviated it for the most part with the operation that came online in the beginning of August in China as well as both of those moves will lower the overall cost of coating. Excuse me, my voice is a little rough.

I’ll try not to make you speak too much more here Jim, maybe a couple of more here. I guess you kind of pre-answered what I was going to ask you, which was where exactly is the bottleneck. But are there other any other areas where you feel like there's going to be -- need to be action to expand capacity just in terms of glass production or diamond-turning capacity? Or we feel pretty good about what has been added thus far this year so that we are on track to, I think, in your guys prepared remarks around -- in the release you mentioned sort of the potential to double the revenues out of your infrared lines? So, -- back to that or what else do we need to add to get there?

Well, I think, on the other side, I mean, I think we're in pretty good shape from a diamond-turn type capacity using the germanium glass on the chalcogenide because of the cost of germanium. There's been a lot more interest, a lot faster than we anticipated in converting a germanium product to chalcogenide product. And as such, we are in the process of expanding our glass manufacturing capacity. So, that hasn't happened yet, but it's underway and we will be adding capacity here in Orlando relatively soon. I think that we'll have another set of furnaces come online here within the next month. And then a little longer term, we're going to add -- we are adding additional capacity for glass melting in Riga. For the chalcogenide material systems, that's a little further down the line, that's a few months out until that comes online. So, for right now, we're approaching our capacity with the demand that we see coming for the BD6, but I think we've got it handled. In the short-term, if we get a little short, we can always buy some material on the open market even though it's more expensive. So that -- and then, along with that, we are expanding our ability to make pre-generation on the germanium side and the BD6 side as well as our polishing capabilities, but I don't see either one of those as a real capacity constraint, but we are expanding those operations.

Okay. And rough, maybe, ballpark figure, what's the cost to sort of getting to the end goal in terms of the total capacity that you're shooting for this year? I mean I know a lot -- I'm just trying to figure out the -- you spent a lot on CapEx this last year, I think, in order to kind of boost capacity and remove some of the bottleneck. So, how much has already been spent and how much is left to spend that'll spill into this fiscal year here?

I think we'll have another couple of million dollars in our capital budget for 2019. The majority of that is targeted towards these kinds of growth operations. So, our capital investment levels are going to be pretty consistent to what they've been for the last couple of years.

Okay. And then just lastly, if I look at gross margins, I know you guys have mentioned sort of that ISP historically kind of ran in the mid-30% range in terms of gross margins. And then core LightPath, looking back over the last couple of years, I know it fluctuated, but you typically were able to generate between 50% to 60% gross margins on most of the core optics products. I'm just trying to get a sense for, sort of, how quickly can we get back to those levels for each of those individual product lines? And what needs to happen to get us there? How many quarters is it going to take to transition during fiscal 2019 to kind of get back to those levels and if that's possible?

Well, I think, the plan is -- I mean, on the precision molded optics side, the visible side of the business, the margins for the products that we're generating are similar to what they've been historically. I mean, they run in the mid-50s to low 60s. They continuing to be there. The problem we had in 2018 was that volume from the telecom business fell off rapidly and the fourth quarter was probably the steepest decline that we saw in the year. So, that's really strictly a volume issue. And the problem is, is when your volume goes down 35% in a quarter in a PMO, in a market segment that grows 5% or 6%, there's no place to go to replace that much business in that kind of timeframe within that market segment. So, what we did is we replaced that with infrared business, which has a different margin structure and so our overall margin suffered in that quarter as a result of that. Now, the problem that we're facing now is, I know for sure and I can say with almost 100% confidence that the telecom business will come back. What I can't tell you is exactly when and I defy anybody else to do that as well because that's the nature of that business. But with all the signs, with a number of new projects and NREs that these guys -- these major equipment manufacturers are spending, and I don't think they're spending their money for things that they don't think are going to -- that aren't needed, that's a pretty good sign that, that business is on its way back. So, as that occurs, I think we'll see that recovery in the margins on that side of the business. The investments and stuff we're making on…

Okay. Got it. That's was very helpful.

That was a mouthful, I know.

Yes. Helpful color very much. So, thanks for the answers and I'll jump back in queue here.

And our next questioner today will be Zack Turcotte with Dougherty. Please go ahead with your question.

Hey guys, Zack on for Catharine Trebnick. First, just what was the revenue attributable to ISP in Q4?

I think it was $4 million, wasn't it?

$4 million?

Just a second, Zack. Just split it out.

ISP in fourth quarter, yes, $4 million.

$4 million.

$4 million. Okay and then something that Matt mentioned was, you said increasing your global IR production capacity could double IR revenues. Over what time period are we looking at that, like fiscal 2019 over fiscal 2018 doubling or longer time period?

Well, I think, we'll have as the stuff put in place during fiscal 2019, so we'll start to see that surpass the ramp-up during the course of this year. So, by the end of 2019, I would say we'll be pretty close to having it doubled.

Okay. And on the capacity constraint, so it sounds like that was pretty much entirely attributed to chalcogenide products due to the move away from germanium, correct? Because of the rising prices?

No, I think it impacted -- it was primarily a coating problem, which impacted both lines. And primarily given where we are, the germanium side of the business was where the constraint was.

Okay. And another just kind of clarification. So, you're talking about adding further production in a month or a few months and being able to do coating for bulk in China that there won't be an impact of the constraints on Q1 directly?

No, I don't think we'll see that kind of constraint in Q1.

Okay, great. And then kind of more general question on the infrared products. You talked about really shifting toward that [indiscernible] your primary driver as of right now due to telecom weakness. So, what are your biggest market opportunities with the infrared products? What use cases or verticals you're selling into do you think will drive a doubling potentially in revenue in fiscal 2019 for infrared?

Well, I think -- I mean, overall, one of the drivers was to shift from germanium to chalcogenide because of the cost of germanium. So, that drives markets into the product. Then I think, you have -- where we've had good applications is in things like firefighting cameras, what I call aiming lenses, which are things for rifle scopes or pointers, those type of devices. And then there's the whole sensing technology. So, this involves the movement to [indiscernible] buildings, the LIDAR, the autonomous vehicles, all of those things are driving applications in this field. Like, the thing that's happening Zack is the cost of thermal imagers, in general, is coming down. It's coming down because the cooling systems. They now have uncooled sensors in the cameras, so that whole segment is a big driver and where we play predominantly. The size of the sensors has gone from 25 microns down to 12 and is probably moving to 10. So, you get twice as many sensors per wafer, so the cost of those sensors is less. And then with -- the optics become the next biggest item on the bill of material of these things and the shift from germanium to chalcogenide is offering a reduction in that cost. And as the overall cost of these imagers come down, then the applications just explode. So, these spectrograph-type applications, sensing, Internet of Things type things, where all these machines need to talk to each other, all of those things are driving those types of applications.

Great. That’s really helpful. Th.

And the next questioner today will be Gene Inger with IngerLetter. Please go ahead.

Hi guys. It's been an interesting time, and I gather what you're saying, because Matt has mostly asked most of the questions that I had. You seem to have resource management under control or at least you know the direction that you're going in. Your resolved capacity constraint. But I am still confused about China in terms of what happens if you've made this transition away from germanium and now you're providing different materials to your customers, what happens if the commodity market changes? And what happens if there is or is not a major trade accord with China?

Well, those are all good questions Gene and I can't answer the politics, but I will tell you this. We kind of looked at -- so first of all, for lenses, for some reason, which I greatly appreciate, have not been on any tariff list that we are aware of. So, we haven't been impacted at all yet. The other thing that I would say is, that's -- a little over 60% of our overall business is international, either in Europe or Asia. So, that business does not necessarily have to be impacted because it doesn't come back to the U.S. And then as you look at the stuff that does come back to the U.S. and you figure out how you could move it around, some of it doesn't need to. So, if the trade thing were to happen and these tariffs go into effect and they start to impact our business, it would be less than 25% of our overall business would be impacted. And then the other thing that I've said is any other tariff rates that we've been looking at for these types of products, things on the metal or the rubber that gets involved in them, those tariffs tend to be more in the lower percentages, like 10% or less, so it really becomes less significant. I mean we're not talking like the 25% tariffs that have been discussed so broadly in the media. So, I think it's going to be -- I think it's something that we could manage from that standpoint, if it were to happen. Obviously, we hope that it doesn't. But we have our capabilities in the U.S. and Europe that can cover a lot of it in the worst case. So, I think, given our diversification and our global nature, we'll probably be okay.

Jim, I'm just back from Berlin IFA, which was a technology show, and I met with a South Korean Professor, Head of a research institute and saw some interesting discussions about wavelength optical axis technology for 5G. Probably, you know what I'm referring to. Wondering whether the capabilities and the changes in this industry are going to be as dynamic. I think you've touched on that a little bit and you believe you have the capabilities. Maybe that's a topic for another time. But I guess I would ask this. Do you anticipate -- since you're talking about integrating the movement of ISP out of New York over the course of this fiscal year that's going to be an inhibitor or a stimulant to revenue and margins as we go through this new fiscal year? In other words, did you have capacity constraints essentially shoving profitability into the new fiscal year?

Well, I think anytime you move a major operation, you try to do it with the least amount of disruption and we've tried to do that. Our plans are such that we don't have that, but I can't say there won't be some part of the disruption. And part of the thing is that we have some duplicate cost going on right now, which showed up in the fourth quarter to some degree, where we have gone ahead and hired a head in the new operation so that we have time to train some of these people so that when the equipment is brought online, it's ready to go immediately. As I said, we bought a new coater and put it in China and that moved a substantial load off of the coating operation in New York such that -- so we don't have to worry about that. So, we've done a number of those things. And then the reason that it's going to take the full year to do it is because we're going to move it a piece at a time. And as we move a machine, we'll get it up and installed and running before we move the next major piece of equipment. And that really relates more to the coating operation than anything else. From a diamond-turning point of view, which is the other major operation, which is in New York, we've already established the process here in Orlando with -- we have now two, it could be three machines dedicated to lens turning, which pretty much covers what is there in New York. And then as we move machines, we are already set up such that we could move the next two machines to Riga and those are basically plug-in. They're -- the facilities are all in place. It's just ready, they get there, they plug them in and spin them up. So, I think that disruption will be minimal. So, I think we've tried to put these kinds of things in place. It's a little expensive upfront, but it pays big dividends on the backend.

I guess, finally, I would just say, coming back from Germany two days ago, there was just an incredible focus on infrared and all kinds of sensors, everything. And a couple of the new cars like the Audi 8 Series, the Audi -- I mean, excuse me, BMW 8 Series, the Audi Q8 have infrared-forward vision. I don't if you're providing the lenses or not. I think they're from [indiscernible]. And these are technologies that you haven't referred to in this discussion. You have in the past. And I wondered if you'd like to comment on how that -- those areas as well as LIDAR and so on are coming along.

Well, I think, we're continuing to work with these companies in the LIDAR field and that's a major technology. It will be used for autonomous vehicles. Some of these guys are struggling with the overall technology of the device still. So, there's still a lot of development work. From the optical side, we feel like we're in pretty good position. We have a nice technology with our collimators that fit into those things very nicely. And so we're ready from that standpoint. We've talked about sensing -- of all kinds of sensing technology, whether that's the assisted driver systems or not. We are in that market and able to provide those type of products. So, where we've had some initial success in the automotive market is more with the laser-assisted headlights. We are either using a super high beam or using a laser on phosphorus to generate the headlight light. So, we're designed into a couple of those systems. So, all those things take a long time to germinate and so those things will be coming in the future, I think, from a production standpoint.

Well, good luck, and hopefully you completed, or are completing the consolidation and turnaround back to better profitability.

Yes, it certainly is a major goal. No question.

Yes. Cheers and good luck.

Thank you, Gene.

Feel better.

Thanks.

And our next questioner today will be Marc Wiesenberger with B. Riley FBR. Please go ahead.

Thank you. With the increased visibility, how should we think about the growth in FY 2019 relative to FY 2018?

Well, I think, on a percentage basis, it should be similar. I mean, the type of growth that we've forecasted typically, we don't give guidance. But we're in that 15% to 20% range. We expect to see that kind of growth organically into 2019.

Great. Thank you. Turning to the Renishaw contract, is this the longest kind of contractual arrangement that you have currently or have had? And also, how does the going through your distributor impact the economics? And then the last part is, how should we think about the cadence of revenues over the three years?

I think it is one of the -- probably the longest contract that we've entered into, I think, from that standpoint. These are lenses that we have been selling to them for the last couple of years. They're very customized lenses. So, I think, the pricing is solid and is indexed. I think -- so that's not a problem. And I think, really what this contract means to us is that business is assured over this period of time both for the customer and for us. So, that point of thing. As I said, it was a custom lens. That gives us a lot of visibility as to what their volumes will be or what their anticipated volumes will be, so that we can do better planning for that type of the business. So, I think it was a win-win for both the customer and us.

And then in terms of the cadence over the three years?

I think it's pretty stable, pretty constant volume to what it's been.

Great. And then, have you made any efforts to better align the revenues and costs kind of in the international contracts?

Well, certainly, in our plans as we negotiate these things in the future that we will be running the revenue in the same currency as the production is done. So, that should smooth out, at least to the gross margin line with those kind of fluctuations. We haven't cut those things in place yet, but those are what we're working on.

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

Thank you.

And this will conclude our question-and-answer session. I would 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 and expanding team at LightPath. With our strength and presence around the world, we remain focused on our efforts to drive topline, bottom-line, and cash flow growth, while making improvements in our overall financial conditions. We're very excited by our growth prospects. So, thanks again for participating on today's conference call and we look forward to speaking with you next quarter.

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