Good morning and welcome to the LightPath Technologies fiscal 2019 fourth 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 also note, this event is being recorded. And now I would like to turn the conference over to Donald Retreage. Please go ahead, sir.

Good morning. 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 the 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 would 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 the company's SEC filings and press releases. Following management discussion, there will be a formal Q&A session open to participants on the call. And now I would like to turn the conference call over to Jim Gaynor, LightPath's President and Chief Executive Officer. Jim, please go ahead.

Thank you and good morning. Welcome to LightPath Technologies' fiscal 2019 fourth quarter financial results conference call. Our financial results press release was issued after the market closed yesterday and posted to our corporate website. Following my remarks, our CFO, Don Retreage, will further review our financial results and provide more perspective on some key areas. We will then conduct a Q&A session and move on from there. LightPath experienced encouraging progress on many fronts during 2019 fiscal year that ended June 30, which were unfortunately masked by a few critical issues. The key takeaway is that the market acceptance of our diversified portfolio of visible and infrared lenses is on the rise. Here is the backdrop. We essentially have two primary sides of our business, precision molded lenses or PMO products is our legacy business which is slower growing and smaller than our infrared or IR business. The PMO addressable market is estimated at about $300 million, growing at about 3% to 5% annually. The IR addressable market is estimated at greater than $500 million, growing at about 7% to 10% annually. Each of these markets is impacted by seasonality and cyclicality. Third line of business falls outside both of these areas and is for specialty products and other projects which will have varying contributions to our consolidated financial results, typically 3% to 10% of total revenues. Fiscal 2019 revenue growth of IR was 8% and PMO was 4%. In the fourth quarter, revenue growth for IR accelerated with an increase of 19% while PMO growth was steady at 4%. On top of that, our 12-month backlog was $17.1 million at June 30, 2019, an increase of 33% as compared to $12.8 million at June 30, 2018. While these metrics were positive, they were not as high as we…

Thank you Jim. First, I would like to mention that much of the information we are discussing during this call is also included in the press release issued yesterday and in our annual report on Form 10-K filed with the SEC. I encourage you to visit our website at lightpath.com and specifically the section titled Investor Relations. Now onto my remarks pertaining to the fourth quarter and full year fiscal 2019. Rather than recite all of the financial details in the press release, I will review some of the highlights and then address the items Jim has referenced in his remarks. Revenue for the fourth quarter of fiscal 2019 was $8.7 million, an increase of 8% as compared to $8.1 million in the fourth quarter of fiscal 2018. Revenue for the full year was $33.7 million for fiscal 2019, an increase of 4% as compared to $32.5 million in fiscal 2018. For our geographic revenue mix in the fourth quarter, we had 39% from North America, 24% from Asia, 34% from Europe and 2% from the rest of the world. For the year, 38% was from North America, 23% from Asia, 36% from Europe and 4% from the rest of the world. Now onto our vertical markets sales review for the first quarter. Sales to catalogs and distributors were 18% of revenue, defense was 14%, industrial was 40%, commercial was 10%, medical was 4% of the total revenue, telecom was 15%. The 12-month was $17.1 million at June 30, 2019 and increased 33% as compared to $12.8 million at June 30, 2018. In addition, we have an undisclosed backlog that goes out from months 13 to 36 which together with our 12-months backlog provides us with enhanced visibility to manage the business and invest according to future manufacturing capacity needs.…

[Operator Instructions]. And the first question comes from Marc Wiesenberger with B. Riley FBR.

Thank you. Good morning.

Well, good morning to you, Marc. It's early morning there.

It is. Can you walk me through your thinking on gross margins over the coming year and some of the puts and takes that are going to go into that?

Well, sure. I think the gross margins and the cost of goods sold were impacted in 2019 by some of these restructure charges and a few other costs that are nonrecurring as well as some redundant labor that we had while we were moving that operation. So, we expect those things, that margin to improve dramatically in fiscal 2020 as we start to take advantage of these programs that we put in place last year. So, I think we will see a significant improvement in the margins as we move forward, and you have already started to see it in the current quarters. If you look back, we went from 30% to 32%, and you know, as we do some of this conversion, you are going to see some improvements as we start to take advantage of the BD6 benefits over germanium costs and those kinds of things moving forward. So, we feel pretty good about that. I think maybe a better metric to consider is how the EBITDAs will change. We reported a 6% EBITDA this year as reported. If you adjusted that for just the cost of the relocation and the redundant labor we had, that would move to 10%. And then if you start to put in some of the cost savings that we expect to see -- that we have already put in place, but the benefits haven't fully flown through the financials yet, then we would move that EBITDA into the range of 12% to 15% and then we continue to go from there. So that's without any volume changes whatsoever. If you start to grow the business as we expect, then I think you will see the EBITDAs return into the margins that we would like to see into the 20s more than likely as we move forward over the next year or two.

Got it. And expanding on our last one a little bit. How do we think about the potential growth of the business now that some of the moving pieces have been resolved?

Well, I think as we said, these markets are growing at a compounded annual rate of 7% to 8%, particularly I mean for the infrared business and about 3% to 5% for the PMO business. We think the visible business is going to be pretty stable at that kind of growth rate. It's going to be driven by the 5G demand. So, we see that continuing. The IR, I think, we will see growing at much faster rate, probably double that at a minimum. We saw some acceleration of that growth rate in the fourth quarter where we had 19% growth. You also saw some very good growth of the molded IR as that starts to pick up steam. So I think we would see that kind of growth there. The specialty business is kind of up and down, depending of what kind of projects that we are able to become involved in. But I would expect that to stay in the range that it typically runs around 6% of our revenue.

Understood. Can you talk about some of the dynamics with regards to the strength in telecom and industrial maybe and then offset by the weakness in the commercial vertical? And how we should think about that going forward?

Well, I think, obviously, our focus has been on the infrared sector which is where we think we see the fastest growth. So, I think that's going to continue. I think the telecom business, being driven by 5G is the main driver of that. We did a lot of work in 2018 developing and designing lenses for that application for our customers there, and those are starting to move in production. So, I think we will see that. I don't see that backing off. That's one of the areas that has the potential to be impacted, in our case, by what's going on with the relation of the tariffs with China. But a lot of that business is built in China and sold in China, so it's not heavily impacted there. But I think that's going to continue to drive that business. That's the main driver there. The types of applications in the infrared that we are doing with riflescopes and sensors and those kinds of things, I think are going to drive the business in the infrared and particularly some of the things that we like are the smaller-type lenses because those are all moldable for us. We have moved these processes around. We have brought the coating processes in-house and developed wear-resistant coatings for both the capabilities for LightPath, anyway for germanium and also for the BD6. So, I think that will help accelerate that conversion to the chalcogenide material system. So those are all things that I think are going to drive the business as we go forward.

Okay. Also, you noted a shortfall of customers. Just crystallize a little more how some of the operational changes you are making will help improve that going forward?

Yes. I think one of the issues that we faced last year was demand generation. And by that, we mean although we grew, we didn't grow at the expected rates that we would like and part of that was impacted by the relocation of the New York operation and bringing up the coating operation here in Orlando. It went smoothly until the last three or four months and then we had some struggles with it, which we have gotten through, but it impacted the rate and pace with which we could take on new projects. We also had this communication problem between some of our functional groups as well as our geographic groups as we made this transition. And one of the things that we are trying to address that, that communication issue really slowed down the quoting process and so we weren't able to get quotes out as timely as our customers would like and then we lost some opportunities as a result of that. So what we have tried to do with the organizational changes is address that problem, one, by creating the Chief Operating Officer position so that we consolidate under a single leader the sales, engineering and operations functions and improve that combination and the communication between those groups as well as between the different physical facilities where the various processes reside. In addition, as I said, we brought the operation up in Orlando to also shorten the lead times and bring up the capabilities that we had. So I think that that kind of thing generates it and then in addition, we created and staffed a product management function. The idea behind that is for the portfolio management. So with the integration of the ISP products and the development of the BD6 and the legacy products, our product portfolio became a lot bigger and a lot more complex. And so what we have now done is try to break it down into these various product groups with a product manager to manage that portfolio and ensure that we are looking at the right types of opportunities, not chasing things that tend to be one-off and go for things that have a little more life to them, bigger opportunities and just manage that process much better. So we are in the beginning stages of that. We have staffed that. Those guys are in place and they are starting to impact that process and make sure that things move through our system more smoothly. So I think that kind of generates that. Also tying together the engineering and operations and sales, now we have a better way of balancing the supply with the demand and make sure that we have the right capacities in place for the right products.

That's helpful. Thank you. And one last one for me. Jim, you have been with LightPath for over 12 years. You have helped expand the product and geographic footprint pretty significantly. But you announced you are going to be stepping down next year. Can you provide with some more details about that transition and maybe the timeline for succession?

Yes. I am going to let my boss answer that question. Bob Ripp happens to be here today. So I am going to turn that one over to him.

Good morning Marc. Good morning everybody. With respect to the succession plan, the Nominating and Governance Committee of the Board, which consists of myself, Louis Leeburg and Sohail Khan, we looked at six different search firms, interviewed three and have an engagement letter with one of them as of now. Each of them that we interviewed were pretty positive about attracting the type of individuals that we would want to lead LightPath. They all were very confident about how quickly they thought they can do it, sometimes in the order of 90 to 100 days. I told them I want right to trump fast in this particular case. But where we stand right now, as we are going through with the search firm that we have engaged through the process of lining up the first round of process to get on with culling from all the applicants that that search firm would be looking at, to a narrower list. And I am sure that within the next two weeks, we will be starting our first interviews. So how long that all will take, based on their forecast, it's about end of year target in their minds. But we will just see how that process goes.

Great. Thank you very much.

Thank you. And the next question comes from Michael Dyett, a private investor.

Thank you Jim and Bob, good to hear your voice. I wondered if you could expand on the sales strategy concept to the extent to which you will be continuing to use the trade shows versus other initiatives and what the post 12-month backlog has looked like in this current year?

Well, I think obviously the backlog, let me go there first, is up about 33% over where it was last year. I mean that's the disclosed backlog. So that means that's what's shippable in the next 12 months. It continues. The infrared business is becoming a larger part of our business and that's where we wanted to be. So the reason is that it's a bigger market, it's faster growing. And so that is reflected in that backlog as we move forward. So I think we have a pretty healthy backlog as it stands right now and that's continuing. I think from a sales process point of view, we are transitioning the sales strategy to a product centric strategy. That's a very technically based process. We put the product managers in place as a way of input into that process to make sure we are looking at the right opportunities as well as to manage that portfolio. I think we have also introduced the concept of capture teams in our sales process, which means that we bring in the right mix, depending on what's the particular opportunity they are looking at, of technical support sales support, operational support. So we form this team to look at the opportunity and develop the quote response and make sure that we have the capabilities in place. We put the right design in place and we have the capacities necessary to execute. So that's basically the process as we move it forward. So we are in that process. We are also increasing our emphasis on the inside sales, so that this group, the sales group has good support for the back-office type things that are included as well as there is a large portion of our business that can be handled by inside sales that's recurring legacy type business.

Thank you Jim. And I will say, this is the best conference call I have heard in probably eight or 10 years. Thank you again and good luck.

All right. Thank you Michael.

Thank you. And as there are currently no more questions in queue, I would like to return the floor to Jim Gaynor for any closing comments.

All right. Thank you operator. Well, thank you all for joining our call today. We have covered a lot of detailed information today. So one of the things I would like to do before we close is summarize what I think the key takeaways are. First, our IR business is growing rapidly with the addition of the BD6 material system, our new family of lens assemblies and the release of several new products. Second, our precision molded optics business is stable with growth being driven primarily by 5G demand. Third, we will benefit significantly from the savings generated by the closing of the New York facility. And fourth, we have sufficient cash to fund operational growth through continued investments in product development, manufacturing capacity and the expansion of our customer base. In conclusion, 2019 presented many challenges and some disappointments, which we have addressed and through which we will pave the way for improved financial performance on both the top and bottom lines. We are excited for the future and the continued growth of LightPath. We will also talk more about our strategy and progress at the upcoming Sidoti Conference in New York later this month and I hope to see you there. Thanks again for participating on today's conference call and we look forward to speaking with you next quarter.

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