Q2 2022 LightPath Technologies Inc Earnings Call

Good afternoon, everyone and welcome to the Lightpath technologies fiscal 2022 second quarter financial results Conference call.

Speaker 1: Good afternoon everyone and welcome to the light path technologies fiscal 2022 2nd quarter financial results conference call. Please note this event is being recorded at this time. I'd like to turn the conference over to Miranda chief financial officer at like past like past technologies. Please go ahead.

Please note this event is being recorded.

At this time I'd like to turn the conference over to Miranda Chief Financial Officer, I'd like Pat Mike Path Technologies. Please go ahead.

Speaker 2: Thank you. Good afternoon, everyone. Before we get started, I'd 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, involve various risks and uncertainties, including the impact of COVID-19 pandemic that are discussed in its periodic SEC filing.

Thank you good afternoon, everyone 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 are based on current expectations involve various risks and uncertainties, including the impact of COVID-19 pandemic.

And its periodic SEC filings, although the company believes that the assumptions underlying these statements are reasonable any of them can be proven to be inaccurate and there can be no assurances that the results would be realized in.

Speaker 2: Although the company believes that the assumptions underlying these statements are reasonable, any of them can be proven to be inaccurate, and there can be no assurances that the results would be realized.

Speaker 2: 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 reconciliation of the company's SEC filings and press releases.

In addition references may be made to certain non generally accepted accounting principles or non-GAAP measures.

Which you should refer to the appropriate disclaimers and reconciliation with.

The company's SEC filings and press releases.

Speaker 2: Following the management's discussion, there will be a formal question and answer session open to participate on the call.

Following management's discussion there will be a formal question and answer session opened to participate on the call.

Speaker 2: I would now like to turn the conference over to Sam Rubin, LIPAC's President and Chief Executive Officer.

I'd now like to turn the conference over to Sam Rubin White past, President and Chief Executive Officer.

Speaker 3: Thank you, Al. Good afternoon to everyone, and welcome to Light Path Technologies' fiscal 2022 second quarter financial results conference call. Our financial results press release was issued after the market closed today and posted at our corporate website.

Thank you al good afternoon, everyone and welcome to delight of Technologists, physical 2022 second quarter financial results Conference call.

Our financial results press release was issued after the market close date was posted to our corporate website.

Speaker 3: The company's performance in the second quarter demonstrated significant progress in the expansion of our product portfolio and business development pipeline, as we have been successfully implementing our new strategic service.

The company's performance in the second quarter demonstrated significant progress in the expansion that will product portfolio and business development pipeline as we have been successfully implementing our new strategic direction.

Speaker 3: Our new strategic direction, which we began rolling out approximately one year ago, is delivering the intended results, with the company transforming itself into a leading global partner for optical engineered solutions, with a highly differentiated product platform the foundation

Strategic direction, which we began rolling out proximately one year ago is delivering the intended results with the company transforming itself into a leading global partners for optical engineered solutions with a highly differentiated products platform as the foundation for the new lifestyle.

Speaker 3: At the same time, we are delivering with operational discipline as we invest in new growth opportunities.

At the same time, we are delivering with operational discipline as we invest in new growth opportunities.

Speaker 3: While the financial recovery of our existing operation takes longer than anticipated, following the transition of our

While the financial recovery.

For our existing cultivation takes longer than anticipated following the transition our business in China.

Speaker 3: This transition pertains to the discovery in our fiscal 2021 fourth quarter of irregularities in our China operation, which after closer look turned out to be illegal activities by the management of our subsidiaries in that country.

This transition pertains to the discovery in our fiscal 2021 fourth quarter irregularity in our China operation, which after closer look turned out to be illegal activities by the management that was subsidiaries in that country.

Speaker 3: including the misappropriation of company money and the rerouting of customer orders to third parties.

Including the misappropriation company money and the rebalancing of customer orders deferred puppies activities, which we now know had been going on for a very long time.

Speaker 3: which we now know had been going on for a very long time.

Speaker 3: We eradicated the problem areas, replaced the management team and overhauled our control systems to avoid any recurrence of such events.

We have advocated the problem areas replaced the management team and overhauled our control systems to avoid any turbines of such events.

Speaker 3: But at the same time, we were also negatively impacted by a reduction in telecom revenues in China from a large customer who had lost his own contract and stopped issuing any new orders.

But at the same time, we were also negatively impacted by a reduction in telecom revenues in China. Okay.

Large customer who had lost one contract and spot.

Issuing any new orders.

Speaker 3: Our revenues in totality from China remain below where we thought they would be in terms of recovery, which has had a corresponding impact on our profitability.

Our revenues in totality from China remain below where we thought they would be in terms of recovery.

Which has had a corresponding impact on our profitability.

Speaker 3: Since telecom sales, which principally had been for 5G infrastructure mill belts, alpha products which produce some of our...

Telecom sales, which principally has been four five G infrastructure build belts.

Also product, which produced some of our highest margins.

Speaker 3: While we are glad to share that the said telecom customer has now began ordering again, those orders are still at a much lower volume than before, and we expect to take a couple of quarters to start scaling.

While we are glad to share that.

<unk> customer has now began ordering again those orders.

At a much lower volume than before and we expect to take a couple of quarters upscaling.

Beyond these challenges in China.

Speaker 3: Beyond these challenges in China, our overall business globally continues to be solid. Revenues for the second quarter and backlog at the end of the period increased from the first quarter.

Our overall business globally continues to be solid revenues for the second quarter and backlog at the end of.

The period increased from the first quarter.

Speaker 3: The backlog factors in the renewal of our largest annual supply.

The backlog factor in saying the renewal of our largest annual supply agreements. This contract is for the purchase of the loyalty of infrared optical lens elements by.

Speaker 3: This contract is for the purchase of a variety of infrared optical lens elements by a major commercial customer and demonstrates our ability to supply high quality infrared optics on a commercial scale for an impactful OEM part.

By a major promotional customer and it demonstrates our ability to supply high quality infrared optics on the commercial scale point impactful OEM partner.

Speaker 3: More important is the future growth potential presented by recent achievements as we continue to execute against our strategic plan. Prior to the second quarter, management focused on executing on important changes necessary for our future growth and evolution as a company in terms of corporate governance and ESG, organizational leadership and workforce alignment.

More important is the future growth potential presented by recent achievements as we continue to execute against our strategic plan.

In the second quarter management focused on executing on important changes necessary for future.

Future growth and evolution as a company in terms of corporate governance in BSG.

Utilization of leadership and workforce alignment.

Speaker 3: Another critical phase was infrastructure investments to increase underlying capacity and capability.

Another critical trades was infrastructure investments to increase in the line capacity and capabilities.

Speaker 3: Most recently, during the second quarter, we announced several technological and manufacturing process developed...

Most recently during the second quarter, we announced several technological and manufacturing process development.

Speaker 3: that create a basis for further differentiating the solutions we can offer as a partner to our customers.

That creates a basis for further differentiating the solutions. We can also as a partner to our customers.

Speaker 3: Such differentiating technologies are key in transitioning the company from a component provider, which produces items with a customer's specification, to a solution provider, which leverages those differentiating technologies to have an in-depth dialogue and involvement in the customer's design process.

Such differentiating technology is a key in transitioning the company from a component provider, which produce items that the customer specification.

Solution, which.

Which leverages those differentiating technologies to have a in depth dialogue and involvement customers designing process.

Speaker 3: and captures some of the value created by owning the IP, which translates to premiums in type.

And captured captured some of the value created by owning the IP, which translates to premiums and pricing.

Speaker 3: Light Path is leveraging its legacy as a low cost provider with some of the industry's best high volume manufacturing capabilities to emerge as a partner for our customers on designing optical engineered solutions where we are adding value by offering the best solutions.

Like buffers, leveraging its legacy as a low cost provider with some of the industry's best high volume manufacturing capability to emerge the partner for our customers.

Mining optical engineered solutions, where we are I think value by offering the best solutions.

Speaker 3: As we had previously outlined, this moves us from being a component supplier, a reactive player, who focuses on being the lowest cost provider, to a partner that brings the domain expertise and optics to the table, a position that is naturally more proactive and value-added.

As we had previously outlined.

This moves us from being a component supplier a reactive player focuses on being the lowest cost provider.

A partner that brings the domain expertise and optics to the table a position that is laterally more proactive and value added.

Speaker 3: This process is part of our strategic plan, which is driving our path forward. And it is now beginning to deliver the intended results with our business development pipeline throttling forward from the strength of our new freeform optics, infrared materials, and other technological innovations.

This process is part of our strategic plan, which is driving our path forward and it is now beginning to deliver the intended result, with our business development pipeline for pulling forward the strength of that when you free form optics input materials.

Electrical innovation.

Particularly for Lidar LVL and space applications.

Speaker 3: particularly for LIDAR, ALVR and space apps.

Speaker 3: Since introducing freeform optics in October 2021, we have been engaged in an increasing number of opportunities, which include non-recurring engineering projects.

Since introducing free form uptick in October 2021, we have been engaged in an increasing number of opportunities which include non recurring engineering projects and all.

Speaker 3: NREs and other programs which could lead to valuable volume production orders.

And the other programs, which could lead to valuable volume production orders.

Speaker 3: At present, we have a total of eight such high-value, high-volume projects in development, all going through the customer coordination

We have a total of eight such high value high volume projects in development, all going through the customer qualification process.

Speaker 3: This is an increase of five projects from the three that we discussed during our last quarterly report.

This is an increase of five projects from the freeze that we discussed during our last quarterly report.

Speaker 3: Almost all of those programs in the area of LIDAR and ARVR and have all launched as a result of customers realizing the value of our new free-form technology and are now working closely with us to leverage those capabilities to deliver performance they could not previously achieve in their system.

Almost all of those programs in the area of Lidar and LDL and have all launched as a result of customers realizing the value that when you free form technology.

And are now working closely with us to leverage those capabilities to deliver performance. They could not previously achieved in the system.

So often these programs as the result of customers wanting priority access to free form technology, among our expanding platform of proprietary materials and manufacturing processes.

Speaker 3: Growth in these programs is a result of customers wanting priority access to freeform technology. Among our expanding platform of proprietary materials and manufacturing...

Once in production each of those opportunities ranging from 1 million to $5 million in annual revenue potential with a good projection production update over the next 24 months.

Speaker 3: Once in production, each of those opportunities ranges from 1 million to 5 million in annual revenue.

Speaker 3: with staggered projection production start dates over the next 24 months.

Speaker 3: In short, we can go from one 10% customer to many of them, where our operating and financial performance will benefit from leverage on the manufacturing floor and less commoditized solutions to gain pricing power and avoid margin compression.

In short we can go from 110% customer to many of them were our operating and financial performance will benefit from leverage on the manufacturing floor and less commoditized solution.

<unk> pricing power and the board avoid margin compression.

Speaker 3: Aided by the substantial completion of investments in manufacturing, coating and finishing that are integral to our strategic plan, we are excited for what may materialize for growth in revenues and profitability.

Aided by the substantial completion of investments in manufacturing coating and finishing that are integral to our strategic plan. We are excited for what may materialize for growth in revenues and profitability.

Speaker 3: We are now in the process of volume production readiness for our expanded coating facilities in Europe .

We are now in the process of volume production readiness for our expanded coating facilities in Europe .

Speaker 3: With no major investment plans for the remainder of this fiscal year, our next focus on capital movement.

We have no major investments planned for the remainder of this fiscal year. Our next focus in capital investment will be the expansion of our facility in Orlando in the next fiscal year.

Speaker 3: will be the expansion of our facility in Orlando in the next...

Speaker 3: With vertically integrated manufacturing capabilities on three continents, we are increasingly being sought after by customers and industry partners alike, which positions us to broaden our product portfolio and address some of the most prominent growth sectors of the economy, including LIDAR, Augmented Reality and Space fiction.

With vertically integrated manufacturing capabilities on three continents, we are increasingly being sought after by customers and industry partners alike, which positions us to broaden our product portfolio and address some of the most prominent growth sectors of the economy, including Lidar.

Okay mental reality and speech technologies.

Speaker 3: Large automotive related customer relationships are being developed for LIDAR and thermal imaging to provide both autonomous driving and enhanced vision capability.

Large automotive related customer relationships are being developed for light oil and thermal imaging.

Panama's joined Ping and enhanced vision capabilities.

Speaker 3: Today we are in a much better competitive position to access these large opportunities due to our differentiating technologies and in particular our award-winning free-form optics manufacturing technologies.

To date, we are in a much better competitive position to access these larger opportunities due to our differentiating technologies and in particular, our award winning free form optics manufacturing technology.

Okay.

The industry's response that wing production of free form optics manufacturing technology with high volume production has been nothing short of overwhelming.

Speaker 3: The industry's response to our introduction of freeform optics manufacturing technology with high volume production has been nothing short of overwhelming.

Speaker 3: Freeform optics can potentially minimize the size of consumer products.

We form optics can potentially minimized side of consumer products, such as augmented reality glasses and laser projectors.

Speaker 3: such as augmented reality glasses and laser projection.

Speaker 3: Additionally, the enhancements that freeform optics provide to optical design allow, for example, designing much wider field of view systems or better resolution and sensitivity for applications such as LIGO.

Additionally, the enhancements that three form optics provide to optical design allow for example, designing a much wider field of view systems or better resolution sensitivity applications.

Applications such as Litle.

However, the adoption has been constrained by volume manufacturing inefficiencies.

Speaker 3: However, adoption has been constrained by volume manufacturing inefficiency.

Speaker 3: extending our molding technology into the production of high precision freeform glass

Extending our molding technology into the production of high precision <unk> Das upticks, we're now enabling mirrored new applications and miniaturization of existing optical system.

Speaker 3: We are now enabling mirrored new applications and miniaturization of existing optical systems.

Speaker 3: to a level that optical community has been demanding for a long time.

To a level that optical community has been demanding for a long time.

Speaker 3: Two weeks ago, we announced that our new freeform optics technology had won the 2022 CRISM Award for manufacturing.

Two weeks ago, we announced that our new free form optics technology has won the 2022 Prism award for manufacturing.

Speaker 3: Winners were announced as part of the SBIE Photonics West trade show. One of the industry's most important...

Those were announced as part of the Spi Photonics West Tradeshow.

One of the industry's most important events of the year.

Speaker 3: The PRISM award is an annual international competition that honors the best new optics and photonics products and technologies on the market.

Prism Award is an annual international competition.

The best New optics, and photonics products and technologies on the market.

<unk>.

Speaker 3: As mentioned, we now have underway a number of large NRE projects for the development of new custom freeform optics and subsystems.

As mentioned, we now have underway a number of large projects from the development of new custom free form optics and subsystems.

Speaker 3: which represents revenue in the form of the work that is paid for by the customers, with resulting intellectual property owned by lifepaths, are expected to lead to production orders that require a series of lenses or assembly.

Which represents revenue in the form of the work that is paid for by our customers.

Resulting internet intellectual property owned by like POS are expected to lead to production orders that require a series of lenses or assembly.

Speaker 3: which would substantially increase the company's current manufacturing volume.

Which would substantially increase the company's current manufacturing volume.

Once in production through separate contracts the proprietary nature of such non Commoditized orders suggest that the higher revenue generation associated with the greater volumes.

Speaker 3: Once in production, through separate contracts, the proprietary nature of such non-commoditised orders suggest that the higher revenue generation associated with the greater volumes also will deliver an improvement in gross margins as compared with the company's existing product line.

So we'll deliver an improvement in gross margins as compared with the comprehensive existing product lines.

Speaker 3: As such, we are delivering on this strategic objective of transitioning into a value-added engineered solutions partner for large global customers as they pursue new and new technologies

As such we are delivering on the strategic objective of transitioning into a value added engineered solutions partner for large global customers.

As they pursue next generation technologies.

While our product portfolio has made great strides now addressed in some very exciting growth market, our spending on research and development remained under $6000 for the quarter.

Speaker 3: While our product portfolio has made great strides and now addresses some very exciting growth markets, our spending on research and development remained under $6,000 from the quarter to the quarter.

This spending has been supplemented by MLB projects as well as <unk> and partnerships, which serve as a testament to our leading expertise in photonics.

Speaker 3: This spending has been supplemented by NRE projects, as well as grants and partnerships, which serve as a testament to our leading expertise in photonics.

Speaker 3: Furthermore, we're very pleased to have recently been funded by the European Space Agency and Space Florida to advance the commercialization of our infrared materials to be used for optics in space.

Furthermore, we are very pleased to have recently been funded by the European Space Agency and space, Florida to advance the commercialization of our weighting to input materials to be used for optics and space.

Speaker 3: A key objective of our strategic plan is to move up the value chain in targeted areas based on technology and engineering capabilities that we have today.

A key objective of our strategic plan is to move up the value chain.

Tip areas based on technology and engineering capabilities that we have today.

To this end.

Speaker 3: To this end, we were honored to have been selected for an exclusive optical usage license to manufacture products using the infrared patents portfolio developed and owned by the United States Naval Research Department.

We were honored to have been selected for an exclusive optical usage license to manufacture products using the infrared patent portfolio developed and owned by the United States Naval Research Laboratory.

Speaker 3: The agreement with NREL provides LightPath with access to an IP portfolio of unique polycogenide glass compositions to develop more advanced optical systems, targeting some of the fastest growing biomaterial models.

The agreement with NOL provide flight path with access to an IP portfolio or unique chalcogenide glass compensation to develop more advanced optical systems targeting some of the fastest growing element to market.

Speaker 3: including the infrared imaging market, which is expected to grow from 5.8 billion in 2022 to 8.3 billion by 2025.

Including the infrared imaging market, which is expected to grow from five 8 billion in 2022 to $8 3 billion by 2025 and.

Speaker 3: and the multispectral imaging market, which is estimated to grow from 10.9 billion in 2022 to 17.6 billion in 2025.

The multi spectral imaging market, which is estimated to grow from $10 9 billion in 2022 to $17 6 billion in 2025.

I am pleased to report that we are receiving very strong market feedback and.

Speaker 3: I am pleased to report that we are receiving very strong market feedback in our NRL IP portfolio, which reaffirms our assumptions that such materials provide significant benefits.

IP portfolio, which reaffirms our assumptions that such materials provide significant value.

Speaker 3: Another development that supports our better positioning is in the area of pricing.

Another development that supports our better positioning within the area of pricing in.

Speaker 3: In recent months, like the rest of the world, we have experienced price increases on raw materials and energy.

In recent months like the rest of the world, we have experienced price increases on the raw materials and energy.

Speaker 3: As Al will mention in his comments, this has also impacted our March

As al mentioned in his comments. This has also impacted our margin.

Speaker 3: in particular in infrared optics which are mostly manufactured in Europe where energy prices increase as much as three times prior rates.

In particular in infrared optics, which are mostly manufactured in Europe , where energy prices increased as much as three times higher.

We are pleased to share that our stronger positioning allows us to work closely with our customers, where we have been able to for the most part increased our prices to offset such increases in costs.

Speaker 3: We are pleased to share that our stronger positioning allowed us to work closely with our customers.

Speaker 3: where we have been able to, for the most part, increase our prices to offset such increases.

Speaker 3: Those price increases will start showing an impact in the middle of Q3, and we believe will offset what would otherwise have been a rolling margin.

Those price increases will start showing an impact in the middle of Q3, and we believe will offset what would otherwise have been eroding margins.

Speaker 3: something like path had experience all too often in the past.

Something like path.

All too often in the past.

While building for the future, we are not without discipline and because I'm looking at the key performance measures. We ended the physical 2022 second quarter by increasing our cash balance and reducing total debt and inventories as compared to the end of first quarter.

Speaker 3: While building for the future, we are not without discipline in the present. Looking at key performance measures, we ended the physical 2022 second quarter by increasing our cash balance and reducing total debt and inventory as compared to the end of first.

Speaker 3: Inventories are now at a four year low. So we are demonstrating operational efficiency.

Inventories on that with a four year low.

So we are demonstrating operational efficiencies as our backlog and revenues remain near historically high levels.

Speaker 3: as our backlog and revenues remain near historically high levels.

Speaker 3: backlog grew to 21.9 million at the end of the second quarter, an increase of over 13% from the end of the first quarter.

Backlog grew to $21 9 million at the end of the second quarter, an increase of over 13% from the end of the first quarter. Following the renewal of a large annual infrared optics supply agreement valued at $4 2 million.

Speaker 3: following a renewal of a large annual infrared optics supply agreement valued at 4.2 million.

Speaker 3: Capital investments were modest at about $118,000 for the second quarter, which is within our budget for the year, as we have completed a significant increase in manufacturing capacity expansion last year in accordance with our strategic plan.

Capital investments were modest developed $118000 for the second quarter, which is within our budget for the year as we have completed a significant increase in manufacturing capacity expansion last year in accordance with our strategic plan.

Speaker 3: The impact of our technology development efforts, our partnership and our overall product and manufacturing expenses

The impact of our technology development efforts, our partnership and our overall product and manufacturing expansion as.

Speaker 3: is a migration to higher-end engineered solutions that afford us to...

As the migration to higher end engineered solutions that afford us too.

Speaker 3: that support us with an exposure to large customers and accelerating growth markets, which are expected to lead to increased profitability, particularly since it is unlikely we would face the same commoditization and competitive issues of some of our more mature products.

That support us with an exposure to large customers and accelerating both markets, which are expected to lead to increased profitability, particularly centipede unlikely we would face the same commoditization.

The issues of some of that with more mature product lines.

Speaker 3: Reflecting this continued progress and outlook for growth, Lightmark's leadership made open market purchases of Class A common stock during both the first fiscal and second quarter.

Reflecting this continued progress and outlook for growth like Pops leadership made open market purchases of class a common stock during the first of the first and second quarter.

Speaker 3: I was among this group in the first half of the fiscal year and now stand even more aligned with all our share.

I was among this group in the first half of the fiscal year and now send even more aligned with all our shareholders.

This concludes my formal remarks, now I'll pass the call over to our CFO to review financial results for the second quarter.

Speaker 3: This concludes my formal remarks. Now I'll pass the call over to Almeranda, our CFO , to review financial results from the second quarter.

Speaker 2: Thank you, Sam. I'd like to remind everyone that much of the information we're discussing during this call is also included in our press release issued earlier today and will be included in the 10Q for the period. I encourage you to visit our website at whitepath.com to access these docs.

Thank you Sam I'd like to remind everyone that much of the information. We're discussing during this call is also included in our press release issued earlier today and will be included in the 10-Q for the period.

Or as you to visit our website at White pass Dot com to access these documents.

Speaker 2: Since Sam just covered the highlights of our strategy and our key accomplishments and business drivers, I will discuss some of the primary financial performance metrics and provide additional color on them to better assist investors in analyzing the company.

And Sam just covered the highlights of our strategy and our key accomplishments and business drivers I will discuss some of the primary financial performance metrics and provide additional color on them to better assist investors in analyzing the company.

As a reminder.

Speaker 2: we have been significantly impacted by the transition and business conditions in China during the fourth quarter of fiscal 2021 and to a lesser extent in the first and second quarters of the current fiscal year. At this juncture, while revenues have been recovering, they still remain below the pre-transition level.

We had been significantly impacted by the transition business conditions in China during the fourth quarter of fiscal 2021 to a lesser extent in the first and second quarters of the current fiscal year.

At this juncture on revenues had been recovering they still remain below the pre transition levels.

Speaker 2: Light Path's second quarter financial results were also negatively impacted by expenses associated with the management employee transition in our Chinese subsidiary.

Ipass second quarter financial results were also negatively impacted.

<unk> is associated with the management and employee transition in our Chinese subsidiaries.

Speaker 2: On an expense basis, one-time costs, charges and accruals were incurred in large part during Q4 of fiscal year 21, with additional items in Q1 and Q3 of fiscal year 21.

On an expense basis onetime cost charges and accruals.

Third in large part during Q4 fiscal year 'twenty one.

Additional items in Q1 and Q2 of this year.

Speaker 2: All of these items are fully addressed in our earnings press releases and SEC files.

All of these items are fully addressed in our earnings press releases and SEC filings.

Speaker 2: While certain civil legal proceedings are ongoing, we are unaware of any further expenses or charges to be incurred going forward.

While certain civil legal proceedings are ongoing we are unaware of any further expenses of charges to be incurred going forward.

Speaker 2: At the same time, we remain focused on our overall strategic plan and we are on a trajectory for longer term growth and profitability.

At the same time, we remain focused on our overall strategic plan and we are on a trajectory for longer term growth and profitability.

Speaker 2: On a consolidated basis, revenue for the second quarter of fiscal 2022 was over 9.2 million. That's up from the first and fourth quarters. So we are seeing sales building back. We are down from prior year period of 9.9 million.

On a consolidated basis revenue for the second quarter of fiscal 2022 was over $9 2 million that's up from the first and fourth quarters. So we are seeing sales building back.

Are down from prior year period of $9 9 million.

Speaker 2: Sales of infrared products comprise 55% of the company's consolidated revenue in the second quarter of fiscal 22 as compared to 48% of consolidated revenue in the same period of the prior fiscal year.

Sales of infrared products comprised 55% of the Companys consolidated revenue in the second quarter of fiscal 'twenty, two as compared to 48% of consolidated revenue in the same period of the prior fiscal year.

Speaker 2: Visible Precision Molded Optics, or PMO, sales represented 41% of the consolidated revenues in the second quarter of fiscal 22, as compared to 48% in the same period of the prior fiscal year.

Visible precision molded optics PMO sales represented 41% of consolidated revenues in the second quarter of fiscal 'twenty, two as compared to 48% in the same period of the prior fiscal year.

Speaker 2: PMO sales as a percent of overall sales is lower than optimum. As Sam has said, due to reduced sales to our major telecom customer in Asia.

PMO sales as a percent of overall sales is lower than optimal Sam said due to reduced sales to our major telecom customer in Asia.

Speaker 2: Specialty products continue to be a small component of the company's business, representing 4% of the consolidated revenues in the second quarter of fiscal 22 and 21.

Specialty products continue to be a small component of the companys business representing 4%.

Consolidated revenues in the second quarter of fiscal 'twenty, two and 'twenty one.

Speaker 2: Revenue generated by IR products was approximately 5.1 million in the second quarter of fiscal 22, an increase of 4% sequentially from 4.9 million in Q1 of 22 and up 6% from 4.8 million into Q21.

Revenue generated by IR products was approximately $5 1 million in the second quarter of fiscal 'twenty, two an increase of 4% sequentially from $4 9 million in Q1 of 'twenty two and.

6%.

$4 8 million and <unk> 21.

Speaker 2: The increase in revenue is driven primarily by customers in the industrial and defense market.

The increase in revenue was driven primarily by customers in the industrial and defense markets.

Speaker 2: PMO sales were $3.8 million in Q2, flat from Q1, and down 21% from $4.7 million in Q2 of this year.

PMA sales were $3 8 million in Q2.

<unk> from Q1 and down 21% from $4 7 million in Q2 of fiscal year 'twenty one.

Speaker 2: year-over-year decline is due to lower telecom sector revenues and other sales in China as mentioned

Year over year decline is due to lower telecom sector revenues the other sales in China as mentioned.

Speaker 2: Beyond these reductions, the company's PMO revenues have strengthened in the areas of sales through catalog and distribution channels, as well as increases in sales to customers in the industrial, commercial, and medical industries.

Beyond these reductions the Companys PMO revenues have strengthened in the areas of sales through catalog distribution channels as well as increases in sales to customers in the industrial commercial and medical industries.

Speaker 2: Specialty revenue is sort of a catchall for products or services that don't fit the other two categories. And they represent a small component of our...

Specialty revenue is sort of a catch all for products or services that don't fit the other two categories.

And they represent a small component of our consolidated revenues.

Speaker 2: Over the last few quarters, there has been a shift from one-off products towards more NRE projects. This is a different type of revenue.

Over the last few quarters, there has been a shift from one off products towards more <unk> projects.

This is a different type of revenue altogether.

Speaker 2: As discussed last quarter, we expect to see an increase in NRE revenues this fiscal year. Driven by the need to engineer solutions for new products like freeform molded lenses as Sam has mentioned.

As discussed last quarter, we expect to see an increase in <unk> revenues. This fiscal year driven by the need to engineer solutions for new products like Freeform molded lenses as Sam has mentioned.

Speaker 2: These are one of our new key technologies that we're bringing to market. As we develop these types of products and deliver prototypes and they are accepted and qualified, we would then expect to receive production orders where we manufacture in quantity. In Q2-22, we handled a growing number of NRE projects for commercial and defense application, again, as Sam mentioned earlier.

These are one of our new key technologies that we're bringing to market as we develop these types of products and deliver prototypes and they are accepted and qualified we would then expect to receive production orders, where we manufacturing quantity in Q2 'twenty two we handle the growing number of NRG projects.

For commercial commercial and defense application again, Sam mentioned earlier.

Let's now move to the discussion to margins.

Speaker 2: I'd first like to share some background that will be helpful for modeling purposes and an understanding impact of our overall strategic direction.

First like to share some background that will be helpful for modeling purposes and in understanding the impact of our overall strategic direction.

Speaker 2: DMO margins are typically higher due to our molding, which enables mass production in a more automated machining process. IR, historically

PMO margins are typically higher due to our molding, which enables mass production in a more automated machine process.

IR historically it was more manually produced but with the growth in our molding technology as applied for IR products being made from our proprietary beauty six material margins will increase from both the advantages and the material costs.

Speaker 2: But with the growth in our molding technology as applied to IR products being made from our proprietary BD6 material, the margins will increase from both the advantages of the material cost and using the automated...

And using the automated molding process.

Speaker 2: In addition, as we migrate towards engineered solutions, we expect margins to increase. This is due to several factors including multiple lenses required for an assembly, both types of lenses used in a single solution, and custom built solutions where our engineering and proprietary designs along with our manufacturing and assembly will dictate pricing and margins that may be more immune to industry trends.

In addition, as we migrate towards engineered solutions, we expect margins to increase this is due to several factors, including multiple lenses required for an assembly. Both types of lenses used in a single solution and custom built solutions, where our engineering and proprietary designs, along with our manufacturing and assembly.

Will dictate pricing and margins that may be more immune to industry trends.

Speaker 2: As a result, ASP, average selling price, which is often cited by analysts who cover us, may be rendered less relevant in the future. To this end, and for competitive reasons, the

As a result, ASP average selling price, which is often cited by analysts who cover us maybe rendered less relevant in the future to this end and for competitive reasons.

Speaker 2: We are going to speak to other metrics and not ASPs on addressing revenues, costing, and large-

We're going to speak to all the metrics and not asps when addressing revenues costing and margins.

Speaker 2: Our consolidated gross margin as a percentage of revenue was 30% for the second quarter of fiscal 2022 compared to 37% in the same period of the prior fiscal and 35% in the first quarter of fiscal 2022.

Our consolidated gross margin as a percentage of revenue was 30% for the second quarter of fiscal 2022 compared to 37% in the same period of the prior fiscal and 35% in the first quarter of fiscal 'twenty two.

Speaker 2: The decrease in gross margins as a percentage of revenue is primarily due to the mix of products sold in each respective period.

The decrease in gross margins as a percentage of revenue is primarily due to the mix of products sold in each respective period.

Speaker 2: While IR sales have increased, the majority was on a high volume contract. We also had a negative impact on margins as we expanded our coding capabilities in Europe .

While IR sales have increased the majority was on a high volume contract. We also had a negative impact on margins as we expanded our coating capabilities in Europe .

Speaker 2: The ramp up and learning curve of coding in the quarter means fully burdened costs with low volume output. This is typical for a new coding implementation.

The ramp up in the learning curve of coding in the quarter means fully burdened cost what tableau volume output and this is typical for a new coding implementation.

Moving on to operating expenses during.

Speaker 2: During the second quarter of fiscal 2022, total operating expenses were $3.8 million, an increase of 206,000 or 6% as compared to $3.6 million in the same period of the prior fiscal year.

During the second quarter of fiscal 2022 total operating expenses were $3 8 million, an increase of 206000 or 6% as compared to $3 6 million in the same period of the prior fiscal year.

Speaker 2: SG&A costs increased by approximately 7% as compared to the same period of the prior fiscal year.

SG&A costs increased by approximately 7% as compared to the same period of the prior fiscal year.

Speaker 2: Higher SG&A cost is primarily due to $153,000 of expenses incurred in Q2.

The higher SG&A cost is primarily due to 153000 of expenses incurred in Q2.

Speaker 2: associated with our transition in China, including legal and consult.

Associated with our transition in China, including legal and consulting fees and.

Speaker 2: In addition, it was determined that one of the Chinese subsidiaries is obligated to pay $248,000 in VAT and related taxes from prior years, which was accrued during the three months ended December 31st.

In addition, we've determined that one of the Chinese subsidiaries is obligated to pay 240000.

248000 in VAT and related taxes from prior years, which was accrued during the three months ended December 31.

Speaker 2: The remaining increase in SG&A expenses is due to increase in personnel related costs and a moderate increase in travel expenses as COVID-19 restrictions are reduced.

The remaining increase in SG&A expenses was due to increase in personnel related costs and a moderate increase in travel expenses as COVID-19 restrictions are reduced.

Yeah.

These increases were partially offset.

Speaker 2: by the absence of approximately 400,000 of non-recurring additional compensation to the company's former CEO in the prior year period.

By the absence of approximately 400000 of non recurring additional compensation to the company's former CEO in the prior year period.

In terms of total employees globally, we now have 15% fewer than we did a year ago.

Speaker 2: In terms of total employees globally, we now have 15% fewer than we did a year ago. We hired senior executives to help with our strategic implementation, including scaling of operations as we prepare for significant growth ahead.

Hired senior executives to help with our strategic implementation that including scaling of operations as we prepare for significant growth ahead.

Speaker 2: In addition, we replaced our temporary leadership in China with permanent hires that are more well versed in the industry as opposed to the fixers or crisis management experts we initially brought up.

In addition, we were pleased our temporary leadership in China with permanent hires that are.

More well versed in the industry as opposed to the fixtures our crisis management experts, we initially brought off.

Speaker 2: Several key roles throughout the global organization were filled by promoting from within, which is something we would like to emphasize.

Several key roles throughout the global organization were filled by promoting from within which is something we would like to emphasize.

Speaker 2: This approach also helped us realign our product groups in the direction of our new strategic plan.

This approach also helped us realign our product groups and the direction of our new strategic plan.

Speaker 2: To this end, we created technical engineering sales leadership for select product groups, and we expect to add one more for this purpose. Otherwise, we are at an optimal workforce level at the present time.

And we created technical engineering sales leadership.

Product groups, and we expect to add one more for this purpose otherwise we are at an optimal workforce level at the present time.

Speaker 2: Moving on net loss for the 2nd quarter of fiscal 2022 is 1.1 million or 4 cents per share. Compared to a net loss of 147,000 or 1 cent per share. The 2nd quarter fiscal 2021.

Moving on net loss for the second quarter of fiscal 2022 was $1 1 million or <unk> <unk> per share compared to a net loss of 147000 or <unk> <unk> per share for the second quarter of fiscal 2021.

Speaker 2: The increase in net loss for the second quarter of fiscal 2022 was primarily attributable to lower revenues and gross margin and increased G&A expenses, including the one-time experience.

The increase in net loss for the second quarter of fiscal 2022 was primarily primarily attributable to lower revenues and gross margin and increased SG&A expenses, including the one time expenses.

Speaker 2: the resulting decrease in operating income is partially offset by a decrease in the provision for income taxes of approximately 206,000 as compared to the same period of the prior fiscal year.

<unk> decrease in operating income was partially offset by a decrease in the provision for income taxes of approximately 206000 as compared to the same period of the prior fiscal year.

For modeling purposes.

We have remaining Nols to cover our profit on a consolidated basis in the U S and pay only Chinese income tax and Latvia, the level of distribution tax on distributed earnings, but we reallocate the profits future growth activities. So we have not been accruing tax on earnings there.

Speaker 2: We have remaining NOLs to cover our profits on a consolidated basis in the US and pay only Chinese income tax. In Latvia, they level a distribution tax on distributed earnings, but we reallocate the profits to future growth activities, so we have not been accruing tax on earnings there.

Speaker 2: Cash was $5.1 million at the end of Q2-22, up from $4 million at the end of Q1.

Cash was $5 1 million at the end of Q2 22 up from $4 million at the end of Q1.

Speaker 2: Cash flow provided by operations was 1.4 million in Q2 compared with the net cash used in operations of 157 for the first half of the year.

Cash flow provided by operations was $1 4 million in Q2 compared with the net cash used in operations of 157 for the first half of the year.

Speaker 2: compares with cash provided by operations of 880,000 and Q2-21, and 1.5 million for the first half of last year.

This compares with cash provided by operations of 880000 in Q2, 'twenty, one and one 5 million for the first half of last year.

Speaker 2: The second quarter differential cash flow from operations is primarily due to changes in working capital items partially offset by the net loss.

Second quarter differential in cash flow from operations is primarily due to changes in working capital items, partially offset by the net loss.

Speaker 2: Cash invested was $118,000 for Q2 and over $1.3 million for the first half of this year.

Cash invested was 118000 for Q2 and over $1 3 million for the first half of this year.

Speaker 2: Cash used in financing activities was $192,000 for Q2.

Cash used in financing activities was 192000 for Q2.

Speaker 2: and the effects of exchange rates on cash was a negative 4,000.

And the effects of exchange rates on cash was a negative 4000.

Therefore, the change in cash was positive $1 1 million for Q2 and negative $1 7 million from the end of the prior fiscal year. So we ended the second quarter.

Speaker 2: Therefore, the change in cash was positive 1.1 million from Q2 and negative 1.7 million from the end of the prior fiscal year to the end of the second quarter.

A fiscal 'twenty two.

At December 31, 2021 from the beginning of the fiscal year receivables increased by 300000.

Speaker 2: At December 31, 2021, from the beginning of the fiscal year, receivables increased by 300,000. Payables and accruals reduced by 653,000. And inventory has declined by 1.4 million to 7.3 million in total.

Payables and accruals reduced by 653000.

Inventories declined by $1 4 million to $7 3 million in total.

Speaker 2: Our backlog as of December 31st, 21 was 21.9 million up from 19.3 million at September 30th, 2021 and 21.3 million at the start of the fiscal year.

Our backlog as of December 31, 21 was $21 9 million up from $19 3 million at September 32021, and $21 3 million at the start of the fiscal year.

Speaker 2: The quarter-ended backlog is the highest level in a year, which accounts for new contracts signed and the renewal of our single largest contract valued at $4.2 million.

Quarter, ending backlog is the highest level in a year, which accounts for new contracts signed and the renewal of our single largest contract.

We had a $4 2 million.

Speaker 2: which have been partially offset by the reduction of certain telecom businesses as we discussed.

Which have been partially offset by the reduction of certain telecom business as we've discussed.

Speaker 2: for a largest contractor in normal deliveries through the year to bring the backlog level down as the year progresses.

For our largest contract or a normal deliveries through the year to bring the backlog level down as the year progresses.

Speaker 2: This December's renewal of our largest contract marks the fifth consecutive year that we have won the high volume order.

This December renewal of our largest contract marks the fifth consecutive year that we have won the high volume order.

In addition from the same customer we have expanded our relationship as a valued partner to provide other IR solutions on their separate programs.

Speaker 2: In addition, from the same customer, we have expanded our relationship as a valued partner to provide other IR solutions under separate programs.

Speaker 2: As a reminder, it is customary for our backlog to fluctuate during the year because of the timing of bookings of orders and annual renewals from all of our customers.

As a reminder, it is customary for our backlog to fluctuate during the year because of the timing of bookings of orders and annual renewals.

From all of our customers.

Speaker 2: With this review of our financial highlights and recent developments concluded, I will now turn the call over to the operator so we may begin the question and answer session.

With this review of our financial highlights and recent developments concluded I will now turn the call over to the operator. So we may begin the question and answer session.

Speaker 1: Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star then 1.

Ladies and gentlemen at this time, we will begin the question and answer session.

Ask a question you May press Star then one.

Speaker 1: If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys. To withdraw your question, you may press...

If you are using a speaker phone, we do ask that you. Please pickup your handset before pressing the keys.

To withdraw your question you May Press Star then two.

Speaker 1: Once again, that is star then one to ask a question. We will pause momentarily to assemble the roster.

Once again that is star then one to ask a question, we will pause momentarily to assemble the roster.

Yes.

The first question today comes from Brian <unk> with Alliance Global Partners. Please go ahead with your question.

Speaker 1: The first question today comes from Brian Kinslinger with Alliance Global Partners. Please go ahead with your question. Great, thanks so much.

Great. Thanks, so much.

Yeah.

The first real easy one on the numbers.

Speaker 1: Your year over year trends been marked by your large China telecom customer. Can you tell us what your year over year revenue growth would be without this customer during 2Q? So if you took it out of a year ago's quarter and this quarter, what would, what would the comparison year over year be for revenue?

Year on year over year trends been mined by your large China telecom customer can.

Can you tell us what your year over year revenue growth would be without this customer during <unk>. So if you took it out of a year ago quarter and this quarter, what would what would the comparison year over year beef or revenue.

Speaker 3: We'll pull up the number while we're speaking. If you have a question, maybe we start with that while. Yeah, no worries. Yep, yep, that's fine. So I wanted to talk about the eight, and if we can't prove the contents engineering programs, it's helpful to get those deep.

We will pull up the number well with speaking.

If you have a kind of a question maybe we start with that one.

Yep Yep.

So I wanted to talk about the eight waffle.

Proof of concept engineering programs.

Helpful to get those details you gave.

Speaker 1: Before they go to production, I suspect you're going to find out whether they're going to move forward with your lenses as part of production. So at what point do you expect an indication? Is that in calendar 2022 for many of these or a few of these, or is that too soon? And the second part of that question is, of these eight programs, are they also testing other optical providers' lenses, or right now are they exclusively testing yours?

Before they go to production I suspect you're going to find out whether theyre going to move forward with your lenses as part of production.

So what point at what point do you expect an indication is that in calendar 2022 for many of these duties.

That too soon in the second part of that question is of the eight programs are they also testing other optical providers lenders or right now are they exclusively testing yours.

Yes, great question I think.

Speaker 3: Yeah, great question. I think, as you indicated, the process between the moment we developed the initial items until we're actually in production is fairly long. In most cases, it's a very structured process, such as EVT, DBT, and steps like that, and production readiness, especially in the automotive. I'd also, and so the time we're talking about delivering initial prototypes for

You indicated the process between the moment.

Developed.

The initial items until we are actually in production.

Surely long in <unk>.

In most cases, it's a very structured process, such as EVP, DVT and steps like that and production readiness, especially in the automotive I'd also.

So the time, we're talking about delivering initial prototypes for.

Speaker 3: Almost all of them will date in the next three or four months.

Almost all of the eight and in the next three or four months I believe.

Speaker 3: But from the initial prototypes, they need to go through extensive testing, and in some cases environmental testing. Then we need to do the transition into manufacturing, the DVT and the low volume and so on. And that can take as much as a year until production actually scales to the long term projection numbers we have from Caltech.

From the initial prototypes they need to go through extensive testing that in some cases environmental testing then we need to do as they transition into manufacturing.

And low volume and so on and that can take as much of the year until production actually scales to to the long term projection numbers, we have some customers.

Speaker 3: At the same time, I mentioned it last quarter and I want to emphasize it again.

The same time I mentioned, it last quarter and I want to emphasize that the gain.

Speaker 3: Many of those customers are not established product lines if we're stepping it. So especially in LIDAR and some of the AR and VR.

Many of those customers are not published product lines with stepping yet so especially in lidar.

Some of the <unk>.

<unk>.

Speaker 3: Success there is not only our ability to develop a product and our product meeting the needs, but it is also the customer winning whatever they need to win down the vote. There's obviously some uncertainty around that. In terms of competing with the

Success, serving not only our ability to develop the product and our products meeting the needs, but it is also the customer winning whatever they need to wind down swing.

And there's obviously some uncertainty around that.

In terms of competing with others.

Speaker 3: Yes, there are actually cases, at least a couple of the eight, where the customers are being already serviced by another vendor out in Asia and they're coming to us because that vendor specifically cannot achieve the same optical performance that we can. So we feel we, even though there are companies working on the freeform and others wanting to go in there, we're confident that we have a significant advantage in that area.

Yes.

Actually cases at least a couple of the eight where the customers are being already serviced by another vendor out in Asia and they are coming to us because that's been the specifically cannot achieve the same optical performance that weekend. So we still we feel we even though they are companies.

Working on the three forms of its one thing to go in there with.

We're definitely we're confident that we have a significant advantage.

Alright.

Speaker 3: So Brian , you're the only one? You said on the phone that there would be a difference in aging? I would make the statement as strong as that. I would say that in plastic, in polymer optics, there's definitely possibilities and they don't exist for a while. And some customers use them and in some applications it's very suitable.

So Brian .

And the other you had 91, we started with wonderful there.

Adrian.

Statements and strong I would say that yes.

Paul and plastic and polymer optics is definitely possibilities.

For a while.

Some customers use them and install applications that today suitable.

Speaker 3: In low volumes and other capabilities, it's also what some have used. As far as I know, there is at least one molding company that I know of that is attempting to produce some freeform molded glass lenses. But so far, as far as I know, I'm successful.

In low volumes as other capabilities.

Some have used it.

As far as I know there is at least one molding company that I know of.

It is attempting to produce some free form moulded glass lenses, but so far as far as I know unsuccessfully.

Brian the answer to your question is Q2 sales would have been up 8%.

Speaker 2: Brian , the answer to your question is Q2 sales would have been up 8%.

<unk>.

Speaker 1: Great, that's helpful. That's a better picture of demand outside of one customer. And then on that large Chinese customer, you said there were some small orders, but with that telecom provider no longer having that large 5G infrastructure build-out contract, at least that's what I believe, do you think going forward we should still expect that customer to remain rather small or is there an opportunity to ramp up at some point for any reason that we might not be aware of?

Alright, that's helpful.

On a per term demand outside of one customer.

And then.

I'm not large Chinese customer you said there were some small orders without telecom provider no longer having that large <unk> infrastructure buildout contracts at least that's what I believe.

Going forward, we should still expect that customer to remain rather small or is there an opportunity to ramp up at some point for any reason that we may not be aware of.

Well without.

Speaker 3: Well, without touching on information the customer might consider sensitive, I would say that

Touching Gordon information that the customer might consider sensitive.

I'd say that.

Speaker 3: From what we understand at least for the next two or three quarters what we're seeing now is what we should expect

From what we understand at least for the next two or three quarters. What we're seeing now is what we should expect.

Speaker 3: but I don't know what else they have in the pipeline. I do know that from the work they have, they have actually given us a bigger share this year percentage-wise compared to what they had in past.

But I don't know what else they have in the pipeline I do notice from the work they have they have actually given us a bigger share this year percentage wise compared to what they had been in past years.

Okay.

Speaker 1: And then I wanted to touch on the gross margin. If I look at the, and you guys gave some detail, but if you look at the mix of your P&O infrared as a percentage of sales.

And then I wanted to touch on the gross margin.

And you guys gave some detail.

Look at the mix of your P&L in infrared as a percentage of sales.

Speaker 1: They were about the same in December and September quarter, so each of the last two quarters. Yet despite the yield issues being better in the December quarter, at least I assume because you've talked about that last quarter being fixed.

We were about the same in December .

A number of quarters, so each of the last two quarters. Despite.

Despite the yield issues being bubble in the December quarter, close I assume because you talked about that last quarter being fixed.

Speaker 1: the gross margin dropped 450 basis points sequentially. So what am I missing from this major drop that I thought we'd be recovering all year?

Margin dropped 400 cookie basis points sequentially, so what am I missing when those needs or drop as I thought we'd be recovering all year.

Thank you.

Yes.

Speaker 2: So, Brian , we would definitely have to get into the weeds on sort of giving you the, maybe the full-fledged answer you want. But in general, what we saw in this quarter was that the IR margins were lower in Q2 than in Q1.

So.

Brian we would definitely have to get into the weeds on.

Sort of giving you the maybe the full fledged the answer you want but in general what we saw in this quarter was at the IR margins were lower in Q2 than in Q1.

And there were some cost drivers behind that in particular some of the things that Sam mentioned, which is.

Speaker 2: And there were some cost drivers behind that, in particular some of the things that Sam mentioned, which is this unexpected energy price hike in mid-November and December .

Unexpected energy price hike in mid November and December .

Speaker 2: The fact that we instituted, we put in place the coding facility in Latvia, fully burdened costs went in in the quarter, but they were still producing at low volume. So there's a few factors that went in there that were cost drivers that were a little bit different than what we saw in Q1.

The fact that we.

Instituted.

We we put in place the coating facility in Lafayette fully burdened cost went in in the quarter, but they were still producing at low volume. So there's a few factors that went in there that were cost drivers that were a little bit different than what we saw in Q1.

Speaker 2: We also have energy cost increases in China, but not nearly as bad as what we're seeing in Europe . As Sam said, we've taken a series of corrective actions, which we'll see.

You also have energy cost increases in China, but not nearly as bad as what we're seeing in Europe and as Sam said the correct. We've taken a series of corrective actions.

Which we'll see in Q3.

Speaker 1: Okay, so help us because...

Okay.

So help us because.

Speaker 1: my last question on gross margin and my last question for now.

My last.

Question on gross margin on the last question for now.

Speaker 1: I think gross margin has fluctuated so much and clearly mixed drives that. You can't handle, you can't predict mix just like, you know, who can is my point. But how should we think about margin going forward? What is reasonable for this business that we should expect going forward?

Okay.

Gross margin has fluctuated, so much and clearly mix drives that clinical.

When you cannot predict mix just like.

Okay.

My point, but.

How should we think about margins going forward what was reasonable.

For this business, but we should expect going forward.

Speaker 1: maybe if it's 50-50, or is that too unpredictable based on size and shape or my just

Maybe to kick in.

Yeah.

Alright, excellent predictable based on size and Cleveland.

Speaker 1: I guess it's been difficult to predict and I've at least been very bad at it. So maybe help us out understand how we should think about that going forward.

I guess, it's been difficult.

<unk>.

I've always been very battled so maybe help us out understand how we should think about that going forward.

Speaker 2: So I think Brian , for us, what we saw in Q2 is on the low end of what we should, you know, what our expectations are, what internally we model.

So I think Brian for US what we saw in Q2 Q2 is on the low end of what we should what our.

Expectations are what.

Internally we model.

What is your goal of long term.

Our long term goal is to get to 40% and hold it there.

Speaker 2: Our long-term goal is to get to 40% and hold it there.

Speaker 1: It could not be in 18 months. Would that be sooner? You know, with you bringing on free form that will hurt yields? I mean, I think a lot of

Okay.

Equal months roughly sooner.

Bringing on platform.

Hurt yields I mean.

I think a lot of it.

Speaker 2: I think a lot of it has to do with the ramp up of Freeform and the sort of unique applications and, you know, the proprietary nature of the customer relationship. That would change the margins for us. And, you know, and Sam is on...

I think a lot of it has to do with the ramp up of free form.

And.

Sort of.

Unique applications in.

The proprietary nature of the customer relationship.

That would that would change.

The margins for us.

And Sam as a warning.

Yes.

Yes.

Speaker 2: Sam has worn well. You know, there's a lot of variables that go into that, the customer and the LIDAR and those markets, right? When do those markets take off and which one of those eight that we're doing business with now are the winners, which ones are the losers?

One is one.

Uh huh.

There's a lot of variables that go into that the customer at the Lidar and those markets right. When does that when does those markets take off and which one of those eight that were doing business with now are the winners which ones are the losers.

Speaker 2: You know, and what was the timing of that? You know, those are things that if you as an analyst knew you would direct the rest of us where to invest all our money. Mm-hmm. Yep. Okay. Thanks.

And what was the timing of that those are things that if you as an analyst knew you would direct the rest of us where to invest all of our money.

Yeah.

Okay. Thanks, so much.

Thank you Brian .

Speaker 1: Our next question will come from Dave Kang with B. Riley SBR. Please go ahead with your question.

Our next question will come from Dave Kang with B Riley FBR. Please go ahead with your question.

Speaker 4: Thank you, good afternoon. My first question is regarding NRE revenue. What is it now and what do you think that will be when you're from now?

Hi. Thank you. Good afternoon. My first question is regarding <unk> revenue what is it now and what do you think that will be one year from now.

Speaker 2: So we're not giving that information out just yet. We're not parsing that specialty group into what is NRE and what isn't. And the reason why is because...

So we're not we're not giving that information out just yet we're not parsing that specialty group to what is an ari and what isn't.

And the reason.

Why is because.

Speaker 2: There's not a direct correlation between a dollar of NRE. That doesn't directly correlate into a dollar of new revenue down the road.

There is not a direct correlation between a dollar of NRI.

That doesn't directly correlated to one dollar of new revenue down the road.

Speaker 2: I think what Sam did is it says we had three projects, we moved it to eight. So if you think about NRE that way, that's probably a better indicator. We had three projects.

Think what Sam did is it says we had three projects we moved to eight so if you think about NRT that way.

That's probably a better indicator if we had three projects.

Speaker 2: The probability of getting one is 30%, but if you've got eight projects, the probability of getting two is greater than, you know, the probability of getting sick.

The ability of getting one is 30%, but if you've got eight projects that probability of getting to is greater than.

Probability of getting six so I think.

Speaker 3: So I think for the time being, that's a better indicator of the direction where NRE is going. Yeah, I don't think we look at NRE as a major revenue stream or something sort of usually worth talking about. I brought it up in such an extent this time because...

For the time being that's a better indicator of the direction, where NRG is going well.

I don't think we look at that as a major revenue stream or something sort of usually worth talking about I brought it up in such an extent this time occurrence.

Speaker 3: The sheer increase in how much interest we're getting and the money customers are willing to put in to sometimes accelerate the development or be earlier in line is I think a very good indicator to just how relevant the technology that we've been developing is. And I think it's, you know,

The sheer increase in how much interest, we're getting and the money customers are willing to put into sometimes accelerates the development or be earlier in line.

Think of a good indicator that the just how relevant the technology that we've been developing.

And I think it's relative terms.

Speaker 3: We're seeing far more NLE today than I think we've seen in, as far as I know, a few years.

We're seeing far more today than I think we've seen and as far as I know a few years.

Speaker 3: by itself again, it's not a financial measure.

By itself again.

Financial measure small.

Got it and regarding those eight projects you mentioned I assume they include Lidar.

Speaker 4: Got it. And regarding those eight projects you mentioned, I assume they include AR, LiDAR.

Lidar.

Speaker 4: And you mentioned that once they go into production, they could be anywhere from 1 million to like 5 million. Is LiDAR or AR bigger than LiDAR? Should we be thinking about AR closer to 5 and LiDAR closer to 1 or vice versa? Any more color on that? More vice versa. We're seeing the LiDAR tends to be higher in terms of total dollar amount.

And you mentioned that you know once they go into production and they could be anywhere from $1 million to like $5 million.

Lidar or a bigger than lidar.

So should we be thinking about or.

Closer to five and lidar closer to one or vice versa, any more color on that more white space, we're seeing the light.

<unk> to be higher in terms of total dollar amount.

Speaker 3: First of all, more optical components in it, so it's usually everything that we're doing in LIDAR is a set of optics.

First of all more optical components in it so it's usually everything that we're doing in lidar as a set of their networks.

Speaker 3: work together. I guess the car is less sensitive to weight than the person's load.

Let's work together get the the curve is less sensitive to weight than personal loans.

Speaker 3: And in the ARVR, it's leaked now the volume that we're seeing from customers are modest. And by modest I mean it's still tens of thousands of units, but it's not...

And in the <unk> fleet now the volumes that we're seeing from customers the model.

By modest I mean, it's still tens of thousands of units, but it's not.

500000 units or so.

Speaker 4: Got it. And then my next question is, once all these projects, programs ramp in the next couple of years, can you talk about the capacity situation? How much incremental capacity you need to add?

Got it and then my next question is once all these projects programs ramp in the next couple of years I mean can you talk about the capacity situation.

How are you how much.

Yeah.

Mental capacity to add up.

Speaker 3: Absolutely, that's actually a great question that we're looking into as we're speaking these days. And the reason is, as I mentioned before,

Absolutely. So that's actually a great question that we are looking into.

Speaking of these states and the reason as I mentioned before.

Speaker 3: We're very lucky to be able to leverage the fact that we build our own molding equipment in such a way that all of these new free forms and larger lenses and unique lenses we're making, we can make them in our molding equipment.

We are very lucky to be able to leverage the fact that we build our own molding equipment in such a way that all of these new free forms and larger lenses and unique lenses, we're making we can make them in our molding equipment.

Speaker 3: However, the cycle time in them and sometimes the cost of tooling is going to be different.

However, the cycle time.

And sometimes the cost of tooling is going to be different and we're only now starting to get our feet wet enough with some low volume production of some of those to know what the pits.

Speaker 3: And we're only now starting to get our feet wet enough with...

Speaker 3: some low volume production of some of those to know what it is.

Speaker 3: Definitely if one were to look at how much units are coming out of a specific molding machine it would probably be lower, but how much dollar revenue is coming out, it would definitely be higher.

Definitely if one were to look at how much units are coming out to the specific moulding machine it would probably be lower how much dollar revenue, it's coming up it would definitely be higher.

Speaker 2: But I think the important part is we can retrofit existing equipment. We don't have to build a whole new factory or buy all new capital equipment. We simply retrofit the existing equipment. They actually are fairly low cost.

But I think the important part is we can retrofit existing equipment.

Everything is you don't we don't have to we don't have to build a whole new factory or buy all new capital equipment, we simply retrofit exists.

Actually fairly low cost base significantly.

Our next question comes from Scott Buck with H C. Wainwright. Please go ahead with your question.

Speaker 1: Our next question comes from Scott Buck with HC Wainwright. Please go ahead with your question.

Speaker 5: Hi, good afternoon guys. I want to circle back on the gross margin conversation. First, what was the headwind on gross margins from the completion of the coding department in Latvia? I mean is that 100 basis points or is it something less than that?

Hi, good afternoon guys.

I wanted to circle back on the gross margin conversation.

First what was the headwind on gross margins from the completion of the coding.

Department in in Latvia.

100 basis points or is it something less than that.

Speaker 2: Oh, sorry, Scott, I didn't convert it into a basis point in my head.

Sorry, Scott I didn't convert into a basis points of my head.

<unk>.

Yes, I think it's probably one right.

Yes, yes.

Speaker 2: Yeah, two. Okay. Yeah, one, one, a little more than one. Yeah. Okay. So it's not, like I said, it's common to have the ramp-up phase and start moving production work in there. So S

One one.

More than one okay.

Okay.

It's not like I said, it's a common to have the ramp up phase.

And start moving production work in there.

So.

Yeah.

I'm not that worried about it.

Speaker 2: I mean, other than it negatively impacts our financials, but I'm not concerned going forward.

I mean other than it negatively impacts our financials, but I'm not concerned going forward.

Speaker 5: Right, that's helpful. And given that, you know, it seems like product mix is going to be kind of what it is for the foreseeable future, or at least the next few quarters. Is there anything proactive you guys can do to help give those gross margins a bump?

Right No. That's helpful. And then given that it seems like product mix is going to be kind of what it is for the foreseeable future or at least the next few quarters is there anything proactive you guys can do.

To help give those gross margins a bump.

Speaker 3: Yeah, so that's a great point because I wouldn't quite say it's necessarily going to be what it is.

So thats a great point, because I wouldn't quite say, it's necessarily going to be what.

Speaker 3: It always tends to be that infrared products and what we call the diamond turns and such have longer lead times. And so the time to turn from an order until a shipment is much longer. Where in molded optics, because of the very large bank or selection of lenses and molds that we already have, we can actually turn around very quickly. And sometimes in a matter of a week or two, from the moment an order comes in we can...

It's always tends to be the infrared products and what we call the diamond turned and such have longer lead times and so the time to turn from an order until the shipment is much longer we are in molded optics because of the very large.

Bank of selection of lenses and molds that we already have we can actually turn around very quickly and sometimes in the matter of a week or two.

From the moment, an order comes in we can ship PMO lend.

Speaker 3: So we're very cautious because the recovery in China is taking longer and the sales in China are all PMO 100%. We don't have anything other than the molded IR and molded PMO in China.

No.

We are very cautious because the recovery in China is taking longer is the sales in China. All of all PMO, 100%, we don't have anything other than the multi dayal and molded PMO in China.

Speaker 3: But it could turn at any day, because that sounds a bit extreme, but it can definitely, that's a ship that can turn around much faster than IR.

But could it could turn attorney.

Don't want to say any day, because it sounds a bit.

A bit extreme but definitely that's a ship that can turn around much faster than IL 10.

Okay. That's very helpful. Stan and then I'm curious I would just say I'd just say on that just to finish.

Speaker 3: Okay, that's very helpful Sam. And then, I'm curious to just say, I just say on that just to finish, you know, we're frustrated from the recovery there, but we're, and signs are not great that it will accelerate very quickly, but we're keeping hopeful.

We're frustrated from from the recoveries there but.

And signs are not great, but it will accelerate very quickly, but we're keeping hopeful developments.

Speaker 5: Right, that's fair. I appreciate that color. And then last for me, I was hoping you guys could kind of touch on M&A. You know, I know it was a little more prominent in the last couple quarters calls, but what are you thinking there? Are you still seeing?

Right that's fair.

I appreciate that color and then last from me I was hoping you guys could kind of touch on.

M&A I know it.

There's a little more prominent in the last couple of quarters calls, but what are you thinking there or are you still seeing.

Speaker 4: you know, a fair number of potential opportunities or has that, you know, kind of moved to the back burner as you work on some of these organic Well, yeah, it's a bit of both, as you know, some of those opportunities and such need development and nurturing over time and so we continue with that and nothing drastic has changed.

A fair number of potential opportunities or has that kind of move to the back burner as you work on some of these organic.

Yes, Robert.

So it's a bit of both as you know.

Some of those opportunities and such need development nurturing overtime and so we continue with that and nothing drastic has changed.

Speaker 3: in our thoughts about this, meaning we still see it as a part of growing the engineered solution more significantly. We're still in touch with those companies. At the same time, we extend great discipline internally about where to focus. And so, as we mentioned, we were focusing on operational improvement. I think the results on inventory and cash are great from that point of view, but we're also seeing slower recovery.

In our fourth adult this meaning we still see it.

Part of growing the engineered solution more significantly.

We're still in touch with those companies at the same time, we then great discipline internally about where to focus and so as we mentioned we were focusing on operational improvements I think the results on inventory and cash are great from that point of view, but we're also seeing slower recovery.

So will the time evaluating where we are.

Speaker 3: We wouldn't do something hate just to get going with M&A or so on if we don't think it's the right time.

We wouldn't do something just to get going with an M&A also on if we don't think it's the right time for the company.

Our next question will come from Orin Hirschman with AIG investment partners. Please go ahead with your question.

Speaker 1: Our next question will come from Oren Hirschman with AIGH Investment Partners. Please go ahead with your question. Hi, how are you?

Hi, how are you.

Speaker 6: In terms of the 8NRE project...

Good terms.

Tim.

Of the eight NRG project.

Speaker 6: What do you think you have the first, even if it's low volume, the first commercial volume order for the 3.4-mile?

Do you think you have the first even if it's low volume.

Commercial volume order or.

Or is it four months.

Speaker 3: if you had to get to the. Absolutely, absolutely. We have already one that is, we've shipped prototype sport and it is gonna be a lower volume one for sure. It's not the consumer products and therefore the volume works. Actually to one of the companies that had financed the development of the free form of the specific interface. So for a long time partner.

Sure.

Absolutely absolutely we have already won that is.

We've shipped prototypes for.

It is going to be a lower volume one for sure.

<unk> products and therefore the volume.

Actually to one of the companies that had finance the development of the fleet for optics.

So for a long time.

Speaker 3: that has been waiting for this to mature in order to get what they've been financing. The second one is a shipment of items for AR, VR related applications, but we're cautious there about volumes because we don't have enough visibility into the customer's pipeline and where those are going.

But there has been waiting for this to mature in order to get what they have been financing.

Second one is a shipment of <unk>.

Oh VR related application.

But we are cautious about volumes, because we don't have enough visibility into the customers' pipeline and where those are going.

Speaker 3: So I'd say within the next few weeks, we're definitely going to ship at least two.

So.

Within the next.

Few week, we're definitely going to ship fleet too.

Speaker 3: the two customers a good amount of prototypes, but we don't know...

The two customers.

With the amount of prototypes.

But we don't know yet the volumes.

Speaker 6: Is it clear that the projects are going into commercial shipment?

Is it clear that the projects are going into commercial shipment.

Yes.

Speaker 3: Again, I didn't hear the first one is a consumer item or not a consumer item? Not a consumer item. The first one is not a consumer item, but it's an extremely complex product. Delivering on that one is probably a much bigger indication of the matureness of the technology than some of the more consumer.

Yes again.

I didn't hear the first one is the consumer item and not a consumer items first of all thanks Bye.

The first one is not I assume.

It's a actually extremely complex product that they think that.

Delivering on that's one that's probably a much better and bigger indication of the maturing of the technology.

Some of their more consumable.

Speaker 6: Okay, but you're saying that's also low dollar ones because it's not a lot of actual

Okay, but you're saying that's also low dollar ones because it's not a lot of actual.

Speaker 3: Number of products? That is one that would be on the lower end of this opportunity.

So all of a product.

That is one that would be on the lower end of those opportunities.

Speaker 6: Okay. In terms of the recovery in China, you know, one of the metrics we look at to see what's going on in the industrial in general in China is the really two laser, three laser makers here in the United States that compete, pat on with a handful of Chinese, you know, copycats that have come up over the years.

Okay.

In terms of the recovery in China.

One of the metrics, we look at and see what's going on in industrial in general in China.

The really the two laser laser makers here in the United States to compete head on with a handful as Chinese.

Copycats that have come up over the years.

Speaker 6: So I guess the question is you ship into all of them, both the domestic ones selling to China as well as the Chinese. You know, is that area...

So I guess the question is you're shipping to all of them both the domestic one selling for China as well as the Chinese.

Is that area still growing.

Speaker 3: when you say recovery in China, do you mean just telecom part? So it's ex telecom, how is China doing? What's going on in China? So when I talk about recovery in China, I talk more about specifics to us rather than macro economical events in China. And that is when we did the transition and we had to let go of the management that was doing the illegal activity.

When you say recovery in China Telecom.

Telecom part of its X telecom, how is China doing.

What's going on at <unk>.

When I when I talked about the recovery in China.

Specific to us.

Macro economical events in China and that is when we did the transition and we had to let go of.

Management that was doing.

Illegal activities.

Speaker 3: It actually included our entire sales team in China.

It's actually included our entire sales team in China.

Speaker 3: and with them a lot of contacts and connections to come.

And with them a lot of contacts in connection to Cup.

Speaker 3: And so the recovery from our point of view, besides the financial impact of all of that, in terms of expenses and costs and rebuild the recovery and rebuilding the sales pipeline.

And so the recovery from our point of view besides the financial impact of all of that in terms of expenses and costs and rebuild and.

That recovery buildings that sales pipeline.

Speaker 3: And it's going well, but it's, you know, we were probably a bit too optimistic at how quickly that was. Did you lose any major customers in the transition?

And it's going well, but we were probably a bit too optimistic how quickly.

Did you lose any major customers in the transition.

We're selling less in China than we were selling before so I think the answer is yes in a way but.

Speaker 3: We're selling less in China than we were selling before. So, you know, I think the answer is yes in a way. But, you know, it was pointed in the first question of today, excluding the large telecom, we're actually at the growth of 8% year over year....

We're disappointed in the first question of today, excluding the large telecom, where actually it's a growth of 8% year over year.

It really is.

Okay.

Hello.

On that note is that the type of growth rate.

Speaker 6: On that note, is that the type of growth rate that you're hoping for without a telecom acceleration?

<unk> four without a telecom acceleration.

Speaker 3: for the year, you know, 10%? Well, I don't know for the year. I don't want to make any forward looking statements or give any guidance on that. But I would say that repeatedly, I have said since I joined Lightbox that the double digit growth is what we should aspire to. And I still believe.

For the year.

Yes.

10%.

For the year I don't want to make any forward looking statements or give any guidance on that.

I would say that repeatedly.

Since I joined late offset the double digit growth is what we should aspire to and they still believe.

Okay.

Speaker 7: Ladies and gentlemen, that's all the time we have for the Q&A segment. I will now pass the call back to management for closing remarks.

Ladies and gentlemen, that's all the time, we have for the Q&A segment I will now pass the call back to management for closing remarks.

Speaker 3: Thank you for participating in today's conference call. We look forward to speaking with you again in the near future. In the meantime, we encourage any investor interested to contact management with any questions and welcome those visiting Orlando during the winter to schedule a tour or meeting at our headquarters, which can be arranged to accommodate health and safety concerns while being productive and highly informative. We hope you can join us. Thank you.

Thank you for participating in today's conference call. We look forward to speaking with you again in the near future in the meantime, we encourage any investor interested contact management with any questions and welcome those visiting Orlando during the winter schedule at all or meeting at our headquarters which can.

Arrange to accommodate health and safety concerns concerns, while being productive and highly informative.

We hope you can join us Thank you again and goodbye.

Speaker 7: Ladies and gentlemen, that concludes today's conference. We thank you for attending. You may disconnect your line.

Ladies and gentlemen that concludes today's conference. We thank you for attending you may disconnect your lines.