Dorothy Cipolla - Corporate VP and CFO Jim Gaynor - President and CEO

Hello and welcome to the LightPath Technologies Fiscal First Quarter 2014 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note, that this event is being recorded. I now would like to turn the conference over to Dorothy Cipolla. Ms. Cipolla, Please go ahead.

Thank you and good afternoon. Welcome to the LightPath Technologies fiscal 2014 fiscal first quarter financial results conference call. Our call today will be hosted by Mr. Jim Gaynor, President and CEO. Following management's discussion, there will be a formal Q&A session open to participants on the call. Before we get started, I'd like to remind you that during the course of this conference call, we will be making an number of forward-looking statements that are based on our current expectations and involve various risks and uncertainties that are discussed in our periodic SEC filings. Although we believe that the assumptions underlying these statements are reasonable, any of them can prove to be inaccurate and there can be no assurance that the results will be realized. With that out of the way, it is now my pleasure to introduce Jim Gaynor, President and CEO of LightPath. The floor is now yours.

Thank you, Dorothy, and welcome to everyone who has joined us on the call today. We appreciate your ongoing interest in LightPath. I will open with an overview of operational result highlights, and then turn the call over to Dorothy for a more in-depth review of our financials. After some closing remarks, we will open the call to your questions. Our fiscal 2014 first quarter is marked by increased core product sales, improved margin, a jump of nearly 80% in cash flow generation and an increase in backlog to $4.4 million. Importantly, we believe we have only begun to scratch the surface for the opportunities available to us, given our proprietary technology, our low cost manufacturing, the leverage in our business, and our demand creation model. Although our sales could be somewhat lumpy, we continue to experience robust demand for and interest in our two primary business lines, precision molded optics and infrared products. The first quarter is representative of the improvements we had made and continue to make in our business. The company's operating results for the first quarter of 2014 is reported under Generally Accepted Accounting Principles, GAAP, include the effect of quarterly mark-to-market adjustments related to warrants that were issued in connection with our private placement in June of 2012. We believe a more important comparison of ongoing operations, exclude the effects of the non-cash expenses associated with such warrants, and its more helpful for investors to better understand the financial results of our ongoing business operations. We believe this non-GAAP measure reveals the strength of our first quarter results, better represents our product businesses performing and represents an inflection point for the company to build on as we go forward. Adjusting our operating results to look at our underlying ongoing performance by removing the contributions of the DARPA project and warrant liability effects, we see a strong and improving business. Revenue grew 6% year-over-year for the fiscal first quarter. This growth comes primarily from sales of our molded aspheric optics, and has not yet appreciably benefited from our new line of infrared products. I will discuss our growth outlook in a moment. Other areas of progress in the quarter, include measures to improve profitability. Gross margin has further improved, with an increase of 31% from the level achieved for all of fiscal 2012, to our most recently completed quarter. The gross margin in the first quarter of fiscal 2014 was 47%, a substantial improvement from 36% for all of fiscal of 2012 and 44% for fiscal 2013. We are managing the company for long term sustainable growth, so we really like these trends. The combination of higher top line performance and improved profitability has led to an increase in cash flow generation. As compared with average cash flow and cash generated by operations of approximately $101,000 per quarter in fiscal 2012 and approximately $140,000 per quarter in fiscal 2013, we delivered cash flow from operations of approximately $251,000 in the first quarter of fiscal 2014. Precision molded optics unit volume has continued to grow, averaging 408,000 lenses per quarter in fiscal 2012; 550,000 per quarter in fiscal 2013; and 530,000 in Q1 of fiscal 2014. These results further demonstrate the powerful trends we have been able to sustain. However, the improvement has been partially offset by the lower prices associated with our shift to high volume applications, albeit at very good margins, which is part of our demand creation model. As the high volume lower price business segment becomes a larger percentage of our overall business, the average selling prices are lower, approximately 13% on average, which impacts the rate of revenue growth. But it is more important that we are effectively creating new market opportunities for our products, in enabling our customers to develop new products. Given our progress on these fronts, an [amazing] outlook for exciting sales growth, which contrasted with our capacity constraints in the first quarter of fiscal 2014, we took the opportunity to further invest in the expansion of our global sales and marketing efforts, increased production capacity and broaden both of our product lines. These investments were, in part, made possible by our improved cash flow, and reflected the accelerated market demand for our molded aspheric lenses, and the outlook for our new infrared products. Last month, we began to build 12 new molding stations at our China operations. This investment will result in an increase in capacity and production capability of over 45%. These machines are expected to be brought online in two phases; the first, by the end of December, and the next, no later than the end of March. But we were also required to increase our overhead expenses, which were higher in the quarter, as compared to the first fiscal quarter last year, by approximately $176,000 or 15%. One half of this increase was due to a reclassification of several members of the R&D staff, being charged to the cost of goods sold while working on the DARPA project last year, and (inaudible) an increase in fees and sales tax on capital purchase or investments increasing our capacity to support current and anticipated growth. The remainder of the increase was for continued investment in our infrared business. These investments in our future, which led to a modest loss in the quarter, are a necessary trade-off, such that we may be positioned to capitalize on numerous market expansion opportunities, that we believe will lead to meaningful returns on investments going forward. New orders received in the first fiscal quarter of 2014 recovered from last quarter's softness to $3.5 million, for the debooking of $300,000 from one of our digital projector customers, who cancelled the order due to technical issues unrelated to the optics, bought net bookings to $3.2 million. This strong order performance increased our 12 month backlog as of September 30, 2013, to $4.42 million, an increase of 7% as compared to June 30, 2013. In our fourth quarter, our fiscal 2013, we outlined major market drivers for our business, which primarily revolve around optical network expansion, to support increasing bandwidth demand. We continue to see this growth in our business, particularly in China and other Asia Pacific markets. New orders from China sales increased 33% in our first quarter 2014 from last year's quarterly average and we anticipate this to continue to grow during the balance of this fiscal year. We remain confident in our growth prospects going forward, with foregoing demand for our precision molded optics and increasing market interest in our infrared product line. End product markets driving the increased demand for aspheric lenses include laser tools, telecommunication, digital projectors, industrial equipment, medical instruments, and increasing use of green laser diode. We are working on securing a number of orders over the next three to four quarters that will require the additional capacity being brought online. To give you a sense of the market application, in China, we were working with three different commercial digital projector manufacturers, which combined, have the potential to generate lens volumes from 700,000 to 1.2 million units per year, starting in 2014, and reaching full potential in 2015. In North America, another interesting program is the lens we have developed for customer, that makes laser diode assemblies used in various fiber laser delivery systems. Currently, we are shipping over 50,000 lenses per month, with a continued growth anticipated. I will now provide an overview of our infrared product lines and our growth expectations. Similar to our molded aspheric product line, the infrared product leverage is our proprietary manufacturing technology. We are now in the process of replicating the demand creation models of our precision molded optics to generate growth in the infrared market. This technology has been limited to visible and near infrared wavelengths, due to crystalline structure of most infrared optical materials. The advances we have made in chalcogenide materials has enabled compression molding for mid and long wavelength infrared optics in a process similar to visible molded optic lenses. LightPath's molded infrastructure optical technology enables high performance, process active infrared aspheric lenses, that does not rely on traditional diamond turning or lengthening polishing methods. Some of the infrared opportunities reside in thermal imaging assemblies, security installations, [thermometry] in a myriad of defense and industrial applications. We have recently had our lenses designed into firefighting camera qualification units, which had passed testing under the NFPA-1801 certification. We anticipate that we will soon see production orders for these products. We also had our lens assembly chosen for second firefighting camera application by another large camera manufacturer, who is now in pilot production. We hope this discussion has been helpful in sharing with you, our view of the market expansion and growth outlook for LightPath technologies. I will now turn the call over to our CFO, Dorothy Cipolla, to provide additional on our first quarter results.

Thank you, Jim. First, I’d like to mention that much of the information we are discussing during this call, is also included in the press release in the Form 10-Q, which we issued earlier today. I encourage you to visit our website at lightpath.com and specifically the section titled Investor Information, where we have included the presentations that we have made at recent investor conferences. I will now review financial performance and operational details from our 2014 first quarter, which ended September 30, 2013. Revenue for the 2014 first quarter totaled approximately $2.81 million compared to approximately $2.89 million for the first quarter of last year, a decrease of 3%. The decrease from the first quarter of last year was attributable to revenue in the prior period of $253,000 for a large purchase order from a customer, in connection with the Defense Advanced Research Project Agency or DARPA low cost thermal imaging manufacturing program, and this was partially offset by an increase in sales for the company's precision molded lenses for the telecommunications market. Looking at our precision-molded optics business, revenue increased 6% compared to the first quarter of last year. This demonstrates that our strategy is to increase production volume, and manage our cost input, to then successfully implement. More specifically, we expanded our precision molded optics to improving our costs and procurement, leveraging purchasing volume, bringing anti-reflective coating in-house, improving our tool life, improving the productivity at our Shanghai factory, and broadening the customer base through expanded distribution and direct sales in Asia. Growth in sales for the next several quarters is expected to be derived primarily from the precision molded lens line, driven by the telecommunication's sector's need for expanded infrastructure to support mobile internet demand; the industrial tool sector, which is benefiting from an improving Chinese market; demand for fiber related delivery system, and entry into the digital projection market. Infrared products now being designed and introduced are expected to accelerate the company's growth more uniquely during the balance of fiscal 2014. Our gross margin percentage in the 2014 first quarter was 47%, up from 41% in the first quarter of last year. Total manufacturing costs of $1.49 million decreased by approximately $223,000 in the 2014 first quarter compared to the same period last year, due to decrease of $156,000 in direct sales costs associated with the DARPA related purchase order, and lower coating costs for our molded optics. During the first quarter of fiscal 2014, the company received $1.3 million in gross proceeds in exercisable warrants. 832,336 previously issued warrants were exercised and converted into common shares in connection with these exercises. The exercise prices range from $0.87 to $0.89 per share of common stock. Cash and cash equivalents totaled approximately $2.88 million as of September 30, an increase from $1.57 million at June 30. The increased cash balance led to an improvement in the company's current ratio as of September 30, which was 4.06 to 1, as compared to 3.75 to 1 as of June 30. Total stockholders' equity as of September 30 was approximately $6.99 million compared to $5.49 million as of June 30; and as of September 30th, the company's 12 month backlog was $4.42 million compared to $4.14 million at June 30, 2013. This includes also sequential improvement of approximately 7%. With this review of our financial highlights concluded, I will now turn the call back to Jim.

Thank you, Dorothy. Our focus is to accelerate our top line growth, while effectively managing our cost structure. We are rigorously pursuing opportunities to further expand our current account and develop new ones. We believe the themes it outlined earlier will provide continued growth. In addition, we continue to see future opportunity for our infrared product. These opportunities are broad-based across several of our larger market segments, and not limited to any specific industry, market or geographic location. We believe the company is well positioned to capitalize on many opportunities we see ahead and that our investment story is really taking shape. To this end, we look forward to presenting at the sixth annual LD Micro Conference to be held in Los Angeles in December. If you'd like to attend this event or meet with us, please contact our Investor Relations representative Jordan Darrow, at 631-367-1866. I will now open the call to any questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from [Steven Darby] a Private Investor.

Hi Jim and Dorothy.

Hi Steve, how are you?

I am doing good. I tried to call in on the number that you posted on your announcement, but it didn't work, and I had to call the international number to get through to you, and so I missed most of your presentation.

Oh I am sorry about that. It was a good one.

Yeah. So what I have to do is read all the material and digest it, but just one question, when will the growth begin?

Well, I think the growth is beginning, Steve. We just recently announced an expansion of our capacity by adding these 12 new press lines in China, you know, and we didn't do that, because we just wanted to build some more machines, so we have a good defined use for those things. So I think we are seeing some very robust growth, in the visible side of the business, associated with the telecom markets, and also, what we call our industrial tool markets, which are high volume lower cost products that go into industrial tools, laser levels and barcode scanners and things like that, where we see a lot of growth taken off again, which had been dormant for a while. So we see really nice opportunities there. I mentioned in the report, I don't know whether you heard this part or not, where we are working with three different digital projector manufacturers in China, and volumes that they are forecasting are very large, from 700,000 up to 1.2 million lenses to us, beginning in 2014, and I think reaching [pole position] in 2015. I don't know if you follow that market at all, but IMAX is investing very heavily in China and Asia, developing a number of their big theaters, and these guys that we are dealing with, a couple of them anyway, are building digital projectors for that guys. So that's where some of this business is coming from.

Okay. Thanks very much. I will read the material and thanks for all your good work.

All right. Thanks. It is good to hear from you.

Thank you. And the next question comes from [Jason Duncan] of [Devine Capital].

Yeah hi, thanks for taking my questions. I am a little new to the story, but I wanted to see, how do you describe the current competitive landscape for your products, vis-à-vis, your ability to manufacture them, price them and distribute them?

I think LightPath has been in the molded aspheric optics business for many years, and what we really are bringing to market is a low cost manufacturing method for aspheric lenses, and what we have been able to do, by setting up our operations in Asia, we have been able to nearly, even substantially reduce our costs. So we can be price competitive with spherical solutions and offering a higher performance lens in an asphere, and that's one of the reasons that we are winning a number of these good type of business in this industrial tools segment, which is growing quite rapidly. Historically LightPath has been very well connected into the telecom business and with the growth in the mobile internet and the bandwidth demand that that's creating, which is stimulating these service providers to expand their optical networks, that is also creating a very large market for us. So we are selling for the equipment manufacturers, the guys, JDSUs, the Holloways, Finisar, Emcores, those type of people. So we see a very robust market in that area, and we believe that will continue for quite some time, given this mobile internet phenomena that's occurring. So I think from that standpoint, on the visible side, we have very large market opportunity in front of us. If you look at all the metrics on the mobile internet stuff, I mean, they are just phenomenal things going on. Everybody has gotten more than one [sticker], predicting 1.4 mobile devices for every man, woman and child on the planet by 2016. The internet is growing, and the video content on internet is growing, and all of this stuff requires more and more bandwidth, which requires larger networks and more capacity to be put in place, and we can play in that market segment and that theme. On the infrared side, what we are bringing to market is a lower cost infrared optic by using molding and so we believe what we have here is an enabling technology for the further commercialization of thermal imaging type devices, and so there is a lot of activity in the marketplace to make low cost thermal imaging devices, and we can participate in that, and as the expenses in these devices comes down, the technology shift that came out with uncooled microbarometers and focal plane arrays, that lowered the most expensive component in these devices, and then the optics are another area that has never been cost reduced. Positional manufacturing methods use high end CMP type operations, single point diamond turning to make aspheric lenses. It's a more expensive process, using a more expensive material, and once you get more than 1,000 pieces of demand for a particular product, molding becomes very effective, and we believe we can offer a lower cost solution by as much as 30% to 40%. So that's how we are going to bring that to market, and in the areas that we can play.

Good. That's great. Thank you for that explanation. Did you also say, I know you said that you have been expanding capacity and obviously growing the production facility in China? Did you (inaudible) say what type of volume the current capacity can support, and if there will be additional investment necessary in the near future?

I mean, when there is additional investment in the near future, depends on how quickly we can generate volume, which is, there is quite a bit of demand creation going on. We did announce that we are adding 12 new lines, mold pressing lines to our China facilities, and so we are doing that expansion. Now our capital costs for that type of expansion is very low. We build our own machines. Our building machines are of a unique design, and cost of capital there is about 10% of what commercially molding equipment is on the marketplace today. So it's extremely low cost and flexible equipment that we use in our process. So the cost of capital to expand is relatively low, and we are able to do that very quickly. So I think we have an advantage there from that standpoint, and no, I didn't give you any unit volume capacities, and I try to keep that as more proprietary technology.

Okay. Understood. So my last question is about the gross margins, obviously they are trending towards, I don't want to say at record levels, but certainly very good levels. Is there a steady state gross margin or a target margin that you plan to reach or expect to reach or hope to reach?

Yeah, and I think our margins, we continue to cost reduce our process on a continuous basis. The latest thing that we have done, that has had a good impact on that, is bringing in-house of our anti-reflective coatings that we did in the last nine months or so, and that has significantly reduced our cost of putting the anti-reflective coating on the lenses. So, we continue to find things like that to continue to reduce our costs. But what we did over the last, I would say 2007 through about 2009 or 2010, we made significant investment in the cost structure of our process and products. We started our China operations in 2005. We the very effective starting in 2007. We changed our tooling material from a nickel inconel type base material to a carbide, which gave us longer tool life, but also allowed us to mold our product at higher temperatures, and that allowed us to bring in much lower cost raw material in the glass. Those three major changes made an order of magnitude change in our cost structure, which allowed us to get into these higher volume lower cost markets, and by order of magnitude change, it used to cost us somewhere from $7 to $10 to build a lens, depending on the type, and today we build many of those lenses under $1 in costs. So now with that and the continued leverage of increased volume, till we get better absorption of our overhead costs, we are continuing to drive those margins up. So I think there is still little room for improvement in the margins, but we are approaching a level that's pretty decent for us in the upper 40s, low 50% type range is where I think that it will probably achieve a steady state.

Okay. Great. Thank you very much.

Thank you.

Thank you. (Operator Instructions). Okay, we have a question from (inaudible) a private investor.

Hi Jim, it's [Randy], how are you?

Very good. Thanks.

Okay. Sorry, I joined the call a little late, and I did not share, whether you made any elaborations on the projections that you had for revenues going forward? Was looking for you to discuss with investors this fall, your statement that in late September about financial guidance for revenue growth in excess of 15% this fiscal year. Can you update us on where that fits right now?

Randy I think what you're asking, if we are going to give some guidance which we typically don't go. We are still a pretty small operation, and so we get a little -- smaller changes make big swings in some of our forecasts, etcetera. However, as I have said, we are on this growth curve with these opportunities coming in these different markets, both in the visible and the infrared side, and as you know, we have announced capacity increase in adding different lines, and we said with that capacity increase, I think it was about a 45% increase in our unit volume capacity. We didn't do that without a reason, and we didn't do it to have those machines sit idle, so that's -- I will let you figure it out from there. We are going to grow.

Okay. So, no significant updates on what (inaudible) end of December, your expectations of --

The predictions that I did then, I still stand by. Yes.

Thank you very much.

Okay.

Thank you. (Operator Instructions). All right. There are no more questions at the present time. Do you have any closing comments?

Yes thank you. I'd like to thank everybody for joining us today, and I particularly want to congratulate our employees for the hard work that resulted in our first profitable year in fiscal 2013, and has created the foundation for an even more prosperous and exciting future. So again, I thank everybody for joining the call, and we will talk to you next time.

Thank you. That concludes today's teleconference. Thank you for participating, you may now disconnect your lines. Have a nice day.