Jim Gaynor - President and CEO Donald Retreage - CFO

Matt Koranda - Roth Capital Partners Zack Turcotte - Dougherty & Company LLC Gene Inger - IngerLetter.com Marc Wiesenberger - B. Riley FBR Chris Petrovski - Private Investor

Good day and welcome to the LightPath Technologies Fiscal 2019 First Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Don Retreage, CFO. Please go ahead.

Good afternoon. 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 and involve bearers, risk, and uncertainties that are discussed in a periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable any of them can prove to be inaccurate and there can be no assurance that the results will be realized. In addition references may be made to certain on generally accepted accounting principles or non-GAAP measures for which you should refer to the appropriate disclaimers and reconciliations in the company's SEC filings and press releases. Following management's discussion there will be a formal Q&A session open to participants on the call. I would not like to turn the conference over to Jim Gaynor LifePath, President and Chief Executive Officer. Please go ahead.

Thank you and good afternoon. Welcome to LightPath technology's Fiscal 2019 first quarter financial results conference call. Our financial results press release was issued after the market closed today and posted to our corporate website. Following my remarks our CFO Donald Retreage will provide more comprehensive review of the numbers and then we'll conduct the Q&A session. We feel really good about LightPath progress in the first quarter of 2019 it was a very busy three months and here are some of the highlights. On the financial results front revenue increased nearly $1 million or 13% to 8.5 million in comparison to the first quarter of last fiscal year. Booking grew in dollar terms by twice as much as the increase in revenues moving higher by $2 million or 30% percent to 8.7 million in comparison to the first quarter of last fiscal year. Our 12-month backlog was approximately 14 million at September 30, 2018 representing an increase of over 1 million from both the 12.8 million at June 30, 2018 and the 12.9 million a year ago. Backlog at the end of fiscal 2019 stood at a record level for the company. On the research and product development front the most important achievement in the quarter surrounds our new line of infrared products. In mid-June we announced comprehensive production capabilities and global availability for a new line of infrared lenses made from chalcogenide compound. This compound has developed and grown internally by LifePath to produce Black Diamond glass which has been trademarked and marketed as BD6. I'll talk more about this product further on in my remarks but in terms of progress in the first quarter we added several more lenses to our product portfolio and secured a number of large and important contracts. On the corporate development and management front in the first quarter we streamlined our operations to maximize more profitable growth which included a consolidation of our product groups down from five to three and organized our target markets by industry. Under the guidance of our strength and management team which included bolstering of our finance and sales leadership with the start of fiscal 2019 we organized our business with the goals of improving our time to market, maximizing sales opportunity and reducing redundant costs. Our business has been consolidated from five product groups into three. Infrared or IR optical products, precision molded or PMO products which now includes both what we used to refer to as low volume and high volume precision molded optics, and specialty products which now includes non-recurring engineering or NRE projects. For sales and marketing purposes our major markets include our catalog business and distributors, commercial, defense, industrial, medical, and telecommunications and networking. Followers of LightPath may have read some of our press releases in the past month or so in which we detailed new orders in terms of our industrial classification. We believe this will help facilitate customer acquisition and enhanced understanding of the practical applications of our increasing product lines Customers in each of these markets may now select the best optical technologies that suit their needs from a light pass entire suite of products. This strategy is availing us to more cross selling opportunities particularly where we can leverage our knowledge base of technical requirements against our expanding design library. We believe that we are seeing success from this strategy as evidenced by our increasing backlog of orders. At the center of the streamlining among other initiatives is our intent to elevate our gross margin to a sustainably higher level. It is important for investors to understand where we believe our gross margins should be. Before our transformational thrust into the infrared business our gross margins had gone from 36% in fiscal 2012 to 54% in fiscal 2016 as revenues went from 11.3 million to 17.3 million in the same time span. Today our PMO gross margins are still at that level depending on the product mix. With the PMO business during the last few quarters being impacted by lower volumes from the higher margin telecommunication sector our gross margins for all PMO revenue in these periods were a bit lower. The good news here is we have seen a marked increase in new orders for our telecommunication products up 58% in Q1 from Q1, 2019 from Q4, 2018. With the inclusion of the IR product revenues our consolidated gross margin was naturally reduced since IR products have a higher material cost and longer processing time. IR revenues went from less than 10% of total revenues to approximately 50% due to our ability to grow this business and the acquisition of ISP optics in December of 2016. In fact first quarter fiscal IR revenues of 5 million represented 58% percent f total revenues. Today the majority of this new business has been based in the standard materials for infrared, germanium, zinc selenide, etc. these materials have volatile prices which has impacted our manufacturing costs. As we convert many of these products to our BD6 material and add a molded component we will see significant improvement in our margins. We intend to make this IR business more profitable in much the same way we improved our PMO profitability. The ongoing relocation of our New York operation which was acquired with ISP to our other facilities in Orlando, Florida, and Riga Latvia is another key step in margin improvement. This relocation was even more necessary as volume production requirements have increased with accelerating adoption of our expanding line of proprietary infrared lenses. As anyone might expect in this process we are incurring redundant costs for overhead and personnel have had to invest in additional equipment and have seen a temporary volume efficiency decline given the obvious productivity level challenges when jobs are being moved. By our estimates approximately half of the increase in cost of goods sold in the first quarter can be attributed to these type of issues associated with the relocation of the New York operation. We expect we will continue to have some higher costs for the next six months as we complete this relocation. Accordingly as we saw significant improvement in the gross margin between Q4, 2018 and Q1, 2019 we expect we'll continue to see improvements as we work through the relocation. Whether it is our IR products or our PMO products LightPath industrial leading value proposition is resonating with new and existing customers alike which in large part has led to the many recent announcements for near-term and long-term supply agreements. One of them was a contract relating to 5G telecommunications requirement that was announced after the end of the first quarter. So this adds to our excitement and the progress being made in fiscal 2019. I'll now turn the call over to CFO Donald Retreage to provide additional details on our financial results for fiscal 2019 first quarter.

Thank you Jim. First I'd like to mention that much of the information we're discussing during this call is also included in the press release issued earlier today. I mean our quarterly report on Form 1040-Q filed with the SEC. I encourage you to visit our website at LightPath and specifically the section titled Investors Relations. Now on to my remarks pertaining to the first quarter of fiscal 2019. Revenue for the first quarter of fiscal 2019 was 8.5 million an increase of nearly 1 million or 13% in comparison to the first quarter of the last fiscal year and 6% over the last quarter. The revenue increase is primarily driven by an increase in infrared volume on higher PMO average prices. In each of the past five quarters infrared product revenue has surpassed PMO revenues solidifying its position as our largest product category Breaking a revenue down by product group we see the following trends. IR products; the industrial market is where we are currently seeing the most growth growing infrared products both molded and turn. In first quarter revenue putting for the infrared product group grew 38% with unit volume up 78%. Within the infrared product group the molded product experiences fastest growth rate albeit from a small number. IR revenues were 58% of revenue compared of 47% last year. PMO product demand from telecom and catalog distribution which includes a number of end markets contributing to a PMO revenues in the first quarter. Total PMO product revenue would stir 6% of revenue compared to 43% in the first quarter of the prior year. However, the average selling price of PMO products sold in Q1 was up 46% compared to Q1, 2018 driven by the mix. I would also note that we saw a significant increase in orders in Q1 for our telecom products with 58% increase over Q1, 2018. This is an encouraging sign looking forward. Speciality NRE products revenue for the speciality products which now includes non-recurrent engineering projects was 6% of revenue in the first quarter down from 10% last year. The decline is a result of timing for NRE products. Well, we have a solid pipeline of customers for this relatively smaller product segment the timing is wholly dependent on customers and their project activities. Each contract and distort performance in the quarters depending on the timing. The first quarter of fiscal 2018 included a large NRE project which was not repeated in the first quarter of fiscal 2019. Moving to our geographic revenue mix 36% was from the U.S., 18% from Asia, 43% from Europe, and 3% from the rest of the world. Our overall graphic mix has shifted away from Asia and towards Europe with increase in our infrared sales with our regional operations in Riga and Latvia. Sales to customers in Europe were 43% of sales for the first quarter compared at 23 in the first quarter of the prior year and 31% in the fourth quarter of fiscal 2018. On diversify revenue with contributions from multiple country operation is an integral to our overall growth strategies that does come with some currency risk and taxation issues which I will address later in my remarks. Further in terms of trade business that are concerned to investors we have not experienced meaningful impact and uncertain if we will. Given our geographic diversity of manufacturing all of orders for China can be made in China or in Riga, Latvia so there is not an expected pressure there. For demand from American customers we do some manufacturing in China for those programs but thus far the impact of [indiscernible] have been minimal. Now on to a vertical market sales review for the first quarter. As compared to the first quarter of last year sales the catalog distributors were 18% of revenues versus 22% last year. Defense was 14% of revenue versus 11% last day. Industrial 42% percent versus 38% last year. Medical was 4% of the revenue versus 5% last year and telecom was 11% percent f revenue versus 10% percent last year. Jim reviewed bookings in his remarks. So I will move on to backlog. In terms of backlog at September 30, 2018 the PMO group represented 32% on IR was 61% of backlog. These levels are consistent with the backlog at the ending of the fourth quarter. As of September 30, LightPath 12 months backlog increased 9% to 14 million as compared at 12.8 million as of June 30, 2018. Gross margin in the first quarter of fiscal 2019 was approximately 3 million or 36% of revenue as compared 3.3 million in the same quarter for the prior year or 43% of revenue. As we discussed IR revenues now represent the majority of our consolidated revenues and because of the higher material costs and the longer process times they have the lower margins than the PMO products. Total operating costs and expenses were approximately $3.3 million, an increase of approximately 213,000 compared to the same period of the prior fiscal year. Management expects eliminated SG&A costs to the end of fiscal 2019 as part of the New York facility relocation. Moving down the income statement some important factors include low end interest expense due to the full satisfaction of the sellers mode for the ISP acquisition during the third quarter of last year. Income tax benefits of approximately 179,000 comparing income tax expense of approximately 58,000 for the period of the prior fiscal year this is based on a mix of taxable income and lasses in our bearers tax jurisdictions. While we have a large NOL carry back to Bennett well we have a large and oil carry back benefits to shield corporate earnings in U.S. e will still pay a foreign subsidiary income taxes. FX exchange losses in the first quarter of fiscal 2019 was approximately 338,000 which had a $0.01 unfavorable impact on our basic and diluted earnings per share compared to a gain of 246 in the first quarter of fiscal 2018 which had a $0.01 favorable impact on a basic and diluted earnings per share. The company reporting the net loss for the first quarter of fiscal 2019 of approximately 583,000 or $0.02 basic and diluted shares per share. Diluted loss per share compared to the net income of approximately 218,000 or $1.01 basic and diluted earnings per share for the first quarter of fiscal 2018. Included in the net loss and expenses for inefficiencies related to the relocation of the New York facilities and the impact of the 338,000 for FX. Cash and cash equivalents total 5.5 million at September 30, 2018 down from 6.5 million at the ending of fiscal year. During the quarter ended September 30, 2018 the company expanded approximately 678,000 for capital equipment as compared to 1.4 million in the same period for the prior fiscal year. With this review of all financial highlights concluded I will turn the call back to operator, so we can begin with questions and answer sessions.

We will now begin the question and the answer session. [Operator Instructions] Our first question will come from Zack Turcotte of Dougherty. Please go ahead.

Hey guys, [indiscernible] first just a housekeeping one if you have the number for contribution from IST in the quarter?

Well, the IR number was about $5 million compared of the 8.5 the vast majority I think what did we do it molded was about 0.5 million, roughly a half a million there I think was precision molded IR stuff.

Right. Okay. Perfect. Thanks and then so on the gross margins I know you said obviously the reasoning for it is higher mix of infrared products which have margins. So even though you're working to increase the infrared margins and you are getting some strength and PMO now from the telecom sector can we expect to see margins remaining sort of in this area as IR continues to shift into a heavier mix.

Jack I think we will see margins continue to improve a little. I mean if you look at where we were in the fourth quarter compared to the first quarter I think our gross margin was around 30% in Q4 it was 36% in Q1 so that's a pretty nice improvement as we transition both through this increasing mix of infrared product and the additional cost that we incurred for some of them and unanticipated some of them for the relocation of New York. Just a little more I mean we had for example during the quarter we had a major water line break in the factory in New York which flooded the factory and it damaged two of our coding operates – two of our coders in that operation. The good news there is one of those we were planning to decommission and obsolete. So that hurried that along. The second one has since been repaired and has just come back online. So we are – we didn't expect that to happen so we had a lot higher repair costs associated with that. I think you know and then in addition as we were moving operations as I've said last time we've got some redundant wages in terms of carrying a couple of extra people while we make this transition and then we just had some more inefficiency in that operation than we would have liked and that contributed significantly. So if you were to adjust for example our EBITDA that was about 6% or 6 points of margin that we gave there for those kinds of things. So I think we're on the track of our margins improving and we expect to see that kind of thing. I think we'll get them back to where they should be which is in probably in the low 40s as we move through this thing, a little bit at a time and I think from this point forward we'll continue to see some improvement as we work our way through that relocation project.

Great and then you talked about consolidating the product groups from five down to three as well as naming some target industries by product like obviously infrared driving strengthen industrial and telecom – PMO for the telecom sector. What kind of cross selling opportunities do you see between these as far as for an example current infrared customer and an industrial customer with infrared products potentially having a use case or PMO or vice versa?

Well, I think we see that because we tend to deal with a lot of the larger companies in China and the U.S. and they have multiple projects so that both of those the visible and the infrared are applicable in some instances but what I was really trying to say in that statement was the fact that is we put these press releases out for these particular wins, we're trying to associate them with the industry group that customer and that product application falls into. So the investors get an idea of where the applications are occurring. We had a major contract that we signed with a major telecommunication customer in the quarter. We did some very good nice infrared ones as well that – so we're building – so there were two parts to that. One is we see the business growing across multiple market sectors as well as we're seeing longer – we're winning larger contracts that are going over a longer period of time and we're starting to build that backlog so we get more visibility in the business and we're not as dependent on short-term orders and what we call turns which are orders that we book and ship within the quarter. So I think both of those things are happening and what we're trying to do is give that sense to the public of how this business is it's growing and the opportunities that we have and the infrared is growing quite rapidly particularly with the chalcogenide material as a substitution for germanium and as we are able to put some of the molded applications or molded product into some of these applications. The interesting thing even though it's a pretty small number the molded products are growing quite rapidly. It's the fastest growing segment that it's still has a way to go before it becomes that we will consider significant but I don't think that's too far off in the future.

Okay and then maybe just one more talking about that telco order in the quarter related to 5G components. How big of an opportunity do you see in 5G this year, next year? There's obviously a lot of talk about it but everything we've heard seems to be that it's in super early stage. So just an idea what you see on that.

Well, we attended a key supplier conference with Huawei during the quarter and that was all they wanted to talk about was 5G and that's where their focus is and they expect that to see that ongoing over the next five years. So that was very encouraging and then we got a really nice order from them for those type of product so I think and we've done a lot of work as we pointed out in the past on the new design lenses for that type of application. So we're starting to see that stuff build. The other thing I would say to that is as the component ever as a component supplier into the back-office backbone networks of these types of devices we should see it early on because that stuff has to be put in place as they begin to roll out these networks. So we will be on the front edge of that slow-growth but there is a tremendous amount of work to do it because you've got to put up an awful lot of towers for these short-range applications that 5G represents and that's the good news and the bad news I guess. There's a lot of work to do in infrastructure to make it which is why I think you're hearing from these guys that it's going to take a while to do.

All right. Perfect. Thanks Jim.

Thanks.

The next question will come from Matt Koranda with Roth Capital. Please go ahead.

Hey guys good afternoon.

Hey Matt. How are you?

Good. Good. Just wanted to start with the implied order flow. Some pretty good growth year-over-year for you guys. So just wanted to see is there anything large or one-time in there that wouldn't necessarily repeat as that business runs out or is that all sort of normal course of business bookings that you got this quarter?

The kinds of bookings that we're seeing are not super huge one-time deals. These would be things that would have a reoccurring element to them as we go through time but they are longer-term, a lot of them are longer-term because of their magnitude. So we are seeing that but what we see and what we have disclosed is the growth in our what we call disclosure backlog which is orders that are shippable in the next 12 months. So they're not they're going to be we'll start to see these type of shipments over the next several quarters and so that they're pretty immediate in that type of impact.

Okay. Got it and the orders that I guess for press released since the end of the quarter so in October I assume this we're not included in the existing backlog that you guys reported.

Correct. We're just talking about the backlog as of the end of September.

Okay. Got it and then maybe could you talk a little bit about sort of the mix that you saw in terms of bookings? Is it kind of trended I mean I would assume it's turning toward the IR side just given the mix that you've got in revenue but does it defer in any material way from sort of the current revenue mix that you've got now so that we can kind of think about how mixed trends over the next year or so?

Didn't we give some percentages on where that backlog was on bookings? I think it is weighted towards the infrared side but the caveat that I would put on that Matt is that we're starting to see a pretty nice pickup in some of the visible stuff particularly in telecom.

61% of the backlog is IR.

Yes. We said 61% of the backlog is infrared.

Okay.

So I think just to give we said there was a 58% increase in the telecom orders that we took in Q1 compared to Q4 which is pretty significant and that represents a dollar value that equal to magnitude to the kind of quarterly telecom orders that we were booking in 2017 which was the peak telecom year for us and significantly higher than the average that we saw in 2018. So if that that's one quarter so even if it continues and it looks like it will that's a pretty encouraging sign for the visible side of the business as well.

Yes. Certainly it is. And then just I guess one more in terms of a mixed question but on the verticals that you shared I noticed that I guess catalog and distribution was down a bit year-over-year. Well, pretty much everything else seemed like it was up or flat any sense for what's driving that in your distribution channel? Is there just some destocking that needs to happen? What are you hearing?

So, I think it has more to do with telecom and the reason I say that is previously we had a major distributor in Singapore that was feeding fiber net who was doing the contract manufacturing for a couple of our major telecom operations and that was previously included as a distributor and now that's moved into the telecommunication sector. So that business is kind of shifted so that's kind of skewing the change in those two categories.

Okay. Got it. So you move that you categorized that particular customer and –

Right because we – what's the word yes we took that business direct. It's no longer going through the distributor and because he wasn't doing a very good job. We fired him.

Got it. Okay. And I mean do you envision that sort of – is that a general trend that we should be considering over the next year or so in terms of going more direct or any more actions to come on that front?

I think that's just going to be like I would hope that that's a one-off type thing it's not just that's not a case-by-case basis. If we see somebody's not doing what we would like them to do keeping their finger on the business and things are changing and we're getting surprised and then we'll take action and so that I mean I wouldn't consider that a strategy or a trend of ours but just we're going to try and manage the business the best way we see fit so that we know what the hell is going on.

Okay got it. And then just in terms of gross margins I guess if I look at the improvement that you guys made on a quarter-over-quarter basis it looks like you're getting quite a bit of pull through in terms of gross profit dollars for the incremental revenue that you've gotten quarter-over-quarter. Is that kind of – is that rate kind of how we should be thinking about the improvement throughout the rest of the year as revenue ramps I mean sort of it's north of a 100% incremental pull throw but I just wanted to hear your comment on that.

Well, I mean that has been our model in the past where we leverage those overheads but think about what we've done is we took an operation that was probably the highest cost operation we had in the corporation and particularly some of the coding operations and we moved almost half of it to our Chinese operation. So we got – and that benefit is now flowing through and now we have moved the diamond turning operation that was in our New York operation has been totally relocated to -- the majority of it went to Riga our other low-cost operation and then the balance came here to Orlando and that isn't totally done but from the way we want the facility set up but it is totally done from running the product through the machines that we've got. We're almost done installing the last pieces of equipment and we've covered those with substitution of equipment that we had in Orlando. So we're not down from a capacity or throughput point of view. We just haven't quite finished all the got the eyes crossing the T's in terms of how we're running diamond turning. So we're starting to see those improvements flow through in that margin and I think we'll see more of that in Q2. Then that leaves us with the coding operation and that's the one that we're starting to work through now. So there's going to be some changes in this quarter, in the next quarter as we do that. So the thing we've been waiting for is the facility expansion in Orlando to be finished so that we can actually install our equipment and that will start happening very soon.

Okay. last one from me I guess I don't know if I caught it maybe you had on prepared remarks I rolled on a little late but anything I guess one time in nature in your OpEx that you'd call out I think you called out elevated expenses with the move of Arrington but I don't know if you guys quantified anything there.

We did. It is and those are those expenses that are we had that water pipes break which in New York which shut down two of the coders one of which we decommissioned and the other just got repaired and has come back online just in the last few days. That was expensive and then as we've indicated before we're carrying some redundant labor as we make these transitions and then we've just were just suffering with some larger inefficiencies in New York than we had anticipated. I mean but it's not I guess it shouldn't be unexpected is when you're moving jobs like that and you have people that have decided not to move and continue and they're short-term in nature and they know it. So it's that's – that was a fairly good expense in the quarter. I think if I made two adjustments to EBITDA for Q1, one for FX which we called out $338,000 impact and the other for those type of inefficiencies and costs EBITDA would have been 14% versus the three.

Okay.

So that's why I am pretty encouraged by what we're doing. I think we're doing the right things.

Perfect. Thanks guys.

Thanks Matt.

The next question will come from Chris Petrovski, a private investor. Please go ahead.

Hello good afternoon.

Good afternoon.

So in previous conference calls you have talked about how you're doing NRE work for telecoms that would result in you having orders for kind of a custom lenses that would be – that will eventually be sold at much higher gross margins than your usual lenses and this is a belief for the visible light lenses for telecom. Is this happening and does new telecom orders that you've been talking about are those kind of custom lenses that has much higher gross margins?

Well, I think the short answer is yes. We're starting to see in this quarter we saw increase in our telecom revenue but not at the level that we saw the increase [telecom] quarters. So we think that's a building trend as that business comes well from our perspective would look like some recovery from the depths of the trial phase that it went into and those that product line has excellent contribution margin with it and so we would expect to see that impact grow as the volume of those new orders starts to go through the production and come shipments.

All right. But would it – is there a change from let's you know kind of look at things every couple of years ago when you had he excellent telecom orders would – if when telecom orders get good again maybe hopefully in a couple of quarters would we have better margins for those from as compared to a couple of years ago because now we're doing cell phones products? Is that something to hope for or is it going to be the same as it was when times were good back in couple of years ago?

I would say there – I would not say that they would be substantially better than they were a couple of years ago when they were pretty damn good. I think as I said those products have excellent contribution margin and as we go forward with these products that move into some of these access network applications and 5G applications they will have similar, very excellent margins associated with them as well.

All right. Okay and moving onto backlog before or maybe last year there was kind of behavior of backlog where it would just kind of go down until the last quarter of the calendar year your fiscal Q2 when it would go up suddenly. Now we're seeing much better results. The backlog is actually increasing before that last calendar quarter. Does that mean that we won't see as large of an increase in the last calendar quarter or would we still see this kind of bump up that happens in the end of the year?

Well, I think the overall business has grown quite nicely through the period and you're right we've generated quite a bit of interest in our chalcogenide products but we still expect that we will have success with renewing some of these very large contracts that we had in the previous years that caused those spikes. I do expect that we're in that time period where we have the opportunity to look at renewing those things. We have taken some from those customers we've gotten some new orders and we've also gotten some orders that extend the existing contract while we work on a renewal.

Okay. That's great to hear and on gross margin you said that the two major things affecting the gross margin well three major things and two of them were the move from New York and the germanium and can we assume that both of those factors will be kind of decreasing over the next couple of quarters as if you have a replacement for germanium lenses, the move from New York is kind of going to sitting along or would we see the same effect going forward?

Well, I think the short-term impact will be from completing the relocation of New York operations and so we won't have those extraneous costs after the next two quarters or so when we finish that move up and through that period we should see some gradual improvement in those things. I think the conversion of our business from our IR on the turn lenses the diamond turn lenses there's two things that are going to happen which will take a little bit longer than the next two quarters to see fully implemented but will be occurring along that timeframe. One is the substitution where we can of molded infrared chalcogenide lenses for what today are turned germanium lenses and the second is just replacing turned germanium lenses with turned chalcogenide lenses. Those things are occurring. That's – for our business that's where we want to drive it using less germanium and zinc selenide and those types of materials and using more of our chalcogenide glass which will give us improvement in those margins. But I think that's a longer term slower implementation as people make those changes in their designs and/or new products are designed with those materials to begin with. So that's going to be a continuing improvement and change that you'll see in our business but to say that it's going to happen in the next three months or six months and the definitive level it's very difficult to do. I think it'll be occurring over time and by the time we get through this fiscal year of 19 and probably halfway through 20 we will see a pretty substantial mix shift in our business that where we will have the chalcogenide being the majority of those types of products for us. I think there always be a place for germanium and the other infrared materials but I think from our perspective we try to drive it to the material that we are material that we manufacture and is moldable.

So, can you just say a couple words about your intellectual property in that material, I think chalcogenide do you have like full [IP rights] to have a patent on the material itself or do you have the patent on the process?

Well, the way we process the material it is company trade secrets and we chose not to do any patents around that. Chalcogenide is a material that is in the marketplace and has been for years and years and so there's nobody has a lock on that material I think. The only thing I would say is we do manufacture it ourselves and we have tuned it to match our processes particularly on the molding side and so that's where we believe we have a pretty good advantage and it just inherently is a lower-cost material than germanium. It's some of the other materials that are common today in the infrared applications just because it has fewer or no [indiscernible] associated with it.

All right. And if there's anybody else managed to both optics using chalcogenide and if so they have advantage over there?

Yes. We have competitors and they are good solid competitors in the marketplace and so far overall we are beating them on cost and price.

Okay. That's great to hear. All right. Thanks. That's it for me looking forward to next quarter.

All right. You are welcome.

The next question comes from Marc Wiesenberger of B. Reilly FBR. Please go ahead.

Yes. Thank you. I think you mentioned that you're seeing some good pricing increases in PMO lenses. Is that across the entire spectrum or with specific verticals and do you see that as a one-time increase or potentially sustainable over multiple quarters?

I think it has a lot to do with a particular mix that we happen to ship in any given quarter more than anything else and as the volume picks back up then it's we have a pretty good we absorb the overheads better than when that volume is off but from a margin point of view we haven't seen any deterioration in the precision molded optics margins through this whole period. So they're holding up pretty well from that standpoint but the price increase we saw -- the average price higher average price we saw in Q1 I think this is as much a result of mix as anything else.

Got it. Thank you. It was a pretty big shift in terms of geographic sales with 43% in Europe. Was this coming from a distributor that was fueling that and if so if you or do you see that kind of shift going forward and would you potentially create or increase your European salesforce to accommodate that shift well I think that shift is really being driven by as we shift the higher percentage of our business becomes infrared and that seems to be where a lot of the applications in Europe and that's also where our major, our largest customer is and so he is a contributor to that shift. I think the sales organization that we have through the distribution system that we have in Europe is it's good and can handle that level of business for us. We have been looking at expanding some of our representation into some of the Scandinavian countries where we haven't done a lot historically. So we're adding there to cover that but I think it's just – it's really driven I think primarily by just the growth in the infrared business more than anything else. Put up against the general weakness in the Chinese economy as well. So the industrial tools and things that were the drivers of the business in Asia China's economy is not strong right now. As a matter of fact it's weak and they're suffering. Our advantage there is we tend to deal with the premier large companies that are either very large OEMs and Chinese companies or their parents are there are assembly operations for companies out of the U.S. and Europe in Asia. So we tend to get that business and that business tends to those guys can survive because they ship worldwide. So I think we're seeing that but most of that shift I think occurred for those two reasons; just the general weakness of the Chinese economy combined with the strength of the growing business in the infrared for us.

Got it and so when you said that there's a decrease in the industrial market that's primarily China you're referring to correct?

Yes I mean those are the industrial tools type applications those kinds of things so that tends to be the lower price point products that we do that are pretty high volume. The laser levels and saw guides and pointers and barcode scanners those type of applications.

Got it. Thank you and then with regards to the time to process and create and ship the IR lenses you have this great new proprietary BD6 material. Do you foresee being able to shorten the cycle for creating and shipping that to kind of get more throughput in a given quarter?

Well, Mark that is one of our major objectives is we have shorten the cycle from book to ship and yes I think we have a lot of programs that we are working on that will start to benefit over time that are aimed at doing just that type thing and that was one of the reasons we've had such success with our precision molded optics is because we really were able to improve and shorten the cycles in that process and the process for the infrared is not for particularly the molded infrared it's not that dissimilar but it does have some particular parameter differences just because of the material systems, etc. that we deal with. So yes we're working on a number of things that will – that are focused exactly on that point but shorten that leap time.

Great I look forward to hearing about those in the future and that's it me.

All right. Thanks.

The next question will come from Gene Inger of IngerLetter.com. Please go ahead.

Hi Jim, Dorothy and welcome Don I think you guys have been real busy this last quarter.

For sure Gene, no question. I don't think it's going to let up either so –

Well, that's good to hear on that and that's what investors certainly want you to do. I'm curious since you mentioning China maybe I have like three questions only. Let me touch them that real quickly. I'm curious about a joint venture you refer to in a press release some time ago in which I think you spoke to a unique technology which can be duplicated by nobody else and I think you said in time the contracts were being worked out and it was on track. I don't know if there's been a delay or you've already covered that or you're referring to that in the industrial fuel category and I wonder if you could elaborate.

So I think that had to do with some applications that we were working with a particular Chinese OEM on a development scale but if it could have worked out would have been really great and the potential was there to do a joint venture in the future. That program has had some setbacks not from our part of it but from their part of it and I think they're retooling their approach. So it is kind of I would say been put on pause. I don't think it's completely dead yet but it's certainly not active at the moment as far as we're concerned. However, in that application area we are working with several other companies and those programs are still very active on a development nature for LiDAR type applications for autonomous type vehicles.

I was just going to ask you two about LiDAR because I didn't know that related to that or simply LiDAR is used in measuring devices and so on in Chinese construction and so on. But –

All right. I think this was more geared towards vehicles in industrial vehicles like for trucks and then some applications in automated warehouses and stuff like that.

Well, how do you stand with respect you LiDAR developments in the United States or elsewhere at this point?

Well, I think those are proceeding quite nicely and we're doing some very unique optical designs for some of those applications that I think put us in a very good position as these things reach progress through the development stage but they're still in the development stage at this point.

Could I ask you to sort of perhaps some something up it sounds like you're saying that despite a couple stumbling blocks like the water break, relocation expenses and so on that the bulk of the problems with that are behind that our maybe non-recurring and now it's sort of just the process of completing it. So when I look at the increasing revenues it's slightly better margins which I know you and I both hope will be improved even more, I guess the question is because one or two of the analysts who have followed you and there are not many have suggested that the company is sort of in a neutral stance as far as investors are concerned. So I wonder if you think that this combination of streamlining operations and relocations and higher sales at slightly better margins proceeding merit and upgrades from the neutral level as far as how one perceives of the company and indeed whether the higher sales and margins will be sufficient to offset these unique expenses and short-term losses?

Well, I think you know we are going through a transition in the business on multiple fronts. One is from a physical plant point of view which is always a major undertaking when you relocate a major facility. We're coming that's becoming less and less risky as we go through time and we get these things set up. We're not done with it as we've said that'll be with us through the rest of this fiscal year. The next two quarters for sure will be some of the heavier work. So that's occurring but once those are what I would consider non-recurring expenses once we get through them but then the other part of it is Jean is we're always working to improve the margins on the product line and we are transitioning our business where infrared is becoming the heavier weight of the total business and it has a different cost structure which we've outlined previously and so I'd like to emphasize that. We have a nice core business that we've developed and worked very hard on. It has excellent margins it still has those. Now we're adding to that this infrared component and it's where the growth in the market place is and where we can participate and grow and you see that growing element in our numbers already and it's become the majority it was 58% of the business in Q1 so it's now the biggest thing but it has because of the materials that are used in it and the processing times. It has inherently a different margin structure which is a little bit lower. So when you mix weight those things together our margins will be a little bit different than they were historically but on a much bigger base.

Go ahead.

I just think that's the right way to run the business. I would rather have a little bit lower margin on a lot bigger number than a super margin on a smaller number in a market segment that has limited growth. I mean the precision molded optics is driven by laser diode growth markets potentially which is historically somewhere between 5% and 7%. The infrared market is just exploding with applications as the cost continued on thermal imagers continues to get better and lower. So that's where the market is growing and that's where we've invested and are participating and I think we'll be quite successful with it.

Thank you very much Jim. Good luck to you guys.

All right. Thank you.

And this concludes our question and answer session. I would now like to turn the conference back over to Jim Gaynor for any closing remarks.

Thank you. So in conclusion we appreciate the support of our shareholders and as always the dedication of our global team at LightPath. With our strength and presence around the world we remain focused on our efforts to drive top-line, bottom-line and cash flow growth while making improvements in our overall financial condition. We’re very excited about our growth prospects and we'll be sharing them at the upcoming Roth Capital and LD micro investor events in December. Thanks again for participating on today's conference call and we look forward to speaking with you next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.