Good afternoon, everyone, and welcome to the LightPath Technologies Fiscal 2022 First Quarter Financial Results Conference Call. Please note, this event is being recorded. At this time, I'd like to turn the conference call over to Al Miranda, Chief Financial Officer at LightPath Technologies. Please go ahead.

Thank you. Good afternoon, everyone. Before we get started, I'd like to remind you that during the course of the conference call, the company will be making a number of forward-looking statements that are based on current expectations and involve various risks and uncertainties, including the impact of the COVID-19 pandemic that are discussed in its periodic SEC filings. Although the company believes that the assumptions underlying these are reasonable, any of them can be proven to be inaccurate, and there can be no assurances that the results would be realized. In addition, references may be made to certain non-generally accepted accounting principles or non-GAAP measures, for which you should refer to the appropriate disclaimers and reconciliations in the company's SEC filings and press releases. Following management's discussion, there will be a formal questions-and-answer session open to participants on the call. I would now like to turn the conference over to Sam Rubin, LightPath's President and Chief Executive Officer.

Thank you, Al. Good afternoon to everyone, and welcome to LightPath Technologies Fiscal 2022 First Quarter Financial Results Conference Call. Our financial results press release was issued after the market closed today and posted to our corporate website. Before I begin my remarks for our new followers and shareholders, I would like to begin with a short recap of the last 18 months. In late 2019, the Board of Directors decided that it was time to refresh and revitalize the company and began the search for a new CEO. As such, I joined as CEO in March 2020, following a career in building and growing companies in the photonics industry in the U.S., China, and Israel. I came to LightPath after 15 years at Thorlabs, where we grew the company over that period from $30 million to $500 million in sales through a combination of organic growth and acquisitions. Shortly after I joined LightPath, I recruited Mark Palvino. He's an industry veteran in the position of Vice President of Global Sales and Marketing. Mark's focus on aligning and building our global sales team was a major contributor to the 17% year-over-year growth we experienced in the first three quarters of fiscal 2021. Also during the first few quarters of fiscal '21, we focused on organizational alignment and the development of our new strategy, which I will discuss in more detail shortly. It was during those efforts that we discovered irregularities in our China operation, which turned out to be illegal activities by management of that subsidiary, misappropriating company money and rerouting customer orders to third-party entities owned by them, thus effectively helping themselves to the company money—activities that we now know have been ongoing for a very long time. Following these discoveries, we immediately discontinued the work of those individuals and began rebuilding the new management team in China. Around the same time in the spring of 2021, we also recruited two other key members needed to round out our senior management team. Members who are accomplished executives with Peter Greif from hyper-growth companies in the optical and electronics industries. We added the new CFO, Al Miranda, who was previously the President and CFO of Jenoptik U.S.A.; and VP Operations, Peter Greif, who joined us from a senior operations position in Jabil, where he managed operations of over $400 million of the business. With these two senior executives on board, we have now turned our focus to recovering from the episode in China and focusing on delivering on our new strategic direction, one that takes us from being a component manufacturer to a solutions provider, which will be the preferred partner for industries and customers looking to integrate photonics into their products. With this overview, I believe the balance of our comments today will provide you with greater perspective on our progress and opportunities. LightPath's strategy, developed over the last 12 months, identified that photonics technology is becoming widely adopted. LightPath is positioning itself to be the partner for such companies that look to use photonics and infrared products by being the main expert in the subject matter. This change in direction takes LightPath from being a component supplier to a solutions partner, providing the design and manufacturing of complete optical subsystems based on our unique and strong design and manufacturing capabilities of optics. Since the strategy is centered around value creation for the customer through domain expertise and capabilities, our technologies, both in design and production, become differentiators. Owning key technologies and design capabilities that utilize those unique technologies allows us to design and deliver optical systems with overall lower costs of ownership, whether by being lighter, smaller, or having better optical performance. As such, we have been focusing our development efforts on expanding our capabilities by building on our core capabilities and creating new differentiating technologies that allow us to both deliver better systems and be known as a partner to go to for the most advanced optical technologies. One such exciting capability, which we announced a couple of weeks ago, is the ability to use our molding technology for high-volume production of freeform optics. Freeform optics, as the name implies, are optical components that have significantly fewer constraints in shapes and dimensions and can therefore expand the range of what can be designed, also drastically reducing the size and weight of an optical system. For an illustrative example, if a lens is an optical element that can focus light and the prism is an element that can combine beams of light, a freeform optical element could theoretically be one element that performs both functions of focusing light and combining light in one element. It's easy to see what an impact this can have on an optical system. Freeform optics has been a promising technology for a long time; one can find demonstrations of how freeform optics can potentially minimize the size of consumer products such as augmented reality glasses and laser projectors. They can go all the way back as much as 10 years. However, as is often the case, the implementation of this in real life has been constrained by manufacturing technologies. Making a freeform element previously could only be done by individually machining a piece of glass one at a time on extremely accurate CNC machines, such as diamond turn enclaves, or alternatively, producing it by molding plastic into shape. The first, machining one by one, is a very expensive technology and is not scalable for consumer-level volume. The second, molding plastic, is an inferior quality product that cannot transmit an image at the desired quality or withstand the requirements of durability and stability. By extending our molding technology into molding high-precision freeform glass optics, we're now enabling a slew of new applications and miniaturization of existing optical systems to a level the optical community has been wishing for, for a long time. To see what impact this might be, it is enough to just Google the words freeform and AR glasses and read through some of the results to understand what people have hoped for, for a long time. This is also evidenced by the multiple development contracts we have signed in recent months for the development of freeform optics as well as optical assemblies based on freeform optics for customers in AR and LiDAR industries. Overall, we're currently working on three major development projects in the AR and LiDAR space that include NRVs in hundreds of thousands of dollars to develop smaller and lighter optical solutions for their next-generation products. While each one of those customers has the potential of generating annual sales anywhere from $1 million to $10 million a year, it's important to remember that the actual materialization of such contracts depends not only on our success as a technology partner but also on the customers' product success. Most of those customers are in new fields that they are just beginning to develop into commercial markets. In addition to commercializing this very exciting technology, our team has also been developing other differentiating technologies, some of them in the materials side of the business, extending our glass manufacturing capabilities into more areas, others in the field of optical coating by developing unique, highly durable coatings that can either protect the optical system better or also perform functions that currently are very challenging to perform. One such example is heating the front element of any infrared camera in a system to defrost any ice on it. We're all familiar with heating the back window to defrost ice. But for the infrared part, there isn't actually any viable solution today. So in this case, if an automotive system works in below-freezing temperatures, such a unique coating as the one we're developing can provide a very affordable solution for heating that element and allowing it to operate under those conditions. Many of those technologies are the basis for some of the more promising projects we are working on in our Engineered Solutions Group, a growing part of the business, including, for example, a thermal imaging assembly for an automotive manufacturer, an optical communication assembly for a major satellite company, and more exciting projects, which I hope to talk about in the coming months. All of those developments and more that we expect to announce in the coming months are important differentiators that will bring more customers to us for our optical system business and allow us to design and deliver better optical solutions than what is available elsewhere. All of which translates to better margins, larger orders, and longer-term relationships with customers compared to what we have experienced in our historical components business. Needless to say, wherever possible, we apply for patents to protect our technology and IP. In the last 12 months, we have applied for three new patents on those new technologies. Now from the macro of strategy, I will switch to the micro of operations. As you all know, the previous quarter was incredibly challenging as it was when we incurred the majority of the hits related to the changes we needed to do in China. Although we have taken steps to minimize the business impact from the termination of management personnel over there and transition to the new management, we experienced some short-term adverse impacts on domestic sales and operating expenses in China in the fourth quarter and somewhat also in the first quarter of this fiscal year. We anticipate the impact on sales may continue for the next one to two quarters. Nevertheless, we are on track with our recovery. In performance on a consolidated basis, revenues improved greater than $9 million in this first quarter, a nearly 10% improvement from the previous fourth quarter while our gross margin as a percentage of sales increased by 10 points sequentially. Moreover, expenses in China have also significantly declined. Overall, I would say that we're pretty much where we thought we could be in terms of recovery from those events and see things continuing to improve in the coming quarters. Our addition of coating capabilities to the facility in Riga, Latvia, which we talked about a few quarters ago, is now complete, allowing for cost savings that will flow to the bottom line as well as enabling us to tap into the defense market in Europe, a market which we could not sell into prior to that. Before passing the call to our CFO, Al Miranda, I'd like to remind the shareholders of record that our annual meeting will be taking place virtually on November 11, exactly one week from today. In addition, for all our followers and prospective investors, we will be presenting at the Ladenburg Thalmann Virtual Technology Expo on November 18 and the Benchmark Company Discovery One-on-One Conference on December 2. Now Al, if you could please walk us through the financial results for the first quarter.

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. I encourage you to visit our website at lightpath.com. So Sam just covered the highlights of our strategy, new management team, the market opportunities and how we are progressing. 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 short reminder, in Q4 '21, we had been significantly impacted by the transition of business conditions in China. Some of the financial impact was also felt, as we indicated it would, last quarter, as Sam just said. Revenue for the first quarter of fiscal 2022 was $9.1 million. That's down 4% from the same period of the prior fiscal year, but up almost 10% from the fourth quarter of fiscal 2021. Sales of infrared products comprised 54% of the company's consolidated revenue in the first quarter of fiscal 2022 as compared to 50% of consolidated revenue in the same period of the prior fiscal year. Visible precision molded optics (PMO) product sales represented 42% of consolidated revenues in the first quarter of fiscal 2022, compared to 45% in the same period of the prior fiscal year. Specialty products continue to be a small component of the company's business, representing 4% of the consolidated revenues in the first quarter of fiscal 2022 as compared to 5% in the same period of the prior fiscal year. IR revenue represents the largest component of our sales. Revenue generated by IR products was approximately $4.9 million in the first quarter of fiscal 2022, an increase of approximately $163,000 or 3% compared to $4.7 million in the same period of the prior year. The increase in revenue is driven by sales of molded IR products, primarily to customers in the industrial markets. PMO sales were $3.8 million, a decrease of 11% from the prior year period. In the telecom sector, revenues, including 5G, remained soft in the quarter. However, PMO product sales increased by 30% sequentially from the fourth quarter. This is clearly a step back in the right direction. While comparative year-over-year sales are down for PMO products, that's primarily in telecom. Products sold through catalog distribution channels, as well as sales to customers in industrial and medical industries, were actually up. Specialty revenue is sort of a catchall of products that don't fit the other two categories and represent a very small inconsistent component of our consolidated revenues. Specialty also includes nonrecurring engineering services projects, so this is a different type of revenue altogether. We expect to see an increase in nonrecurring engineering revenues this fiscal year driven by the need to engineer solutions for new products like freeform molded lenses, as Sam mentioned, one of the 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. At that time, the revenue would most likely be reflected in their respective product categories of either IR or PMO. Each of the product groups has a very different margin profile. PMO typically has higher margins due to our molding, which enables mass production in a more automated machined process. IR, historically, was more manually produced, but with the growth in our molding technology applied to IR products made from our proprietary BD6 material, the margins will increase from both the advantages of the material and the automated molding process. So we expect to see margins continue to improve regarding IR. The specialty product margins will vary based on the project. Our consolidated gross margin as a percentage of revenue was 35% for the first quarter of fiscal 2022 compared to 40% for the same period of the prior fiscal year and 25% in the fourth quarter of fiscal 2021. It's clearly a big step in the right direction versus Q4. During the fiscal 2022 first quarter, we rectified a yield issue that contributed to the lower Q4 margins and something that we've been talking about for the past few quarters. This benefit was partially realized in the first quarter. So we still expect to see greater benefit in Q2 2022. Also, prior year Q3 and Q4 had a number of new products going into volume production, which ordinarily would have lower margins until target production efficiency levels are reached. We are presently nearing peak efficiencies for those products at their now current level of production. We are also adding more, which will go through the same cycle, so we have a little of both in the future. Excluding some major yield complications, as we had last year that stemmed from coating and finishing inconsistencies, we should experience more consistent margins to the quarter. However, the consolidated margin will vary with the mix of products shipped. Ultimately, as we generate more and more revenue from engineered solutions and new technologies, we look forward to even higher consolidated margins going forward. Moving on to operating expenses. During the first quarter of fiscal 2022, total operating expenses were $3.6 million, an increase of $405,000 or 13% as compared to $3.2 million in the same period of the prior fiscal year. At this time, in comparison to Q4, which had much higher expenses, it's inappropriate since the period incurred substantial one-time costs as with our situation in China. SG&A costs increased by approximately 18% as compared to the same period of the prior fiscal year. The increase is primarily due to approximately $328,000 of additional one-time legal fees and consulting expenses associated with the events in China. As you recall and as Sam just said, during the fourth quarter of fiscal 2021, the company terminated several employees of its Chinese subsidiaries after determining that they had engaged in malfeasance and conduct adverse to the interests of the company. The company's Chinese subsidiaries are involved in certain ongoing legal proceedings with the terminated employees who were somewhat precluded from any further discussions on that particular topic. Slightly higher SG&A also was incurred as a result of our additional headcount, as Sam mentioned, some of the people that we've hired, and the costs associated with operational improvement and to support our new strategic plan. Based on Sam's comments, it appears that our investments are going to deliver terrific returns, and we really needed to make those workforce additions as well as move forward to our capital investments to provide for additional production capacity and capabilities in the future. Net loss for the first quarter of fiscal 2022 was $632,000 or $0.02 per share compared to net income of $97,000 or $0.00 per share for the first quarter of fiscal 2021. The decrease in net income for the first quarter of fiscal 2022 was primarily attributable to lower gross margins and increased SG&A expenses, including the one-time expenses. The resulting decrease in operating income was partially offset by a decrease in the provisions for income taxes of approximately $305,000 as compared to the same period of the prior fiscal year. For modeling purposes, we have remaining NOLs to cover our profits on a consolidated basis in the U.S. and pay only Chinese income tax. In Latvia, they will have the distribution tax on undistributed earnings, but we reallocate the profits to future growth activities. So we have not been accruing tax on earnings there. Cash was $4 million at the end of Q1 '22, down from $6.8 million at June 30, 2021. Cash flow used in operations was $1.6 million in Q1, compared with cash provided by operations of $662,000 a year ago. The decrease in cash flows from operations in Q1 '22 is due to the decrease in net income, changes in working capital items, and payment on liabilities and accruals. Cash invested was $1.2 million. Cash provided by financing activities was $51,000, and the effects of exchange rates on cash was a negative $32,000. Therefore, the change in cash was negative $2.8 million from the end of the prior fiscal year to the end of the first quarter of fiscal 2022. Within that time frame, receivables increased by $1.3 million. Payables and accruals were reduced by $800,000, and inventories remained consistent at $8.7 million. Our backlog as of September 30, 2021, was $19.3 million, down from $21.3 million at June 30, 2021, which primarily reflects the reduction of certain telecom business and the normal deliveries against annual contracts, including our largest that is up for renewal in about a month. This is partially offset by increases in orders for other product lines. As we have noted, it's natural for our backlog to fluctuate during the year because of the timing of bookings of large orders and annual renewals. Our single largest contract last year that is up for renewal would be valued at about 30% of our backlog at September 30, 2021. With this review of our financial highlights and recent developments concluded, I will now turn the call over to the operator so we can begin the question-and-answer session.

[Operator Instructions] Our first question today comes from Brian Kinstlinger from Alliance Global Partners.

It's great to see the improvement in revenue and margins much faster on that recovery. In regards to the new freeform product, will there be any incremental expenses ahead of revenue? And then I think you indicated this, but are there going to be cases here where new products have early yield challenges until you get efficient? And when will we see that weigh on margins a little bit? Is that the back half of this fiscal year?

Yes. That's a good question. So freeform is going to be similar in mechanism of revenue and costs to the PMO, meaning most times there aren't any standard freeform products. Each product is going to be tailored for a customer's system as we now do with some customers, which means that the NRV charge is included with it. Those net NRV charges are in the tens of thousands, and sometimes more, for the initial runs for developing the molds for customizing it. Then afterwards, there's production variance. Currently, at least, most of the places where we're working on this are for customers that are implementing new technologies such as LiDAR and augmented reality glasses. We don't expect very high volumes from it yet because they need to get market traction with their own product. We do have a couple of customers that are using it for more conventional products, and there, we will start seeing larger volumes sooner.

Great. And then how do you think about the addressable market?

That's a great point. As you might know, part of the uniqueness of LightPath is that we have developed our own production equipment in molding. We have a few different versions of molding machines that we developed here and built in-house. This allows us to make very slight modifications to existing molding machines to be able to use them for freeform optics. Capacity-wise, for the most part, this is going to use equipment that we have already for the PMO.

If it's the same line, the same equipment a year ago, maybe two years ago, you had capacity issues. Does this mean you need more capacity now?

Right. So we actually have capacity. That's not an issue at this point. A lot of that capacity was previously constrained by telecom and the urgent need for lenses for contactless temperature measurement. Both of them were down significantly, so the capacity is there. In terms of addressable market, I'd look at it as components that perform a function of a few different components together. So typically, the unit price is going to be higher than our regular PMO, meaning these are going to be probably in the $10 to $30 or $40 range. Typically, something like an application in LiDAR would need one if a customer uses those freeforms. For AR glasses, the projection, in an ideal scenario, is for both eyes, so there would be two needed. What is the possible market of LiDAR and AR? That's beyond me at this point.

Last one, and then I'll get back in the queue. I want to touch on margins. Again, you hit the 35% mark about a quarter earlier than I would have thought based on the need to turn over inventory before the margins improved. So there sound like a few puts and takes, mostly benefits of product launches becoming more efficient and the yield issues being a full quarter of benefit of the coating. So maybe talk about when you think you can hit that 40% range. Obviously, it's dependent on the mix, but is that the second quarter or is that third quarter? How should investors think about getting back to that high watermark that you guys have been targeting?

Brian, it's Al. We do forecast getting back to that 40% gross margin territory. You hit the nail on the head with your own question by saying it's about the mix. That's the piece that from a forecasting perspective is not 100% sure exactly when it comes. We think it comes sooner rather than later. From the cost perspective, that's the part that we feel more comfortable managing. If we get the right mix, we'll get there certainly in this fiscal year.

Let me just make sure I understand and then I'll see the line. What you're saying is from a yield and production standpoint, you can get to 40%. You're going to have some quarters you're going to be below based on mix. Some quarters, you may be at or above depending on new products coming out. But everything is in place to get to 40% depending on mix now.

I want to clarify for you that the new products, like freeform, for example, Sam mentioned that the margins are better there. In our modeling, we're not factoring in a lot of revenue from there. So in our models, that's not really taken into consideration. We're being somewhat conservative, looking at our current products and thinking we can achieve that 40%. What's the cost situation and what's the mix?

Our next question comes from Scott Buck from H.C. Wainwright.

First, I guess, I have a question on the labor side. How are you guys doing there? Having any challenges in hiring or maintaining personnel in the current environment?

Yes. That's a good question. Thanks. We are facing some challenges in recruiting in the Orlando facility in the U.S. We find that we need to reach out to other geographical areas in the U.S. for potential employees, definitely more than we would have liked to do two, three years ago. That is a bit challenging, and some positions are a bit more competitive than others. But overall, on the production side, we don't have any major issues. It is really about finding talented people on the management side at reasonable costs. In China and Latvia, we don't face too many issues. In Latvia, we have a very detailed training program since there isn't a massive high-tech industry in Latvia. It's a fairly small country, so we invest a lot in training. Overall, as long as we can plan for it, it's manageable.

Great. That's really helpful, Sam. And then the second one for me. I was hoping we could get an update around M&A. I know in the last quarter's call, it was kind of a focused item, if you will. So I just wanted to check in and see kind of where we are there.

Yes. Absolutely. We're definitely still very interested in that. It's going to be a good part of our growth, we believe. We have some good prospects. We wanted to focus also internally for a bit. The last quarter was a bit too much of a hit than what we wanted to in the bottom line, and we felt like we needed to look inwards a bit and size things up and improve. I feel like we're actually right on track in terms of what we would have wanted to in terms of improvement. I'm hoping that we continue along this track, and we can go back to looking seriously at M&A. But we do want to ensure that we also deliver on our current operations and not just go and bite off something.

[Operator Instructions] Our next question comes from Gene Inger from ingerletter.com.

Sam and Al, I think you have done a pretty solid job, and you needed to after the previous quarter you just alluded to in resetting expectations. I wonder whether the shareholders appreciate that enough. Because I think obviously, as far as the stock, it's been dormant and hovers around $2, and people are wondering when things will become accretive to shareholders. What you're saying is that's a ways out. But I have a specific question as a result of the discussion you just had about margins and yields, which might be whether we could have a surprise because you're talking about 40% margins on freeform. While you discussed clientele maybe of $1 million to $10 million each order and that's being conservative, that doesn't sound like a lot of money until you look at the specialty product category if I've got this right, which is almost nothing now. You can imagine you would have anywhere from 30% to 100% increase in gross revenues in the business. Am I missing something?

Well, I'd start by saying that 40% was an aggregate number we were talking about. The actual margin from freeforms, we would expect them to be more in line with that of PMO, which is a strong margin. Now of course, some of our freeform customers might be listening, so we don't want to disclose the exact margin, but we do feel like it would be accretive and definitely help us. The specialty products group and the business defined now sort of is a catchall for other parts. So I don't know if that's a good indicator of what the growth in margins from PMO would be.

But such products would not take away from what we would call, let's say, the existing infrared business. They would constitute a new revenue segment.

Absolutely.

Right. Okay. And speaking of those segments, last call, you acknowledged that it's not just Mars Rover, but low earth orbiting satellites you're involved with. That's a form of telecom. That's obviously not the telecom that you said a customer reduced orders because their business was down. First of all, was that customer in China or the United States.

The satellite company, you mean? Which customer? Sorry.

Well, the satellite company is going to be in the United States or Europe, I'm sure.

Yes.

You said the telecom orders were down because one customer had lower business.

Oh, yes. That was in China. That was our lone customer in the region.

Well, Huawei's down and China telecom is down because a lot of people died, seriously. They have a lot of people canceling accounts. That's one way people track their death toll. But anyway, my question might relate to the medical side of the coin, and there's a big movement to be disruptive with things like clinic on your wrist, and you know what I'm talking about.

Yes, of course.

The Dr. Wrist one, that's Rockley. I don't mean to mention another company. Everybody knows it, so. But Medtronic, Apple, they're all going in this direction, and it involves infrared. I wonder if you're—without compromising your relations with the customers—can you give us a better idea if you're involved in such things.

Yes, I'd say it's a very good question and a very good example of a place where there's a desire to miniaturize what otherwise could be much larger optical systems. I go back to something like freeform optics where we can combine basically the function of a few elements into one or two, and we can make those down to about a millimeter or two in size. So these kinds of industries are exactly ones that would benefit from high-precision freeform glass optics.

And for those who are listening who don't know, I'm referring to Apple Watch 8.0, of course, which is supposed to basically—and so will Medtronic. What they're going to do is glucose monitoring, sugar, which will probably be attractive to every diabetic in the world instead of using needles. But in any event, no, no, I think that's important. So you guys are doing. I'm sorry, I interrupted you.

Please, go ahead. I appreciate the comments. They're very useful, and I'm sure other investors appreciate it, too. Thanks, Gene.

Do you know what you're working on is more infrared, not laser? I'm assuming there's no radiation involved in either. That would be detrimental in the medical— in fact, the absence of radiation would make it advisable to go in that direction.

Yes. We work— In the core of the business, the components of our historical business have been passive optical components. We have now projects such as the one with this major satellite company, where we are designing and building a complete optical transmitter for optical transmission between satellites, including laser and receiver. This is a great example of where we are taking the company into much more integrated solutions, designing a complete solution, utilizing our unique technology and know-how to design something better than what otherwise would be available.

Has Musk booked you on a flight into space yet, Sam?

He has not, but if you have a word with him, I'm waiting for my Tesla. It's available in the States now. Thank you, Gene.

Our next question comes from Vishal Mishra from Mishra Capital.

Do you think you can provide some sort of a broad classification of your revenues? Like what percent is in the defense, medical, auto, telecom, consumer? Is it already available somewhere in the presentation? Apologies if it's already there.

Yes. While I explain that number, I'll mention in terms of U.S. and non-U.S. in general, our sales are pretty much one-third each, meaning the U.S. is probably stronger, so probably closer to 40%, and other parts divided between Asia and Europe. But when it comes to the actual sales, it could be different. The destination of shipment could be very different from the origin of the order. Many of our customers for high volume have manufacturing and assembly in Asia but the relationship and the entire design work and everything gets done here in the U.S.

We do have numbers. Our catalog is 20%, defense is 6%, industrial applications are 43%, medical is 7%, telecom is 7%, and then commercial applications are 17%. When it comes to that 20% regarding catalog and distribution, that could also be other categories, right? Like, it doesn't always go through those—we don't always capture the specific market.

Got it. And the second question related to that was, like, Sam, you had mentioned that you want to transition from the prior LightPath, which was mid to low single digits to high double digits. Will that come from higher growth markets like LiDAR and AR/VR, etc.? Or would it come from shifting from making components to subassemblies and solutions?

Yes. Great question. Yes, I think when we look at everything, it is based on value add— where can we add value and where can we bring some uniqueness to customers? We have very unique strengths when it comes to infrared optics. We make the materials ourselves. We have very unique capabilities in the fabrication and the coatings there. So most times, the easiest path for us to get into making a complete subassembly or even a system tends to be more in the infrared area. That does not mean we're not exploring LiDAR and AR/VR that are visible. We even have one case like that where we are making a complete assembly. We're looking into that. But the vast majority right now is that we're seeing where most of the activity in engineered solutions and complexity is in the infrared, and those oftentimes tend to be our space and defense.

The overall photonics industry is forecast to grow at mid to high single digits, but you would like to grow slightly faster. Is it coming from your faster-growing end markets? Or will it come from doing more solutions?

It will come a bit from capturing the new markets and converting where customers go from buying one component from us to buying two components from us to buying a complete assembly that we design.

Our next question is a follow-up from Brian Kinstlinger.

I think we covered a lot of ground, but we really didn't cover the growth drivers for the two businesses in the near term. The results, to me, I would have expected the opposite based on your comments last quarter, a sequential improvement in infrared and more flatness in PMO. So first of all, I'm curious what drove, other than lumpiness, the changes quarter to quarter. But even a bigger picture and more important, as I think about both those segments, which are those industries that are going to drive it? I've heard defense; it's 7% of revenue. It's not that big. So what are the industries? And how do you go after them to drive better adoption and penetration?

Yes. So quickly on where growth comes from, as people might recall, we mentioned all the way back in April, but definitely in the Q4 results, that some of our hit to sales in China was due to the relationships lost when we had to let go of the senior management, since both they owned the relationships, and they were funneling sales through these straight shell companies. There was an impact on us, besides the telecom customer, a customer in China that we sort of lost touch with for a short period. We anticipated that coming back, and we're seeing that coming back. A lot of that growth that we saw now and I'm sure will continue to see is from the focus on regaining back the PMO customers that we were disconnected from for a while. In terms of where the growth comes from in industries, that's very diverse and, in a way, difficult to predict. You have situations like a, say, automotive thermal camera that we're working on. It is very promising. If it will be successful, it will be, overnight, a multimillion-dollar deal. It can also be not successful, nothing to do with us. It could be that the automotive company decides to postpone it because of a lack of components they have in delivering cars. So there are multiple industries where this can come from. Defense, you're right, is only 7%, but defense is actually a place where we need to work on contracts for a long time before we win them. Once we do it, it can sort of become an overnight big hit. So we do expect defense to be quite a bit more in the future because we're winning designs and contracts there. Other than that, it's really in places where new industries or new players want to adopt photonics and use it in their products, and we work with them closely, sometimes for a couple of months, sometimes for half a year or even a year. Then it could be a $1 million to $5 million order at some point.

Understood. So to the degree there's a component shortage for one of your customers, it's possible we see slower demand at times. But to the degree we have new products, new successful products, those could create spikes in revenue.

Yes, absolutely. I mean, we've had situations where customers mentioned they might need to reschedule because of component shortages. Thankfully, that didn't actually happen, and we think it is getting better at least with those customers that work—it may have been developed. But you're right, that's always a concern for us like any component manufacturer.

Ladies and gentlemen, at this time, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to management for any closing remarks.

Thank you for participating in today's conference call. We look forward to speaking with you again at our upcoming Annual Meeting of Shareholders and the investor conference next week. We hope you can join us. Thank you again, and goodbye.

Ladies and gentlemen, with that, we will conclude today's conference. We do thank you for attending. You may now disconnect your lines.