Lightpath Technologies Inc Q2 FY2022 Earnings Call

Good afternoon everyone, and welcome to the LightPath Technologies Fiscal 2022 Second Quarter Financial Results Conference Call. Please note this event is being recorded. At this time, I’d like to turn the conference 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 this conference call, the company will be making a number of forward-looking statements that are based on current expectations, involve various risks and uncertainties, including the impact of the COVID-19 pandemic discussed in its periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can be proven to be inaccurate, and there can be no assurances that the results would be realized. In addition, references may be made to certain non generally accepted accounting principles or non-GAAP measures for which you should refer to the appropriate disclaimers and reconciliation in the company’s SEC filings and press releases. Following the management’s discussion, there will be a formal question-and-answer session open to participate 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 second quarter financial results conference call. Our financial results press release was issued after the market closed today and posted on our corporate website. The company’s performance in the second quarter demonstrated significant progress in the expansion of our product portfolio and business development pipeline. As we have been successfully implementing our new strategic direction, which we began rolling out approximately one year ago, we are seeing the intended results with the company transforming itself into a leading global partner for optical engineered solutions with a highly differentiated product platform as the foundation for the new LightPath. Meanwhile, we are maintaining operational discipline as we invest in new growth opportunities. While the financial recovery for our existing operations takes longer than anticipated following the transition of our business in China, this transition pertains to the discovery in our fiscal 2021 fourth quarter of irregularities in our China operation, which upon closer inspection turned out to be illegal activities by the management of our subsidiaries in that country, including the misappropriation of company money and the violation of customer orders to third parties—activities that we now know had been ongoing for a very long time. We have eradicated the problem areas, replaced the management team, and overhauled our control systems to avoid any recurrence of such events. At the same time, we were also negatively impacted by a reduction in telecom revenues in China from a large customer who had lost its own contract and stopped issuing any new orders. In total, our revenues from China remain below where we thought they would be in terms of recovery, which has had a corresponding impact on our profitability since telecom sales, which primarily had been for 5G infrastructure builds, are among those that produce some of our highest margins. We are pleased to share that the telecom customer has now begun ordering again, but those orders are still at much lower volumes than before, and we expect to take a couple of quarters to start scaling. Beyond these challenges in China, our overall business globally continues to be solid. Revenues for the second quarter and backlog at the end of the period increased from the first quarter. The backlog factors in the renewal of our largest annual supply agreement. This contract is for the purchase of a variety of infrared optical lens elements by a major commercial customer and demonstrates our ability to supply high-quality infrared optics on a commercial scale for an impactful OEM partner. More importantly, there is future growth potential presented by recent achievements as we continue to execute against our strategic plan. Prior to the second quarter, management focused on executing the important changes necessary for our future growth and evolution as a company in terms of corporate governance and ESG, organizational leadership, and workforce alignment. Another critical phase was infrastructure investments to increase and align capacity and capabilities. Most recently, during the second quarter, we announced several technological and manufacturing process developments that create a basis for further differentiating the solutions we can offer as a partner to our customers. Such differentiating technologies are key in transitioning the company from being a component provider, which produces items as per customer specifications, to a solution provider that leverages those differentiating technologies to have in-depth dialogue and involvement in the customer’s design process and capture some of the value created by owning the IP, which translates to price premiums. LightPath is leveraging its legacy as a low-cost provider with some of the industry’s best high-volume manufacturing capabilities to emerge as a partner for our customers on designing optical engineered solutions, where we add value by offering the best solutions. As we had previously outlined, this moves us from being a component supplier, a reactive player focused on being the lowest cost provider, to a partner that brings domain expertise in optics to the table—a position that is naturally more proactive and value-added. This process is part of our strategic plan, which is driving our path forward, and it is now beginning to deliver the intended results with our business development pipeline thriving on the strength of our new freeform optics, infrared materials, and other technological innovations, particularly for LiDAR, AR/VR, and space applications. Since introducing freeform optics in October 2021, we have been engaged in an increasing number of opportunities, which include non-recurring engineering projects (NREs) and other programs that could lead to valuable volume production orders. At present, we have a total of eight such high-value, high-volume projects in development or going through the customer qualification process. This is an increase of five projects from the three that we discussed during our last quarterly report. Almost all of those programs are in the area of LiDAR and AR/VR, and they have all launched as a result of customers realizing the value of our new freeform technology and are now working closely with us to leverage those capabilities to deliver performance they could not previously achieve in those systems. Growth in these programs is due to customers wanting priority access to freeform technology among our expanding platform of proprietary materials and manufacturing processes. Once in production, each of those opportunities ranges from $1 million to $5 million in annual revenue potential with staggered production start dates projected over the next 24 months. In short, we can go from one 10% customer to many, where our operating and financial performance will benefit from leverage on the manufacturing floor and less commoditized solutions to gain pricing power and avoid margin compression. Aided by the substantial completion of investments in manufacturing, coating, and finishing that are integral to our strategic plan, we are eager to see what may materialize for growth in revenues and profitability. We are now in the process of preparing our expanded coating facilities in Europe for volume production, with no major investment planned for the remainder of this fiscal year. Our next focus in capital investments will be the expansion of our facility in Orlando in the next fiscal year. With vertically integrated manufacturing capabilities on three continents, we are increasingly being sought after by customers and industry partners alike, which positions us to broaden our product portfolio and address some of the most prominent growth sectors of the economy, including LiDAR, augmented reality, and space technologies. Large automotive-related customer relationships are being developed for LiDAR and thermal imaging to provide both autonomous driving and enhanced vision capabilities. Today, we are in a much better competitive position to access these large opportunities due to our differentiating technologies and particularly our award-winning freeform optics manufacturing technology. The industry’s response to our introduction of high-volume freeform optics manufacturing has been overwhelmingly positive. Freeform optics can potentially minimize the size of consumer products such as augmented reality glasses and laser projectors. Additionally, the enhancements that freeform optics provide to optical design allow, for example, designing much wider fields of view or better resolution and sensitivity for applications such as LiDAR. However, adoption had been constrained by volume manufacturing inefficiencies. By extending our molding technology into the production of high-precision freeform glass optics, we are now enabling new applications and miniaturizing existing optical systems to a level that the optical community has long demanded. Two weeks ago, we announced that our new freeform optics technology had won the 2022 Prism Award for Manufacturing. Winners were announced as part of the SPIE Photonics West trade show, one of the industry’s most important events of the year. The Prism Awards is an annual international competition that honors the best new optics and photonics products and technologies on the market. As mentioned, we now have underway a number of large NRE projects for the development of new custom freeform optics and subsystems—projects that represent revenue in the form of development work that is paid for by the customers, with resulting intellectual property owned by LightPath. These projects are expected to lead to production orders that require a series of lenses or assemblies, which would substantially increase the company’s current manufacturing volumes. Once in production, through separate contracts, the proprietary nature of such non-commoditized orders suggests that the higher revenue generation associated with greater volumes will also deliver improvements in gross margins compared with the company’s existing product lines. As such, we are delivering on the strategic objective of transitioning into a value-added engineered solutions partner for large global customers as they pursue next-generation technologies. While our product portfolio has made great strides and now addresses some very exciting growth markets, our spending on research and development remained under $6,000 for the quarter. This spending has been supplemented by NRE projects, as well as grants and partnerships, which serve as a testament to our leading expertise in photonics. Furthermore, we’re very pleased to have recently been funded by the European Space Agency and Space Florida to advance the commercialization of our infrared materials for optics in space. A key objective of our strategic plan is to move up the value chain in targeted areas based on the technology and engineering capabilities that we possess today. To this end, we were honored to have been selected for an exclusive optical usage license to manufacture products using the infrared patented portfolio developed and owned by the United States Naval Research Laboratory. The agreement with NRL provides LightPath with access to an IP portfolio of unique and fortunate class compositions to develop more advanced optical systems targeting some of the fastest growing raw material markets, including the infrared imaging market, which is expected to grow from $5.8 billion in 2022 to $8.3 billion by 2025, and the multispectral imaging market, which is estimated to grow from $10.9 billion in 2022 to $17.6 billion in 2025. I'm pleased to report that we are receiving very strong market feedback on our NRL IP portfolio, which reaffirms our assumptions that such materials provide significant value. Another development that supports our better positioning is in the area of pricing. In recent months, like the rest of the world, we have experienced price increases on raw materials and energy. As Al will mention in his comments, this has impacted our margins, particularly in infrared optics, which are mostly manufactured in Europe, where energy prices have increased by as much as three times higher rates. We are pleased to share that our stronger positioning allowed us to work closely with our customers, where we have generally been able to increase our prices to offset such increases in costs. Those price increases will begin to show an impact in the middle of Q3, and we believe will offset what would otherwise have been eroding margins—something LightPath had experienced all too often in the past. While building for the future, we are also disciplined in the present. Looking at key performance measures, we ended the fiscal 2022 second quarter by increasing our cash balance and reducing total debt and inventories as compared to the end of the first quarter. Inventories have now reached a four-year low, demonstrating our operational efficiencies as our backlog and revenues remain near historically high levels. Our backlog grew to $21.9 million at the end of the second quarter, an increase of over 13% from the end of the first quarter, following the renewal of a large annual infrared optics supply agreement valued at $4.2 million. Capital investments were modest at about $118,000 for the second quarter, which is within our budget for the year, as we had completed a significant increase in manufacturing capacity expansion last year in accordance with our strategic plan. The impact of our technology development efforts, our partnerships, and our overall product and manufacturing expansion is leading us to higher-end engineered solutions that connect us with large customers and accelerate growth markets, expected to lead to increased profitability, particularly since it is unlikely we would face the same commoditization and competitive issues as with some of our more mature product lines. Reflecting this continued progress and outlook for growth, LightPath’s leadership made open market purchases of Class A common stock during the first physical and second quarter. I was among this group in the first half of the fiscal year and now feel aligned with all our shareholders. This concludes my formal remarks. Now, I’ll pass the call over to Al Miranda, our CFO, to review the financial results for the second 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 for the period. I encourage you to visit our website at lightpath.com to access these documents. Since Sam just covered the highlights of our strategy and our key accomplishments and business drivers, I will discuss some of the primary financial performance metrics and provide additional context to assist investors in analyzing the company. As a reminder, we had been significantly impacted by the transition and business conditions in China during the fourth quarter of fiscal 2021 and to a lesser extent in the first and second quarters of the current fiscal year. At this juncture, all revenues have been recovering; they still remain below the pre-transition level. LightPath’s second quarter financial results are also negatively impacted by expenses associated with the management and employee transition in our Chinese subsidiaries. On an expense basis, one-time cost charges and accruals were incurred largely during Q4 of fiscal year 2021, with additional items in Q1 and Q2 of this year, all of which are fully addressed in our earnings press releases and SEC filings. While certain civil legal proceedings are ongoing, we are unaware of any further expenses or charges to be incurred going forward. At the same time, we remain focused on our overall strategic plan, and we are on a trajectory for long-term growth and profitability. On a consolidated basis, revenue for the second quarter of fiscal 2022 was over $9.2 million. That’s up from the first and fourth quarters, so we are seeing sales building back, although down from a prior year period of $9.9 million. Sales of infrared products comprised 55% of the company’s consolidated revenue in the second quarter of fiscal 2022, compared to 48% of consolidated revenue in the same period of the prior fiscal year. Visible precision molded optics (PMO) sales represented 41% of the consolidated revenues in the second quarter of fiscal 2022, compared to 48% in the same period of the prior fiscal year. PMO sales as a percentage of overall sales is lower than optimal, as Sam mentioned, due to reduced sales to our major telecom customer in Asia. Specialty products continue to be a small component of the company’s business, representing 4% of consolidated revenues in the second quarter of fiscal 2022 versus 2021. Revenue generated by IR products was approximately $5.1 million in the second quarter of fiscal 2022, an increase of 4% sequentially from $4.9 million in Q1 of 2022 and up 6% from $4.8 million in Q2 of 2021. The increase in revenues was driven primarily by customers in the industrial and defense markets. PMO sales were $3.8 million in Q2, flat from Q1, and down 21% from $4.7 million in Q2 of fiscal year 2021. The year-over-year decline is due to lower telecom sector revenues and other sales in China, as mentioned. Beyond these reductions, the company’s PMO revenues have strengthened in areas of sales through catalog and distribution channels, as well as increases in sales to customers in the industrial, commercial, and medical industries. Specialty revenue is somewhat of a catch-all for products or services that don’t fit the other two categories and they represent a small component of our consolidated revenues. Over the last few quarters, there has been a shift from one-off products towards more NRE projects. This represents a different type of revenue altogether. As discussed last quarter, we expect to see an increase in NRE revenues this fiscal year, driven by the need to engineer solutions for new products, such as freeform molded lenses, as Sam has mentioned. As we develop these types of products and deliver prototypes, which are accepted and qualified, we expect to receive production orders where we manufacture in quantity. In Q2 2022, we handled the growing number of NRE projects for commercial and defense applications, again, as Sam mentioned earlier. Let’s now move to a discussion on margins. I’d first like to share some background that will be helpful for modeling purposes and for understanding the impact of our overall strategic direction. PMO margins are typically higher due to our molding, which enables mass production and a more automated machining process. IR has historically been 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 cost and using the automated molding process. In addition, as we migrate towards engineered solutions, we expect margins to increase. This is due to several factors, including multiple lenses required for an assembly, both types of lenses used in a single solution, and custom-built solutions where our engineering and proprietary designs, along with our manufacturing and assembly, will dictate pricing and margins that may be more immune to industry trends. As a result, average selling price (ASP), which is often cited by analysts who cover us, may become less relevant in the future. To this end, and for competitive reasons, we are going to speak to other metrics and not ASPs when discussing revenues, costs, and margins. Our consolidated gross margin as a percentage of revenue was 30% for the second quarter of fiscal 2022, compared to 37% in the same period of the prior fiscal year, and compared to 35% in the first quarter of fiscal 2022. The decrease in gross margins as a percentage of revenue is primarily due to the mix of products sold in each respective period. While IR sales have increased, the majority was on a high-volume contract, and we also had a negative impact on margins as we extended our coating capabilities in Europe. The ramp-up and learning curve of coating in the quarter led to fully burdened costs with low volume output, which is typical for new coating implementations. Moving on to operating expenses. During the second quarter of fiscal 2022, total operating expenses were $3.8 million, an increase of $206,000 or 6% compared to $3.6 million in the same period of the prior fiscal year. SG&A costs increased by approximately 7% compared to the same period of the prior fiscal year. Higher SG&A costs are primarily due to $153,000 of expenses incurred in Q2 associated with our transition in China, including legal and consulting fees. In addition, we determined that one of the Chinese subsidiaries is obligated to pay $248,000 in that and related taxes from prior years, which was accrued during the three months ended December 31. The remaining increase in SG&A expenses is due to increases in personnel-related costs and a moderate increase in travel expenses as COVID-19 restrictions have reduced. These increases were partially offset by actions to cut approximately $400,000 in non-recurring additional compensation to the company’s former CEO in the prior year period. In terms of total employees globally, we now have 15% fewer than we did a year ago. We hired senior executives to assist with our strategic implementation, including scaling operations as we prepare for significant future growth. Additionally, we replaced our temporary leadership in China with permanent hires who are more versed in the industry, as opposed to the fixers or crisis management experts we initially brought in. Several key roles throughout the global organization were filled by promoting from within, which is something we would like to emphasize. This approach has also helped us realign our product groups with the direction of our new strategic plan. To this end, we created technical engineering sales leadership for select product groups, and we expect to add one more for this purpose; otherwise, we are at an optimal workforce level at the present time. Moving on, the net loss for the second quarter of fiscal 2022 was $1.1 million, or $0.04 per share, compared to a net loss of $147,000 or $0.01 per share in the second quarter of fiscal 2021. The increase in net loss for the second quarter of fiscal 2022 was primarily attributable to lower revenues, gross margin, and increased SG&A expenses, including the one-time expenses. The resulting decrease in operating income was partially offset by a decrease in the provision for income taxes of approximately $206,000 compared to the same period of the prior fiscal year. For modeling purposes, we have remaining net operating losses to cover our profits on a consolidated basis in the U.S. and pay only Chinese income tax. In last year, they levied a distribution tax on distributed earnings, but we reallocated the profits to future growth activities, so we have not been accruing tax on earnings there. Cash was $5.1 million at the end of Q2 2022, up from $4 million at the end of Q1. Cash flow provided by operations was $1.4 million in Q2 compared with the net cash used in operations of $157,000 for the first half of the year. This compares with cash provided by operations of $880,000 in Q2 2021 and $1.5 million for the first half of last year. The differential in cash flow from operations for the second quarter is primarily due to changes in working capital items, only partially offset by the net loss. Cash invested was $118,000 for Q2, and over $1.3 million for the first half of this year. Cash used in financing activities was $192,000 for Q2, and the effects of exchange rates on cash were a negative $4,000. Therefore the change in cash was positive $1.1 million for Q2 and negative $1.7 million from the end of the prior fiscal year to the end of the second quarter of fiscal 2022. At December 31, 2021, from the beginning of the fiscal year, receivables increased by $300,000; payables and accruals reduced by $653,000; and inventory declined by $1.4 million to $7.3 million in total. Our backlog as of December 31, 2021, was $21.9 million, up from $19.3 million at September 30, 2021, and $21.3 million at the start of the fiscal year. The quarter-end backlog is the highest level in a year, which accounts for new contracts signed and the renewal of our single largest contract valued at $4.2 million, which has been partially offset by the reduction of certain telecom business, as discussed. For our largest contractor, normal deliveries throughout the year will bring the backlog level down as the year progresses. This December’s renewal of our largest contract marks the fifth consecutive year that we have won the high-volume order. In addition, from the same customer, we have expanded our relationship as a valued partner to provide other IR solutions under separate programs. As a reminder, it is customary for our backlog to fluctuate during the year due to the timing of order bookings and annual renewals from all of our customers. With this review of our financial highlights and recent developments concluded, I’ll now turn the call over to the operator so we may begin the question-and-answer session.

Great. Thanks so much. First, really easy one on the numbers. Your year-over-year trends have been marked by your large China telecom customer. Can you tell us what your year-over-year revenue growth would be without this customer during 2Q? So if you took it out of a year ago’s quarter and this quarter, what would the comparison year-over-year be for revenue?

We’ll pull up the number. While we’re speaking, if you have a follow-up question, maybe we can start with that.

Yes. No worries. Yes, that’s fine. So, I wanted to talk about the eight proof-of-concept engineering programs; it's helpful to get those details you gave. Before they go to production, I suspect you’re going to find out whether they’re going to move forward with your lenses as part of production. At what point do you expect an indication? Is that in calendar 2022 from any of these or a few of these, or is that too soon? And the second part of that question is, of these eight programs, are they also testing other optical providers' lenses, or are you currently the only one?

Great question. I think as you indicated, the process between the moment we develop the initial items until we’re actually in production is fairly long. In most cases, it’s a very structured process, such as EVT, DVT, and steps like that and production readiness, especially in automotive. The time we’re talking about delivering initial prototypes for almost all of those eight in the next three to four months, I believe. But for the initial prototypes, they need to go through extensive testing, and in some cases, environmental testing. Then we need to do the transition into manufacturing, the DVT, low volume, and so on. That can take as much as a year before production actually scales to the long-term projection numbers we have from customers. At the same time, I mentioned it last quarter, and I want to emphasize again, many of those customers are not established product lines. If we’re stepping in, it’s especially in LiDAR and in some of the AR and VR successors. It’s not only our ability to develop a product and our product meeting their needs, but it is also the customer winning whatever they need to win downstream. There’s obviously some uncertainty around that. In terms of competing with others, in actually a couple of the eight cases, the customers are being served by another vendor out in Asia, and they’re coming to us because that vendor specifically cannot achieve the same optical performance that we can. So we feel confident that, even though there are companies working on the freeform and others wanting to go in, we have a significant advantage in that area.

The others, you’re the only one; they’re being Asian.

That statement is as strong as that. I would say that yes, all in plastic, in polymer optics has possibilities and has existed for a while, and some customers use them, and in some applications, it’s very suitable. In low volumes and other capabilities, some have used as far as I know, there is at least one molding company that I know of that is attempting to produce some freeform molded glass lenses, but so far, as far as I know, unsuccessfully.

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

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

Well, without touching on information as the customer might consider sensitive, I would say that from what we understand, at least for the next two or three quarters, what we’re seeing now is what we should expect. But I don’t know what they may have in the pipeline. I do know that from the work they have, they have actually given us a bigger share this year, percentage-wise, compared to what they had in past years.

Okay. And then I wanted to touch on the gross margin. If I look at the mix of your PMO infrared as a percentage of sales, they were about the same in December and September quarter. So each of the last two quarters yet, despite the yield issues being better in the December quarter, at least I assume, because you’ve talked about that last quarter being fixed, the gross margin dropped 450 basis points sequentially. So, what am I missing from this major drop? I thought we’d be recovering all year. Thank you.

Yes. So Brian, we would definitely have to get into the weeds on sort of giving you the maybe the full-fledged answer you want. But in general, what we saw in this quarter was that the IR margins were lower in Q2 than in Q1, and there were some cost drivers behind that, in particular, some of the things that Sam mentioned: this unexpected energy price hike in mid-November and December, the fact that we instituted the coating facility in Latvia—fully burdened costs went in the quarter, but they were still producing at low volume. So there are a few factors that led to cost pressures that were a little bit different than what we saw in Q1. We also faced energy cost increases in China, but not nearly as much as what we’re seeing in Europe. And as Sam said, we expect the corrective actions will show in Q3.

Okay. So help us because it’s my last question on gross margin. I think the gross margin has fluctuated so much and clearly mixed drive that you can handle, and you can’t predict mixed just like who can is my point. But how should we think about margin going forward? What is reasonable for this business that we should expect going forward? Maybe it could be 50-50, or is that too unpredictable based on size and freeform? I just, I guess it’s been difficult to predict and I’ve at least been very bad at, so maybe help us understand how we should think about that going forward.

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

Right. What is your goal long-term?

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

And it cannot be in 18 months. Could that be sooner? With you bringing on freeform that will hurt yields? I mean…

I think a lot of it has to do with the ramp-up of freeform and the sort of unique applications, the proprietary nature of the customer relationship will change the margins for us.

Yes. Sam is…

There are a lot of variables that go into that—the customer, the LiDAR and those markets, right? When do those markets take off? And which one of those eight that we’re doing business with now, or the winners, which ones are the losers? What would be the timing of that? Those are things that if you, as an analyst, knew, you would direct the rest of us on where to invest all our money.

Yes. Okay. Thanks so much.

Thank you, Brian.

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

Thank you. Good afternoon. My first question is regarding NRE revenue. What is it now? And what do you think that will be when you’re from now?

So, we’re not giving that information out just yet. We’re not parsing that specialty group to what is NRE and what isn’t. The reason why is because there’s not a direct correlation between a dollar of NRE that doesn’t directly correlate to a dollar of new revenue down the road. I think what Sam did is it says we had three projects; he moved it to eight. If you consider NRE that way, that’s probably a better indicator. If we had three projects, the probability of getting one is 30%, but if you’ve got eight projects, the probability of getting two is greater than the probability of getting six. So I think for the time being, that’s a better indicator of the direction where NRE is going.

Yes, well, I don’t think we look at NRE as a major revenue stream or something sort of usually worth talking about. I brought it up to such an extent this time because the share of increase in how much interest we’re getting and the money customers are willing to put in sometimes helps accelerate the development or be earlier in line. I think it’s a very good indicator of just how relevant the technology that we’ve been developing is. In relative terms, we’re seeing far more NRE today than I think we’ve seen in, as far as I know, a few years, but by itself, again, it’s not a financial measure that holds strong weight.

Got it. And regarding those eight projects you mentioned, I assume they include AR, LiDAR. You mentioned that once they go into production, they could be anywhere from $1 million to $5 million. Is LiDAR or AR bigger than LiDAR, and should we be thinking about AR closer to $5 million and LiDAR closer to $1 million or vice versa—any more color on that?

Well, more vice versa. We’re seeing that LiDAR tends to be higher in terms of total dollar amount, as there are usually more optical components involved. Everything in LiDAR is just a set of optics that works together. I guess the car is less sensitive to weight than the person loads. In the AR/VR space, at least now, the volumes we’re seeing from customers are modest. And by modest, I mean it’s still tens of thousands of units, but it’s not 500,000 units.

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

Absolutely. That’s actually a great question that we’re looking into as we speak. The reason is, as I mentioned before, we are very lucky to be able to leverage the fact that we build our own molding equipment in such a way that all of these new freeforms and larger lenses we’re making can be produced with our molding equipment. However, the cycle time in them, and sometimes the cost of tooling is going to be different. We’re only now starting to get our feet wet enough with some low-volume production of some of those to know what it truly is. But definitely, one word to look at is how many units are coming out of a specific molding machine. It would probably be lower, but the dollar revenue coming out would definitely be higher for those.

But I think the important part is we can retrofit existing equipment. We don’t have to build a whole new factory or buy all new capital equipment. We simply retrofit the existing. The costs involved are fairly low; they’re not very significant.

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

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

Oh, sorry, Scott. I didn’t convert it into basis points in my head. Yes, I think it’s probably one, right?

Yes, two. Yes.

Yes, one, a little more than one. It’s not, like I said, it’s common to have the ramp-up phase and start moving production work in there. I’m not particularly concerned about it, other than it negatively impacts our financials.

Right. No, that’s helpful. And then given that it seems like product mix is going to be kind of what it is for the foreseeable future, or at least the next few quarters. Is there anything proactive you guys can do to help give those gross margins a bump?

Yes, that’s a great point. I wouldn’t quite say it’s necessarily going to be what it is. It tends to always be that infrared products and what we call diamond turned and such have longer lead times. The time to turn from an order until a shipment is much longer than in molded optics because of the very large bank or selection of lenses and molds that we have. We can actually turn around very quickly and sometimes ship PMO lenses within a week or two from order receipt. So, we are very cautious, as the recovery in China is taking longer and the sales in China are all PMO, 100%. We don’t have anything other than the molded IR and molded PMO in China, but they could turn at any time; I don’t want to say any day because that sounds a bit extreme, but it can definitely turn around much faster than IR revenue can.

Okay. That’s very helpful, Sam. And then I’m curious…

I just say on that, just to finish, we’re frustrated from the recoveries there, but we’re keeping hopeful about it.

Right. No, that’s fair. I appreciate that color. And then last for me, I was hoping you guys could kind of touch on M&A. I know it was a little more prominent in the last couple of quarters’ calls, but what are you thinking there? Are you still seeing a fair number of potential opportunities or has that kind of moved to the back burner as you work on some of these organic…?

Yes, it’s a bit of both, because some of those opportunities and such need new development and nurturing over time. We continue with that and nothing drastic has changed in our thoughts about this—I mean we still see it as a part of growing by engineered solutions more significantly. We’re still in touch with those companies. At the same time, we’re exercising great discipline internally about where to focus. We mentioned that we’re focusing on operational improvements. I think the results on inventory and cash are great from that point of view, but we’re also seeing slower recovery. We wouldn’t do something hastily just to get going with M&A or so on if we don’t think it’s the right time for the company.

Our next question will come from Orin Hirschman with AIGH Investment Partners. Please go ahead with your question.

Hi, how are you?

Good.

In terms of the eight NRE projects, when do you think you’ll have the first, even if it’s low volume, the first commercial volume order for the freeform optics you have to get benefits?

Absolutely. We already have one that we’ve shipped prototypes for, and it is going to be a lower volume one for sure. It’s not for consumer products, and therefore the volume was—this is actually going to one of the companies that have financed the development of the freeform optics for a long-time partner who has been waiting for this to mature in order to get what they’ve been financing. The second one is a shipment of items for an AR/VR related application, but we’re cautious there about volumes because we don’t have enough visibility into the customer’s pipeline and where those are going. I’d say within the next few weeks, we’re definitely going to ship at least two customers a good amount of prototypes, but we don’t yet know the volume.

But is it clear that the projects are going into commercial shipment?

Yes.

Yes. Again, I didn’t hear—the first one is a consumer item or not a consumer item, the first one?

The first one is not a consumer item, but it’s actually an extremely complex product that I believe delivering on that one is probably a much better and bigger indication of the maturity of the technology than some of their more consumer products.

Okay. But you’re saying that’s also a low dollar one because it’s not a lot of actual of product?

Yes. I mean, that is one that would be on the lower end of those opportunities.

Okay. In terms of the recovery in China, one of the metrics we look at just to see what’s going on in the industrial sectors in general and China is that there are really two, three main laser makers here in the United States that compete head-on with a handful of Chinese copycats that have come up over the years. So I guess the question is: do you ship into all of them, both the domestic ones selling to China, as well as the Chinese? Is that area still growing? When you say recovery in China, do you mean just telecom part? So is ex-telecom, how is China doing? What’s going on in China?

Yes, so when I talk about the recovery in China, I refer more to us and the macroeconomic events in China. That is, when we did the transition and had to let go of the management that was performing illegal activities, it actually included our entire sales team in China—including many contacts and connections to customers. The recovery, from our point of view, besides the financial impact of all that in terms of expenses and costs and rebuilding the team, is about rebuilding the sales pipeline. It’s going well, but we were probably a bit too optimistic about how quickly that would happen.

Did you lose any major customers in the transition?

We’re selling less in China than we were before. So I think the answer is yes, in a way, but as pointed out in the first question of today, excluding the large telecom, we’re actually at growth of 8% year-over-year, really that—hello?

On that note, is that the type of growth rate that you’re hoping for without a telecom acceleration this year—8% or 10%?

Well, I don’t know for the year. I don’t want to make any forward-looking statements or give any guidance on that, but I would say that repeatedly, I have said since I joined LightPath, that double-digit growth is what we should aspire to, and I still believe in that.

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

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

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