LightPath Technologies (LPTH) Q2 2021 Earnings Call Transcript

LightPath Technologies (NASDAQ: LPTH) Q2 2021 earnings call dated Feb. 03, 2021

Corporate Participants:

Donald Retreage — Senior Vice President and Chief Financial Officer

Sam Rubin — President and Chief Executive Officer

Brian Kinstlinger — Alliance Global Partners — Analyst

Analysts:

Marc Wiesenberger — B. Riley FBR — Analyst

Presentation:

Operator

Good afternoon and welcome to the LightPath Technologies Fiscal 2021 Second Quarter Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please also note, today’s event is being recorded.

I will now pass the call off to Don Retreage, Chief Financial Officer of LightPath Technologies. Please go ahead.

Donald Retreage — Senior Vice President and Chief Financial Officer

Good afternoon. Before we get started, I would like to remind you that during the course this 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 COVID-19 pandemic that are 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 assurance that the results will 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 Q&A session open to participants on the call.

I would now like to turn the conference over to Sam Rubin, LightPath’s President and Chief Operating Officer — Chief Executive Officer. Sam?

Sam Rubin — President and Chief Executive Officer

Thank you and good afternoon. Welcome to LightPath Technologies’ fiscal 2021 second quarter financial results conference call. Our financial results press release was issued after the market close today and posted to our corporate website. Following my remarks, our CFO Donald Retreage will further review our financial results and provide more perspective on key areas. We will then conduct a Q&A session.

Now onto my remarks. I’d like to start out by expressing my encouragement from the progress we are making on driving our top line growth and growing the organization amid the limitations imposed on all of us by the COVID-19 pandemic. We have made significant slides with advancements on our long-term strategic growth initiatives in the first half of fiscal 2021, which was underscored by achieving record levels for consolidated quarterly revenues and total backlog at the end of the fiscal second quarter although with lower margins than we targeted, which I will address shortly in my comments.

While the growth drivers of our business remain intact and relatively insulated from the coronavirus pandemic, we have been hitting some roadblocks caused by it. This has primarily been in the aspect of the business that requires travel such as recruiting of senior level employees from out of town as well as service of some of our manufacturing equipment, which has been impacted by limitations on travel of service staff. Those limitations primarily impact our operations side, and in particular, our ability to implement some of the efficiencies and changes we would like to make and at the rate we would like to see those changes happen. We’re still very proud of our team to be able to implement the improvements we have and grow the business at a double-digit rate in spite of those challenges and limitations.

On an operational basis, we also took important steps in terms of scaling and diversifying our production facilities, enhancing our global distribution, expanding our international sales presence, and strengthening our product portfolio. However, as pleased as we are with improving our growth rate and initiating deliveries on some key contracts, we are not satisfied with our performance in terms of gross margins this quarter and we are taking active steps to remedy this and return to our previous margins.

The growth achieved this quarter and in the first half of fiscal year has resulted both from the capacity we have added in the last 12 months as well as the commencement of high-volume deliveries on two key BD6 accounts, BD6, as a reminder, being our internally developed infrared glass material. Both of those customer accounts relate to contracts on BD6 to replace previously used germanium material. However, as can be the case when beginning to deliver initial production quantities of a new product or a new technology, during this phase-in period of a new product, the margins of those products are impacted by stage production inefficiencies and the learning curve of some new processes and technologies.

In this case, the main contributors to the lower gross margins have been inefficiencies in a stage of the glass production as well as low yield in the final coating of the lens. Those issues are being addressed through a concentrated effort by our engineering groups worldwide, supplemented with hiring an industry veteran for the position of Global Coating Manager, a position that has been vacant for over two years.

Additionally, we have put in place a strong review process for any new quotes to ensure our pricing methodology meets our corporate standards and target margins. While we have been focusing on identifying and correcting those issues, it is important to mention that we do not accept those margins and inefficiencies as they are now and we are placing significant efforts and resources to repair the issues we identify so that within a few months, we will see an impact on our margins in the infrared business.

That said, we have been seeing positive momentum in many areas, including revenue for the first half of fiscal 2021 of $19.4 million, which is an increase of 13% compared to the same period last year; second quarter revenue of $9.9 million, which marks the highest level of any quarter in the company’s history. EBITDA for the first half of fiscal 2021 was approximately $2.4 million, which is up 33% from prior period. Cash flow from operations in the first half was up 64% from prior year and final record level benchmark was achieved with our total backlog increasing to $23.8 million at the end of the second quarter.

Also, during the second quarter, we were awarded the renewal of an annual infrared supply agreement valued at over $5.8 million, which is a 16% increase over the prior year contract. This renewal has since been supplemented with two — with additional orders from this customer, bringing the annual growth from this customer to over 20%. Our success with this customer is representative of the strategy we’re deploying globally where we have been leveraging initial entry point in order to provide a more comprehensive solution approach to all our customer’s optical and photonics needs.

I’d like to now switch gears and provide an update on the efforts around our new strategic direction and the transformation of the organization. In our previous quarterly call, I provided an update on changes we have done to our sales process, new products and technologies we were working on, operational improvements and large contracts in the pipeline. Along the same lines, our team has focused and continuing to position us to provide more value-added solutions, while growing the organization and improving the operation as a whole.

Some of those activities include, on the sales side, we have recently announced the opening of our sales office in Germany for coverage of the entire continent of Europe, the Middle East and other close-by regions. We’re excited to welcome to our team Dr. Thanassis Kokorakis who will manage the direct sales interactions and be responsible for driving revenue growth in this territory. Thanassis comes to LightPath with over 20 years of sales experience, including time with companies like Ocean Optics, Newport Spectra-Physics, and Lightwave Electronics.

Secondly, on the technical capabilities and products front, our team has continued to focus on developing both unique technologies such as, for example, freeform optics, a component that, as its name indicates, has a form or shape that is free from constraints that are typical in optics such as symmetrical constraints. This unique new technology requires very careful machining of each piece on a multi-axes optical CMC or diamond turning machine. This has been prohibiting the adaptation of this technology in any applications that require mass production and therefore makes it a perfect fit for our own optical molding technology, which can replicate items in mass production. We expect to begin to take orders using this technology within the next few quarters.

In the last call, I had mentioned some high-value longer-term contracts we are working on. While many of those opportunities have a lengthy proposal and prototype process, we have had satisfactory results already with some of those. One such customer has recently decided to adopt the use of our new 75 millimeter lens assembly, which we’ve announced through a press release a few days ago in lieu of the optical systems they had previously used. That same customer further went and requested us to design the optical system for their next two future products. Additionally, one of our largest customers for discrete infrared components has recently accepted prototypes for a complete optical assembly designed and produced by LightPath, which will replace their own designed optical assembly. Those type of wins, while still relatively small in terms of value of initial orders, paves the way for more multi-year orders for complete assembly and brings us a step closer to our new strategic path.

Lastly, in terms of update on — of transformation of the organization, I will provide an update on our operational improvements. After the end of the fiscal second quarter, we announced the completion of the first phase of our facility expansion in Riga, Latvia, adding new infrared coating capabilities as part of our operational improvement plan as well as our global production capacity expansion. This expansion will enable our facility in Riga to coat all infrared components produced at this location.

For reference, in the world of optics, each optical component needs to be coated from both sides with different coatings depending on the customer’s application. Being able to do this last step at the component production and same — and the component production at same site will lead to an increase in margins, shorter lead time, and improved customer service overall. This also will free up some of our coating capacity in Orlando and China to develop new products and capabilities. This is the beginning of an effort that will take about a year to complete, at which point the Riga facility will be fully integrated such that we can improve the margins on our infrared products.

I would also like to thank the LightPath team that in spite of significant constraints due to the COVID travel restrictions have been able to develop this new technical capability in Riga as well as many other achievements that would typically require significant travel and on-site presence.

In conclusion, we are seeing the impact of our sales efforts and improvements to customer service driving the growth to double digits, something we had set as a goal for this fiscal year. We are seeing our investments and focus on differentiating technology and value-added solutions result in both new customers as well as converting component customers into solutions customers. And lastly, we are successfully implementing some of the operational elements required to execute on our strategy.

With our expanding product platforms and global team in pursuit of a solutions-oriented approach to our customers, we believe, we’ll ultimately deliver greater sales and improved consolidated margins and profitability. However, as we’ve noted previously and as certain of our second quarter results (inaudible). The additional capacity — the additional investments in machinery capacity and improvements related to operating personnel typically take several months until achieving full scale outputs and productivity where we see more meaningful margin contribution.

Now I’ll pass the call over to our CFO Don Retreage to provide more details on our recent financial performance.

Donald Retreage — Senior Vice President and Chief Financial Officer

Thank you, Sam. First, I would like to mention that much of the information we’re discussing during this call is also included in our press release issued earlier today and in our 10-Q filed with the SEC. I encourage you to visit our website at lightpath.com and specifically the section titled Investor Relations.

Now onto my remarks pertaining to the fiscal 2021 second quarter and half year ended December 31st, 2020. Sam’s remark covered a lot of our financial performance, so I will be specifically discussing some of the key performance areas.

Revenue for the second quarter of fiscal 2021 was approximately $9.9 million, up 4% sequentially from $9.5 million in the first quarter of 2021 and up 3% from $9.6 million in the second quarter of fiscal 2020 when we had about $0.5 million in holdover revenue from the first quarter 2020. Revenue for the first half of fiscal 2021 was approximately $19.4 million, an increase of $2.3 million or 13% as compared to $17.2 million in the same period of the prior fiscal year.

Infrared product revenue was $4.8 million in the second quarter of fiscal ’21 or 48% of the total revenue, down from $5 million or 52% in the second quarter of fiscal 2020. Visible precision molded optics or PMO products revenue in the second quarter of fiscal 2021 was $4.7 million or 48% of the total, up from $7.7 million or 39% of the total in the second quarter of fiscal 2020. The balance of our revenues for the second quarter was $372,000 from specialty products and non-recurring engineering projects, which vary greatly from quarter-to-quarter, but are substantially smaller contributors to the consolidated revenue. Revenue from this group in the prior year were $885,000.

With respect to our margin profile, generally speaking, PMO products are smaller and almost entirely molded. So we have faster turnaround time, higher volume applications, and more automated processing. These products also are generally lower in price. We historically have a margin averaging in the 40s to 50 range. Of our two primary revenue reporting groups, PMO is the smaller group with a higher margin. With the higher volumes and margins, you can determine — one can determine that our average unit selling prices will trend lower than with the infrared groups.

Infrared product group represents a larger and faster growing market opportunity. Infrared margins have historically been in the 20% to 30% range, and depending on the revenue mix in any particular period under review, our ASPs can vary so we do not believe that this is a meaningful performance analytic. Instead, we encourage investors to focus on our revenue and gross margin as a percentage of the revenue over the long term, not necessarily on a quarterly basis since we are relatively a small company where order completions can influence our results in any particular short-term or quarterly period.

In the first quarter of 2021, our top line growth was much higher than a traditional quarter due to the holdover revenue from the prior-year period where revenues were pushed from the first quarter 2020 to the second quarter 2020. Similarly, the second year — second quarter year-over-year comparison masks our second quarter 2021 growth since the second quarter 2020 included the holdover revenues from the first quarter 2020. Our margin — our gross margins can similarly fluctuate depending on order completions, product groups that dominate the quarter, and other important operational issues.

As Sam mentioned, we have a significant amount of new product lines just coming online, which generally have much lower yields and efficiencies, which reduce our gross margin on the units shipped in that quarter. When the product line is bolstered with fine-tuning, we will increase volumes and output, which will elevate gross margins to a more normalized basis.

Many of our product lines coming into production volumes in the second quarter 2021 are from our molded infrared lens family of products, which use our proprietary internally developed BD6 material. These will come in in the higher end of the margin range. Increases to our margin will be realized within this category as volumes grow and efficiencies improve.

Gross margin as a percentage of revenue was 38% for the first half of fiscal 2021 compared to 37% for the same period of the prior fiscal year. So we are moving in a positive direction even though our second quarter 2021 margins were impacted by a fair amount of product lines dilution.

As we have discussed, we have new production lines being introduced, which have low initial outputs. These will increase, and with it, so will the margins. Some of these new lines are converting all their lower margins germanium lenses to our new BD6 material, which also will lend to higher gross margins.

At the same time, we continue to produce more lenses overall. Total production for their product lines increased to 1.1 million lenses in the second quarter, up from 900,000 lenses in the second quarter of last year. In the first six months of fiscal 2021, we shipped 2.4 million lenses, up from 1.5 million lenses in the prior-year period.

Moving on to operating expenses, during the second quarter of fiscal 2021, total operating expenses was approximately $3.6 million, an increase of about $700,000 or 24% as compared to the $2.9 million in the same period of the prior fiscal year. The increase is primarily due to $400,000 of non-recurring additional compensation to the company’s former CEO and higher SG&A for a moderate increase in headcount and costs associated with operational improvement projects. New product development costs increased by approximately $61,000 or 13%, which was needed to address the demand for advanced optical designs.

Partially offsetting these increases was limited travel and marketing expenses from the COVID-19 restrictions net of pandemic related increases of cleaning and safety expenses. Operating expenses for the second quarter of the fiscal 2020 was also reduced by a net gain on disposal of property and equipment of $79,000, which did not repeat in the second quarter of fiscal 2021. Our consolidated corporate income tax in the US is shielded by our net operating loss forward benefits of approximately $74 million on December 31st, but we must pay income tax in the countries of certain foreign subsidiaries.

Second quarter 2021 income tax expense was approximately $241,000 compared to approximately $322,000 for the same period of the prior fiscal year primarily related to income taxes from the company’s operation in China. Income tax for the second quarter included Chinese withholding taxes of $200,000 associated with intercompany dividends declared by the company’s Chinese subsidiary in December of 2019.

Net foreign currency translation gains due to changes in the value of the Chinese yuan and the euro against the US dollar was $77,000 in the second quarter of fiscal ’21 compared to $119,000 in 2020 with no impact on the earnings per share in either period.

Net loss for the second quarter 2021 was $147,000 or $0.01 per share compared to a net income of $769,000 or $0.03 per share earnings per share for the second quarter of fiscal 2020.

For EBITDA, a non-GAAP measure, which we believe provides important insight into our performance and progress, we had a positive EBITDA of approximately $1 million in 2021 as compared to $2 million for the second quarter of fiscal 2020. This decrease was primarily due to the low operating income from lower gross margin and increased SG&A, primarily, again, for the $400,000 of non-recurring additional compensation for the former CEO, and to a lesser extent, the increase in new product development expenses.

Again, looking at a longer-term progress, which is more meaningful, EBITDA for the first half of fiscal 2021 was approximately $2.4 million or $2.8 million, excluding the one-time non-recurring departed executive additional compensation as compared to $1.8 million for the first half of fiscal 2020.

Moving to the balance sheet and cash flow related items, capital expenditure was $1 million in the second quarter of 2021 and $2.2 million for the first half of the year, up from under $1 million in the second quarter 2020 and $1.2 million for the first half of the fiscal 2020. Given that we have been running at near capacity and our backlog continues to grow, we have increased our expected capital expenditures for the year to come within a range of $2.5 million to $3 million for the year, up from the $2 million vicinity. It is important to note, however, that the recognition of capital expenditures is based on the dates of invoices, and in some cases, prepayments and often these are delayed between the timing of decision on order to when the capital expenditure is booked and when the equipment is received and brought online.

Meanwhile, net cash provided by operation was $1.5 million for the first half of fiscal ’21, up from $938,000 in the prior-year period. Total debt including financial leases was $5.7 million, which was reduced approximately by $246,000 in the first half of fiscal ’21 from $6 million at the beginning of the fiscal year. This represents a 4% reduction year-to-date.

Our cash balance on December 31st, 2020 was $5.3 million, down modestly from $5.4 million at the beginning of the fiscal year, even though we reduced debt amid significant investment to increase our production capacity to deliver future revenue growth and increased cash flow.

Finally, on to our backlog. As of December 31st, 2020, LightPath’s total backlog was $23.8 million, an increase of 6% from $22.6 million as of December 31st, 2019 and an increase of 9% from $21.9 million as of June 30th, 2020. Our December 31st 2020 backlog is the highest level in the company’s history. It should be noted that it is natural for our backlog to fluctuate during the year because of the timing of such bookings of large orders and annual renewals.

With this review of our financial highlights and recent developments concluded, I will now turn the call over to the operator so that we may begin with our question-and-answer solution [ph]. Thank you.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Brian Kinstlinger — Alliance Global Partners — Analyst

Hi, good evening, guys. Thanks for taking my questions. Can you talk about the outlook for the 5G buildout in China? And based on your capacity and with the recent investments you’ve made to capacity, do you expect supply will catch up to demand this year or will it be more like next year in terms of the PMO side of the business?

Sam Rubin — President and Chief Executive Officer

Well, we’re seeing a continued demand for 5G in China and a recent growing demand for 5G outside of China. Now, as a reminder, oftentimes, we provide the components to suppliers that could be two or three tiers removed from the final deployment of 5G. And therefore we do not always have the visibility on to where physically or geographically the 5G equipment ends up and to the demand for that end 5G equipment. As of now, we continue to see similar demand from our customers for 5G inside China and growing demand for our customers for 5G related lenses outside China. Nothing is indicating any of that is going change in the near future. And as we noted previously, we typically see such rollouts of a new technology in optical communication to last about four to five years and we’re now about at the beginning of the second year of that rollout.

Brian Kinstlinger — Alliance Global Partners — Analyst

Second part of that question is, I mean, let’s assume or hypothesize that there could be a 30% increase in demand for the number of units. Do you the capacity to meet that? Do you not? I guess from a capacity standpoint, where are you in terms of your investments in need to build out?

Sam Rubin — President and Chief Executive Officer

Yeah. So, definitely. So we’ve been investing in capacity growth and we’re seeing that in the growth of our top line right now. Earlier, about a year ago, the constraint in capacity was on the molding equipment itself, the machines, which we use to make the molding — molded lenses. Later on, it was on some auxiliary equipment such as sorbs and coating and dicing machines. We’ve been investing in both of those.

As of now, while we were able to catch up with the demand at that point from the 5G customers, demand in other areas have been — has been growing again thankfully, and we’re still running at capacity in our molded optics. We’re not turning down any orders, but our lead times for some of the orders that we’re delivering are longer than what we and our customers would want.

We’ve revisited that recently and started another set of investments into molding machines, which will go into effect next quarter or maybe beginning of this quarter we’re in now and into next quarter and then will take a few months until it is actually fully in place and operational.

Brian Kinstlinger — Alliance Global Partners — Analyst

Got it. And then on the infrared side of the business, do the continuing resolution in the government impact order timing on the defense side? And while the December quarter was a difficult comparison, you highlighted given the delays last year that moved in from the first quarter to the second, is this segment a double-digit grower in the near term or is it going to grow a bit slower than that in the near term?

Sam Rubin — President and Chief Executive Officer

Well, the defense is not a fast growing because of the turnaround. If you recall, for most of the defense lenses, which are large lenses, which are CNC per se, those are six to nine months at least. So the growth, double-digit, I think yeah, because we have some of the — we have some good things in the pipeline, but that turn, we will not see until probably a year from now.

Brian Kinstlinger — Alliance Global Partners — Analyst

I’m going to ask one more question and I’ll get back in the queue because I have a few more, but sure others have some questions. Regarding the lower yield, how long do you think it will take for the changes you’ve made to repair the issues and then return to the stronger gross margins in that business? And will the March quarter gross margins look stronger given you highlighted the BD6 materials contributing a higher gross margin?

Sam Rubin — President and Chief Executive Officer

Yeah. So as I mentioned in my notes, there’s at least two areas where we’re seeing those deals, two areas that are significant enough to easily identify, probably a few more that we haven’t reached yet. In those two areas, one of those areas, the team feels fairly confident we will resolve within the two to three months. With the second area, we are not yet down the path enough to know when the solution will be. In either case, it would not be more than a few months. Keep in mind also that some of those products have a production cycle that can last as much as six weeks from beginning to end and with FIFO kind of set up in production, even an impact on solving the problem on the root cause of glass production, for example, won’t actually show up in the cost of materials until at least six weeks later. So the short answer is, possibly we’re aiming for some of that to impact in the quarter ending in March, but definitely by the quarter after that, we should have it under control.

Brian Kinstlinger — Alliance Global Partners — Analyst

Great. I’ll get back in the queue to ask my other questions after others had a chance.

Operator

(Operator Instructions) The next question is from Marc Wiesenberger with B. Riley FBR. Please go ahead.

Marc Wiesenberger — B. Riley FBR — Analyst

Yeah. Thank you. Good afternoon and thanks for taking the question. I believe the company might have had yield issues with IR molding in fiscal — late fiscal ’19 or maybe early fiscal ‘ 20. Are these the same issues that you previously had before? And maybe could you quantify the impact the yield had on COGS this quarter?

Sam Rubin — President and Chief Executive Officer

Yeah. So — good to hear you, Marc. The issues are not the same one as the company had the year or so or a year and a half ago. Back then, it was a step called annealing, which is a step early on in the process of the glass production. Right now the issues we’re having are what — part of them are in the glass production in a slightly different step than for annealing and the more significant ones have been in the coating. And significant ones, the reason why I say significant in coating, because that is really the very last step in the entire length of production. So anything that reaches that step and then gets disqualified because of a damage or yield issue or so on, the entire value of the production effort, all the labor, all the material and everything that went into that gets scrapped with it.

Other parts like annealing and like the problem we’re having right now in the freeform production of glass or much earlier on and so the financial impact of them is lesser while the impact of being able to deliver could be higher. And that’s why last year, and the annealing issue impacted the Q1 deliveries much more significantly, but those deliveries then moved into Q2, but did not have as much of a financial impact. With the coating issues we’ve been experiencing, those have a bigger financial impact because you’re essentially throwing away nearly ready product.

Marc Wiesenberger — B. Riley FBR — Analyst

Understood. That’s really helpful. And just would you be able to quantify kind of is it a 200 or 300 basis point hit to gross margins or where does it stand there?

Sam Rubin — President and Chief Executive Officer

I mean, it’s around anywhere from 2.5% to 3% on the margin roughly.

Donald Retreage — Senior Vice President and Chief Financial Officer

Of the infrared.

Sam Rubin — President and Chief Executive Officer

Of the infrared, roughly.

Marc Wiesenberger — B. Riley FBR — Analyst

Understood. Thank you. You noted in the press release and earlier in the call that the 5G demand remains steady and growing in some other places. So I’m wondering if you could kind of lay out the demand and growth expectations we should see in the fiscal third quarter and maybe for fiscal ’21 in aggregate.

Sam Rubin — President and Chief Executive Officer

Yeah. So I think several times I mentioned in the past, I believe, or at least I wanted to mention if I haven’t, that our goal is to get to double-digit growth. That’s what we would consider a sustainable growth and that’s sort of almost minimum that we expect from the company in a growing segment and growing market such as photonics. We are right now with a — as of now, for the first two quarters, we are at a 13% growth compared to the first two quarters in the last fiscal year and that definitely is a place we’re, I wouldn’t say content with, but we are satisfied reaching this within a fairly short period of time, and I’d want it to stay at least in this level of above 10%.

Marc Wiesenberger — B. Riley FBR — Analyst

Very helpful. Thank you. And I guess, as you look at the business, what parts have gotten back to pre-pandemic levels? What parts are still lagging? And kind of what are some of the expectations for when it will catch up?

Sam Rubin — President and Chief Executive Officer

I’d say items related to some consumer products, but it’s pretty sporadic, it’s not systematic in any way where some customers are still lagging and those customers still hurting. For example, one customer in which our parts go into, products used in elective surgeries, that has not gone back to the levels pre-pandemic. In many other places, it had gone back or remains fairly steady. In some places like the contact temperature measurement, we could see sometimes some spikes, some demand such as recently in China when the number of cases went up, there was another wave of demand for contactless temperature measurement, but not — nothing anywhere near to what we had a year ago. So I think we’re fairly steady for the most part.

Marc Wiesenberger — B. Riley FBR — Analyst

Great. Thank you. And then last one from me. You talked about that this was the initial phase of the facility expansion in Riga and also got some other CapEx plans as well. I think you had mentioned at one point doubling the molding capacity. I guess, are we still on track for that? And what time period there? And if the initial phase has been done in Riga, what are some of the subsequent steps and where should we look to see some of the most proximate CapEx dollars go into? Thank you.

Sam Rubin — President and Chief Executive Officer

Yeah. So in terms of Riga facility, I’d say the initial phase is adding in about roughly half of the capabilities they need in order to satisfy all of their needs for coating. The second half of it is in progress and some of that equipment is on order. We can see that actually in our higher CapEx numbers this quarter, but unfortunately that equipment can — has a very long lead time where some pieces of it as long as a year lead time from the moment of order. And that’s why we have large prepayments for that equipment. I’d say that probably from the moment that equipment arrives, until it’s fully functional, we’d expect the Riga facility to be fully in place in terms of coating by the beginning of our next fiscal year, so meaning end of summer.

In terms of CapEx altogether, Don, do you want to…

Donald Retreage — Senior Vice President and Chief Financial Officer

Yeah. CapEx altogether, Sam, as we stated earlier, the increase — meeting the demands and increasing the cap — the capacity to meet the demands and also to meet the lagging because of some of the issues that we are having on the yield, that delays the product. So we definitely need more machines. As was mentioned also, we’re putting online new molding machines coming up in the next quarter or two. This will not double the capacity in molding, but it will increase the capacity and trying to meet the demand. And again, it’s varied because of the varied size of the lenses. If you’re looking at the $1 lenses, we could easily double those, but as you go up the line, we can’t double them, but we’re definitely increasing the machines. And we see probably an extra $0.5 million to $600,000 compared to the prior years where we were at the 2.5 level.

Marc Wiesenberger — B. Riley FBR — Analyst

Great. Thank you.

Operator

The next question is a follow-up from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Brian Kinstlinger — Alliance Global Partners — Analyst

Great. Can you talk about how customers are responding or receiving LightPath’s message to become an engineering solution partner instead of a supplier? Is there push-back? Is there excitement? Is there some of both?

Sam Rubin — President and Chief Executive Officer

Yeah. So I think one of the — one good examples of that is 75 millimeter assembly I mentioned in my remarks. And that is a US customer that serves the defense industry that came over, has been buying individual components from us, came for a site visit and inspection; during that visit, saw and noticed some of the assemblies we’re putting together. A dialogue started around that. We happened to have a few ready that they could take a look at and measure, and that wowed them enough to decide to replace the existing assembly they have with our assembly and to proactively reach out to us and ask if we would design the assemblies for the optical part of their next two systems. And I think that to me is a great example. It wasn’t — it was very subtle in terms of the sales team and the message. No one was pushing it down their throat in a sense of start buying components from us and you have to start buying solutions, but rather, the customer got to see the value created through that and chose to go down that path. We believe there is far more to do in that direction, although it can be slower in terms of adaptation.

And so in parallel to that, we’re also developing our sales capabilities to proactively go out to customers and offer our engineered solution path and they will be more selective towards customers that we think we can create value to board them. We’re not going to go to a customer that, I’d say, knows optics inside out and doesn’t need our help in designing. There there would be probably a push-back. We would go to the customers that we believe optics is something that they could use better knowledge and experience with and there our offering will be accepted.

Brian Kinstlinger — Alliance Global Partners — Analyst

Thanks. Lastly, for Don responded and gave about 2.5 to 3 points in the margin is the impact of the issues in the yields, can you quantify for the first half of the year on revenue, if you had unlimited capacity if you will and the yield issue didn’t exist, how much revenue was left on the table?

Donald Retreage — Senior Vice President and Chief Financial Officer

That’s hard to give you a number. And the reason for that is, remember on these components, you have a lens there that’s germanium and a lens that’s the new BD6. So that’s kind of hard to split out.

Brian Kinstlinger — Alliance Global Partners — Analyst

I see. Without going to specific numbers, would you have shipped materially more lenses?

Donald Retreage — Senior Vice President and Chief Financial Officer

Yes, for sure.

Brian Kinstlinger — Alliance Global Partners — Analyst

Yeah. So there is an impact on both revenue and margin. Correct?

Donald Retreage — Senior Vice President and Chief Financial Officer

That’s correct.

Sam Rubin — President and Chief Executive Officer

Yeah. And we definitely believe that one — the more efficiencies we put in the operation, just as we saw now by growing to $9.9 million in revenue this quarter, those efficiencies are not only on the costs and bottom line, they also enable us to ship more with the existing capacity and equipment and resources we have.

Brian Kinstlinger — Alliance Global Partners — Analyst

Okay. All right, guys. Thanks so much.

Operator

At this time, we show no additional questions. I’d like to turn the conference back over to Mr. Rubin for any closing remarks.

Sam Rubin — President and Chief Executive Officer

Thank you. Thank you for participating in today’s conference call. We look forward to speaking with you next quarter, but until then, we’re excited to be participating in tomorrow’s Alliance Growth Partners Virtual Emerging Growth Technology Conference. We hope our institutional investors following us will join us at the conference and that all of you continue to follow our progress. Thank you again and goodbye.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.