What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-12 compared with 2022-02-10 · 133 added, 132 removed, 197 unchanged (57% of the section changed)

12 unchanged sentences

Those measures are continuously adjusted in each of our locations, according to local conditions and guidelines.

To date, we have not seen any significant direct negative impact of COVID-19 to our business.

However, the COVID-19 pandemic continues to impact economic conditions, which could impact the short-term and long-term demand from our customers and, therefore, has the potential to negatively impact our results of operations, cash flows, and financial position in the future.

In addition, we saw some increased demand for thermal imaging assemblies for fever detection applications in response to the pandemic.

Such demand has leveled off in recent quarters.

Additionally, some areas have imposed travel restrictions, which may impact some aspects of our operations that depend on travel, such as recruitment of senior positions, and travel of service providers to maintain our production equipment.

The duration of the COVID-19 pandemic continues to impact global economic conditions, even as restrictions have lifted in many places throughout the world.

Currently, China continues to experience rolling COVID-19 lockdowns in efforts to mitigate the spread of COVID-19.

These lockdowns are resulting in global supply chain issues.

To date, our facilities have not been directly impacted by these lockdowns;

however, many of our customers located in China have delayed receipt of orders while the customers are closed for business.

Even though these customers have not cancelled any orders with us, the delayed receipt of orders has impacted our revenue and we expect it to continue to impact our revenue in future periods while China has these rolling lockdowns.

Additionally, some areas, such as China, have imposed travel restrictions, which may impact some aspects of our operations that depend on travel, such as recruitment of senior positions, and travel of service providers to maintain our production equipment.

Management is actively monitoring this situation and any impact on our financial condition, liquidity, and results of operations.

57 unchanged sentences

Results of Operations

Three months ended December 31, 2021, compared to three months ended December 31, 2020

Revenue for the second quarter of fiscal 2022 was approximately $9.2 million, a decrease of approximately $679,000, or 7%, as compared to approximately $9.9 million in the same period of the prior fiscal year.

Revenue generated by infrared products was approximately $5.1 million in the second quarter of fiscal 2022, an increase of approximately $267,000, or 6%, as compared to approximately $4.8 million in the same period of the prior fiscal year.

The increase in revenue generated by infrared products is primarily driven by sales to customers in the industrial and defense markets.

Revenue generated by PMO products was approximately $3.8 million for the second quarter of fiscal 2022, a decrease of approximately $980,000, or 21%, as compared to approximately $4.7 million in the same period of the prior fiscal year.

As discussed in recent prior quarters, the decrease in sales of PMO products was a result of both our largest telecommunications customer decreasing their orders, and a temporary decrease in our domestic sales in China due to the transition of our management team in China.

While sales of products for the telecommunications market continue to be lower as we replace them with sales of products for other markets, our domestic sales in China have partially recovered, as previously demonstrated by sequential growth of 30% in our PMO sales from the fourth quarter of fiscal 2021 to the first quarter of fiscal 2022.

PMO sales for the second quarter of fiscal 2022 maintained a similar level as compared to the first quarter of fiscal 2022.

These decreases were partially offset by an increase in sales through our catalog and distribution channels, as well as increases in sales to customers in the industrial and medical industries.

Revenue generated by our specialty products was approximately $406,000 in the second quarter of fiscal 2022, an increase of approximately $34,000, or 9%, compared to $372,000 in the same period of the prior fiscal year.

This increase is primarily due to NRE projects for customers in the commercial and defense industries during the second quarter of fiscal 2022.

Six months ended December 31, 2021, compared to six months ended December 31, 2020

Revenue for the first half of fiscal 2022 was approximately $18.3 million, a decrease of approximately $1.1 million, or 6%, as compared to approximately $19.4 million in the same period of the prior fiscal year.

Revenue generated by infrared products was approximately $10.0 million in the first half of fiscal 2022, an increase of approximately $430,000, or 5%, as compared to approximately $9.5 million in the same period of the prior fiscal year.

The increase in revenue is primarily driven by sales to customers in the industrial market.

Revenue generated by PMO products was approximately $7.6 million for the first half of fiscal 2022, a decrease of approximately $1.5 million, or 16%, as compared to approximately $9.0 million in the same period of the prior fiscal year.

As previously discussed, PMO sales for the first and second quarters of fiscal 2022 demonstrate partial recovery as compared to the fourth quarter of fiscal 2021.

The decreases in telecommunications and other domestic sales in China were partially offset by an increase in sales through our catalog and distribution channels, as well as increases in sales to customers in the industrial and commercial industries.

Revenue generated by our specialty products was approximately $808,000 in the first half of fiscal 2022, a decrease of approximately $54,000, or 6%, compared to $862,000 in the same period of the prior fiscal year.

This decrease is primarily related to sales of custom specialty products during the first half of fiscal 2021, which orders did not repeat in the first half of fiscal 2022.

This decrease was partially offset by an increase in NRE projects for customers in the commercial and defense industries, particularly in the second quarter of fiscal 2022.

Three months ended March 31, 2022, compared to three months ended March 31, 2021

Revenue for the third quarter of fiscal 2022 was approximately $8.3 million, a decrease of approximately $2.4 million, or 22%, as compared to approximately $10.7 million in the same period of the prior fiscal year.

Revenue generated by infrared products was approximately $3.7 million in the third quarter of fiscal 2022, a decrease of approximately $2.7 million, or 42%, as compared to approximately $6.5 million in the same period of the prior fiscal year.

The decrease in revenue from sales of infrared products is primarily due to a decrease in sales to customers in the industrial market, for temperature sensing applications, for which demand peaked during the third quarter of fiscal 2021.

The decrease is also partially due to lower revenue from a large annual contract which was renewed in the second quarter of fiscal 2022.

Revenue generated by PMO products was approximately $4.0 million for the third quarter of fiscal 2022, an increase of approximately $128,000, or 3%, as compared to approximately $3.9 million in the same period of the prior fiscal year.

The increase is driven by sales through catalog and distribution channels, as well as increases in sales to customers in the industrial market.

Sales of PMO products in China have improved sequentially each quarter of fiscal 2022, driven in part by other telecommunications customers, as well as increased sales to customers in the industrial and commercial industries.

This improvement partially offset decreases in sales of PMO products to a large customer beginning in the third quarter of fiscal 2021.

Revenue generated by our specialty products was approximately $547,000 in the third quarter of fiscal 2022, an increase of approximately $213,000, or 64%, compared to $334,000 in the same period of the prior fiscal year.

This increase is primarily due to NRE projects for customers in the industrial and defense industries during the third quarter of fiscal 2022.

Nine months ended March 31, 2022, compared to nine months ended March 31, 2021

Revenue for the first nine months of fiscal 2022 was approximately $26.7 million, a decrease of approximately $3.5 million, or 12%, as compared to approximately $30.1 million in the same period of the prior fiscal year.

Revenue generated by infrared products was approximately $13.7 million in the first nine months of fiscal 2022, a decrease of approximately $2.3 million, or 14%, as compared to approximately $16.0 million in the same period of the prior fiscal year.

The decrease in revenue is primarily driven by a decrease in sales to customers in the industrial market.

Revenue generated by PMO products was approximately $11.6 million for the first nine months of fiscal 2022, a decrease of approximately $1.3 million, or 10%, as compared to approximately $12.9 million in the same period of the prior fiscal year.

As previously discussed, PMO sales for the first nine months of fiscal 2022 demonstrate sequential recovery as compared to the fourth quarter of fiscal 2021.

The decreases in telecommunications and other domestic sales in China were partially offset by an increase in sales through catalog and distribution channels, as well as increases in sales to customers in the industrial and commercial industries.

Although sales of PMO products in China have improved sequentially each quarter of fiscal 2022, these sales are still lower as compared to the first three quarters of fiscal 2021.

Revenue generated by our specialty products was approximately $1.4 million in the first nine months of fiscal 2022, an increase of approximately $158,000, or 13%, compared to $1.2 million in the same period of the prior fiscal year.

This increase is primarily driven by an increase in NRE projects for customers in the commercial and defense industries.

Cost of Sales and Gross Margin

Three months ended December 31, 2021, compared to three months ended December 31, 2020

Gross margin in the second quarter of fiscal 2022 was approximately $2.8 million, a decrease of 23%, as compared to approximately $3.6 million in the same period of the prior fiscal year.

Total cost of sales was approximately $6.4 million for the second quarter of fiscal 2022, compared to approximately $6.3 million for the same period of the prior fiscal year.

Gross margin as a percentage of revenue was 30% for the second quarter of fiscal 2022, compared to 37% for the same period of the prior fiscal year.

The decrease in gross margin as a percentage of revenue is primarily due to the mix of products sold in each respective period.

Infrared products, which typically have lower margins than our PMO products, comprised 55% of revenue for the second quarter of fiscal 2022, as compared to 48% of revenue for the second quarter of fiscal 2021.

In addition, infrared product sales for the second quarter of fiscal 2022 primarily consisted of non-molded infrared products, which typically have lower margins than molded infrared products.

Three months ended March 31, 2022, compared to three months ended March 31, 2021

Gross margin in the third quarter of fiscal 2022 was approximately $3.0 million, a decrease of 22%, as compared to approximately $3.9 million in the same period of the prior fiscal year.

Total cost of sales was approximately $5.3 million for the third quarter of fiscal 2022, compared to approximately $6.8 million for the same period of the prior fiscal year.

Gross margin as a percentage of revenue was 37% for the third quarter of fiscal 2022, compared to 36% for the same period of the prior fiscal year.

The increase in gross margin as a percentage of revenue is primarily due to the mix of products sold in each respective period.

PMO products, which typically have higher margin than infrared products, comprised 49% of revenue for the third quarter of fiscal 2022, as compared to 36% of revenue for the third quarter of fiscal 2021, whereas infrared products comprised 45% of revenue for the third quarter of fiscal 2022, as compared to 60% of revenue for the third quarter of fiscal 2021.

This favorable change in mix resulted in slightly higher gross margin as a percentage of revenue, despite the significantly lower revenue level in the third quarter of fiscal 2022, as compared to the third quarter of fiscal 2021.

Nine months ended March 31, 2022, compared to nine months ended March 31, 2021

Gross margin in the first nine months of fiscal 2022 was approximately $9.0 million, a decrease of 21%, as compared to approximately $11.4 million in the same period of the prior fiscal year.

Total cost of sales was approximately $17.6 million for the first nine months of fiscal 2022, compared to approximately $18.7 million for the same period of the prior fiscal year.

Gross margin as a percentage of revenue was 34% for the first nine months of fiscal 2022, compared to 38% for the same period of the prior fiscal year.

Although the product mix is similar for PMO and infrared products for the first nine months of fiscal 2022, as compared to the first nine months of fiscal 2021, the gross margin as a percentage of revenue is unfavorably impacted by the 12% decrease in revenue, which resulted in under-utilized capacity in some areas.

Infrared product margins also reflect increased costs associated with the completion of the coating department in our Riga Facility, which will improve over time as that facility works through the qualification stages and begins to produce at volume.

Six months ended December 31, 2021, compared to six months ended December 31, 2020

Gross margin in the first half of fiscal 2022 was approximately $6.0 million, a decrease of 20%, as compared to approximately $7.5 million in the same period of the prior fiscal year.

Total cost of sales was approximately $12.4 million for the first half of fiscal 2022, compared to approximately $12.0 million for the same period of the prior fiscal year.

Gross margin as a percentage of revenue was 33% for the first half of fiscal 2022, compared to 38% for the same period of the prior fiscal year.

The decrease in gross margin as a percentage of revenue is primarily due to the mix of products sold in each respective period.

Infrared products, which typically have lower margins than our PMO products, comprised 54% of revenue for the first half of fiscal 2022, as compared to 49% of revenue for the first half of fiscal 2021.

Gross margins for newer infrared products have begun to improve in comparison to prior periods, as we move past some of the traditional start-up inefficiencies of new lenses moving into the volume production stage.

The yield issues previously experienced in connection with BD6 coatings were resolved during the first quarter of fiscal 2022, which has begun to decrease our costs for those products.

We continue to see progress toward bringing our manufacturing efficiencies on these new products to a level similar to our existing products, particularly as we begin to further utilize the new coating chambers added to the Riga Facility.

Selling, General and Administrative

Three months ended December 31, 2021, compared to three months ended December 31, 2020

Selling, general and administrative (“SG&A”) costs were approximately $2.9 million for the second quarter of fiscal 2022, an increase of approximately $184,000, or 7%, as compared to approximately $2.8 million in the same period of the prior fiscal year.

This increase is primarily due to approximately $153,000 of expenses incurred in the second quarter of fiscal 2022 associated with the previously described events that occurred at our Chinese subsidiaries, including legal and consulting fees.

Three months ended March 31, 2022, compared to three months ended March 31, 2021

Selling, general and administrative (“SG&A”) costs were approximately $2.6 million for the third quarter of fiscal 2022, a decrease of approximately $187,000, or 7%, as compared to approximately $2.8 million in the same period of the prior fiscal year.

The decrease in SG&A costs is primarily due to a decrease of approximately $149,000 of expenses associated with the previously described events that occurred at our Chinese subsidiaries, including legal and consulting fees.

Please refer to Note 13, Contingencies , in the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information.

In addition, it was determined that one of our Chinese subsidiaries is obligated to pay $248,000 in VAT and related taxes from prior years, which was accrued during the three months ended December 31, 2021.

The remaining increase in SG&A costs, as compared to the same period of the prior fiscal year, is due to increases in personnel-related costs and a moderate increase in travel expenses as COVID-19 restrictions are reduced.

These increases were partially offset by the absence of approximately $400,000 of non-recurring additional compensation to our former Chief Executive Officer, which was included in SG&A for the second quarter of fiscal 2021, and previously disclosed in the Current Report on Form 8-K filed with the SEC on November 18, 2020.

Six months ended December 31, 2021, compared to six months ended December 31, 2020

For the first half of fiscal 2022, SG&A costs were approximately $5.8 million, an increase of approximately $612,000, or 12%, as compared to approximately $5.2 million in the same period of the prior fiscal year.

The increase is primarily due to approximately $481,000 of expenses incurred associated with the previously described events that occurred at our Chinese subsidiaries, including legal and consulting fees.

The remaining decrease in SG&A costs, as compared to the same period of the prior fiscal year, is due to decreases in non-recurring personnel-related costs incurred in the third quarter of the prior fiscal year.

Nine months ended March 31, 2022, compared to nine months ended March 31, 2021

For the first nine months of fiscal 2022, SG&A costs were approximately $8.4 million, an increase of approximately $426,000, or 5%, as compared to approximately $8.0 million in the same period of the prior fiscal year.

The increase in SG&A costs is primarily due to an increase of approximately $380,000 of expenses incurred associated with the previously described events that occurred at our Chinese subsidiaries, including legal and consulting fees, as compared to the same period of the prior fiscal year.

Please refer to Note 13, Contingencies , in the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information.

In addition, SG&A costs for the first half of fiscal 2022 include the aforementioned $248,000 of VAT and related taxes owed by one of our Chinese subsidiaries from prior years.

The remaining increase in SG&A costs, as compared to the same period of the prior fiscal year, is due to increases in personnel-related costs associated with a moderate increase in headcount.

In addition, SG&A costs for the first nine months of fiscal 2022 include certain VAT and related taxes owed by one of our Chinese subsidiaries from prior years, which was identified and settled during the first nine months of fiscal 2022.

These increases were partially offset by the absence of approximately $400,000 of non-recurring additional compensation to our former Chief Executive Officer which was included in SG&A for the second quarter of fiscal 2021, and previously disclosed in the Current Report on Form 8-K filed with the SEC on November 18, 2020.

New Product Development

New product development costs were approximately $552,000 in the second quarter of fiscal 2022, an increase of approximately $22,000, or 4%, as compared to the same period of the prior fiscal year.

This increase is primarily due to personnel-related costs.

New product development costs were approximately $979,000 in the first half of fiscal 2022, nearly the same as the $980,000 expended in the same period of the prior fiscal year.

New product development costs were approximately $590,000 in the third quarter of fiscal 2022, a decrease of approximately $50,000, or 8%, as compared to the same period of the prior fiscal year.

For the first nine months of fiscal 2022, new product development costs were approximately $1.6 million, a decrease of $51,000 as compared to the same period of the prior fiscal year.

The decreases are primarily due to timing of certain development project expenses, for which costs were higher in the prior fiscal year periods.

Other Income (Expense)

Interest expense, net, was approximately $50,000 for the second quarter of fiscal 2022, as compared to $55,000 for the same period of the prior fiscal year.

For the first half of fiscal 2022, interest expense, net, was approximately $96,000, as compared to $114,000 for the same period of the prior fiscal year.

The decrease in interest expense is due to lower interest rates and a reduction in our total debt of 18% as of the quarter ended December 31, 2021, as compared to the quarter ended December 31, 2020.

Other income, net, was approximately $11,000 for the second quarter of fiscal 2022, as compared to $93,000 for the same period of the prior fiscal year.

Other income and expenses are primarily comprised of net gains losses on foreign exchange transactions.

For the first half of fiscal 2022, other expense, net was approximately $40,000, as compared to other income, net, of $6,000 for the same period of the prior fiscal year.

Interest expense, net, was approximately $55,000 for the third quarter of fiscal 2022, as compared to $53,000 for the same period of the prior fiscal year.

For the first nine months of fiscal 2022, interest expense, net, was approximately $151,000, as compared to $166,000 for the same period of the prior fiscal year.

The decrease in interest expense is due to lower interest rates and a reduction in our total debt of 18% as of the quarter ended March 31, 2022, as compared to the quarter ended March 31, 2021.

Other income, net, was approximately $180,000 for the third quarter of fiscal 2022, as compared to other expense, net, of $29,000 for the same period of the prior fiscal year.

For the first nine months of fiscal 2022, other income, net was approximately $140,000, as compared to other expense, net, of $23,000 for the same period of the prior fiscal year.

Other expense, net, for the third quarter and the first nine months of fiscal 2022 includes a benefit of $210,000, which represents the reversal of a potential liability related to the actions of the terminated employees of our subsidiaries in China, as previously discussed.

This potential liability was accrued as of June 30, 2021, pending further investigation, and it was determined in the third quarter of fiscal 2022 that our Chinese subsidiary would not be responsible for this amount.

The remainder of other income and expenses are primarily comprised of net gains losses on foreign exchange transactions.

We execute all foreign sales from our U.S.

2 unchanged sentences

Assets and liabilities denominated in non-United States currencies, primarily the Chinese Yuan and Euro, are translated at rates of exchange prevailing on the balance sheet date, and revenues and expenses are translated at average rates of exchange for the year.

During the second quarter of fiscal 2022, we incurred net foreign currency transaction losses of approximately $14,000, compared to net foreign currency transaction gains of $77,000 for the same period of the prior fiscal year.

During the first half of fiscal 2022, we incurred net foreign currency transaction losses of $40,000, as compared to $21,000 for the same period of the prior fiscal year.

During the second quarter of fiscal 2022, income tax expense was approximately $35,000, compared to approximately $241,000 for the same period of the prior fiscal year.

During the first half of fiscal 2022, income tax expense was approximately $165,000, as compared to $676,000 in the same period of the prior fiscal year.

During the third quarter of fiscal 2022, we incurred net foreign currency transaction losses of approximately $67,000, compared to $17,000 for the same period of the prior fiscal year.

During the first nine months of fiscal 2022, we incurred net foreign currency transaction losses of $107,000, as compared to $38,000 for the same period of the prior fiscal year.

During the third quarter of fiscal 2022, income tax expense was approximately $163,000, compared to approximately $308,000 for the same period of the prior fiscal year.

During the first nine months of fiscal 2022, income tax expense was approximately $328,000, as compared to $984,000 in the same period of the prior fiscal year.

Income tax expense is primarily related to income taxes from our operations in China, including estimated Chinese withholding taxes associated with intercompany dividends declared by LPOIZ and payable to us as its parent company.

The decrease is due to lower taxable income in that jurisdiction.

Net loss for the second quarter of fiscal 2022 was approximately $1.1 million, or $0.04 basic and diluted loss per share, compared to $147,000, or $0.01 basic and diluted loss per share, for the second quarter of fiscal 2021.

The decrease in net income for the second quarter of fiscal 2022, as compared to the same period of the prior fiscal year, was primarily attributable to lower gross margin and higher SG&A expenses, including expenses incurred related to the previously described events that occurred in our Chinese subsidiaries.

The resulting decrease in operating income was partially offset by a decrease in the provision for income taxes of approximately $206,000, as compared to the same period of the prior fiscal year.

Net loss for the first half of fiscal 2022 was approximately $1.7 million, or $0.06 basic and diluted loss per share, compared to $49,000, or $0.00 basic and diluted loss per share, for the first half of fiscal 2021.

The decrease in net income for the first half of fiscal 2022, as compared to the same period of the prior fiscal year, was primarily attributable to lower gross margin and increased SG&A expenses, including expenses incurred related to the previously described events that occurred in our Chinese subsidiaries.

The resulting decrease in operating income was partially offset by a decrease in the provision for income taxes of approximately $510,000, as compared to the same period of the prior fiscal year.

Weighted-average common shares outstanding were 27,008,748, basic and diluted, in the second quarter of fiscal 2022, compared to 26,117,239, basic and diluted, in the second quarter of fiscal 2021.

Weighted-average common shares outstanding were 27,001,360, basic and diluted, in the first half of fiscal 2022, compared to 26,049,750, basic and diluted, in the first half of fiscal 2021.

Net loss for the third quarter of fiscal 2022 was approximately $495,000, or $0.02 basic and diluted loss per share, compared to $223,000, or $0.01 basic and diluted loss per share, for the third quarter of fiscal 2021.

The decrease in net income for the third quarter of fiscal 2022, as compared to the same period of the prior fiscal year, was primarily attributable to lower revenue and gross margin, partially offset by lower operating expenses.

The resulting decrease in operating income was partially offset by the aforementioned other income item of $210,000, and a decrease in the provision for income taxes of approximately $145,000, as compared to the same period of the prior fiscal year.

Net loss for the first nine months of fiscal 2022 was approximately $2.2 million, or $0.08 basic and diluted loss per share, compared to $272,000, or $0.01 basic and diluted loss per share, for the first nine months of fiscal 2021.

The decrease in net income for the first nine months of fiscal 2022, as compared to the same period of the prior fiscal year, was primarily attributable to lower revenue and gross margin and increased SG&A expenses, including expenses incurred related to the previously described events that occurred in our Chinese subsidiaries.

The resulting decrease in operating income was partially offset by the aforementioned other income item of $210,000, and a decrease in the provision for income taxes of approximately $655,000, as compared to the same period of the prior fiscal year.

Weighted-average common shares outstanding were 27,033,578, basic and diluted, in the third quarter of fiscal 2022, compared to 26,366,651, basic and diluted, in the third quarter of fiscal 2021.

Weighted-average common shares outstanding were 27,011,943, basic and diluted, in the first nine months of fiscal 2022, compared to 26,153,839, basic and diluted, in the first nine months of fiscal 2021.

The increase in the weighted-average basic common shares was due to the issuance of shares of Class A common stock (i) under the 2014 ESPP, (ii) upon the exercises of stock options, and (iii) underlying vested RSUs.

Liquidity and Capital Resources

As of December 31, 2021, we had working capital of approximately $11.0 million and total cash and cash equivalents of approximately $5.1 million, of which, greater than 50% of our cash and cash equivalents was held by our foreign subsidiaries.

As of March 31, 2022, we had working capital of approximately $11.0 million and total cash and cash equivalents of approximately $5.2 million, of which, greater than 50% of our cash and cash equivalents was held by our foreign subsidiaries.

Cash and cash equivalents held by our foreign subsidiaries in China and Latvia were generated in-country as a result of foreign earnings.

5 unchanged sentences

In China, before any funds can be repatriated, the retained earnings of the legal entity must equal at least 50% of the registered capital.

We repatriated approximately $1.8 million and $2 million from LPOIZ during the six-month periods ended December 31, 2021 and 2020, respectively.

As of December 31, 2021, LPOIZ had approximately $5.2 million available for repatriation and LPOI did not have any earnings available for repatriation, based on earnings accumulated through December 31, 2021, the end of the most recent statutory tax year, that remained undistributed as of December 31, 2021.

We repatriated approximately $2.2 million and $3.0 million from LPOIZ during the nine-month periods ended March 21, 2022 and 2021, respectively.

As of March 31, 2022, LPOIZ had approximately $4.8 million available for repatriation and LPOI did not have any earnings available for repatriation, based on earnings accumulated through December 31, 2021, the end of the most recent statutory tax year, that remained undistributed as of March 31, 2022.

Loans payable consists of the BankUnited Term Loan and the BankUnited Revolving Line, both pursuant to the Amended Loan Agreement, and the subordinated Equipment Loan.

As of December 31, 2021, the outstanding balance on the BankUnited Term Loan was approximately $4.2 million, and there were no borrowings outstanding on the BankUnited Revolving Line.

The outstanding balance on the Equipment Loan was approximately $435,000 as of December 31, 2021.

As of March 31, 2022, the outstanding balance on the BankUnited Term Loan was approximately $4.1 million, and there were no borrowings outstanding on the BankUnited Revolving Line.

The outstanding balance on the Equipment Loan was approximately $400,000 as of March 31, 2022.

The Amended Loan Agreement and the Letter Agreement includes certain customary covenants.

As of December 31, 2021, we obtained a waiver of compliance for both the fixed charge coverage ratio and total leverage ratio, and we were in compliance with all other covenants, as amended.

As of March 31, 2022, we obtained a waiver of compliance for both the fixed charge coverage ratio and total leverage ratio, and we were in compliance with all other covenants, as amended.

For additional information, see Note 11, Loans Payable , to the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

In February 2022, we filed a shelf registration statement to facilitate the issuance of our Class A common stock, warrants exercisable for shares of our Class A common stock, and/or units up to an aggregate offering price of $75.8 million from time to time.

In connection with the filing of the shelf registration statement, we also included a prospectus supplement relating to an at-the-market equity program under which we may issue and sell shares of our Class A common stock up to an aggregate offering price of $25.2 million from time to time, decreasing the aggregate offering price available under our shelf registration statement to $50.6 million.

The shelf registration statement was declared effective by the SEC on March 1, 2022.

We have not issued any shares of our Class A common stock pursuant to the at-the-market equity program.

We generally rely on cash from operations and equity and debt offerings, to the extent available, to satisfy our liquidity needs and to maintain our ability to repay the BankUnited Term Loan.

7 unchanged sentences

Cash Flows – Operating:

Cash used in operations was approximately $157,000 for the first half of fiscal 2022, compared to cash provided by operations of approximately $1.5 million for the same period of the prior fiscal year.

The decrease in cash flows from operations during the first half of fiscal 2022 is due to the decrease in net income and a decrease in accounts payable and accrued liabilities, partially offset by a reduction in inventory.

The decrease in accounts payable and accrued liabilities was primarily due to the previously described events that occurred at our Chinese subsidiaries, for which certain expenses were accrued as of June 30, 2021, many of which were paid during the first half of fiscal 2022, as well as payment of certain bonuses earned by our executive officers and other employees during fiscal 2021 and the first installment payment of payroll taxes deferred in fiscal 2020 under the CARES act.

Cash provided by operations was approximately $352,000 for the first nine months of fiscal 2022, compared to approximately $3.1 million for the same period of the prior fiscal year.

The decrease in cash flows from operations during the first nine months of fiscal 2022 is due to the decrease in net income and a decrease in accounts payable and accrued liabilities, partially offset by a reduction in inventory.

The decrease in accounts payable and accrued liabilities was primarily due to the previously described events that occurred at our Chinese subsidiaries, for which certain expenses were accrued as of June 30, 2021, many of which were paid during the first nine months of fiscal 2022, as well as payment of certain bonuses earned by our executive officers and other employees during fiscal 2021 and the first installment payment of payroll taxes deferred in fiscal 2020 under the Coronavirus Aid, Relief, and Economic Security Act.

Cash Flows – Investing:

During the first half of fiscal 2021, we expended approximately $1.3 million in investments in capital equipment, compared to approximately $2.2 million in the same period of the prior fiscal year.

The majority of our capital expenditures during the first half of fiscal 2022 were related to the continued expansion of our infrared coating capacity as well as increasing our lens diamond turning capacity to meet current and forecasted demand.

During the first nine months of fiscal 2021, we expended approximately $1.5 million in investments in capital equipment, compared to approximately $2.7 million in the same period of the prior fiscal year.

The majority of our capital expenditures during the first nine months of fiscal 2022 were related to the continued expansion of our infrared coating capacity as well as increasing our lens diamond turning capacity to meet current and forecasted demand.

Overall, we anticipate that the level of capital expenditures during fiscal 2022 will be less than fiscal 2021, however, the total amount expended will depend on opportunities and circumstances.

Cash Flows – Financings:

Net cash used in financing activities was approximately $243,000 for the first half of fiscal 2022, compared to approximately $116,000 in the same period of the prior fiscal year.

Cash used in financing activities for the first half of fiscal 2022 reflects approximately $470,000 in principal payments on our loans and finance leases, loan costs of approximately $61,000 associated with the restructure of the BankUnited Term Loan, offset by proceeds of approximately $267,000 from the Equipment Loan, and approximately $22,000 in proceeds from the sale of Class A common stock under the 2014 ESPP.

Cash used in financing activities for the first half of fiscal 2021 reflects approximately $531,000 in principal payments on our loans and capital leases, offset by proceeds of approximately $275,000 from the Equipment Loan, and approximately $140,000 in proceeds from the exercise of stock options and the sale of Class A common stock under the 2014 ESPP.

Net cash used in financing activities was approximately $425,000 for the first nine months of fiscal 2022, compared to approximately $313,000 in the same period of the prior fiscal year.

Cash used in financing activities for the first nine months of fiscal 2022 reflects approximately $682,000 in principal payments on our loans and finance leases and loan costs of approximately $61,000 associated with the restructure of the BankUnited Term Loan, offset by proceeds of approximately $267,000 from the Equipment Loan and approximately $52,000 in proceeds from the sale of Class A common stock under the 2014 ESPP.

Cash used in financing activities for the first nine months of fiscal 2021 reflects approximately $761,000 in principal payments on our loans and capital leases, offset by proceeds of approximately $275,000 from the Equipment Loan, and approximately $173,000 in proceeds from the exercise of stock options and the sale of Class A common stock under the 2014 ESPP.

Contractual Obligations and Commitments

As of December 31, 2021, our principal commitments consisted of obligations under operating and finance leases, and debt agreements.

No material changes occurred during the first six months of fiscal 2022 in our contractual cash obligations to repay debt or to make payments under operating and finance leases, or in our contingent liabilities as disclosed in our Annual Report on Form 10-K for the year ended June 30, 2021.

As of March 31, 2022, our principal commitments consisted of obligations under operating and finance leases, and debt agreements.

No material changes occurred during the first nine months of fiscal 2022 in our contractual cash obligations to repay debt or to make payments under operating and finance leases, or in our contingent liabilities as disclosed in our Annual Report on Form 10-K for the year ended June 30, 2021.

Off Balance Sheet Arrangements

1 unchanged sentence

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates during the six months ended December 31, 2021 from those disclosed in Item 7.

There have been no material changes to our critical accounting policies and estimates during the nine months ended March 31, 2022 from those disclosed in Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended June 30, 2021.

34 unchanged sentences

Generally, a higher total backlog is better for us.

Our total backlog at December 31, 2021 was approximately $21.9 million, a decrease of 8%, as compared to $23.8 million as of December 31, 2020.

Compared to the end of fiscal 2021, our total backlog increased by 3% during the first half of fiscal 2022.

Our total backlog at March 31, 2022 was approximately $19.7 million, an increase of 1%, as compared to $19.5 million as of March 31, 2021.

Compared to the end of fiscal 2021, our total backlog decreased by 8% during the first nine months of fiscal 2022.

Backlog change rates for the last five fiscal quarters are:

Prior Year End

The increase in our backlog from the first quarter of fiscal 2022 to the second quarter of fiscal 2022 was largely due to the renewal of a large annual contract for infrared products during the second quarter, which we will begin shipping against in the third quarter of fiscal 2022, after shipments against the previous contract are completed.

The timing of this renewal is similar to prior fiscal years, however the dollar value of the new annual contract is less than the prior year contract, which is the primary driver of the decrease in backlog as of December 31, 2021 as compared to December 31, 2020.

The lower dollar value is the result of a strategic decision to bid on fewer, higher-value items.

Backlog levels may increase substantially when annual and multi-year orders are received, and the total backlog is subsequently drawn down as shipments are made against these orders.

Total Backlog

Change From Prior Year End

Change From Prior Quarter End

The decrease in backlog during the first nine months of fiscal 2022 was largely due to timing of the renewal of a large annual contract for infrared products.

Consistent with prior years, we received the renewal of this contract in the fiscal second quarter, and began shipping against this contract in the fiscal third quarter.

The timing of other contract renewals may not be as consistent and, thus, backlog levels may increase substantially when annual and multi-year orders are received, and the total backlog is subsequently drawn down as shipments are made against these orders.

Our annual and multi-year contracts are expected to renew in future quarters.

We continue to experience a growing demand for infrared products used in the industrial, defense and first responder sectors.

Markets continue to experience growing demand for infrared products used in the industrial, defense and first responder sectors.

Demand for infrared products continues to be fueled by interest in lenses made with our new BD6 material.

With the global supply of germanium currently sourced from Russia and China, recent global events are generating renewed interest in BD6 as an alternative to germanium.

We expect to maintain moderate growth in our visible PMO product group by continuing to diversify and offer new applications, with a cost competitive structure;

4 unchanged sentences

Revenue Dollars and Units by Product Group

The following table sets forth revenue dollars and units for our three product groups for the three and six-month periods ended December 31, 2021 and 2020:

The following table sets forth revenue dollars and units for our three product groups for the three and nine-month periods ended March 31, 2022 and 2021:

Three Months Ended

Six Months Ended

Nine Months Ended March 31,

Infrared Products

3 unchanged sentences

Specialty Products

Three months ended December 31, 2021

Our revenue decreased by approximately $679,000 for the second quarter of fiscal 2022, as compared to the same period of the prior fiscal year, primarily due to a decrease in PMO product sales, partially offset by an increase in infrared product sales.

Revenue generated by the PMO product group during the second quarter of fiscal 2022 was $3.8 million, a decrease of approximately $980,000, or 21%, as compared to the same period of the prior fiscal year.

The decrease in revenue is primarily attributed to a reduction in orders from a key customer in the telecommunications market, due to a decrease in that customer’s market share.

This decrease was partially offset by an increase in sales through our catalog and distribution channels, as well as increases in sales to customers in the industrial and commercial industries.

Three months ended March 31, 2022

Our revenue decreased by approximately $2.4 million, for the third quarter of fiscal 2022, as compared to the same period of the prior fiscal year, primarily due to a decrease in infrared product sales, partially offset by an increase in PMO product sales.

Revenue generated by the PMO product group during the third quarter of fiscal 2022 was $4.0 million, an increase of approximately $128,000, or 3%, as compared to the same period of the prior fiscal year.

The increase is driven by sales through catalog and distribution channels, as well as increases in sales to customers in the industrial market, partially offset by a reduction in orders from a key customer in the telecommunications market, due to a decrease in that customer’s market share.

Sales of PMO units decreased by 14%, as compared to the same period of the prior fiscal year, and average selling prices increased by 20%.

The volume decrease was largely driven by a lower mix of telecommunications products, which typically have lower average selling prices.

The unit volume for telecommunications products decreased by approximately 66% for the second quarter of fiscal 2022, as compared to the same period of the prior fiscal year.

Revenue generated by the infrared product group during the second quarter of fiscal 2022 was $5.1 million, an increase of approximately $267,000, or 6%, as compared to the same period of the prior fiscal year.

The increase in revenue is primarily driven by sales to customers in the industrial and defense markets.

During the second quarter of fiscal 2022, sales of infrared units were similar to the prior year period.

In the second quarter of fiscal 2022, our specialty products revenue increased by $34,000, or 9%, as compared to the same period of the prior fiscal year, primarily due to NRE projects for customers in the commercial and defense industries during the second quarter of fiscal 2022.

Six months ended December 31, 2021

Our revenue decreased by approximately $1.1 million for the first half of fiscal 2022, as compared to the same period of the prior fiscal year, primarily due to a decrease in PMO product sales, partially offset by an increase in infrared product sales.

Revenue generated by the PMO product group during the first half of fiscal 2022 was $7.6 million, a decrease of approximately $1.5 million, or 16%, as compared to the same period of the prior fiscal year.

The unit volume for telecommunications products decreased by approximately 44% for the third quarter of fiscal 2022, as compared to the same period of the prior fiscal year.

Revenue generated by the infrared product group during the third quarter of fiscal 2022 was $3.7 million, a decrease of approximately $2.7 million, or 42%, as compared to the same period of the prior fiscal year.

The decrease in revenue from sales of infrared products is primarily due to a decrease in sales to customers in the industrial market for temperature sensing applications, for which demand peaked during the third quarter of fiscal 2021.

During the third quarter of fiscal 2022, sales of infrared units decreased by 49%, as compared to the prior year period.

The decrease in units is due primarily due to the mix of products shipped, as the prior year period included more molded infrared lenses which are lower in volume and higher in price than the larger diamond-turned lenses.

In the third quarter of fiscal 2022, our specialty products revenue increased by $213,000, or 64%, as compared to the same period of the prior fiscal year, primarily due to NRE projects for customers in the industrial and defense industries during the third quarter of fiscal 2022.

Nine months ended March 31, 2022

Our revenue decreased by approximately $3.5 million for the first nine months of fiscal 2022, as compared to the same period of the prior fiscal year, due to decreases in both PMO and infrared product sales.

Revenue generated by the PMO product group during the first nine months of fiscal 2022 was $11.6 million, a decrease of approximately $1.3 million, or 10%, as compared to the same period of the prior fiscal year.

The decrease in revenue is primarily attributed to a reduction in orders from a key customer in the telecommunications market, due to a decrease in that customer’s market share.

This decrease was partially offset by an increase in sales through our catalog and distribution channels, as well as increases in sales to customers in the industrial and medical industries.

This decrease was partially offset by an increase in sales through our catalog and distribution channels, as well as increases in sales to customers in the industrial and commercial industries.

Sales of PMO units decreased by 43%, as compared to the same period of the prior fiscal year, and average selling prices increased by 58%.

The volume decrease was largely driven by a lower mix of telecommunications products, which typically have lower average selling prices.

The unit volume for telecommunications products decreased by approximately 65% for the first half of fiscal 2022, as compared to the same period of the prior fiscal year.

Revenue generated by the infrared product group during the first half of fiscal 2022 was $10.0 million, an increase of approximately $430,000, or 5%, as compared to the same period of the prior fiscal year.

The increase in revenue is driven by sales of non-molded infrared products, primarily to customers in the industrial market.

During the first half of fiscal 2022, sales of infrared units decreased by 12%, as compared to the prior year period.

The decrease in units is due primarily due to the mix of products shipped, including more thermal imaging assemblies which are lower in volume and higher in price, as well as more larger diamond-turned lenses.

Industrial applications, firefighting cameras, and other public safety applications continue to be the primary drivers of the increased demand for infrared products, including thermal imaging assemblies.

The unit volume for telecommunications products decreased by approximately 60% for the first nine months of fiscal 2022, as compared to the same period of the prior fiscal year.

Revenue generated by the infrared product group during the first nine months of fiscal 2022 was $13.7 million, a decrease of approximately $2.3 million, or 14%, as compared to the same period of the prior fiscal year.

The decrease in revenue is primarily driven by sales to customers in the industrial market.

During the first nine months of fiscal 2022, sales of infrared units decreased by 26%, as compared to the prior year period.

Industrial applications, firefighting cameras, and other public safety applications continue to be the primary drivers of demand for infrared products, including thermal imaging assemblies.

During fiscal 2020 and 2021, we saw an increase in demand for medical and temperature sensing applications, such as fever detection.

Demand for temperature sensing applications have been accelerated by COVID-19, and although the demand has leveled off since the initial spike, it remains elevated.

In the first half of fiscal 2022, our specialty products revenue decreased by $54,000, or 6%, as compared to the same period of the prior fiscal year, primarily related to sales of custom specialty products during the first half of fiscal 2021, which orders did not repeat in the first half of fiscal 2022.

This decrease was partially offset by an increase in NRE projects for customers in the commercial and defense industries, particularly in the second quarter of fiscal 2022.

Demand for temperature sensing applications were accelerated by COVID-19, and although the demand has leveled off since the initial spike, it remains elevated.

In the first nine months of fiscal 2022, our specialty products revenue increased by $158,000, or 13%, as compared to the same period of the prior fiscal year, primarily driven by an increase in NRE projects for customers in the commercial and defense industries.

Other Key Indicators

20 unchanged sentences

We believe EBITDA is helpful for investors to better understand our underlying business operations.

The following table adjusts net loss to EBITDA for the three and six months ended December 31, 2021 and 2020:

Quarter Ended December 31,

Six Months Ended December 31,

$ (1,055,291 )

The following table adjusts net loss to EBITDA for the three and nine months ended March 31, 2022 and 2021:

Quarter Ended March 31,

Nine Months Ended March 31,

$ (2,182,391 )

2 unchanged sentences

Interest expense

Our EBITDA for the three months ended December 31, 2021 was a loss of approximately $41,000, compared to earnings of $1.0 million for the same period of the prior fiscal year.

The decrease in EBITDA in the second quarter of fiscal 2022 was primarily attributable to lower revenue and gross margin, coupled with increased SG&A expenses, largely related to the previously described events that occurred in our China subsidiaries.

Our EBITDA for the six months ended December 31, 2021 was approximately $413,000, compared to $2.4 million for the same period of the prior fiscal year.

The decrease in EBITDA in the first half of fiscal 2022 was primarily attributable to lower gross margin and increased SG&A expenses, including expenses incurred related to the previously described events that occurred in our Chinese subsidiaries.

Our EBITDA for the three months ended March 31, 2022 was approximately $647,000, compared to earnings of $1.1 million for the same period of the prior fiscal year.

The decrease in EBITDA in the third quarter of fiscal 2022 was primarily attributable to lower revenue and gross margin, partially offset by the aforementioned other income item of $210,000.

Our EBITDA for the nine months ended March 31, 2022 was approximately $1.1 million, compared to $3.5 million for the same period of the prior fiscal year.

The decrease in EBITDA in the first nine months of fiscal 2022 was primarily attributable to lower revenue and gross margin and increased SG&A expenses, including expenses incurred related to the previously described events that occurred in our Chinese subsidiaries.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis