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Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-05-12 · 132 added, 169 removed, 161 unchanged (65% of the section changed)

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Potential Impact of COVID-19

In March 2020, the World Health Organization (“WHO”) declared the outbreak of COVID-19 as a pandemic based on the rapid increase in global exposure.

Thereafter, COVID-19 spread throughout world, including the United States.

Throughout the COVID-19 pandemic, our manufacturing facilities in China, Latvia, and the United States have continued to operate substantially as normal.

Some of our United States- and Latvia-based non-manufacturing employees are continuing to work remotely, either on a full or partial basis.

Where possible, we have staggered shifts to reduce contact within shifts and between different shifts, and have minimized interaction and physical proximity between employees working within the same building.

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

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.

However, given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not presently able to estimate the effects of the COVID-19 pandemic on our future results of operations, financial, or liquidity for the remainder of fiscal year 2022 and, possibly, beyond.

In March 2020, the WHO declared the outbreak of COVID-19 as a pandemic based on the rapid increase in global exposure.

COVID-19 has spread throughout world, including the U.S., and continues to spread as additional variants emerge.

As a result of the COVID-19 pandemic, our employees at our facilities in China, Latvia, and the U.S.

were subject to stay-at-home orders during a portion of fiscal year 2021, which restrictions have since been lifted.

In addition to stay-at-home orders, many jurisdictions also implemented social distancing and other restrictions and measures to slow the spread of COVID-19.

These restrictions significantly impacted economic conditions in the U.S.

in 2020 and continued into 2021 and 2022.

Beginning in the spring of 2021, restrictions began to lift as vaccines became more available.

Despite these stay-at-home orders and other measures and restrictions implemented in the areas in which we operate, as a critical supplier to both the medical and defense industries, we were deemed to be an essential business;

thus, regardless of the stay-at-home orders, our workforce was permitted to work from our facilities and our business operations have generally continued to operate as normal.

Nonetheless, despite the lifting of these stay-at-home orders, out of concern for our workforce, our U.S.- and Latvia-based non-manufacturing employees have continued to work remotely to some extent.

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

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

Additionally, some areas still have travel restrictions in place, which has impacted 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 taking steps to mitigate the impact on our financial condition, liquidity, and results of operations globally.

We were incorporated in Delaware in 1992 as the successor to LightPath Technologies Limited Partnership, a New Mexico limited partnership, formed in 1989, and its predecessor, Integrated Solar Technologies Corporation, a New Mexico corporation, formed in 1985.

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ISP is a vertically integrated manufacturer offering a full range of infrared products from custom infrared optical elements to catalog and high-performance lens assemblies.

Historically, ISP’s facility located in Irvington, New York functioned as its global headquarters for operations, while also providing manufacturing capabilities, optical coatings, and optical and mechanical design, assembly, and testing.

In June 2019, we completed the relocation of this facility to our existing Orlando Facility and our facility located in Riga, Latvia (the “Riga Facility”).

Since June 2019, ISP’s manufacturing operation has been located at our Orlando Facility.

ISP Latvia is a manufacturer of high precision optics and offers a full range of infrared products, including catalog and custom infrared optics.

ISP Latvia’s Riga Facility functions as its manufacturing facility.

ISP Latvia’s facility in Riga, Latvia (the “Riga Facility”) functions as its manufacturing facility.

For additional information, please refer to our Annual Report on Form 10-K for the year ended June 30, 2022.

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These product groups are supported by our major product capabilities:

molded optics, thermal imaging optics, and custom designed optics.

Beginning in late 2019, we implemented a product management function, with a product manager for each of our major product capabilities:

molded optics, thermal imaging optics and custom designed optics.

molded optics, thermal imaging optics, and custom designed optics, with a product manager for each.

Product management is principally a portfolio management process that analyzes products within the product capability areas as defined above.

This function has begun to facilitate choosing investment priorities to help strategically align our competencies with strategic industry revenue opportunities.

This function facilitates choosing investment priorities to help strategically align our competencies with strategic industry revenue opportunities.

Over the longer term, this function will also help ensure successful product life cycle management.

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The timing and extent of any such product development is outside of our control.

We design, build, and sell optical assemblies in markets for test and measurement, medical devices, military, industrial, and communications based on our proprietary technologies.

Many of our optical assemblies consist of several products that we manufacture.

In connection with our new strategic direction and the expanding portfolio of products and services, we are evaluating the ways in which we may optimize the financial reporting of our product groups.

Growth Strategy

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While still positioned as a component provider, we expanded our addressable market with the acquisition of ISP, a manufacturer of infrared optical components, in December 2016.

Collectively, our operations lacked synergies, maintained a high cost structure, and lacked a defined path for capitalizing on the industry’s evolution and growth opportunities.

In March 2020, our Board of Directors (our “Board”) recruited Mr.

Sam Rubin to assume the role of Chief Executive Officer and to develop and implement a new strategy going forward.

Collectively, our operations had lacked synergies, maintained a high cost structure, and lacked a defined path for capitalizing on the industry’s evolution and growth opportunities.

In March of 2020, our Board of Directors (our “Board”) recruited Mr.

Sam Rubin, an industry veteran with a proven track record for delivering high growth through organic and inorganic means, to assume the role of Chief Executive Officer and to develop and implement a new strategy going forward.

In the fall of 2020, Mr.

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Throughout the process, we focused on developing a strategy that creates a unique and long-lasting value to our customers, and utilizes our unique capabilities and differentiators, both existing capabilities and differentiators, as well as new capabilities we acquire and develop organically.

Understanding the shifts that are happening in the marketplace, and the changes that come when a technology like photonics moves from being a specialty, to being integrated into mainstream industries and applications, we redefined our strategic direction to provide our wide customer base with domain expertise in optics, and become their partner for the optical engine of their system.

In our view, as the use of photonics evolves, so do the needs evolve.

Understanding the shifts that are happening in the marketplace and the changes that come when a technology, like photonics, moves from being a specialty to being integrated into mainstream industries and applications, we redefined our strategic direction to provide our wide customer base with domain expertise in optics, and became their partner for the optical engine of their systems.

In our view, as the use of photonics evolves, so do customer needs.

The industry is transforming from a fragmented industry with many component manufacturers into a solution-focused industry with the potential for partnerships for solution development and production.

We believe such a partnership starts with us, as the supplier.

We have in-house domain expertise in photonics, knowledge and experience in the most advanced technologies and the necessary manufacturing techniques.

We can then further develop these partnerships by working closely with the customer throughout their design process, designing an optical solution that is tailored to their needs, often times using unique technologies we own, and supplying the customer with the corresponding complete optical subsystem to be integrated into their product.

Such an approach builds on our unique, value-added technologies that we both currently own, such as optical molding, fabrication, and system design along with other technologies we may acquire or develop in the future to create tailored solutions for our customers, which often are based on proprietary manufacturing technologies.

Providing the domain expertise and the extensive “know how” in optical design, fabrication, production and testing technologies will allow our customers to focus on their own development efforts, without needing to develop subject matter expertise in optics.

By providing the bridge into the optical solution world, we partner with our customers on a long-term basis, create value to our customers, and capture that value through the long-term supply relationships we develop.

We believe such partnerships can start with us as the supplier.

We have in-house domain expertise in photonics, knowledge and experience in advanced optical technologies, and the necessary manufacturing techniques and capabilities.

We believe we can develop these partnerships by working closely with the customer throughout their design process, designing an optical solution that is tailored to their needs, often times using unique technologies that we own, and supplying the customer with a complete optical subsystem to be integrated into their product.

Such an approach builds on our unique, value-added technologies that we currently own, such as optical molding, fabrication, system design, and proprietary manufacturing technologies, along with other technologies that we may acquire or develop in the future, to create tailored solutions for our customers.

Our domain expertise and the extensive “know how” in optical design, fabrication, production and testing technologies will allow our customers to focus on their own development efforts, freeing them from the need to develop subject matter expertise in optics.

By providing the bridge into the optical solution world, we are able to partner with our customers on a long-term basis, create value for our customers, and capture that value through the long-term supply relationships we seek to develop.

Further information about our strategic direction can be found in our recent Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

Results of Operations

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.

Revenue for the first quarter of fiscal 2023 was approximately $7.4 million, a decrease of approximately $1.7 million, or 19%, as compared to approximately $9.1 million in the same period of the prior fiscal year.

The two main factors contributing to the sales decrease were as follows:

(1) decreased demand in the Asia market due to the economic downturn in China;

and (2) sales across all product groups were negatively impacted by the unexpected closure of our U.S.

facility for the last several days of the fiscal 2023 first quarter due to Hurricane Ian.

Revenue generated by infrared products was approximately $3.6 million in the first quarter of fiscal 2023, a decrease of approximately $1.2 million, or 26%, as compared to approximately $4.9 million in the same period of the prior fiscal year.

The decrease in revenue is primarily driven by sales of BD6-based molded infrared products, particularly to customers in the China industrial market.

Sales of diamond-turned infrared products also decreased, primarily attributable to customers in the defense and industrial markets.

Revenue generated by PMO products was approximately $3.3 million for the first quarter of fiscal 2023, a decrease of approximately $540,000, or 14%, as compared to approximately $3.8 million in the same period of the prior fiscal year.

The decrease in revenue is primarily attributed to decreases in sales through our catalog and distribution channels, as well as sales to commercial customers.

The majority of the decrease in sales through our catalog and distribution channels is due to the termination of our distribution agreement in Europe during the third quarter of fiscal 2022.

We are no longer accepting new orders through this distributor, and are now soliciting and receiving orders directly from the end customers.

This transition will continue through the third quarter of fiscal 2023, as we will continue to ship distribution orders that were in place prior to the contract termination.

The remainder of the decrease in PMO product sales is related to customers in China, across all of the industries we serve.

Revenue generated by our specialty products was approximately $455,000 in the first quarter of fiscal 2023, an increase of approximately $52,000, or 13%, compared to $402,000 in the same period of the prior fiscal year.

The increase was primarily driven by non-recurring charges billed to a customer during the first quarter of fiscal 2023.

Cost of Sales and Gross Margin

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.

Gross margin in the first quarter of fiscal 2023 was approximately $2.2 million, a decrease of 30%, as compared to approximately $3.2 million in the same period of the prior fiscal year.

Total cost of sales was approximately $5.1 million for the first quarter of fiscal 2023, compared to approximately $5.9 million for the same period of the prior fiscal year.

Gross margin as a percentage of revenue was 30% for the first quarter of fiscal 2023, compared to 35% for the same period of the prior fiscal year.

The decrease in gross margin as a percentage of revenue is primarily due to the significantly lower revenue level, with less contribution toward fixed manufacturing costs.

Maintaining a gross margin of 30% at this low revenue level reflects the benefit of a number of the operational and cost structure improvements that we have been implementing.

Selling, General and Administrative

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.

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.

SG&A costs were approximately $2.6 million for the first quarter of fiscal 2023, a decrease of approximately $231,000, or 8%, as compared to approximately $2.9 million in the same period of the prior fiscal year.

The decrease in SG&A costs is primarily due to a decrease of approximately $300,000 of expenses associated with the previously disclosed 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, 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 $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.

New product development costs were approximately $550,000 in the first quarter of fiscal 2023, an increase of approximately $123,000, or 29%, as compared to the same period of the prior fiscal year.

This increase was primarily due to the re-allocation of personnel resources among our new product development and manufacturing engineering departments, the latter of which is included in cost of goods sold.

Other Income (Expense)

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.

Interest expense, net, was approximately $70,000 for the first quarter of fiscal 2023, as compared to $46,000 for the same period of the prior fiscal year.

The increase in interest expense is due to higher interest rates and increased amortization of loan fees.

Total debt has decreased 19% as of the quarter ended September 30, 2022, as compared to the quarter ended September 30, 2021.

Other income, net, was approximately $27,000 for the first quarter of fiscal 2023, as compared to other expense, net, of $51,000 for the same period of the prior fiscal year.

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

We execute all foreign sales from our U.S.

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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 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.

During the first quarter of fiscal 2023, we incurred net foreign currency transaction gains of approximately $23,000, compared to losses of approximately $26,000 for the same period of the prior fiscal year.

During the first quarter of fiscal 2023, income tax expense was approximately $102,000, compared to approximately $130,000 for 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 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.

Net loss for the first quarter of fiscal 2023 was approximately $1.4 million, or $0.05 basic and diluted loss per share, compared to $632,000, or $0.02 basic and diluted loss per share, for the same quarter of the prior fiscal year.

The increase in net loss for the first quarter of fiscal 2023, 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 and income taxes.

Weighted-average common shares outstanding were 27,070,949, basic and diluted, in the first quarter of fiscal 2023, compared to 26,993,971, basic and diluted, in the first quarter of fiscal 2022.

The increase in the weighted-average basic common shares was due to the issuance of shares of Class A common stock under the 2014 ESPP and underlying vested RSUs.

Potential Impact of Economic Conditions in China

Due to our operations in China, our business, results of operations, financial condition and prospects may be influenced to a significant degree by economic, political, legal and social conditions in China.

China’s economy differs from the economies of other countries in many respects, including with respect to the level of development, growth rate, amount of government involvement, control of foreign exchange and allocation of resources.

While China’s economy has experienced significant growth over the past several decades, its growth rate has declined in recent years and may continue to decline.

According to the National Bureau of Statistics of China, the annual economic growth rate in China was 6.9% in 2017, 6.8% in 2018, 6.1% in 2019, 2.3% in 2020, and 8.1% in 2021.

The annual economic growth rate in 2022 is estimated to be 4.8%, although some analysts have indicated that China’s economic growth could be lower.

Deteriorating economic conditions in China generally and as a result of China’s zero-COVID strategy, have led to lower demand for the Company’s products in China and thus lower revenues and net income for our subsidiaries in China and the Company overall.

A continuation of China’s current economic conditions or a further slowdown in the economic growth, an economic downturn, a recession, or other adverse economic conditions in China is likely to have a material adverse effect on our business and results of operations in future quarters.

Liquidity and Capital Resources

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.

As of September 30, 2022, we had working capital of approximately $9.2 million and total cash and cash equivalents of approximately $4.3 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.

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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 $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 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.

As of September 30, 2022, LPOIZ had approximately $3.3 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 September 30, 2022.

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

As of September 30, 2022, the outstanding balance on the BankUnited Term Loan was approximately $3.8 million.

The outstanding balance on the Equipment Loan was approximately $301,000 as of September 30, 2022.

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

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.

As of September 30, 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.

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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.

As of September 30, 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.

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If these efforts are not successful, we may need to raise additional capital.

Should capital not be available to us at reasonable terms, other actions may become necessary in addition to cost control measures and continued efforts to increase sales.

Should capital not be available to us at reasonable terms or rates, other actions may become necessary in addition to cost control measures and continued efforts to increase sales.

These actions may include exploring strategic options for the sale of the Company, the sale of certain product lines, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, the creation of licensing arrangements with respect to our technology, or other alternatives.

Cash Flows – Operating:

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 used in operations was approximately $415,000 for the first three months of fiscal 2023, compared to approximately $1.6 million for the same period of the prior fiscal year.

Cash used in operations for the first three months of fiscal 2023 was less than in the comparable period, with an outflow of approximately $69,000 from the net change in operating assets and liabilities in the first quarter of fiscal 2023, compared to $2 million from the net changes in operating assets and liabilities for the first quarter of fiscal 2022.

The amount of cash used in operations in the first fiscal quarter of 2022 resulted from several factors, including a decrease in accounts payable and accrued liabilities during such quarter arising from the payment of certain expenses related to previously disclosed events that occurred at our Chinese subsidiaries which were accrued as of June 30, 2021, and an increase in accounts receivable due to higher sales than the previous sequential quarter.

Cash used in operations in the first three months of fiscal 2023 reflect a decrease in accounts receivable due to lower sales than the previous sequential quarter.

Cash Flows – Investing:

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.

During the first three months of fiscal 2023, we expended approximately $243,000 in investments in capital equipment, compared to approximately $1.2 million in the same period of the prior fiscal year.

The first three months of fiscal 2023 reflects only maintenance capital expenditures, whereas the majority of our capital expenditures during the first three 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 2023 will be greater than fiscal 2022, however, the total amount expended will depend on opportunities and circumstances.

Cash Flows – Financings:

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.

Net cash used in financing activities was approximately $187,000 for the first three months of fiscal 2023, compared to cash provided by financing activities of approximately $51,000 in the same period of the prior fiscal year.

Cash used in financing activities for the first three months of fiscal 2023 reflects approximately $207,000 in principal payments on our loans and finance leases offset by approximately $20,000 in proceeds from the sale of Class A common stock under the 2014 ESPP.

Cash provided by financing activities for the first three months of fiscal 2022 reflects approximately $238,000 in principal payments on our loans and finance leases, 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.

Contractual Obligations and Commitments

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.

As of September 30, 2022, our principal commitments consisted of obligations under operating and finance leases, and debt agreements.

No material changes occurred during the first three months of fiscal 2023 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, 2022.

Off Balance Sheet Arrangements

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Critical Accounting Policies and Estimates

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.

There have been no material changes to our critical accounting policies and estimates during the three months ended September 30, 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, 2022.

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Generally, a higher total backlog is better for us.

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.

Our total backlog at September 30, 2022 was approximately $23.0 million, an increase of 19%, as compared to $19.3 million as of September 30, 2022.

Compared to the end of fiscal 2022, our total backlog increased by 29% during the first three months of fiscal 2023.

Backlog change rates for the last five fiscal quarters are:

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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 increase in backlog during the first three months of fiscal 2023 was largely due to a $4 million supply agreement with a long time European customer of precision motion control systems and OEM assemblies.

The new supply agreement will go into effect in the second half of our fiscal year 2023 and is expected to run for around 12-18 months.

In addition, orders were received for several other significant long-term projects with customers in the U.S and in Europe.

Historically, it is in the second quarter of each fiscal year that we receive the renewal of a large annual contract for infrared products, which we typically begin shipping against 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.

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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.

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

With the global supply of germanium currently concentrated in 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.

however, we believe that the terminations of certain of our management employees in our China subsidiaries, LPOIZ and LPOI, and transition to new management personnel, has adversely impacted the domestic sales in China of these subsidiaries over the past two quarters, which could continue for a few more quarters, and which would affect potential growth in our PMO lens business for that period.

Our former employees, including management personnel, maintained relationships with certain of our customers in China and we expect that until our new sales and management personnel establish relationships with these customers, of which there can be no assurance, domestic sales in China may be adversely impacted.

Although the recovery is taking longer than initially expected, we have begun to recapture some customers.

Our sales and management team in China was enhanced in October 2021 with two key new hires, and we are beginning to see more progress in this area.

However, order bookings for both PMO and Infrared products continue to be slow in China.

During fiscal 2022, we believe the terminations of certain of our management employees in our China subsidiaries, LPOIZ and LPOI, and transition to new management personnel, adversely impacted the domestic sales in China of these subsidiaries.

Although our new sales and management personnel have begun to establish relationships with customers, domestic sales in China have also been adversely impacted by the economic downturn in China, which we expect to continue to negatively impact fiscal 2023 revenue in that region.

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 nine-month periods ended March 31, 2022 and 2021:

The following table sets forth revenue dollars and units for our three product groups for the three-month periods ended September 30, 2022 and 2021:

Three Months Ended

Nine Months Ended March 31,

September 30,

Infrared Products

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Specialty Products

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 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 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 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 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.

Three months ended September 30, 2022

Our revenue decreased by 19% in the first quarter of fiscal 2023, as compared to the same quarter of the prior fiscal year, driven by decreases in both PMO and Infrared products.

The two main factors contributing to the sales decrease were as follows:

(1) decreased demand in the Asia market due to the economic downturn in China;

and (2) sales across all product groups were negatively impacted by the unexpected closure of our U.S.

facility for the last several days of the fiscal 2023 first quarter due to Hurricane Ian.

Revenue from the PMO product group for the first quarter of fiscal 2023 was $3.3 million, a decrease of 14%, as compared to the same quarter of the prior fiscal year.

The decrease in revenue is primarily attributed to decreases in sales through our catalog and distribution channels, as well as sales to commercial customers.

The majority of the decrease in sales through our catalog and distribution channels is due to the termination of our distribution agreement in Europe during the third quarter of fiscal 2022.

We are no longer accepting new orders through this distributor, and are now soliciting and receiving orders directly from the end customers.

This transition will continue through the third quarter of fiscal 2023, as we will continue to ship distribution orders that were in place prior to the contract termination.

The remainder of the decrease in PMO product sales is related to customers in China, across all of the industries we serve.

Revenue generated by the infrared product group for the first quarter of fiscal 2023 was $3.6 million, a decrease of 26%, as compared to same quarter of the prior fiscal year.

The decrease in revenue is primarily driven by sales of BD6-based molded infrared products, particularly to customers in the China industrial market.

Sales of diamond-turned infrared products also decreased, primarily attributable to customers in the defense and industrial markets.

Our specialty products revenue increased by 13%, as compared to the same period of the prior fiscal year, and represented 6% and 4% of total revenue for the first quarters of fiscal 2023 and 2022, respectively.

The increase was primarily driven by non-recurring charges billed to a customer during the first quarter of fiscal 2023.

Other Key Indicators

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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 nine months ended March 31, 2022 and 2021:

Quarter Ended March 31,

Nine Months Ended March 31,

The following table adjusts net loss to EBITDA for the quarters ended September 30, 2022 and 2021:

Quarter Ended September 30,

$ (1,380,700 )

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Interest expense

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.

Our EBITDA for the quarter ended September 30, 2022 was a loss of approximately $392,000, compared to earnings of $454,000 for the same period of the prior fiscal year.

The decrease in EBITDA in the first quarter of fiscal 2023 was primarily attributable to lower revenue and gross margin, partially offset by lower operating costs.

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