What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-09 compared with 2022-11-10 · 154 added, 117 removed, 176 unchanged (61% of the section changed)

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

in 2020 and continued into 2021 and 2022.

in 2020 that continued into 2021 and 2022.

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

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Management is actively monitoring this situation and taking steps to mitigate the impact on our financial condition, liquidity, and results of operations globally.

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, financials, or liquidity in fiscal year 2023 or beyond.

However, we are not presently able to estimate the effects of the continuing COVID-19 pandemic on our future results of operations, financials, or liquidity in fiscal year 2023 or beyond.

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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Growth Strategy

Historically, we operated with a focus on optical component manufacturing, and specifically on our leadership position as a precision molded lens manufacturer for visual light applications.

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 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.

Rubin led our Board and the leadership team in collaborative discussions with the purpose of defining a new comprehensive strategy for our business.

The collaborative strategic planning process included leaders from across the organization, detailed dialogs with customers, vendors and partners, and an in-depth analysis of the environment we are in, changes and trends in and around the use of photonics, and an analysis of our capabilities, strengths and weaknesses.

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 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.

Based on the shifts in the marketplace and the changes that come when a technology, like photonics, moves from being a specialty product to being integrated into mainstream industries and applications, we redefined our strategic direction to leverage our strengths, and specifically our subject matter expertise in optics, to provide our wide customer base with complete optical and electro-optical solutions, and to become their partner for the optical engine of their systems.

Since 2020, we have focused on developing a strategy and executing a plan that capitalizes on the changing market conditions, creates a unique and long-lasting value to our customers, and utilizes our unique capabilities and differentiators.

We intend to use our differentiators to move up the value chain, thereby offering a more comprehensive value proposition to our customers.

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

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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.

A current example of a unique, value-added solution is our new multispectral camera, Mantis, that we recently developed as a showcase of our capabilities and to demonstrate what is possible with today’s technology.

Our subject-matter experience and 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.

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Results of Operations

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.

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

Revenue for the second quarter of fiscal 2023 was approximately $8.5 million, a decrease of approximately $0.8 million, or 8%, as compared to approximately $9.2 million in the same period of the prior fiscal year, primarily due to a decrease in sales of infrared products.

Revenue generated by infrared products was approximately $4.0 million in the second quarter of fiscal 2023, a decrease of approximately $1.1 million, or 21%, as compared to approximately $5.1 million in the same period of the prior fiscal year.

The decrease in revenue is primarily due to timing sales of infrared products against a large annual contract, the shipments for which were completed in the second quarter of fiscal 2023, while shipments against the renewed contract signed in November 2022 will not begin until the third quarter of fiscal 2023.

The renewed contract represents a 20% increase over the previous contract.

Revenue generated by PMO products was approximately $3.9 million for the second quarter of fiscal 2023, an increase of approximately $114,000, or 3%, as compared to approximately $3.8 million in the same period of the prior fiscal year.

The increase in revenue is due to increases in sales to defense, industrial and medical customers, offset by a decrease in sales to customers in the telecommunications industry.

PMO product sales to customers in China continue to be soft across all of the industries we serve due to unfavorable economic conditions in that region.

Revenue generated by our specialty products was approximately $571,000 in the second quarter of fiscal 2023, an increase of approximately $166,000, or 41%, compared to $406,000 in the same period of the prior fiscal year.

The increase is primarily due to increased demand for collimator assemblies.

Six months ended December 31, 2022, compared to six months ended December 31, 2021

Revenue for the first half of fiscal 2023 was approximately $15.8 million, a decrease of approximately $2.5 million, or 14%, as compared to approximately $18.3 million in the same period of the prior fiscal year.

Revenue generated by infrared products was approximately $7.7 million in the first half of fiscal 2023, a decrease of approximately $2.3 million, or 23%, as compared to approximately $9.9 million in the same period of the prior fiscal year.

The decrease in revenue is primarily driven by sales of diamond-turned infrared products, primarily attributable to customers in the defense and industrial markets, including the timing of sales of infrared products against a large annual contract, the shipments for which were completed in the second quarter of fiscal 2023, while shipments against the renewed contract signed in November 2022 will not begin until the third quarter of fiscal 2023.

The renewed contract represents a 20% increase over the previous contract.

Sales of molded infrared products made from our proprietary BD6 material also decreased, particularly to customers in the China industrial market.

Revenue generated by PMO products was approximately $7.1 million for the first half of fiscal 2023, a decrease of approximately $426,000, or 6%, as compared to approximately $7.6 million in the same period of the prior fiscal year.

The decrease in revenue is primarily attributed to decreases in sales to customers in the telecommunications and commercial industries.

PMO product sales to customers in China continue to be soft across all of the industries we serve due to unfavorable economic conditions in that region.

Revenue generated by our specialty products was approximately $1.0 million in the first half of fiscal 2023, an increase of approximately $218,000, or 27%, compared to $808,000 in the same period of the prior fiscal year.

The increase is primarily due to increase demand for collimator assemblies, as well as a charge for in-process materials billed to a customer upon order cancellation, during the first quarter of fiscal 2023.

Cost of Sales and Gross Margin

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.

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

Gross margin in the second quarter of fiscal 2023 was approximately $3.2 million, an increase of 15%, as compared to approximately $2.8 million in the same period of the prior fiscal year.

Total cost of sales was approximately $5.2 million for the second quarter of fiscal 2023, compared to approximately $6.4 million for the same period of the prior fiscal year.

Gross margin as a percentage of revenue was 38% for the second quarter of fiscal 2023, compared to 30% for the same period of the prior fiscal year.

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

PMO products, which typically have higher margins than our infrared products, comprised 46% of revenue for the second quarter of fiscal 2023, as compared to 41% of revenue for the second quarter of fiscal 2022.

In addition, within our infrared product group, sales for the second quarter of fiscal 2023 were more heavily weighted toward molded infrared products than in the same quarter of the prior fiscal year.

Molded infrared products typically have higher margins than non-molded infrared products.

During the second quarter of fiscal 2022, infrared product margins were also negatively impacted by increased costs associated with the completion of the coating department in our Riga Facility, which have since improved as that facility is now producing at volume.

Six months ended December 31, 2022, compared to six months ended December 31, 2021

Gross margin in the first half of fiscal 2023 was approximately $5.4 million, a decrease of 9%, as compared to approximately $6.0 million in the same period of the prior fiscal year.

Total cost of sales was approximately $10.4 million for the first half of fiscal 2023, compared to approximately $12.4 million for the same period of the prior fiscal year.

Gross margin as a percentage of revenue was 34% for the first half of fiscal 2023, compared to 33% for the same period of the prior fiscal year.

The lower revenue level for the first half of fiscal 2023, as compared to the same period of the prior fiscal year, resulted in less contribution toward fixed manufacturing costs, however the mix of products shipped in the first half of fiscal 2023 was more favorable and also reflects the benefit of a number of the operational and cost structure improvements that we have been implementing.

Selling, General and Administrative

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.

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

SG&A costs were approximately $3.0 million for the second quarter of fiscal 2023, an increase of approximately $84,000, or 3%, as compared to approximately $2.9 million in the same period of the prior fiscal year.

The increase in SG&A costs is primarily due to an increase in stock compensation, partially due to director retirements that occurred during the quarter, as well as increases in other personnel-related costs.

SG&A costs for the second quarter of fiscal 2023 also include approximately $45,000 in fees paid to BankUnited under our Amended Loan Agreement for not prepaying the BankUnited Term Loan by December 31,2022.

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

These increases are partially offset by a decrease of $248,000 in VAT and related taxes from prior years that were accrued by one of our Chinse subsidiaries in the second quarter of fiscal 2022, as well as a decrease of approximately $150,000 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.

Six months ended December 31, 2022, compared to six months ended December 31, 2021

SG&A costs were approximately $5.7 million for the first half of fiscal 2023, a decrease of approximately $147,000, or 3%, as compared to approximately $5.8 million in the same period of the prior fiscal year.

The decrease in SG&A costs reflects a decrease of $248,000 in VAT and related taxes from prior years that were accrued by one of our Chinse subsidiaries in the second quarter of fiscal 2022, as well as a decrease of approximately $480,000 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.

These decreases were partially offset by an increase in stock compensation, partially due to director retirements that occurred during the quarter, as well as increases in other personnel-related costs.

SG&A costs for the second quarter of fiscal 2023 also include the aforementioned fees of approximately $45,000 paid to BankUnited.

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

New Product Development

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.

New product development costs were approximately $466,000 in the second quarter of fiscal 2023, a decrease of approximately $86,000, or 16%, as compared to the same period of the prior fiscal year.

For the first half of fiscal 2023, new product development costs were approximately $1.0 million, an increase of $37,000, or 4%, as compared to the same period of the prior fiscal year.

The differences are primarily due to varying allocations of personnel resources among our new product development and manufacturing engineering functions, the latter of which is included in cost of goods sold.

In addition, the second quarter of fiscal 2023 reflects some cost savings from seasoned engineer retirements.

Other Income (Expense)

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.

Interest expense, net, was approximately $81,000 for the second quarter of fiscal 2023, as compared to $50,000 for the same period of the prior fiscal year.

For the first half of fiscal 2023, interest expense, net was approximately $152,000, as compared to $96,000 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.

Total debt has decreased 21% as of the quarter ended December 31, 2022, as compared to the quarter ended December 31, 2021.

Other expense, net, was approximately $1,300 for the second quarter of fiscal 2023, as compared to other income, net, of $11,000 for the same period of the prior fiscal year.

For the first half of fiscal 2023, other income, net was approximately $26,000, as compared to other expense, net, of $40,000 for the same period of the prior fiscal year.

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

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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 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.

We incurred foreign currency transaction losses of $29,000 and $14,000 during the second quarter of fiscal year 2022 and 2021, respectively.

For the first half of fiscal year 2023 and 2022, we recognized net foreign currency transaction losses of $7,000 and $40,000, respectively.

During the second quarter of fiscal 2023, income tax expense was $55,000, compared to approximately $35,000 for the same period of the prior fiscal year.

During the first half of fiscal 2023, income tax expense was approximately $157,000, compared to approximately $165,000 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 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.

Net loss for the second quarter of fiscal 2023 was approximately $694,000, or $0.03 basic and diluted loss per share, compared to $1.1 million, or $0.04 basic and diluted loss per share, for the same quarter of the prior fiscal year.

The decrease in net loss for the second quarter of fiscal 2023, as compared to the same period of the prior fiscal year, was primarily attributable to higher gross margin, despite the decrease in revenue.

Net loss for the first half of fiscal 2023 was approximately $2.1 million, or $0.08 basic and diluted loss per share, compared to $1.7 million, or $0.06 basic and diluted loss per share, for the same quarter of the prior fiscal year.

The increase in net loss for the first half 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.

Weighted-average common shares outstanding were 27,172,226, basic and diluted, in the second quarter of fiscal 2023, compared to 27,008,748, basic and diluted, in the second quarter of fiscal 2022.

For the first half of fiscal 2023, weighted-average common shares outstanding were 27,121,583, basic and diluted, as compared to 27,001,360, basic and diluted, in the first half 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 and RSAs.

Potential Impact of Economic Conditions in China

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Liquidity and Capital Resources

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.

As of December 31, 2022, we had working capital of approximately $9.6 million and total cash and cash equivalents of approximately $3.8 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.

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.

As of December 31, 2022, LPOIZ had approximately $3.9 million available for repatriation and LPOI did not have any earnings available for repatriation, based on earnings accumulated through December 31, 2022, the end of the most recent statutory tax year, that remained undistributed as of December 31, 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.

As of December 31, 2022, the outstanding balance on the BankUnited Term Loan was approximately $3.6 million.

The outstanding balance on the Equipment Loan was approximately $305,000 as of December 31, 2022.

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

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.

As of December 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.

On February 16, 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.

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

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.

We anticipate refinancing our debt obligations with a new lender prior to the maturity date of the Term Loan, of which there can be no assurances.

There are a number of factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated sales growth, increased material costs, increased labor costs, planned production efficiency improvements not being realized, increases in property, casualty, benefit and liability insurance premiums, and increases in other costs.

We will also continue efforts to keep costs under control as we seek renewed sales growth.

Our efforts are directed toward generating positive cash flow and profitability.

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

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.

As of December 31, 2022, we had not issued any shares of our Class A common stock pursuant to the at-the-market equity program.

On January 12, 2023, the Company entered into a securities purchase agreement (“Purchase Agreement”), pursuant to which the Company agreed to issue and sell in a public offering under the shelf registration statement an aggregate of 9,090,910 shares of the Company’s Class A common stock, par value $0.01 per share for a purchase price of $1.10 per share and filed a prospectus supplement with the SEC related thereto.

The sale of shares pursuant to the Purchase Agreement closed on January 17, 2023, and resulted in net proceeds of approximately $9.2 million after payment of placement agent fees, and certain other costs and expenses of the offering.

Based on the capital raise that was completed in January 2023, we do not expect to need additional equity capital for the foreseeable future, however there are a number of factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated sales growth, increased material costs, increased labor costs, planned production efficiency improvements not being realized, increases in property, casualty, benefit and liability insurance premiums, and increases in other costs.

In addition, we may identify opportunities for acquisitions and other strategic transactions to expand and further enhance our business that may require that we raise additional capital should we elect to pursue any of such transactions.

Cash Flows – Operating:

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 used in operations was approximately $752,000 for the first half of fiscal 2023, compared to approximately $157,000 for the same period of the prior fiscal year.Cash used in operations for the first half of fiscal 2023 was largely driven by a decrease in accounts payable and accrued liabilities, including the payment of severance related to the previously disclosed employee terminations that occurred at our Chinese subsidiaries, which liability has been accrued since June 30, 2021.

The first half of fiscal 2023 also reflects the final payment of payroll taxes deferred in fiscal 2020 under the CARES act.

Cash used in operations in the first half of fiscal 2022 also reflects a decrease in accounts payable and accrued liabilities during such period resulting from the payment of certain other expenses related to previously disclosed events that occurred at our Chinese subsidiaries which were accrued as of June 30, 2021, partially offset by a decrease in inventory.

Cash Flows – Investing:

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.

During the first half of fiscal 2023, we expended approximately $412,000 in investments in capital equipment, compared to approximately $1.3 million in the same period of the prior fiscal year.

The first half of fiscal 2023 primarily includes maintenance capital expenditures, whereas 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.As disclosed in Note 10, Leases , in the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, we are constructing additional tenant improvements in our Orlando Facility subject to our continuing lease, of which the landlord has agreed to provide $2.4 million in tenant improvement allowances.

We will fund the balance of the tenant improvement costs, estimated to be approximately $2.5 million, the majority of which will be expended during the second half of fiscal 2023.

Cash Flows – Financings:

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.

Net cash used in financing activities was approximately $443,000 for the first half of fiscal 2023, compared to approximately $243,000 in the same period of the prior fiscal year.

Cash used in financing activities for the first half of fiscal 2023 reflects approximately $463,000 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 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.

Contractual Obligations and Commitments

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.

As of December 31, 2022, 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 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 three months ended September 30, 2022 from those disclosed in Item 7.

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

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sales via ad-hoc purchase orders of mostly standard product configurations (our “turns” business) and the more challenging and potentially more rewarding business of customer product development.

In this latter type of business, we work with customers to help them determine optical specifications and even create certain optical designs for them, including complex multi-component designs that we call “engineered solutions.” This is followed by “sampling” small numbers of the product for the customers’ test and evaluation.

In this latter type of business, we work with customers to help them determine optical specifications and even create certain optical designs for them, including complex, multi-component, integrated designs that we call “engineered solutions.” These engineered solutions are often based on existing reference designs we have demonstrated, that then get further customized to the customer's specific needs.

This is followed by “sampling” small numbers of the product for the customers’ test and evaluation.

Thereafter, should a customer conclude that our specification or design is the best solution to their product need;

we negotiate and “win” a contract (sometimes called a “design win”) – whether of a “blanket purchase order” type or a supply agreement.

The strategy is to create an annuity revenue stream that makes the best use of our production capacity, as compared to the turns business, which is unpredictable and uneven.

This annuity revenue stream can also generate low-cost, high-volume type orders.

The strategy is to create an annuity revenue stream that leverages our engineering capabilities and makes the best use of our production capacity, as compared to the turns business, which is unpredictable and uneven.

A key business objective is to convert as much of our business to the design win and annuity model as is possible.

We face several challenges in doing so:

Maintaining an optical design and new product sampling capability, including a high-quality and responsive optical design engineering staff;

Maintaining an optical design and new product design and sampling capability, including a high-quality and responsive optical design engineering staff, and proactive design of reference design or technology demonstrators;

The fact that as our customers take products of this nature into higher volume, commercial production (for example, in the case of molded optics, this may be volumes over one million pieces per year) they begin to focus on reducing costs – which often leads them to turn to larger or overseas producers, even if sacrificing quality;

Our small business mass means that we can only offer a moderate amount of total productive capacity before we reach financial constraints imposed by the need to make additional capital expenditures – in other words, because of our limited cash resources and cash flow, we may not be able to service every opportunity that presents itself in our markets without arranging for such additional capital expenditures.

Despite these challenges to winning more “annuity” business, we nevertheless believe we can be successful in procuring this business because of our unique capabilities in optical design engineering that we make available on the merchant market, a market that we believe is underserved in this area of service offering.

Despite these challenges to winning more “annuity” and “engineered solutions” business, we nevertheless believe we can be successful in procuring this business because of our unique capabilities in optical design engineering and manufacturing.

Additionally, we believe that we offer value to some customers as a source of supply in the U.S.

should they be unwilling to commit to purchase their supply of a critical component from foreign merchant production sources.

should they be unwilling to commit to purchase their supply of a critical component from foreign production sources.

For information regarding revenue recognition related to our various revenue streams, refer to Critical Accounting Policies and Estimates in our Annual Report on Form 10-K dated June 30, 2022.

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Generally, a higher total backlog is better for us.

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.

Our total backlog at December 31, 2022 was approximately $29.4 million, an increase of 34%, as compared to $21.9 million as of December 31, 2021.

Compared to the end of fiscal 2022, our total backlog increased by 66% during the first half of fiscal 2023.

Backlog change rates for the last five fiscal quarters are:

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Change From Prior Quarter End

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.

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

The increase in backlog during the first half of fiscal 2023 was due to several large customer orders.

One such order is 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 fourth quarter of our fiscal year 2023 and is expected to run for around 12-18 months.

During the second quarter of fiscal 2023 we also received the renewal of a large annual contract for infrared products, for an amount 20% greater than the previous renewal.

We anticipate beginning to ship against the new contract in the third quarter of fiscal 2023, after shipments against the previous contract are completed.

During the third quarter we were qualified to provide advanced infrared optics for a critical international military program, and received an initial order valued at $2.5 million from the related customer.

This order represents a significant increase in this customer’s business with us.

In addition, we received orders we received orders from existing customers in the U.S.

and Europe related to several other significant long-term projects.

The timing of multi-year contract renewals are not always consistent and, thus, backlog levels may increase substantially when annual and multi-year orders are received, and decrease as shipments are made against these orders.We believe we are in a good position with our existing annual and multi-year contracts to be renewed in future quarters.

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 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.

Demand for infrared products continues to be fueled by interest in lenses made with our proprietary BD6 and our new BDNL4 materials.

With the global supply of germanium currently concentrated in Russia and China, recent global events are generating renewed interest in germanium alternatives such as our proprietary BD6 material, and other materials we are currently developing under an exclusive license with the Naval Research Lab.

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, 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.

We believe the terminations of certain of our management employees in our China subsidiaries, LPOIZ and LPOI, and transition to new management personnel in fiscal year 2021, adversely impacted the domestic sales in China of these subsidiaries during fiscal year 2022 and fiscal year 2023.

Although our new sales and management personnel have now established 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-month periods ended September 30, 2022 and 2021:

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

Three Months Ended

September 30,

Six Months Ended

Infrared Products

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Specialty Products

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.

Three months ended December 31, 2022

Our revenue decreased by 8% in the second quarter of fiscal 2023, as compared to the same quarter of the prior fiscal year, primarily driven by a decrease in sales of infrared products.

Revenue from the PMO product group for the second quarter of fiscal 2023 was $3.9 million, an increase of 3%, as compared to the same quarter of the prior fiscal year.

The increase in revenue is due to increases in sales to defense, industrial and medical customers, offset by a decrease in sales to customers in the telecommunications industry.

PMO product sales to customers in China continue to be soft across all of the industries we serve due to unfavorable economic conditions in that region.

Revenue generated by the infrared product group for the second quarter of fiscal 2023 was $4.0 million, a decrease of 21%, as compared to same quarter of the prior fiscal year.

The decrease in revenue is primarily due to timing sales of infrared products against a large annual contract, for which shipments against the prior contract were completed in the second quarter of fiscal 2023, while shipments against the renewed contract signed in November 2022 will not begin until the third quarter of fiscal 2023.

The renewed contract represents a 20% increase over the previous contract.

Our specialty products revenue increased by 41%, as compared to the same period of the prior fiscal year.

The increase is primarily due to increased demand for collimator assemblies.

Six months ended December 31, 2022

Our revenue decreased by 14% in the first half of fiscal 2023, as compared to the same period of the prior fiscal year, driven by decreases in both PMO and Infrared products.

Revenue from the PMO product group for the first half of fiscal 2023 was $7.1 million, a decrease of 6%, as compared to the same period of the prior fiscal year.

The decrease in revenue is primarily attributed to decreases in sales to customers in the telecommunications and commercial industries.

PMO product sales to customers in China continue to be soft across all of the industries we serve due to unfavorable economic conditions in that region.

Revenue generated by the infrared product group for the first half of fiscal 2023 was $7.7 million, a decrease of 23%, as compared to same period of the prior fiscal year.

shipments against the prior contract were completed in the second quarter of fiscal 2023, while shipments against the renewed contract signed in November 2022 will not begin until the third quarter of fiscal 2023.

The renewed contract represents a 20% increase over the previous contract.

Sales of BD6-based molded infrared products also decreased, particularly to customers in the China industrial market.

Our specialty products revenue increased by 27%, as compared to the same period of the prior fiscal year, and represented 6% and 4% of total revenue for the first half of fiscal 2023 and 2022, respectively.

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 quarters ended September 30, 2022 and 2021:

Quarter Ended September 30,

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

Quarter Ended December 31,

Six Months Ended December 31,

$ (1,055,291 )

$ (2,074,761 )

$ (1,687,388 )

Depreciation and amortization

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Interest expense

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.

Our EBITDA for the quarter ended December 31, 2022 was approximately $207,000, compared to a loss of $41,000 for the same period of the prior fiscal year.

The increase in EBITDA in the second quarter of fiscal 2023 was primarily attributable to higher gross margin.

Our EBITDA for the six months ended December 31, 2022 was a loss of approximately $185,000, compared to earnings of $413,000 for the same period of the prior fiscal year.

The decrease in EBITDA in the first half 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