What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-11 compared with 2023-02-09 · 141 added, 127 removed, 203 unchanged (57% of the section changed)

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Please also see the cautionary language at the beginning of this Quarterly Report regarding forward-looking statements.

Potential Impact of COVID-19

Continual Impact of COVID-19

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

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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.

were subject to stay-at-home orders during a portion of fiscal 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.

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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.

thus, regardless of the stay-at-home orders, our workforce was permitted to work from our facilities and our business operations 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.

Additionally, some areas have had travel restrictions in place, including China until recently.

Even though China's travel restrictions are no longer in place, we are required to re-apply for travel visas and approvals which will continue to affect our ability to travel in China.

As a result, 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 have been, and will continue to be, adversely impacted.

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

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.

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 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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Our infrared product group is comprised of infrared optics, both molded and diamond-turned, and thermal imaging assemblies.

This product group also includes both conventional and CNC ground and polished lenses.

Between these two product groups, we have the capability to manufacture lenses from very small (with diameters of sub-millimeter) to over 300 millimeters, and with focal lengths from approximately 0.4 millimeters to over 2000 millimeters.

This product group also includes both conventional and CNC (computer numerical control) ground and polished lenses.

Between these two product groups, we have the capability to manufacture lenses from very small (with diameters of a sub-millimeter) to over 300 millimeters, and with focal lengths from approximately 0.4 millimeters to over 2000 millimeters.

In addition, both product groups offer both catalog and custom designed optics.

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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 have in-house 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.

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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.

Our subject-matter expertise and 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.

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

Results of Operations

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.

Three months ended March 31, 2023, compared to three months ended March 31, 2022

Revenue for the third quarter of fiscal 2023 was approximately $7.4 million, a decrease of approximately $0.9 million, or 11%, as compared to approximately $8.3 million in the same period of the prior fiscal year, primarily due to a decrease in sales of PMO products.

Revenue was negatively impacted across all product groups by temporary production disruptions in the Orlando Facility during the third quarter of fiscal 2023, which occurred as a result of the construction.

Although the project is not yet complete, the remaining phases are expected to be minimally disruptive.

Revenue generated by infrared products was approximately $3.6 million in the third quarter of fiscal 2023, a decrease of approximately $119,000, or 3%, as compared to approximately $3.7 million in the same period of the prior fiscal year.

The decrease in revenue is primarily due to timing sales of infrared products under a large annual contract, the shipments for which were completed in the second quarter of fiscal 2023, while shipments under the renewed contract signed in November 2022 began late in 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.

This decrease was partially offset by the sale of the majority of our infrared catalog inventory to Edmund Optics, as they will now service this portion of our catalog business.

Revenue generated by PMO products was approximately $3.1 million for the third quarter of fiscal 2023, a decrease of approximately $0.9 million, or 23%, as compared to approximately $4.0 million in the same period of the prior fiscal year.

The decrease in revenue is due to a decrease in sales to customers in the telecommunications industry and a decrease in sales of commercial products, partially offset by increases in sales to defense and industrial customers.

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.

Revenue generated by our specialty products was approximately $698,000 in the third quarter of fiscal 2023, an increase of approximately $151,000, or 28%, compared to $547,000 in the same period of the prior fiscal year.

The increase is primarily due to increased demand for collimator assemblies, and increased sales of a custom visible lens assembly to a medical customer.

Nine months ended March 31, 2023, compared to nine months ended March 31, 2022

Revenue for the first nine months of fiscal 2023 was approximately $23.2 million, a decrease of approximately $3.4 million, or 13%, as compared to approximately $26.7 million in the same period of the prior fiscal year, driven by both PMO and Infrared products.

Although the project is not yet complete, the remaining phases are expected to be minimally disruptive.

Revenue generated by infrared products was approximately $11.3 million in the first nine months of fiscal 2023, a decrease of approximately $2.4 million, or 18%, as compared to approximately $13.7 million in the same period of the prior fiscal year.

Shipments against the prior contract were completed in the second quarter of fiscal 2023, while shipments under the renewed contract signed in November 2022 began late in 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.

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

Revenue generated by PMO products was approximately $10.3 million for the first nine months of fiscal 2023, a decrease of approximately $1.4 million, or 12%, as compared to approximately $11.6 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.

Revenue generated by our specialty products was approximately $1.7 million in the first nine months of fiscal 2023, an increase of approximately $369,000, or 27%, compared to $1.4 million in the same period of the prior fiscal year.

The increase is primarily due to increased demand for collimator assemblies, and increased sales of a custom visible lens assembly to a medical customer.

The first quarter of fiscal 2023 also included 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

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.

Three months ended March 31, 2023, compared to three months ended March 31, 2022

Gross margin in the third quarter of fiscal 2023 was approximately $2.5 million, a decrease of 16%, as compared to approximately $3.0 million in the same period of the prior fiscal year.

Total cost of sales was approximately $4.9 million for the third quarter of fiscal 2023, compared to approximately $5.3 million for the same period of the prior fiscal year.

Gross margin as a percentage of revenue was 34% for the third quarter of fiscal 2023, compared to 37% for the same period of the prior fiscal year.

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

The mix of revenue by product group for the third quarter of fiscal 2023 was also more heavily weighted toward infrared products, which typically have lower margins than PMO products.

Gross margin of 34% at this low revenue level with a less favorable product mix reflects the benefit of a number of the operational and cost structure improvements that we have been implementing.

Nine months ended March 31, 2023, compared to nine months ended March 31, 2022

Gross margin in the first nine months of fiscal 2023 was approximately $8.0 million, a decrease of 11%, as compared to approximately $9.0 million in the same period of the prior fiscal year.

Total cost of sales was approximately $15.3 million for the first nine months of fiscal 2023, compared to approximately $17.6 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 2023 and for the same period of the prior fiscal year.

The lower revenue level for the first nine months of fiscal 2023, as compared to the same period of the prior fiscal year, resulted in less contribution toward fixed manufacturing costs.

The mix of revenue by product group for the first nine months of fiscal 2023 was similar to that of the same period of the prior fiscal year.

Maintaining a gross margin of 34% at a lower 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 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.

Three months ended March 31, 2023, compared to three months ended March 31, 2022

SG&A costs were approximately $2.8 million for the third quarter of fiscal 2023, an increase of approximately $140,000, or 5%, as compared to approximately $2.6 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 and other personnel-related costs.

In addition, we incurred approximately $129,000 related to the exit of our secondary facility in Orlando, for which the lease ended in February 2023.

These increases are partially offset by a decrease of approximately $45,000 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.

Nine months ended March 31, 2023, compared to nine months ended March 31, 2022

SG&A costs were approximately $8.4 million for the first nine months of fiscal 2023, a decrease of less than 1%, as compared to approximately $8.4 million in the same period of the prior fiscal year.

The decrease in SG&A costs reflects a decrease of $248,000 in value-added tax (“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 $526,000 of expenses associated with the previously disclosed events that occurred at our Chinese subsidiaries, including legal and consulting fees incurred during the first nine months of fiscal 2022.

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.

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

In addition, we incurred approximately $129,000 during the first nine months of fiscal 2023 related to the exit of our secondary facility in Orlando, for which the lease ended in February 2023.

SG&A costs for the first nine months of fiscal 2023 also include fees of $53,000 paid to BankUnited under our Amended Loan Agreement for not prepaying the BankUnited Term Loan by certain dates.

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 $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.

New product development costs were approximately $514,000 in the third quarter of fiscal 2023, a decrease of approximately $76,000, or 13%, as compared to the same period of the prior fiscal year.

For the first nine months of fiscal 2023, new product development costs were approximately $1.5 million, a decrease of $40,000, or 3%, 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.

In addition, the second and third quarters of fiscal 2023 reflect some cost savings from seasoned engineer retirements.

Other Income (Expense)

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.

Interest expense, net, was approximately $77,000 for the third quarter of fiscal 2023, as compared to $55,000 for the same period of the prior fiscal year.

For the first nine months of fiscal 2023, interest expense, net was approximately $229,000, as compared to $151,000 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 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.

Total debt has decreased 40% as of the quarter ended March 31, 2023, as compared to the quarter ended March 31, 2022.

Other expense, net, was approximately $61,000 for the third quarter of fiscal 2023, as compared to other income, net, of $180,000 for the same period of the prior fiscal year.

For the first nine months of fiscal 2023, other expense, net was approximately $35,000, as compared to other income, net, of $140,000 for the same period of the prior fiscal year.

Other income, 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 and 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.

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.

We incurred foreign currency transaction losses of $79,000 and $67,000 during the third quarter of fiscal 2023 and 2022, respectively.

For the first nine months of fiscal 2023 and 2022, we recognized net foreign currency transaction losses of $85,000 and $107,000, respectively.

During the third quarter of fiscal 2023, income tax expense was $65,000, compared to approximately $163,000 for the same period of the prior fiscal year.

During the first nine months of fiscal 2023, income tax expense was approximately $222,000, compared to approximately $328,000 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 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.

Net loss for the third quarter of fiscal 2023 was approximately $1.2 million, or $0.03 basic and diluted loss per share, compared to $495,000, 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 third quarter of fiscal 2023, as compared to the same period of the prior fiscal year, was primarily attributable to lower revenue and gross margin.

Net loss for the first nine months of fiscal 2023 was approximately $3.2 million, or $0.11 basic and diluted loss per share, compared to $2.2 million, or $0.08 basic and diluted loss per share, for the same period of the prior fiscal year.

The increase in net loss for the first nine months 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 35,124,095, basic and diluted, in the third quarter of fiscal 2023, compared to 27,033,578, basic and diluted, in the third quarter of fiscal 2022.

For the first nine months of fiscal 2023, weighted-average common shares outstanding were 29,750,138, basic and diluted, as compared to 27,011,943, basic and diluted, for the first nine months of fiscal 2022.

The increase in the weighted-average basic common shares was due to the sale of an aggregate of 9,090,910 shares of Class A common stock pursuant to a public offering which closed January 17, 2023, as well as 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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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.

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, 8.1% in 2021, and 3% in 2022.

The annual economic growth rate in 2023 is estimated to be 5.1%, although some analysts have indicated that China’s economic growth could be lower.

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Liquidity and Capital Resources

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.

As of March 31, 2023, we had working capital of approximately $16.0 million and total cash and cash equivalents of approximately $9.9 million, of which, greater than 25% 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 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.

As of March 31, 2023, LPOIZ had approximately $3.4 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 March 31, 2023.

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

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 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.

As of March 31, 2023, the outstanding balance on the BankUnited Term Loan was approximately $2.4 million.

The outstanding balance on the Equipment Loan was approximately $284,000 as of March 31, 2023.

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

As of March 31, 2023, 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.

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.

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 in the longer term, 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 $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 used in operations was approximately $921,000 for the first nine months of fiscal 2023, compared to cash provided by operations of approximately $352,000 for the same period of the prior fiscal year.Cash used in operations for the first nine months of fiscal 2023 was largely driven by an increase in inventory, which occurred during the third quarter as production was disrupted by the construction in the Orlando Facility.

Cash provided by operations in the first nine months of fiscal 2022 reflects a lower net loss than in the first nine months of fiscal 2023, as well as an inventory reduction.

These inflows were partially offset by 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.

Cash Flows – Investing:

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.

During the first nine months of fiscal 2023, we expended approximately $2.3 million in investments in capital equipment, compared to approximately $1.5 million in the same period of the prior fiscal year.

The first nine months of fiscal 2023 is largely driven by the Orlando Facility expansion, whereas 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.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 agreed to provide $2.4 million in tenant improvement allowances.

The balance of the tenant improvement costs is estimated to be $2.5 million, which we began to fund during the third quarter of fiscal 2023.

Through the third quarter of fiscal 2023, we expended $1.2 million toward this project, with the remaining estimated $1.3 million expected to be expended during the fourth quarter of fiscal 2023.

Cash Flows – Financings:

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.

Net cash provided by financing activities was approximately $7.5 million for the first nine months of fiscal 2023, compared to cash used in financing activities of approximately $425,000 in the same period of the prior fiscal year.

Cash provided by financing activities for the first nine months of fiscal 2023 reflects equity proceeds of $9.2 million from a public offering of Class A common stock, which closed in January 2023, offset by approximately $1.7 million in principal payments on our loans and finance leases.

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, 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.

Contractual Obligations and Commitments

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.

As of March 31, 2023, 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 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 six months ended December 31, 2022 from those disclosed in Item 7.

There have been no material changes to our critical accounting policies and estimates during the nine months ended March 31, 2023 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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We face several challenges in doing so:

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;

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Generally, a higher total backlog is better for us.

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.

Our total backlog at March 31, 2023 was approximately $26.6 million, an increase of 35%, as compared to $19.7 million as of March 31, 2022.

Compared to the end of fiscal 2022, our total backlog increased by 50% during the first nine months 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 half of fiscal 2023 was due to several large customer orders.

The increase in backlog during the first nine months 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.

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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.

We began to ship against the new contract in the third quarter of fiscal 2023, after shipments against the previous contract were completed.

Also during the second quarter of fiscal 2023, 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.

In addition, 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.

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 anticipate that our existing annual and multi-year contracts will be renewed in future quarters.

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

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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.

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 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 six-month periods ended December 31, 2022 and 2021:

Three Months Ended

Six Months Ended

The following table sets forth revenue dollars and units for our three product groups for the three and nine-month periods ended March 31, 2023 and 2022:

Three Months Ended March 31,

Nine Months Ended March 31,

Infrared Products

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Specialty Products

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.

Three months ended March 31, 2023

Our revenue decreased by 11% in the third quarter of fiscal 2023, as compared to the same quarter of the prior fiscal year, primarily driven by a decrease in sales of PMO products.

Revenue from the PMO product group for the third quarter of fiscal 2023 was $3.1 million, a decrease of 23%, as compared to the same quarter of the prior fiscal year.

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.

Revenue generated by the infrared product group for the third quarter of fiscal 2023 was $3.6 million, a decrease of 3%, as compared to same quarter of the prior fiscal year.

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

This decrease was partially offset by the sale of the majority of our infrared catalog inventory to Edmund Optics, as they will now service this portion of our catalog business.

Our specialty products revenue increased by 28%, 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 increase is primarily due to increased demand for collimator assemblies, and increased sales of a custom visible lens assembly to a medical customer, for which we have an end of life order in backlog going into fiscal 2025.

Nine months ended March 31, 2023

Our revenue decreased by 13% in the first nine months 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 nine months of fiscal 2023 was $10.3 million, a decrease of 12%, 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.

Revenue generated by the infrared product group for the first nine months of fiscal 2023 was $11.3 million, a decrease of 18%, 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.

Shipments against the prior contract were completed in the second quarter of fiscal 2023, while shipments against the renewed contract signed in November 2022 began late in 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.

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

Our specialty products revenue increased by 27%, as compared to the same period of the prior fiscal year, and represented 7% and 5% of total revenue for the first nine months of fiscal 2023 and 2022, respectively.

The increase is primarily due to increase demand for collimator assemblies, and increased sales of a custom visible lens assembly to a medical customer, for which we have and end of life order with backlog going into fiscal 2025.

The first quarter of fiscal 2023 also included a charge for in-process materials billed to a customer upon order cancellation, 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 six months ended December 31, 2022 and 2021:

Quarter Ended December 31,

Six Months Ended December 31,

The following table adjusts net loss to EBITDA for the three and nine months ended March 31, 2023 and 2022:

Quarter Ended March 31,

Nine Months Ended March 31,

$ (1,163,270 )

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Interest expense

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.

Our EBITDA for the quarter ended March 31, 2023 was a loss of approximately $242,000, compared to earnings of $647,000 for the same period of the prior fiscal year.

The decrease in EBITDA in the third quarter of fiscal 2023 was primarily attributable to lower revenue and gross margin.

Our EBITDA for the nine months ended March 31, 2023 was a loss of approximately $427,000, compared to earnings of $1.1 million for the same period of the prior fiscal year.

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

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