LIGHTPATH TECHNOLOGIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations, and liquidity. This discussion and analysis should be read in conjunction with the attached unaudited Condensed Consolidated Financial Statements and notes thereto and our Annual Report on Form 10-K for the year ended June 30, 2022, including the audited Consolidated Financial Statements and notes thereto. The following discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Please also see the cautionary language at the beginning of this Quarterly Report regarding forward-looking statements. 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. COVID-19 has spread throughout world, including the U.S., and continues to spread as additional variants emerge. As a result of the COVID-19 pandemic, our employees at our facilities in China, Latvia, and the U.S. were subject to stay-at-home orders during a portion of fiscal 2021, which restrictions have since been lifted. In addition to stay-at-home orders, many jurisdictions also implemented social distancing and other restrictions and measures to slow the spread of COVID-19. These restrictions significantly impacted economic conditions in the U.S. in 2020 that continued into 2021 and 2022. Beginning in the spring of 2021, restrictions began to lift as vaccines became more available. Despite these stay-at-home orders and other measures and restrictions implemented in the areas in which we operate, as a critical supplier to both the medical and defense industries, we were deemed to be an essential business; thus, regardless of the stay-at-home orders, our workforce was permitted to work from our facilities and our business operations 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 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 2023 or beyond. Introduction 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. Today, LightPath is a global company with major facilities in the United States, the People’s Republic of China, and the Republic of Latvia. Our capabilities include precision molded optics, thermal imaging optics, custom designed optics, and the design and manufacturing of optical assemblies and subsystems. These capabilities allow us to manufacture optical components and higher-level assemblies, including precision molded glass aspheric optics, molded and diamond-turned infrared aspheric lenses and other optical materials used to produce products that manipulate light. We design, develop, manufacture and integrate optical components and assemblies utilizing advanced optical manufacturing processes. Product verticals range from consumer (e.g., cameras, cell phones, gaming, and copiers) to industrial (e.g., lasers, data storage, and infrared imaging), from products where the lenses are the central feature (e.g., telescopes, microscopes, and lens systems) to products incorporating lens components (e.g., 3D printing, machine vision, LIDAR, robotics and semiconductor production equipment) and communications. As a result, we market our products across a wide variety of customer groups, including laser systems manufacturers, laser OEMs, infrared-imaging systems vendors, industrial laser tool manufacturers, telecommunications equipment manufacturers, medical instrumentation manufacturers and industrial measurement equipment manufacturers, government defense agencies, and research institutions worldwide. 22 Table of Contents Subsidiaries In November 2005, we formed LPOI, a wholly-owned subsidiary, located in Jiading, People’s Republic of China. LPOI provides sales and support functions. In December 2013, we formed LPOIZ, a wholly-owned subsidiary located in the New City district, of the Jiangsu province, of the People’s Republic of China. LPOIZ’s 55,000 square foot manufacturing facility (the “Zhenjiang Facility”) serves as our primary manufacturing facility in China and provides a lower cost structure for production of larger volumes of optical components and assemblies. In December 2016, we acquired ISP, and its wholly-owned subsidiary, ISP Latvia. ISP is a vertically integrated manufacturer offering a full range of infrared products from custom infrared optical elements to catalog and high-performance lens assemblies. Since June 2019, ISP’s manufacturing operation has been located at our Orlando Facility. ISP Latvia is a manufacturer of high precision optics and offers a full range of infrared products, including catalog and custom infrared optics. ISP Latvia’s facility in Riga, Latvia (the “Riga Facility”) functions as its manufacturing facility. For additional information, please refer to our Annual Report on Form 10-K for the year ended June 30, 2022. Product Groups Our business is organized in three product groups: PMO, infrared products and specialty products. These product groups are supported by our major product capabilities: molded optics, thermal imaging optics, and custom designed optics, with a product manager for each. Product management is principally a portfolio management process that analyzes products within the product capability areas as defined above. This function facilitates choosing investment priorities to help strategically align our competencies with strategic industry revenue opportunities. Over the longer term, this function will also help ensure successful product life cycle management. Our PMO product group consists of visible precision molded optics with varying applications. 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 (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. Our specialty product group is comprised of value-added products, such as optical subsystems, assemblies, and collimators, and non-recurring engineering (“NRE”) products, consisting of those products we develop pursuant to product development agreements that we enter into with customers. Typically, customers approach us and request that we develop new products or applications for our existing products to fit their particular needs or specifications. The timing and extent of any such product development is outside of our control. We design, build, and sell optical assemblies in markets for test and measurement, medical devices, military, industrial, and communications based on our proprietary technologies. Many of our optical assemblies consist of several products that we manufacture. In connection with our new strategic direction and the expanding portfolio of products and services, we are evaluating the ways in which we may optimize the financial reporting of our product groups. Growth Strategy 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. 23 Table of Contents We believe such partnerships can start with us as the supplier. 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. 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. 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 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 Annual Report on Form 10-K for the fiscal year ended June 30, 2022. Results of Operations Revenue 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. 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 $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. 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. 24 Table of Contents 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. 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 under a large annual contract. 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 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 $1.7 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 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 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. 25 Table of Contents 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 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 $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 and third quarters of fiscal 2023 reflect some cost savings from seasoned engineer retirements. Other Income (Expense) 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 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. facilities and inter-company transactions in U.S. dollars, partially mitigating the impact of foreign currency fluctuations. 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 $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. Income Taxes 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. 26 Table of Contents Net Loss 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 Due to our operations in China, our business, results of operations, financial condition and prospects may be influenced to a significant degree by economic, political, legal and social conditions in China. China’s economy differs from the economies of other countries in many respects, including with respect to the level of development, growth rate, amount of government involvement, control of foreign exchange and allocation of resources. While China’s economy has experienced significant growth over the past several decades, its growth rate has declined in recent years and may continue to decline. According to the National Bureau of Statistics of China, the annual economic growth rate in China was 6.9% in 2017, 6.8% in 2018, 6.1% in 2019, 2.3% in 2020, 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. Deteriorating economic conditions in China generally and as a result of China’s zero-COVID strategy, have led to lower demand for the Company’s products in China and thus lower revenues and net income for our subsidiaries in China and the Company overall. A continuation of China’s current economic conditions or a further slowdown in the economic growth, an economic downturn, a recession, or other adverse economic conditions in China is likely to have a material adverse effect on our business and results of operations in future quarters. Liquidity and Capital Resources As of March 31, 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. Historically, we considered unremitted earnings held by our foreign subsidiaries to be permanently reinvested. However, during fiscal 2020, we began declaring intercompany dividends to remit a portion of the earnings of our foreign subsidiaries to us, as the U.S. parent company. It is still our intent to reinvest a significant portion of earnings generated by our foreign subsidiaries, however, we also plan to repatriate a portion of their earnings. During fiscal 2020, we began to accrue for these taxes on the portion of earnings that we intend to repatriate. 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 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. 27 Table of Contents Loans payable consists of the BankUnited Term Loan, pursuant to the Amended Loan Agreement, and the subordinated Equipment Loan. 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. 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. 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 the shelf registration statement to $50.6 million. The shelf registration statement was declared effective by the SEC on March 1, 2022. 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 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 $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 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. 28 Table of Contents Cash Flows – Financings: 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 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 We do not engage in any activities involving variable interest entities or off-balance sheet arrangements. Critical Accounting Policies and Estimates There have been no material changes to our critical accounting policies and estimates during the nine months ended March 31, 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. How We Operate We have continuing sales of two basic types: 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, 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 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 design and sampling capability, including a high-quality and responsive optical design engineering staff, and proactive design of reference designs 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; and · 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” 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 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. 29 Table of Contents Our Key Performance Indicators: Typically, on a weekly basis, management reviews a number of performance indicators, both qualitative and quantitative. These indicators change from time to time as the opportunities and challenges in the business change. These indicators are used to determine tactical operating actions and changes. We believe that our non-financial production indicators, such as those noted, are proprietary information. Financial indicators that are considered key and reviewed regularly are as follows: · Sales backlog; · Revenue dollars and units by product group; and · Other key indicators. These indicators are also used to determine tactical operating actions and changes and are discussed in more detail below. Management is evaluating these key indicators as we transition to our new strategic plan, and is implementing certain changes and updates as further described below. Sales Backlog We believe our sales growth has been and continues to be our best indicator of success. Our best view into the efficacy of our sales efforts is in our “order book.” Our order book equates to sales “backlog.” It has a quantitative and a qualitative aspect: quantitatively, our backlog’s prospective dollar value and qualitatively, what percent of the backlog is scheduled by the customer for date-certain delivery. We evaluate our total backlog, which includes all firm orders requested by a customer that are reasonably believed to remain in the backlog and be converted into revenues. This includes customer purchase orders and may include amounts under supply contracts if they meet the aforementioned criteria. Generally, a higher total backlog is better for us. Our total backlog at March 31, 2023 was approximately $26.6 million, an increase of 35%, as compared to $19.7 million as of March 31, 2022. Compared to the end of fiscal 2022, our total backlog increased by 50% during the first nine months of fiscal 2023. Backlog change rates for the last five fiscal quarters are: Quarter Total Backlog ($ 000) Change From Prior Year End Change From Prior Quarter End Q3 2022 $ 19,678 -8 % -10 % Q4 2022 $ 17,767 -17 % -10 % Q1 2023 $ 22,973 29 % 29 % Q2 2023 $ 29,427 66 % 28 % Q3 2023 $ 26,620 50 % -10 % 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. 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 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 from existing customers in the U.S. and Europe related to several other significant long-term projects. 30 Table of Contents 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. 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. 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 continue to negatively impact fiscal 2023 revenue in that region. Revenue Dollars and Units by Product Group The following table sets forth revenue dollars and units for our three product groups for the three and nine-month periods ended March 31, 2023 and 2022: (unaudited) Three Months Ended March 31, Nine Months Ended March 31, Quarter Year-to-date 2023 2022 % Change 2023 2022 % Change Revenue PMO $ 3,105,533 $ 4,033,218 -23 % $ 10,254,715 $ 11,608,665 -12 % Infrared Products 3,606,535 3,725,684 -3 % 11,270,785 13,688,770 -18 % Specialty Products 697,580 546,510 28 % 1,723,728 1,354,494 27 % Total revenue $ 7,409,648 $ 8,305,412 -11 % $ 23,249,228 $ 26,651,929 -13 % Units PMO 296,107 586,528 -50 % 1,147,894 1,600,836 -28 % Infrared Products 28,109 89,476 -69 % 124,218 337,773 -63 % Specialty Products 5,909 5,075 16 % 41,989 14,869 182 % Total units 330,125 681,079 -52 % 1,314,101 1,953,478 -33 % 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. 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 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 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 began late in the third quarter of fiscal 2023. 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, 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. 31 Table of Contents 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 nine months of fiscal 2023 was $11.3 million, a decrease of 18%, as compared to 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. 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 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 Other key indicators include various operating metrics, some of which are qualitative and others are quantitative. These indicators change from time to time as the opportunities and challenges in the business change. They are mostly non-financial indicators, such as evaluating the pipeline of sales opportunities, on time delivery trends, units of shippable output by major product line, production yield rates by major product line, and the output and yield data from significant intermediary manufacturing processes that support the production of the finished shippable product. These indicators can be used to calculate such other related indicators as fully-yielded unit production per-shift, which varies by the particular product and our state of automation in production of that product at any given time. Higher unit production per shift means lower unit cost and, therefore, improved margins or improved ability to compete, where desirable, for price sensitive customer applications. The data from these reports is used to determine tactical operating actions and changes. Management also assesses business performance and makes business decisions regarding our operations using certain non-GAAP measures. These non-GAAP measures are described in more detail below under the heading “Non-GAAP Financial Measures.” Non-GAAP Financial Measures We report our historical results in accordance with GAAP; however, our management also assesses business performance and makes business decisions regarding our operations using certain non-GAAP financial measures. We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition and results of operations computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use. EBITDA EBITDA is a non-GAAP financial measure used by management, lenders, and certain investors as a supplemental measure in the evaluation of some aspects of a corporation’s financial position and core operating performance. Investors sometimes use EBITDA, as it allows for some level of comparability of profitability trends between those businesses differing as to capital structure and capital intensity by removing the impacts of depreciation and amortization. EBITDA also does not include changes in major working capital items, such as receivables, inventory and payables, which can also indicate a significant need for, or source of, cash. Since decisions regarding capital investment and financing and changes in working capital components can have a significant impact on cash flow, EBITDA is not necessarily a good indicator of a business’s cash flows. We use EBITDA for evaluating the relative underlying performance of our core operations and for planning purposes. We calculate EBITDA by adjusting net income to exclude net interest expense, income tax expense or benefit, depreciation and amortization, thus the term “Earnings Before Interest, Taxes, Depreciation and Amortization” and the acronym “EBITDA.” 32 Table of Contents We believe EBITDA is helpful for investors to better understand our underlying business operations. The following table adjusts net loss to EBITDA for the three and nine months ended March 31, 2023 and 2022: (unaudited) Quarter Ended March 31, Nine Months Ended March 31, 2023 2022 2023 2022 Net loss $ (1,163,270 ) $ (495,003 ) $ (3,238,031 ) $ (2,182,391 ) Depreciation and amortization 778,668 924,219 2,359,550 2,763,620 Income tax provision 65,282 163,059 222,416 328,328 Interest expense 77,094 54,984 228,705 151,064 EBITDA $ (242,226 ) $ 647,259 $ (427,360 ) $ 1,060,621 % of revenue -3 % 8 % -2 % 4 % 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.