What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-05-11 · 141 added, 195 removed, 149 unchanged (69% of the section changed)

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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 2021, which restrictions have since been lifted.

were subject to stay-at-home orders during a portion of fiscal year 2021, which restrictions have since been lifted as of the date of this Quarterly Report on Form 10-Q.

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.

from 2020 to 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.

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.

To date, we have not experienced 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 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.

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

However, 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.

However, we are not able to precisely estimate the effects of the continuing COVID-19 pandemic on our future results of operations, financials, or liquidity in fiscal 2024 and 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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ISP Latvia’s facility in Riga, Latvia (the “Riga Facility”) functions as its manufacturing facility.

In July 2023, we acquired Liebert Consulting LLC, dba Visimid Technologies (“Visimid”).

Visimid is an engineering and design firm specializing in thermal imaging, night vision and IOT applications.

Visimid provides design and consulting services for DoD contractors, commercial and industrial customers, and OEMs for original new products.

Visimid’s core competency is developing and producing custom thermal and night vision cores.

We believe that Visimid’s capabilities are aligned with our strategy to focus on engineered solutions.

Visimid’s facility is located in Plano, TX.

For additional information, please refer to our Annual Report on Form 10-K for the year ended June 30, 2023.

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.

We previously organized our products in three groups:

PMO, infrared, and specialty products.

Revenues from product development agreements for engineering services were included in specialty products.

With our strategic transition into more value-added solutions, and the addition of Visimid in July 2023, we reorganized our products into four product groups:

infrared components, visible components, assemblies and modules, and engineering services.

Assemblies and modules were previously included in infrared or specialty products, depending on the lens type.

Our visible components product group consists of visible precision molded optics with varying applications.

Our infrared product group is comprised of infrared optical components, including molded, diamond-turned, or polished lenses.

Polished lenses include 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 2,000 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.

Our assemblies and modules product group is comprised of value-added engineered solutions, such as infrared cameras, infrared imaging modules and cores, optical assemblies, thermal imaging assemblies, and collimators.

Products in this category are typically designed for specific customer needs and requirements, and are sold into OEMs that further integrate them into their systems.

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

Our solutions and assemblies can vary in complexity level from assemblies of lenses that get mounted on a customer’s camera, laser or detector, to complete imaging systems that generate a processed image electronically.

Our engineering services product group represents services we provide pursuant to product development agreements that we enter into with customers.

Typically, customers approach us and request that we develop new products or applications utilizing our existing products to fit their particular needs or specifications.

The timing and extent of any such product development requests are outside of our control, and the related revenue is recognized upon satisfaction of the performance obligation, and transfer of control of the agreed-upon deliverable.

As we continue down the path of strategic shift into highly engineered solutions, we expect this product group to grow in a similar way as our assemblies and modules business.

Furthermore, as the engineering effort precedes the product revenue, the revenue from this product group is often, but not always, a lead indicator to the revenue in assemblies and modules product group.

We believe these four product groups better align with our strategic direction and will allow us to better track the results of our focus on engineered solution and assemblies.

Growth Strategy

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

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

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.

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

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

The industry is transforming from a fragmented industry with a component oriented supply chain, into a solution-focused industry with the potential for partnerships for solution development and production.

Over the last couple of years we have worked to align our organization to this strategy, and leverage our in-house domain expertise in photonics, knowledge and experience in advanced optical technologies, and the necessary manufacturing techniques and capabilities.

We have been developing these partnerships by working closely with our customers throughout their design process, designing optical solutions that are 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 infrared materials, optical molding, fabrication, system design, and proprietary manufacturing technologies, along with other technologies that we may acquire or develop in the future, to create tailored solutions for our customers.

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

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

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Results of Operations

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.

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.

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.

Revenue for the first quarter of fiscal 2024 was approximately $8.1 million, an increase of approximately $0.7 million, or 10%, as compared to approximately $7.4 million in the same period of the prior fiscal year, driven by increases in sales of infrared components, assemblies and modules, and engineering services.

Revenue generated by infrared components was approximately $3.8 million in the first quarter of fiscal 2024, an increase of approximately $0.6 million, or 20%, as compared to approximately $3.2 million in the same period of the prior fiscal year.

The increase in revenue is primarily due to an increase in shipments against an annual contract for an international military program.

Revenue from the visible components product group for the first quarter of fiscal 2024 was $2.7 million, a decrease of 18%, as compared to the same quarter of the prior fiscal year.

The decrease in revenue is primarily due to a decrease in sales to customers in the telecommunications industry in China and a decrease in sales through catalog and distribution channels in the U.S.

and in Europe.

Revenue from assemblies and modules increased by 45%, as compared to the same period of the prior fiscal year.

Approximately one-third of this increase is due to the addition of Visimid product sales;

the remaining increase is driven by sales to customers in the defense industry, 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.

Revenue from engineering services increased by $253,000, as compared to the same period of the prior fiscal year.

The majority of this increase is due to the addition of Visimid sales.

The remaining increase is driven by revenue from one of our space-related funded research contracts.

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.

Gross margin in the first quarter of fiscal 2024 was approximately $2.3 million, an increase of $98,000, or 4%, as compared to the same period of the prior fiscal year.

Total cost of sales was approximately $5.7 million for the first quarter of fiscal 2024, compared to approximately $5.1 million for the same period of the prior fiscal year.

Gross margin as a percentage of revenue was 29% for the first quarter of fiscal 2024, compared to 30% for the same period of the prior fiscal year.

The decrease in gross margin as a percentage of revenue is due to the decrease in visible components sales, which typically have higher margins than our infrared components product group, which comprised a greater portion of our sales for the first quarter of fiscal 2024.

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.

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.

SG&A costs were approximately $2.7 million for the first quarter of fiscal 2024, an increase of approximately $23,000, or 1%, 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 costs of approximately $83,000 associated with the acquisition of Visimid, which closed in July 2023.

These costs were partially offset by a decrease in stock compensation.

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.

New product development costs were approximately $640,000 in the first quarter of fiscal 2024, an increase of approximately $90,000, or 16%, as compared to the same period of the prior fiscal year.

The increase is primarily due to materials and outside services utilized for development projects.

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.

Interest expense, net, was approximately $58,000 for the first quarter of fiscal 2024, as compared to $70,000 for the same period of the prior fiscal year.

The decrease in interest expense is primarily due to a decrease in amortization of loan costs of approximately $19,000, as all loan costs have been fully amortized in prior periods.

Total debt has decreased 38% as of the quarter ended September 30, 2023, as compared to the quarter ended September 30, 2022, while the interest rate on our largest loan balance has increased from 5% to 8.5% for the same period.

Other income, net, was approximately $5,000 for the first quarter of fiscal 2023, as compared to $27,000 for the same period of the prior fiscal year.

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 $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.

We incurred foreign currency transaction gains of $25,000 and $23,000 during the first quarter of fiscal 2024 and 2023, respectively.

During the first quarter of fiscal 2024, income tax expense was approximately $40,000, compared to $102,000 for the same period of the prior fiscal year.

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

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

Net loss for the third quarter of fiscal 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.

Net loss for the first quarter of fiscal 2024 was approximately $1.3 million, or $0.04 basic and diluted loss per share, compared to $1.4 million, or $0.05 basic and diluted loss per share, for the same quarter of the prior fiscal year.The decrease in net loss of approximately $38,000 for the first quarter of fiscal 2024, as compared to the same period of the prior fiscal year, was primarily attributable to the favorable change in the provision for income taxes.

Weighted-average common shares outstanding were 37,431,748, basic and diluted, in the first quarter of fiscal 2024, compared to 27,070,949, basic and diluted, in the first quarter of fiscal 2023.

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.

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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.

As of September 30, 2023, we had working capital of approximately $11.4 million and total cash, cash equivalents and restricted cash of approximately $6.9 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.

We routinely declare 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.

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, and we 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.

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.

As of September 30, 2023, LPOIZ had approximately $2.7 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 September 30, 2023.

Loans payable consists of the BankUnited Term Loan, pursuant to the Amended Loan Agreement, two third-party equipment loans, and the ANBTX Note.

As of September 30, 2023, the outstanding balance on the BankUnited Term Loan was approximately $2.0 million, the outstanding balance on the equipment loans was approximately $361,000, and the outstanding balance on the ANBTX Loan was $150,000.

Pursuant to that certain Fourth Amendment to the Loan Agreement dated February 7, 2023, the BankUnited Term Loan, the only remaining BankUnited Loan, matures and is due and payable in full on December 31, 2024.

The BankUnited Term Loan bears interest at BankUnited’s then prime rate of interest, as adjusted from time to time (8.5% as of September 30, 2023).

Monthly payments of $75,000 are due and payable on the first day of each month, and commencing on January 1, 2024 and continuing on the first day of each month thereafter until the maturity date, monthly payments will increase to $100,000, with each such payment applied first to interest, costs and expenses and then to principal.

Upon maturity, all principal and interest shall be immediately due and payable.

Pursuant to that certain Fifth Amendment to the Loan Agreement dated May 9, 2023, the security interest in certain collateral securing the Term Loan as of such date terminated and was replaced by a security interest in a cash collateral account maintained at BankUnited, initially in the amount of approximately $2,457,000, with a portion of such cash collateral to be released on a quarterly basis equal to 110% of the principal reductions effected during that quarter.

The cash collateral is reflected as Restricted Cash in the accompanying unaudited Condensed Consolidated Balance Sheets as of September 30, 2023 and June 30, 2023.

An exit fee equal to 1% of the outstanding principal balance will be due on December 31, 2023 and (b) 4% of the outstanding principal balance on December 31, 2024 (to the extent the Term Loan is still outstanding on the respective dates and has not been refinanced with another lender).

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.

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

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

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.

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

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

Cash Flows – Operating:

Cash used in operations was approximately $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 provided by operations was approximately $1.1 million for the first three months of fiscal 2024, compared to cash used in operations of approximately $415,000 for the same period of the prior fiscal year.Cash provided by operations for the first three months of fiscal 2024 was largely driven by decrease in accounts receivable, as sales were higher in the fourth quarter of fiscal 2023 than in the first quarter of fiscal 2024.

Cash used in operations in the first three months of fiscal 2023 reflects a decrease in accounts payable and accrued liabilities during such period resulting from the payment of certain expenses related to previously disclosed events that occurred at our Chinese subsidiaries, which were accrued in prior periods.

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.

During the first three months of fiscal 2024, we expended approximately $955,000 in investments in capital equipment, compared to approximately $243,000 in the same period of the prior fiscal year.

We also expended approximately $572,000, net of cash acquired, to acquire Visimid during the first three months of fiscal 2024, as disclosed in Note 3, Acquisition of Visimid Technologies , in the unaudited Condensed Consolidated Financial Statements.

The first three months of fiscal 2024 also reflect proceeds of approximately $365,000 from sale-leasebacks of equipment.

The spending in the first three months of fiscal 2024 is largely driven by the Orlando Facility expansion, whereas the majority of our capital expenditures during the first three months of fiscal 2023 reflected only maintenance capital expenditures.As disclosed in Note 11, Leases , in the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, we constructed 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 $3.8 million.

During the first quarter of fiscal 2024, we expended $890,000 toward this project, with the remaining estimated $550,000 expected to be expended during the second quarter of fiscal 2024, pending final construction invoices.

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.

Net cash used in financing activities was approximately $214,000 for the first three months of fiscal 2024, compared to approximately $187,000 in the same period of the prior fiscal year.

Cash used in financing activities for the first three months of fiscal 2024 reflects $234,000 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 three months of fiscal 2023 reflects approximately $207,000 in principal payments on our loans and finance leases, offset by approximately $20,000 in proceeds from the sale of Class A common stock under the 2014 ESPP.

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.

As of September 30, 2023, our principal commitments consisted of obligations under operating and finance leases, and debt agreements.

No material changes occurred during the first three months of fiscal 2024 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, 2023.

Off Balance Sheet Arrangements

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Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates during the nine months ended March 31, 2023 from those disclosed in Item 7.

There have been no material changes to our critical accounting policies and estimates during the three months ended September 30, 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, 2023.

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Sales backlog;

Revenue dollars and units by product group;

Revenue by product group;

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.

Management continues to evaluate these key indicators as we transition to our new strategic plan, and is implementing certain changes and updates as further described below.

Sales Backlog

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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.

Our total backlog at September 30, 2023 was approximately $21.3 million, a decrease of 7%, as compared to $23.0 million as of September 30, 2022.

Compared to the end of fiscal 2023, our total backlog decreased by 2% during the first three months of fiscal 2024.

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 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.

The decrease in backlog during the first three months of fiscal 2024 is primarily due shipments against several annual and multi-year contract renewals, which orders were added to the backlog in prior periods.

Shipments during the first quarter of fiscal 2024 were partially offset by one significant contract renewal for advanced infrared optics for a critical international military program, which renewal represented a 40% increase in dollar value as compared to the previous order.

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.

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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:

Three Months Ended March 31,

Nine Months Ended March 31,

Infrared Products

Specialty Products

As we have outlined in our Strategic direction, we do not expect to see significant growth in our visible components product group in the near future.

Competition in that product group has grown substantially over the last few years, and some of our new molding capabilities and technologies such as free-form molded optics, might take longer than anticipated to reach full commercialization, depending on economic conditions and technology trends in the area of AR/VR.

However, order bookings for both visible and infrared components and assemblies continue to be slow in China.

Domestic sales in China have also been adversely impacted by the economic downturn in China, which continues to negatively impact revenue and bookings in that region.

Revenue by Product Group

We previously organized our products in three groups:

precision molded optics (“PMO”), infrared, and specialty products.

Revenues from product development agreements for engineering services were included in specialty products.

With our strategic transition into more value-added solutions, and the addition of Visimid in July 2023, we reorganized our products into four product groups:

infrared components, visible components, assemblies and modules, and engineering services.

Assemblies and modules were previously included in PMO, infrared or specialty products, depending on the lens type.

We also previously presented the number of units sold by product group, however this is no longer a measure that we focus on internally, as our focus moves toward engineered solutions.

The following table sets forth revenue for our four product groups for the three-month periods ended September 30, 2023 and 2022:

Three Months Ended

September 30,

Infrared components

Visible components

Assemblies and modules

Engineering services

Total revenue

Infrared Products

Specialty Products

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 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.

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.

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.

Three months ended September 30, 2023

Our revenue increased by 10% in the first quarter of fiscal 2024, as compared to the same quarter of the prior fiscal year, driven by increases in sales of infrared components, assemblies and modules, and engineering services.

Revenue generated by the infrared components product group for the first quarter of fiscal 2024 was $3.8 million, an increase of 20%, as compared to same quarter of the prior fiscal year.

The increase in revenue is primarily due to an increase in shipments against an annual contract for an international military program.

This contract was also renewed during the first quarter of fiscal 2024 for a higher dollar value than the previous contract.

Revenue from the visible components product group for the first quarter of fiscal 2024 was $2.7 million, a decrease of 18%, as compared to the same quarter of the prior fiscal year.

The decrease in revenue is primarily due to a decrease in sales to customers in the telecommunications industry in China and a decrease in sales of through catalog and distribution channels in the U.S.

and in Europe.

Revenue from assemblies and modules increased by 45%, as compared to the same period of the prior fiscal year.

Approximately one-third of this increase is due to the addition of Visimid product sales.

The remaining increase is driven by sales to customers in the defense industry, 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.

Revenue from engineering services increased by $253,000, as compared to the same period of the prior fiscal year.

Approximately $175,000 of this increase is due to the addition of Visimid sales.

The remaining increase is driven by revenue from one of our space-related funded research contracts.

Other Key Indicators

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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.

They are mostly non-financial indicators, such as evaluating the pipeline of sales opportunities, on time delivery trends, 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.

The data from these reports is used to determine tactical operating actions and changes.

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

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

Quarter Ended March 31,

Nine Months Ended March 31,

$ (1,163,270 )

The following table adjusts net loss to EBITDA for the three months ended September 30, 2023 and 2022:

Quarter Ended September 30,

$ (1,342,376 )

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Interest expense

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.

Our EBITDA for the quarter ended September 30, 2023 was a loss of approximately $432,000, compared to $392,000 for the same period of the prior fiscal year.

The decrease in EBITDA in the first quarter of fiscal 2024 was primarily attributable to other income and expenses (non-operating).

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