What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-08 compared with 2023-11-09 · 137 added, 92 removed, 198 unchanged (54% of the section changed)

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

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 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.

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 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.

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 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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Results of Operations

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.

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

Revenue for the second quarter of fiscal 2024 was approximately $7.3 million, a decrease of approximately $1.2 million, or 14%, as compared to approximately $8.5 million in the same quarter of the prior fiscal year, primarily driven by a decrease in sales of visible components.

Revenue generated by infrared components was approximately $3.6 million in the second quarter of fiscal 2024, an increase of approximately $0.3 million, or 9%, as compared to approximately $3.3 million in the 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.

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.

Revenue from the visible components product group for the second quarter of fiscal 2024 was $2.7 million, a decrease of approximately $1.2 million, or 31%, 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 defense industry, as well as 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.

Sales to customers in the telecommunications industry in China also decreased.

Revenue from assemblies and modules decreased by 20%, as compared to the same quarter of the prior fiscal year, primarily due to timing of shipments against a multi-year contract with a defense customer.

This decrease was partially offset by the addition of Visimid revenue.

Revenue from engineering services was flat for the second quarter of fiscal 2024, as compared to the same quarter of the prior fiscal year.

Six months ended December 31, 2023, compared to six months ended December 31, 2022

Revenue for the first half of fiscal 2024 was approximately $15.4 million, a decrease of approximately $0.4 million, or 3%, as compared to approximately $15.8 million in the same period of the prior fiscal year, primarily driven by a decrease in sales of visible components.

Revenue generated by infrared components was approximately $7.4 million in the first half of fiscal 2024, an increase of approximately $0.9 million, or 14%, as compared to approximately $6.5 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 half of fiscal 2024 was $5.4 million, a decrease of approximately $1.8 million, or 25%, as compared to the same period of the prior fiscal year.

The decrease in revenue is primarily due to a decrease in sales to customers in the defense industry, as well as a decrease in sales through catalog and distribution channels in the U.S.

and in Europe.

Sales to customers in the telecommunications industry in China also decreased.

Revenue from assemblies and modules increased by 7%, as compared to the same period of the prior fiscal year, primarily due to the addition of Visimid revenue, which increase was partially offset by a decrease in shipments against a multi-year contract with a defense customer due to timing.

Revenue from engineering services increased by $253,000, as compared to the same period of the prior fiscal year, primarily due to the addition of Visimid revenue as well as revenue from one of our space-related funded research contracts.

Cost of Sales and Gross Margin

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.

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

Gross margin in the second quarter of fiscal 2024 was approximately $2.2 million, a decrease of $1.1 million, or 33%, as compared to the same quarter of the prior fiscal year.

Total cost of sales was approximately $5.1 million for the second quarter of fiscal 2024, compared to approximately $5.2 million for the same quarter of the prior fiscal year.

Gross margin as a percentage of revenue was 30% for the second quarter of fiscal 2024, compared to 38% for the same quarter of the prior fiscal year.

Six months ended December 31, 2023, compared to six months ended December 31, 2022

Gross margin in the first half of fiscal 2024 was approximately $4.5 million, a decrease of $1.0 million, or 18%, as compared to the same period of the prior fiscal year.

Total cost of sales was approximately $10.9 million for the first half of fiscal 2024, compared to approximately $10.4 million for the same period of the prior fiscal year.

Gross margin as a percentage of revenue was 29% for the first half of fiscal 2024, compared to 34% for the same period of the prior fiscal year.

Selling, General and Administrative

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.

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

SG&A costs were approximately $2.9 million for the second quarter of fiscal 2024, a decrease of approximately $172,000, or 6%, as compared to approximately $3.0 million in the same quarter of the prior fiscal year.

The decrease in SG&A costs is primarily due to a decrease in stock-based compensation, partially offset by an increase in wages.

Six months ended December 31, 2023, compared to six months ended December 31, 2022

SG&A costs were approximately $5.5 million for the first half of fiscal 2024, a decrease of approximately $149,000, or 3%, as compared to approximately $5.7 million in the same period of the prior fiscal year.

The decrease in SG&A costs is primarily due to a decrease in stock-based compensation, partially offset by an increase in wages.

This decrease was also partially offset by costs of approximately $97,000 associated with the acquisition of Visimid, which closed in July 2023.

New Product Development

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.

New product development costs were approximately $608,000 in the second quarter of fiscal 2024, an increase of approximately $142,000, or 30%, as compared to the same quarter of the prior fiscal year.

For the first half of fiscal 2024, new product development costs were $1.2 million, an increase of $232,000 or 23%, as compared to the same period of the prior fiscal year.

These increases are primarily due to the addition of engineering personnel as a result of the Visimid acquisition, as well as an increase in materials and outside services utilized for development projects.

Amortization of Intangibles

Amortization of intangibles increased by $204,000 for both the second quarter and first half of fiscal 2024, due to the amortization of identifiable intangible assets associated with the Visimid acquisition.

See Note 3, Acquisition of Visimid , in the unaudited Condensed Consolidated Financial Statements, for further information.

Other Income (Expense)

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.

Interest expense, net, was approximately $54,000 for the second quarter of fiscal 2024, as compared to $81,000 for the same quarter of the prior fiscal year.

For the first half of fiscal 2024, interest expense was approximately $111,000, as compared to $152,000 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, as all loan costs have been fully amortized in prior periods.

Total debt has decreased 35% as of the quarter ended December 31, 2023, as compared to the quarter ended December 31, 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 $200,000 for the second quarter of fiscal 2024, as compared to other expense, net, of $1,000 for the same quarter of the prior fiscal year.

For the first half of fiscal 2024, other income, net, was $205,000, as compared to $26,000 for the same period of the prior fiscal year.

Other income for the second quarter and first half of fiscal 2024 includes a gain of $190,000 for the return of funds previously misappropriated by our former Chinese management team, as a result of the ongoing legal proceedings described in Note 14, Contingencies , in the unaudited Condensed Consolidated Financial Statements.

Other income and expenses also include 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 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.

Income tax expense was approximately $76,000 for the second quarter of fiscal 2024, as compared to $55,000 for the same period of the prior year.

The increase is due to timing of intercompany dividends.

During the first half of fiscal 2024, income tax expense was approximately $116,000, compared to $157,000 for the same period of the prior fiscal year.

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

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.

Net loss for the second quarter of fiscal 2024 was approximately $1.7 million, or $0.05 basic and diluted loss per share, compared to $0.7 million, or $0.03 basic and diluted loss per share, for the same quarter of the prior fiscal year.The increase in net loss of approximately $1 million for the second quarter of fiscal 2024, as compared to the same quarter of the prior fiscal year, was primarily attributable to the decrease in revenue and gross margin, partially offset by the aforementioned other income in our Chinese subsidiary.

Net loss for the first half of fiscal 2024 was approximately $3.1 million, or $0.08 basic and diluted loss per share, compared to $2.1 million, or $0.08 basic and diluted loss per share, for the same period of the prior fiscal year.

The increase in net loss of approximately $1 million for the first half of fiscal 2024, as compared to the same period of the prior fiscal year, was primarily attributable to the decrease in revenue and gross margin, partially offset by the aforementioned other income in our Chinese subsidiary.

Weighted-average common shares outstanding were 37,501,683, basic and diluted, in the second quarter of fiscal 2024, compared to 27,172,226, basic and diluted, in the same quarter of fiscal 2023.

For the first half of fiscal 2024, weighted-average common shares outstanding were 37,446,714, basic and diluted, as compared to 27,121,583, basic and diluted, in the first half 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.

Potential Impact of Economic Conditions in China

Potential Impact of Economic Conditions and Policies 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.

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

According to the National Bureau of Statistics of China, the annual economic growth rate in China was 6.9% in 2017, 6.8% in 2018, 6.1% in 2019, 2.3% in 2020, 8.1% in 2021, and 3% in 2022.

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, a3% in 2022, and 5.2% in 2023.

The annual economic growth rate in 2024 is estimated to be 4.6%, 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.

Deteriorating economic conditions in China generally 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.

In addition, on July 4, 2023 China announced export limitations on Germanium and Gallium, two materials that are commonly used in infrared optical components.

A certain portion of our infrared optics revenue has always been dependent on those materials.

As a precaution to the disruption in the supply chain of Germanium, and in anticipation of customers ordering more optics produced from other materials, primarily our own BlackDiamond materials, we have, in agreement with one key customer, proactively canceled some of our sales orders for optics made of Germanium.

This serves to both reduce our exposure to possible shortages in Germanium material supply, as well as to free up capacity for orders for optics made of materials other than Germanium.

This also led to us intentionally not renew a large annual customer order for optics made of Germanium from the same customer.

This annual order is typically renewed during our second fiscal quarter;

the prior renewal was announced in December 2022 for over $5 million.

The lack of this renewal impacts our backlog in the short term, as we would typically have received this order during the second fiscal quarter.

The lack of this order booking does not mean, however, that we have lost the customer.

Instead, we expect this order to renew in coming months, as the customer completes evaluating, and working toward transitioning to optics made of our BlackDiamond materials.

Liquidity and Capital Resources

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.

As of December 31, 2023, we had working capital of approximately $9.1 million and total cash, cash equivalents and restricted cash of approximately $5.9 million, of which, greater than 25% of our cash and cash equivalents was held by our foreign subsidiaries.

Cash and cash equivalents held by our foreign subsidiaries in China and Latvia were generated in-country as a result of foreign earnings.

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In China, before any funds can be repatriated, the retained earnings of the legal entity must equal at least 50% of the registered capital.

As of 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.

As of December 31, 2023, LPOIZ had approximately $2.0 million available for repatriation and LPOI did not have any earnings available for repatriation, based on earnings accumulated through December 31, 2023, the end of the most recent statutory tax year, that remained undistributed as of December 31, 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.

As of December 31, 2023, the outstanding balance on the BankUnited Term Loan was approximately $1.8 million, the outstanding balance on the equipment loans was approximately $504,000, and the outstanding balance on the ANBTX Note 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).

The BankUnited Term Loan bears interest at BankUnited’s then prime rate of interest, as adjusted from time to time (8.5% as of December 31, 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.

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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).

The cash collateral is reflected as Restricted Cash in the accompanying unaudited Condensed Consolidated Balance Sheets as of December 31, 2023 and June 30, 2023.

An exit fee equal to 1% of the outstanding principal balance as of December 31, 2023 will be incurred and a further exit fee of 4% of the outstanding principal balance as of December 31, 2024 will be incurred (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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Cash Flows – Operating:

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 provided by operations was approximately $851,000 for the first half of fiscal 2024, compared to cash used in operations of approximately $751,000 for the same period of the prior fiscal year.Cash provided by operations for the first half of fiscal 2024 was largely driven by decrease in accounts receivable, as sales were higher in the fourth quarter of fiscal 2023 than in each of the first two quarters of fiscal 2024.

Cash used in operations in the first half 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 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.

During the first half of fiscal 2024, we expended approximately $1.5 million in investments in capital equipment, compared to approximately $412,000 in the same period of the prior fiscal year.

We also expended approximately $722,000, net of cash acquired, to acquire Visimid during the first half of fiscal 2024, as disclosed in Note 3, Acquisition of Visimid Technologies , in the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

The first half of fiscal 2024 also reflects proceeds of approximately $365,000 from sale-leasebacks of equipment.

The spending in the first half of fiscal 2024 is largely driven by the Orlando Facility expansion, whereas the majority of our capital expenditures during the first half 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 $3.7 million, pending final construction invoices.

During the first half of fiscal 2024, we expended $994,000 toward this project, with the remaining estimated $380,000 expected to be expended during the second half of fiscal 2024.

Cash Flows – Financings:

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.

Net cash used in financing activities was approximately $304,000 for the first half of fiscal 2024, compared to approximately $443,000 in the same period of the prior fiscal year.

Cash used in financing activities for the first half of fiscal 2024 reflects $466,000 in principal payments on our loans and finance leases, offset by approximately $143,000 in proceeds from the 2023 Equipment Loan, and $20,000 in proceeds from the sale of Class A common stock under the 2014 ESPP.

Cash used in financing activities for the first half of fiscal 2023 reflects approximately $463,000 in principal payments on our loans and finance leases, offset by approximately $20,000 in proceeds from the sale of Class A common stock under the 2014 ESPP.

Contractual Obligations and Commitments

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.

As of December 31, 2023, our principal commitments consisted of obligations under operating and finance leases, and debt agreements.

No material changes occurred during the first half 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 three months ended September 30, 2023 from those disclosed in Item 7.

There have been no material changes to our critical accounting policies and estimates during the six months ended December 31, 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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Generally, a higher total backlog is better for us.

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.

Our total backlog at December 31, 2023 was approximately $21.2 million, a decrease of 28%, as compared to $29.4 million as of December 31, 2022.

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

Backlog change rates for the last five fiscal quarters are:

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Change From Prior Quarter End

The decrease in backlog during the first 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 decrease in backlog during the first half 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 half of fiscal 2024 were partially offset by the following:

(i) a 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;

and (ii) a significant contract awarded to Visimid by a defense customer in December 2023.

In previous years we have typically received a significant contract renewal from our largest customer for infrared products made of Germanium during the second fiscal quarter.

However, as previously disclosed we have decided to reduce the amount of optics we produce from Germanium, both to reduce our risk of supply chain disruption, and more importantly, to work with customers to convert their systems to use optics made of our own BlackDiamond materials.

As such, in second quarter of fiscal 2024 we have not booked our typical annual renewal order for Germanium optics with this customer.

Instead, we continue to work with this customer, as well as other customers to convert their systems to use BlackDiamond optics.

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.

1 unchanged sentence

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.

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

While the process of converting those systems over is progressing, it is not an immediate transition and as a result we may experience a short term adverse impact on our revenues and backlog as we decrease the orders for optics made of Germanium, before we start receiving the new orders for optics made of BlackDiamond.

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.

In addition, 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.

7 unchanged sentences

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,

The following table sets forth revenue for our four product groups for the three and six-month periods ended December 31, 2023 and 2022:

Three Months Ended December 31,

Six Months Ended December 31,

Infrared components

3 unchanged sentences

Total revenue

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.

Three months ended December 31, 2023

Our revenue decreased by 14% in the second quarter of fiscal 2024, as compared to the same quarter of the prior fiscal year, driven by a decrease in sales of visible components.

Revenue generated by the infrared components product group for the second quarter of fiscal 2024 was $3.6 million, an increase of 9%, as compared to same quarter of the prior fiscal year.

The increase in revenue is primarily due to an increase in sales to customers in the defense industry, including 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.

Revenue from the visible components product group for the second quarter of fiscal 2024 was $2.7 million, a decrease of 31%, 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 defense industry, as well as 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.

Sales to customers in the telecommunications industry in China also decreased.

Revenue from assemblies and modules decreased by 20% for the second quarter of fiscal 2024, as compared to the same quarter of the prior fiscal year.

The majority of the decrease is due to timing of shipments against a multi-year contract with a defense customer.

This decrease was partially offset by the addition of Visimid revenue of approximately $146,000.

Revenue from engineering services was flat for the second quarter of fiscal 2024, as compared to the same period of the prior fiscal year.

Six months ended December 31, 2023

Our revenue decreased by 3% in the first half of fiscal 2024, as compared to the same period of the prior fiscal year, driven by a decrease in sales of visible components.

Revenue generated by the infrared components product group for the first half of fiscal 2024 was $7.4 million, an increase of 14%, as compared to same period of the prior fiscal year.

The increase in revenue is primarily due to an increase sales to customers in the defense industry, including 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 half of fiscal 2024 was $5.4 million, a decrease of 25%, as compared to the same period of the prior fiscal year.

The decrease in revenue is primarily due to a decrease in sales to customers in the defense industry, as well as a decrease in sales through catalog and distribution channels in the U.S.

and in Europe.

Sales to customers in the telecommunications industry in China also decreased.

Revenue from assemblies and modules increased by 7% for the first half of fiscal 2024, as compared to the same period of the prior fiscal year, primarily due to the addition of Visimid revenue of approximately $281,000, partially offset by a decrease in shipments against a multi-year contract with a defense customer due to timing.

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.

Approximately $186,000 of this increase is due to the addition of Visimid revenue.

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

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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 months ended September 30, 2023 and 2022:

Quarter Ended September 30,

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

Three Months Ended December 31,

Six Months Ended December 31,

$ (1,713,663 )

$ (3,056,039 )

$ (2,074,761 )

Depreciation and amortization

1 unchanged sentence

Interest expense

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).

Our EBITDA for the quarter ended December 31, 2023 was a loss of approximately $454,000, compared to income of $207,000 for the same quarter of the prior fiscal year.

The decrease in EBITDA in the second quarter of fiscal 2024 was primarily attributable to lower sales and gross margin, partially offset by the aforementioned other income in our Chinese subsidiary.

Our EBITDA for the six months ended December 31, 2023 was a loss of approximately $886,000, compared to $185,000 for the same period of the prior fiscal year.

The decrease in EBITDA in the first half of fiscal 2024 was primarily attributable to lower revenue and gross margin, partially offset by the aforementioned other income in our Chinese subsidiary.

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