What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2024-02-08 · 134 added, 115 removed, 220 unchanged (53% of the section changed)

42 unchanged sentences

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.

We design, build, and sell cameras and optical assemblies in markets for defense, industrial test and measurement, medical devices, sporting, and communications applications 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.

2 unchanged sentences

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.

As we continue a 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.

1 unchanged sentence

Growth Strategy

The industry is transforming from a fragmented industry with many component manufacturers into a solution-focused industry with the potential for partnerships for solution development and production.

The optics industry is transforming from a fragmented industry with many component manufacturers into a solution-focused industry with the potential for partnerships for solution development and production.

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

11 unchanged sentences

Results of Operations

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.

Three months ended March 31, 2024, compared to three months ended March 31, 2023

Revenue for the third quarter of fiscal 2024 was approximately $7.7 million, an increase of approximately $0.3 million, or 4%, as compared to approximately $7.4 million in the same quarter of the prior fiscal year, driven by increases in sales of infrared components and engineering services.

Revenue generated by infrared components was approximately $3.6 million in the third quarter of fiscal 2024, an increase of approximately $0.5 million, or 16%, as compared to 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 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 the visible components product group for the third quarter of fiscal 2024 was $2.7 million, a decrease of approximately $0.4 million, or 13%, 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 and medical industries.

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

Revenue from assemblies and modules decreased by 16%, 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.

This decrease was partially offset by the addition of Visimid sales of infrared camera cores.

Revenue from engineering services increased by $0.4 million, or 211%, for the third quarter of fiscal 2024, as compared to the same quarter of the prior fiscal year.

This increase was primarily driven by Visimid’s contract with Lockheed Martin, where revenue is generally recognized based on the achievement of milestones.

Nine months ended March 31, 2024, compared to nine months ended March 31, 2023

Revenue for the first nine months of fiscal 2024 was approximately $23.1 million, a decrease of approximately $0.2 million, or 1%, as compared to approximately $23.2 million in the same period of the prior fiscal year, primarily driven by a decrease in sales of visible components, partially offset by increases in sales of infrared components and engineering services.

Revenue generated by infrared components was approximately $11.0 million in the first nine months of fiscal 2024, an increase of approximately $1.4 million, or 15%, as compared to approximately $9.6 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.

Revenue from the visible components product group for the first nine months of fiscal 2024 was $8.1 million, a decrease of approximately $2.2 million, or 21%, 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.

1 unchanged sentence

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.

Revenue from assemblies and modules were flat, as compared to the same period of the prior fiscal year, due to a decrease in shipments against a multi-year contract with a defense customer, due to timing, which was offset by the addition of Visimid sales of infrared camera cores.

Revenue from engineering services increased by $621,000, or 213%, as compared to the same period of the prior fiscal year.

This increase was primarily driven by Visimid’s contract with Lockheed Martin, where revenue is generally recognized based on the achievement of milestones.

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 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.

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 second quarter of fiscal 2024.

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.

Three months ended March 31, 2024, compared to three months ended March 31, 2023

Gross margin in the third quarter of fiscal 2024 was approximately $1.6 million, a decrease of $0.9 million, or 37%, as compared to the same quarter of the prior fiscal year.

Total cost of sales was approximately $6.1 million for the third quarter of fiscal 2024, compared to approximately $4.9 million for the same quarter of the prior fiscal year.

Gross margin as a percentage of revenue was 21% for the third quarter of fiscal 2024, compared to 34% for the same quarter of the prior fiscal year.

The decrease in gross margin as a percentage of revenue is due to two main factors.

First, the decrease in visible components sales, offset by an increase in infrared components sales which typically have lower margins than visible components.

Second, our quarterly revaluation of inventory resulted in a more significant adjustment for the third quarter of fiscal 2024 than in prior periods.

The revaluation was a net write-down of inventory, driven by cost reduction efforts related to material, labor and outside services.

Nine months ended March 31, 2024, compared to nine months ended March 31, 2023

Gross margin in the first nine months of fiscal 2024 was approximately $6.1 million, a decrease of $1.9 million, or 24%, as compared to the same period of the prior fiscal year.

Total cost of sales was approximately $17.0 million for the first nine months of fiscal 2024, compared to approximately $15.3 million for the same period of the prior fiscal year.

Gross margin as a percentage of revenue was 26% for the first nine months of fiscal 2024, compared to 34% for the same period of the prior fiscal year.

The decrease in gross margin as a percentage of revenue is primarily due to the decrease in visible components sales, which typically have higher margins than our infrared components product group.

Our infrared components product group comprised a greater portion of our sales for the first half of fiscal 2024.

In addition, gross margin as a percentage of revenue for the first nine months of fiscal 2024 was unfavorably impacted by the aforementioned revaluation of inventory during the third quarter of fiscal 2024.

Selling, General and Administrative

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.

Three months ended March 31, 2024, compared to three months ended March 31, 2023

SG&A costs were approximately $3.2 million for the third quarter of fiscal 2024, an increase of approximately $412,000, or 15%, as compared to approximately $2.8 million in the same quarter of the prior fiscal year.

The increase in SG&A costs is primarily due to an increase in wages, including the addition of employees upon the acquisition of Visimid.

We also incurred additional legal and professional fees in the third quarter of fiscal 2024 associated with our rescheduled annual stockholder meeting and previously disclosed Delaware chancery court proceedings.

Nine months ended March 31, 2024, compared to nine months ended March 31, 2023

SG&A costs were approximately $8.7 million for the first nine months of fiscal 2024, an increase of approximately $263,000, or 3%, as compared to approximately $8.4 million in the same period of the prior fiscal year.

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

We also incurred approximately $97,000 associated with the acquisition of Visimid, which closed in July 2023, as well as additional legal and professional fees in the third quarter of fiscal 2024 associated with our rescheduled annual stockholder meeting and previously disclosed Delaware chancery court proceedings.

New Product Development

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.

New product development costs were approximately $570,000 in the third quarter of fiscal 2024, an increase of approximately $56,000, or 11%, as compared to the same quarter of the prior fiscal year.

For the first nine months of fiscal 2024, new product development costs were $1.8 million, an increase of $288,000 or 19%, 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.

Amortization of intangibles increased by $153,000 and $357,000 for three and nine months ended March 31, 2024, respectively, 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 $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.

Interest expense, net, was approximately $37,000 for the third quarter of fiscal 2024, as compared to $77,000 for the same quarter of the prior fiscal year.

For the first nine months of fiscal 2024, interest expense was approximately $149,000, as compared to $229,000 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.

In February 2024, our largest loan balance was paid in full using the restricted cash that previously secured the loan.

Other income, net, was approximately $29,000 for the third quarter of fiscal 2024, as compared to other expense, net of $61,000 for the same quarter of the prior fiscal year.

For the first nine months of fiscal 2024, other income, net, was $234,000, as compared to other expense, net, of $35,000 for the same period of the prior fiscal year.

Other income for the first nine months 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.

4 unchanged sentences

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.

Income tax expense was approximately $6,000 for the third quarter of fiscal 2024, as compared to $65,000 for the same period of the prior year.

The decrease is due to timing of intercompany dividends.

During the first nine months of fiscal 2024, income tax expense was approximately $121,000, compared to $222,000 for the same period of the prior fiscal year.

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

Net loss for the 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.

Net loss for the third quarter of fiscal 2024 was approximately $2.6 million, or $0.07 basic and diluted loss per share, compared to $1.2 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 $1.4 million for the third quarter of fiscal 2024, as compared to the same quarter of the prior fiscal year, was primarily attributable to the decrease in gross margin, coupled with increased operating expenses, including amortization of intangibles.

Net loss for the first nine months of fiscal 2024 was approximately $5.7 million, or $0.15 basic and diluted loss per share, compared to $3.2 million, or $0.11 basic and diluted loss per share, for the same period of the prior fiscal year.

The increase in net loss of approximately $2.4 million for the first nine months 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, coupled with increased operating expenses and partially offset by the aforementioned other income in our Chinese subsidiary.

Weighted-average common shares outstanding were 37,988,770, basic and diluted, in the third quarter of fiscal 2024, compared to 35,124,095, basic and diluted, in the same quarter of fiscal 2023.

For the first nine months of fiscal 2024, weighted-average common shares outstanding were 37,639,464, basic and diluted, as compared to 29,750,138, basic and diluted, in the same period of the prior fiscal year.

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

The increase is also attributable to the shares of Class A common stock issued in conjunction with the acquisition of Visimid, 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 and Policies in China

2 unchanged sentences

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, 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.

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, 3% in 2022, and 5.2% in 2023.

The annual economic growth rate in 2024 is projected to be 4.6%, although some analysts have indicated that China’s economic growth could be lower.

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.

11 unchanged sentences

Liquidity and Capital Resources

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.

As of March 31, 2024, we had working capital of approximately $7.8 million and total cash, cash equivalents and restricted cash of approximately $3.2 million, of which, greater than 50% of our cash and cash equivalents was held by our foreign subsidiaries.

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

3 unchanged sentences

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

As of December 31, 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 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 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.

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 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).

As of March 31, 2024, 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 March 31, 2024.

Loans payable consists of two third-party equipment loans and the ANBTX Note.

The BankUnited Term Loan was paid in full as of March 31, 2024.

As of March 31, 2024, the outstanding balance on the equipment loans was approximately $449,000, and the outstanding balance on the ANBTX Note was $150,000.

The ANBTX Note was repaid in full on May 2, 2024.

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.

1 unchanged sentence

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.

As of March 31, 2024, we issued 68,041 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.

3 unchanged sentences

Cash Flows – Operating:

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 provided by operations was approximately $456,000 for the first nine months of fiscal 2024, compared to cash used in operations of approximately $920,000 for the same period of the prior fiscal year.Cash provided by operations for the first nine 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 each of the first three quarters of fiscal 2024.

Cash used in operations in the first nine 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 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.

During the first nine months of fiscal 2024, we expended approximately $1.9 million in investments in capital equipment, compared to approximately $2.3 million in the same period of the prior fiscal year.

We also expended approximately $847,000, net of cash acquired, to acquire Visimid during the first nine months 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 nine months of fiscal 2024 also reflects proceeds of approximately $365,000 from sale-leasebacks of equipment.

The spending in the first nine months of fiscal 2024 is largely driven by the Orlando Facility expansion.

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 was $3.7 million.

During fiscal 2023, we expended approximately $2.3 million toward this project, and during the first nine months of fiscal 2024, we expended $1.3 million, with the remaining $0.1 million to be expended during the fourth quarter of fiscal 2024.

For the first nine months of fiscal 2023, the majority of our capital expenditures were related to the expansion of our infrared coating and lens diamond turning capacity.

Cash Flows – Financings:

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.

Net cash used in financing activities was approximately $2.1 million for the first nine months of fiscal 2024, compared to cash provided by financing activities of approximately $7.5 million in the same period of the prior fiscal year.

Cash used in financing activities for the first nine months of fiscal 2024 reflects approximately $2.4 million in principal payments on our loans and finance leases, offset by $143,000 in proceeds from the 2023 Equipment Loan, $98,000 in proceeds from the sale of Class A common stock pursuant to the at-the-market equity program and $40,000 in proceeds from the sale of Class A common stock under the 2014 ESPP.

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, and $40,000 in proceeds from the sale of Class A common stock under the 2014 ESPP, offset by approximately $1.7 million in principal payments on our loans and finance leases.

Contractual Obligations and Commitments

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.

As of March 31, 2024, 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 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

1 unchanged sentence

Critical Accounting Policies and Estimates

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

There have been no material changes to our critical accounting policies and estimates during the nine months ended March 31, 2024 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.

28 unchanged sentences

Sales Backlog

We believe our sales growth has been and continues to be our best indicator of success.

We believe our sales activity has been and continues to be a key indicator of success.

Our best view into the efficacy of our sales efforts is in our “order book.” Our order book equates to sales “backlog.” It has a quantitative and a qualitative aspect:

3 unchanged sentences

Generally, a higher total backlog is better for us.

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.

Our total backlog at March 31, 2024 was approximately $22.0 million, a decrease of 17%, as compared to $26.6 million as of March 31, 2023.

Compared to the end of fiscal 2023, our total backlog increased by 1% during the first nine months of fiscal 2024.

Backlog change rates for the last five fiscal quarters are:

2 unchanged sentences

Change From Prior Quarter End

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:

The decrease in backlog during the nine months ended March 31, 2024 as compared to March 31, 2023 is primarily due to shipments against the prior period backlog under several annual and multi-year contract renewals.

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

The reduction in backlog as a result of these shipments during the first nine months 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.

and (ii) a significant contract awarded to Visimid by Lockheed Martin 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.

As such, in second quarter of fiscal 2024 we did not book 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.

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

14 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 and six-month periods ended December 31, 2023 and 2022:

Three Months Ended December 31,

Six Months Ended December 31,

The following table sets forth revenue for our four product groups for the three and nine-month periods ended March 31, 2024 and 2023:

Three Months Ended

Nine Months Ended

Year-to -date

Infrared components

$ 3,638,674 $ 3,143,718 16 % $ 11,046,129 $ 9,623,597 15 %

Visible components

2,688,475 3,104,572 -13 % 8,055,714 10,248,857 -21 %

Assemblies and modules

829,265 986,651 -16 % 3,077,987 3,085,256 0 %

Engineering services

542,761 174,707 211 % 912,230 291,518 213 %

Total revenue

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.

$ 7,699,175 $ 7,409,648 4 % $ 23,092,060 $ 23,249,228 -1 %

Three months ended March 31, 2024

Our revenue increased by 4% in the third quarter of fiscal 2024, as compared to the same quarter of the prior fiscal year, driven by increases in sales of infrared components and engineering services.

Revenue generated by the infrared components product group for the third quarter of fiscal 2024 was $3.6 million, an increase of 16%, 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 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.

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.

Revenue from the visible components product group for the third quarter of fiscal 2024 was $2.7 million, a decrease of 13%, 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 and medical industries.

Sales to customers in the telecommunications industry in China also decreased for the third consecutive quarter, representing less than 1% of our consolidated revenue for the third quarter of fiscal 2024.

Revenue from assemblies and modules decreased by 16% for the third 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 $241,000.

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.

Revenue from engineering services increased by $0.4 million, or 211%, for the third quarter of fiscal 2024, as compared to the same quarter of the prior fiscal year.

This increase was primarily driven by Visimid’s contract with Lockheed Martin, where revenue is generally recognized based on the achievement of milestones.

Nine months ended March 31, 2024

Our revenue decreased by 1% in the first nine months of fiscal 2024, as compared to the same period of the prior fiscal year, driven by a decrease in sales of visible components, partially offset by increases in sales of infrared components and engineering services.

Revenue generated by the infrared components product group for the first nine months of fiscal 2024 was $11.0 million, an increase of 15%, 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.

Revenue from the visible components product group for the first nine months of fiscal 2024 was $8.1 million, a decrease of 21%, 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.

Sales to customers in the telecommunications industry in China also decreased by approximately 50%.

Revenue from assemblies and modules were flat for the first nine months of fiscal 2024, as compared to the same period of the prior fiscal year, due to a decrease in shipments against a multi-year contract with a defense customer, due to timing, which was offset by the addition of Visimid revenue of approximately $521,000.

Revenue from engineering services increased by $621,000 for the first nine months of fiscal 2024, as compared to the same period of the prior fiscal year.

Approximately $524,000 of this increase is due to the addition of Visimid revenue.

This increase was primarily driven by Visimid’s contract with Lockheed Martin, where revenue is generally recognized based on the achievement of milestones.

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

19 unchanged sentences

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

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

Three Months Ended December 31,

Six Months Ended December 31,

The following table adjusts net loss to EBITDA for the three and nine months ended March 31, 2024 and 2023:

Three Months Ended March 31,

Nine Months Ended March 31,

$ (2,597,534 )

1 unchanged sentence

$ (5,653,573 )

$ (3,238,031 )

Depreciation and amortization

1 unchanged sentence

Interest expense

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.

$ (1,511,237 )

$ (2,397,273 )

Our EBITDA for the quarter ended March 31, 2024 was a loss of approximately $1.5 million, compared to $242,000 for the same quarter of the prior fiscal year.

The decrease in EBITDA in the third quarter of fiscal 2024 was primarily attributable to lower sales and gross margin, coupled with increased operating expenses.

Our EBITDA for the nine months ended March 31, 2024 was a loss of approximately $2.4 million, compared to $427,000 for the same period of the prior fiscal year.

The decrease in EBITDA in the first nine months of fiscal 2024 was primarily attributable to lower revenue and gross margin, coupled with increased operating expenses and partially offset by the aforementioned other income in our Chinese subsidiary.

Quantitative and Qualitative Disclosures about Market Risk

Because we are allowed to comply with the disclosure obligations applicable to a “smaller reporting company,” as defined by Rule 12b-2 of the Exchange Act, with respect to this Quarterly Report on Form 10-Q, we are not required to provide the information required by this Item.

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