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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from ___________ to ____________
Commission file number
(Exact name of registrant as specified in its charter) |
| ||
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
http://www.lightpath.com
(Address of principal executive offices)
(ZIP Code)
(
(Registrant’s telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
|
| The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
LIGHTPATH TECHNOLOGIES, INC.
Form 10-Q
Index
Item |
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| 4 |
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| 4 |
| |
| Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) |
| 5 |
|
| Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity |
| 6 |
|
|
| 7 |
| |
| Notes to Unaudited Condensed Consolidated Financial Statements |
| 8 |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| 21 |
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| 23 |
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| 26 |
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| 27 |
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| 27 |
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| 27 |
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| 33 |
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| 33 |
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| 33 |
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| 34 |
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| 36 |
| ||
2 |
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements and information in this Quarterly Report on Form 10-Q for the quarter ended December 31, 2021 (the “Quarterly Report”) may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, which address activities, events, or developments that we expect or anticipate will or may occur in the future, including such things as future capital expenditures, growth, product development, sales, business strategy, statements related to any further expected effects on our business from the coronavirus (“COVID-19”) pandemic, and other similar matters are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or other comparable terminology. These forward-looking statements are based largely on our current expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control. These statements are subject to many risks, uncertainties, and other important factors that could cause actual future results to differ materially from those expressed in the forward-looking statements including, but not limited to, the continued duration and scope of the COVID-19 pandemic and any impact on the demand for our products; our ability to obtain needed raw materials and components from our suppliers; additional actions governments, businesses, and individuals take in response to the pandemic, including mandatory business closures and restrictions on onsite commercial interactions; the impact of the pandemic and actions taken in response to the pandemic on global and regional economies and economic activity; the pace of recovery when the COVID-19 pandemic subsides; general economic uncertainty in key global markets and a worsening of global economic conditions or low levels of economic growth; the effects of steps that we could take to reduce operating costs; our inability to sustain profitable sales growth, convert inventory to cash, or reduce our costs to maintain competitive prices for our products; circumstances or developments that may make us unable to implement or realize the anticipated benefits, or that may increase the costs, of our current and planned business initiatives; and those factors detailed by us in our public filings with the Securities and Exchange Commission (the “SEC”), including in Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended June 30, 2021. In light of these risks and uncertainties, all of the forward-looking statements made herein are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized. We undertake no obligation to update or revise any of the forward-looking statements contained herein.
| 3 |
| Table of Contents |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LIGHTPATH TECHNOLOGIES, INC. | |||||
Condensed Consolidated Balance Sheets | |||||
(unaudited) |
|
| December 31, |
|
| June 30, |
| ||
| 2021 |
|
| 2021 |
| |||
Assets | ||||||||
Current assets: |
|
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| ||
Cash and cash equivalents |
| $ |
|
| $ |
| ||
Trade accounts receivable, net of allowance of $ |
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| ||
Inventories, net |
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Other receivables |
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Prepaid expenses and other assets |
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Total current assets |
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Property and equipment, net |
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| ||
Operating lease right-of-use assets |
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Intangible assets, net |
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Goodwill |
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| ||
Deferred tax assets, net |
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| ||
Other assets |
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| ||
Total assets |
| $ |
|
| $ |
| ||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: |
|
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Accounts payable |
| $ |
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| $ |
| ||
Accrued liabilities |
|
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Accrued payroll and benefits |
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Operating lease liabilities, current |
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Loans payable, current portion |
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Finance lease obligation, current portion |
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Total current liabilities |
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Finance lease obligation, less current portion |
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Operating lease liabilities, noncurrent |
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Loans payable, less current portion |
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Total liabilities |
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Commitments and Contingencies |
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Stockholders’ equity: |
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Preferred stock: Series D, $ |
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Common stock: Class A, $ |
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shares issued and outstanding |
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Additional paid-in capital |
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Accumulated other comprehensive income |
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Accumulated deficit |
|
| ( | ) |
|
| ( | ) |
Total stockholders’ equity |
|
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| ||
Total liabilities and stockholders’ equity |
| $ |
|
| $ |
| ||
The accompanying notes are an integral part of these condensed consolidated financial statements. |
| 4 |
| Table of Contents |
LIGHTPATH TECHNOLOGIES, INC. |
Condensed Consolidated Statements of Comprehensive Income (Loss) |
(unaudited) |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| December 31, |
|
| December 31, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Revenue, net |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Cost of sales |
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| ||||
Gross margin |
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| ||||
Operating expenses: |
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Selling, general and administrative |
|
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| ||||
New product development |
|
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| ||||
Amortization of intangibles |
|
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| ||||
Gain on disposal of property and equipment |
|
|
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|
| ( | ) |
|
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|
| ( | ) | ||
Total operating expenses |
|
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| ||||
Operating income (loss) |
|
| ( | ) |
|
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| ( | ) |
|
|
| ||
Other income (expense): |
|
|
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|
|
|
|
|
|
Interest expense, net |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Other income (expense), net |
|
|
|
|
|
|
|
| ( | ) |
|
|
| |||
Total other income (expense), net |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | |
Income (loss) before income taxes |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
| ||
Income tax provision |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Foreign currency translation adjustment |
|
|
|
|
|
|
|
| ( | ) |
|
|
| |||
Comprehensive income (loss) |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ |
| ||
Loss per common share (basic) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Number of shares used in per share calculation (basic) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loss per common share (diluted) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Number of shares used in per share calculation (diluted) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
The accompanying notes are an integral part of these condensed consolidated financial statements. |
| 5 |
| Table of Contents |
LIGHTPATH TECHNOLOGIES, INC. |
Condensed Consolidated Statements of Changes in Stockholders' Equity |
(unaudited) |
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| ||||||
|
| Class A |
|
| Additional |
|
| Other |
|
|
|
|
| Total |
| |||||||||
|
| Common Stock |
|
| Paid-in |
|
| Comphrehensive |
|
| Accumulated |
|
| Stockholders’ |
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income |
|
| Deficit |
|
| Equity |
| ||||||
Balances at June 30, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Issuance of common stock for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Stock-based compensation on stock options RSUs |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Foreign currency translation adjustment |
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | |||
Net loss |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Balances at September 30, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Issuance of common stock for: |
|
|
|
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Settlement of RSUs, net |
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
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|
|
| |||||
Stock-based compensation on stock options RSUs |
|
| - |
|
|
|
|
|
|
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|
|
|
|
|
|
|
| |||||
Foreign currency translation adjustment |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net loss |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Balances at December 31, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
|
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|
|
Balances at June 30, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Issuance of common stock for: |
|
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Employee Stock Purchase Plan |
|
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| ||||||
Exercise of stock options, net |
|
|
|
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|
|
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|
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|
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|
|
| ||||||
Stock-based compensation on stock options RSUs |
|
| - |
|
|
|
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|
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|
|
|
|
|
| |||||
Foreign currency translation adjustment |
|
| - |
|
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| |||||
Net income |
|
| - |
|
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|
| |||||
Balances at September 30, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Issuance of common stock for: |
|
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Exercise of stock options RSU's, net |
|
|
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|
| ||||||
Stock-based compensation on stock options RSUs |
|
| - |
|
|
|
|
|
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|
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|
|
|
|
|
|
|
| |||||
Foreign currency translation adjustment |
|
| - |
|
|
|
|
|
|
|
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|
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|
|
|
|
|
| |||||
Net loss |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
Balances at December 31, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
The accompanying notes are an integral part of these condensed consolidated financial statements. |
| 6 |
| Table of Contents |
LIGHTPATH TECHNOLOGIES, INC. |
Condensed Consolidated Statements of Cash Flows |
(unaudited) |
|
| Six Months Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net loss |
| $ | ( | ) |
| $ | ( | ) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
| ||
Interest from amortization of debt costs |
|
|
|
|
|
| ||
Gain on disposal of property and equipment |
|
|
|
|
| ( | ) | |
Stock-based compensation on stock options RSUs, net |
|
|
|
|
|
| ||
Provision for doubtful accounts receivable |
|
|
|
|
|
| ||
Change in operating lease assets and liabilities |
|
| ( | ) |
|
| ( | ) |
Inventory write-offs to allowance |
|
|
|
|
|
| ||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
| ( | ) |
|
| ( | ) |
Other receivables |
|
| ( | ) |
|
|
| |
Inventories |
|
|
|
|
| ( | ) | |
Prepaid expenses and other assets |
|
|
|
|
|
| ||
Accounts payable and accrued liabilities |
|
| ( | ) |
|
|
| |
Net cash (used in) provided by operating activities |
|
| ( | ) |
|
|
| |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
| ( | ) |
|
| ( | ) |
Net cash used in investing activities |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
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|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
|
|
|
| ||
Proceeds from sale of common stock from Employee Stock Purchase Plan |
|
|
|
|
|
| ||
Loan costs |
|
| ( | ) |
|
|
| |
Borrowings on loans payable |
|
|
|
|
|
| ||
Payments on loans payable |
|
| ( | ) |
|
| ( | ) |
Repayment of finance lease obligations |
|
| ( | ) |
|
| ( | ) |
Net cash used in financing activities |
|
| ( | ) |
|
| ( | ) |
Effect of exchange rate on cash and cash equivalents |
|
| ( | ) |
|
|
| |
Change in cash and cash equivalents |
|
| ( | ) |
|
| ( | ) |
Cash and cash equivalents, beginning of period |
|
|
|
|
|
| ||
Cash and cash equivalents, end of period |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid in cash |
| $ |
|
| $ |
| ||
Income taxes paid |
| $ |
|
| $ |
| ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 7 |
| Table of Contents |
LIGHTPATH TECHNOLOGIES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Basis of Presentation
References in this document to “the Company,” “LightPath,” “we,” “us,” or “our” are intended to mean LightPath Technologies, Inc., individually, or as the context requires, collectively with its subsidiaries on a consolidated basis.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the requirements of Article 8 of Regulation S-X promulgated under the Exchange Act and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with our Consolidated Financial Statements and related notes, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, filed with the SEC. Unless otherwise stated, references to particular years or quarters refer to our fiscal years ended June 30 and the associated quarters of those fiscal years.
These Condensed Consolidated Financial Statements are unaudited, but include all adjustments, including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly our financial position, results of operations and cash flows for the interim periods presented. The Consolidated Balance Sheet as of June 30, 2021 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year as a whole. The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
2. Significant Accounting Policies
Our significant accounting policies are provided in Note 2, Summary of Significant Accounting Policies, in the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. There have been no material changes to our significant accounting policies during the six months ended December 31, 2021, from those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
Use of Estimates
Management makes estimates and assumptions during the preparation of our unaudited Condensed Consolidated Financial Statements that affect amounts reported in the unaudited Condensed Consolidated Financial Statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes available, which, in turn, could impact the amounts reported and disclosed herein.
3. Revenue
Product Revenue
We are a manufacturer of optical components and higher-level assemblies, including precision molded glass aspheric optics, molded and diamond-turned infrared optical components, and other optical materials used to produce products that manipulate light. We design, develop, manufacture, and distribute optical components and assemblies utilizing advanced optical manufacturing processes. We also perform research and development for optical solutions for a wide range of optics markets. Revenue is derived primarily from the sale of optical components and assemblies.
Revenue Recognition
Revenue is generally recognized upon transfer of control, including the risks and rewards of ownership, of products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We generally bear all costs, risk of loss, or damage and retain title to the goods up to the point of transfer of control of products to customers. Shipping and handling costs are included in the cost of goods sold. We present revenue net of sales taxes and any similar assessments.
Customary payment terms are granted to customers, based on credit evaluations. We currently do not have any contracts where revenue is recognized, but the customer payment is contingent on a future event. We record deferred revenue when cash payments are received or due in advance of our performance. Deferred revenue was not significant as of June 30, 2021 and December 31, 2021.
| 8 |
| Table of Contents |
Nature of Products
Revenue from the sale of optical components and assemblies is recognized upon transfer of control, including the risks and rewards of ownership, to the customer. The performance obligations for the sale of optical components and assemblies are satisfied at a point in time. Product development agreements are generally short term in nature, with revenue recognized upon satisfaction of the performance obligation, and transfer of control of the agreed-upon deliverable. We have organized our products in three groups: precision molded optics (“PMO”), infrared, and specialty products. Revenues from product development agreements are included in specialty products. Revenue by product group for the three and six months ended December 31, 2021 and 2020 was as follows:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
PMO |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Infrared Products |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Specialty Products |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total revenue |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
4. Inventories
The components of inventories include the following:
|
| December 31, 2021 |
|
| June 30, 2021 |
| ||
Raw materials |
| $ |
|
| $ |
| ||
Work in process |
|
|
|
|
|
| ||
Finished goods |
|
|
|
|
|
| ||
Allowance for obsolescence |
|
| ( | ) |
|
| ( | ) |
|
| $ |
|
| $ |
| ||
The value of tooling in raw materials, net of the related allowance for obsolescence, was approximately $
| 9 |
| Table of Contents |
5. Property and Equipment
Property and equipment are summarized as follows:
|
| Estimated Lives (Years) |
|
| December 31, 2021 |
|
| June 30, 2021 |
| |||
Manufacturing equipment |
|
|
| $ |
|
| $ |
| ||||
Computer equipment and software |
|
|
|
|
|
|
|
| ||||
Furniture and fixtures |
|
|
|
|
|
|
|
| ||||
Leasehold improvements |
|
|
|
|
|
|
|
| ||||
Construction in progress |
|
|
|
|
|
|
|
|
|
| ||
Total property and equipment |
|
|
|
|
|
|
|
|
|
| ||
Less accumulated depreciation and amortization |
|
|
|
|
|
| ( | ) |
|
| ( | ) |
Total property and equipment, net |
|
|
|
|
| $ |
|
| $ |
| ||
6. Goodwill and Intangible Assets
There were no changes in the net carrying value of goodwill during the six months ended December 31, 2021.
Identifiable intangible assets were comprised of:
|
| Useful Lives (Years) |
|
| December 31, 2021 |
|
| June 30, 2021 |
| |||
Customer relationships |
|
|
|
| $ |
|
| $ |
| |||
Trade secrets |
|
|
|
|
|
|
|
|
| |||
Trademarks |
|
|
|
|
|
|
|
|
| |||
Total intangible assets |
|
|
|
|
|
|
|
|
|
| ||
Less accumulated amortization |
|
|
|
|
|
| ( | ) |
|
| ( | ) |
Total intangible assets, net |
|
|
|
|
| $ |
|
| $ |
| ||
Future amortization of identifiable intangibles is as follows:
Fiscal year ending: |
|
|
| |
June 30, 2022 (remaining six months) |
|
|
| |
June 30, 2023 |
|
|
| |
June 30, 2024 |
|
|
| |
June 30, 2025 |
|
|
| |
After June 30, 2025 |
|
|
| |
|
| $ |
| |
| 10 |
| Table of Contents |
7. Income Taxes
A summary of our total income tax expense and effective income tax rate for the three and six months ended December 31, 2021 and 2020 is as follows:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
(Loss) income before income taxes |
| $ | ( | ) |
| $ |
|
| $ | ( | ) |
| $ |
| ||
Income tax provision |
| $ |
|
| $ |
|
| $ | 165,269 |
|
| $ | 675,752 |
| ||
Effective income tax rate |
|
| - | % |
|
| % |
|
| - | % |
|
| % | ||
The difference between our effective tax rates in the periods presented above and the federal statutory rate is due to the mix of taxable income and losses generated in our various tax jurisdictions, which include the United States (the “U.S.”), the People’s Republic of China, and the Republic of Latvia. For the three and six months ended December 31, 2021 and 2020, income tax expense was primarily related to income taxes from our operations in China, including accruals for withholding taxes on intercompany dividends declared by LightPath Optical Instrumentation (Zhenjiang) Co., Ltd. (“LPOIZ”), which dividend will be paid to us, as its parent company.
We record net deferred tax assets to the extent we believe it is more likely than not that some portion or all of these assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of December 31, 2021 and June 30, 2021, we have provided for a valuation allowance against our net deferred tax assets to reduce the net deferred tax assets to the amount we estimate is more-likely-than-not to be realized. Our net deferred tax asset consists primarily of federal and state tax credits with indefinite carryover periods.
U.S. Federal and State Income Taxes
Our U.S. federal and state statutory income tax rate is estimated to be
Income Tax Law of the People’s Republic of China
Our Chinese subsidiaries, LightPath Optical Instrumentation (Shanghai) Co., Ltd. (“LPOI”) and LPOIZ, are governed by the Income Tax Law of the People’s Republic of China. As of December 31, 2021, LPOI and LPOIZ were subject to statutory income tax rates of
During fiscal 2020, the Company began declaring intercompany dividends to remit a portion of the historical earnings of its foreign subsidiaries to the U.S. parent company. The Company intends to reinvest a portion of the more recent earnings generated by its foreign subsidiaries, however the Company also plans to repatriate a portion of the historical earnings of its subsidiaries. During fiscal 2020, the Company began to accrue for these taxes on the portion of historical earnings that it intends to repatriate.
Law of Corporate Income Tax of Latvia
Our Latvian subsidiary, ISP Optics Latvia, SIA (“ISP Latvia”), is governed by the Law of Corporate Income Tax of Latvia. Effective January 1, 2018, the Republic of Latvia enacted tax reform with the following key provisions: (i) corporations are no longer subject to income tax, but are instead subject to a distribution tax on distributed profits (or deemed distributions, as defined) and (ii) the rate of tax was changed to 20%; however, distribution amounts are first divided by 0.8 to arrive at the profit before tax amount, resulting in an effective tax rate of 25%. As a transitional measure, distributions of earnings prior to January 1, 2018 are not subject to tax if declared prior to December 31, 2019. ISP Latvia has declared an intercompany dividend to be paid to ISP, its U.S. parent company, for the full amount of earnings accumulated prior to January 1, 2018. Distributions of this dividend will be from earnings prior to January 1, 2018 and, therefore, will not be subject to tax. We currently do not intend to distribute any earnings generated after January 1, 2018. If, in the future, we change such intention, we will accrue distribution taxes, if any, as profits are generated.
| 11 |
| Table of Contents |
8. Stock-Based Compensation
Our directors, officers, and key employees are granted stock-based compensation through our Amended and Restated Omnibus Incentive Plan, as amended (the “Omnibus Plan”), through October 2018 and after that date, the 2018 Stock and Incentive Compensation Plan (the “SICP”), including incentive stock options, non-qualified stock options, and restricted stock unit (“RSU”) awards. The stock-based compensation expense is based primarily on the fair value of the award as of the grant date, and is recognized as an expense over the requisite service period.
The following table shows total stock-based compensation expense for the three and six months ended December 31, 2021 and 2020 included in selling, general and administrative (“SGA”) expenses in the accompanying unaudited Condensed Consolidated Statements of Comprehensive Income:
|
| Three Months Ended December 31, |
|
| Six Months Ended December 31, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Stock options |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
RSUs |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
We also adopted the LightPath Technologies, Inc. Employee Stock Purchase Plan (the “2014 ESPP”). The 2014 ESPP permits employees to purchase Class A common stock through payroll deductions, subject to certain limitations. A discount of $
Grant Date Fair Values and Underlying Assumptions; Contractual Terms
We estimate the fair value of each stock option as of the date of grant, using the Black-Scholes-Merton pricing model. The fair value of 2014 ESPP shares is the amount of the discount the employee obtains at the date of the purchase transaction.
Most stock options granted vest ratably over two to four years and are generally exercisable for ten years. The assumed forfeiture rates used in calculating the fair value of RSU grants was 0%, and the assumed forfeiture rates used in calculating the fair value of options for performance and service conditions were 20% for each of the six months ended December 31, 2021 and 2020. The volatility rate and expected term are based on seven-year historical trends in Class A common stock closing prices and actual forfeitures. The interest rate used is the U.S. Treasury interest rate for constant maturities.
No stock options were granted during the six months ended December 31, 2021. For stock options granted in the six-month period ended December 31, 2020, we estimated the fair value of each stock option as of the date of grant using the following assumptions:
| Weighted-average expected volatility |
|
| % | |
| Dividend yields |
|
| % | |
| Weighted-average risk-free interest rate |
|
| % | |
| Weighted-average expected term, in years |
|
|
| |
|
|
|
|
|
| 12 |
| Table of Contents |
Information Regarding Current Share-Based Compensation Awards
A summary of the activity for share-based compensation awards in the six months ended December 31, 2021 is presented below:
|
| Stock Options |
|
| Restricted Stock Units (RSUs) |
| ||||||||||||||
|
|
|
|
| Weighted- |
|
| Weighted- |
|
|
|
|
| Weighted- |
| |||||
|
|
|
|
| Average |
|
| Average |
|
|
|
|
| Average |
| |||||
|
|
|
|
| Exercise |
|
| Remaining |
|
|
|
|
| Remaining |
| |||||
|
| Shares |
|
| Price |
|
| Contract |
|
| Shares |
|
| Contract |
| |||||
June 30, 2021 |
|
|
|
| $ |
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
| - |
|
| $ |
|
|
|
|
|
|
|
|
|
|
| |||
Exercised |
|
| - |
|
| $ |
|
|
|
|
|
|
| ( | ) |
|
|
|
| |
Cancelled/Forfeited |
|
| ( | ) |
| $ |
|
|
|
|
|
|
| ( | ) |
|
|
|
| |
December 31, 2021 |
|
|
|
| $ |
|
|
|
|
|
|
|
|
| 0.9 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards exercisable/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
vested as of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
|
| $ |
|
|
|
|
|
|
|
|
| - |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards unexercisable/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unvested as of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
|
| $ |
|
|
|
|
|
|
|
|
|
| |||||
|
|
| 417,401 |
|
|
|
|
|
|
|
|
|
|
| 2,047,471 |
|
|
|
|
|
RSU awards vest immediately or from one to four years from the date of grant.
As of December 31, 2021, there was approximately $1.4 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements (including stock options and RSUs) granted. We expect to recognize the compensation cost as follows:
Fiscal Year Ending: |
| Stock Options |
|
| RSUs |
|
| Total |
| |||
June 30, 2022 (remaining six months) |
| $ |
|
| $ |
|
| $ |
| |||
June 30, 2023 |
|
|
|
|
|
|
|
|
| |||
June 30, 2024 |
|
|
|
|
|
|
|
|
| |||
June 30, 2025 |
|
|
|
|
|
|
|
|
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
| 13 |
| Table of Contents |
9. Earnings (Loss) Per Share
Basic earnings per share is computed by dividing net income or loss by the weighted-average number of shares of Class A common stock outstanding, during each period presented. Diluted earnings per share is computed similarly to basic earnings per share, except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue shares of Class A common stock were exercised or converted into shares of Class A common stock. The computations for basic and diluted earnings (loss) per share of Class A common stock are described in the following table:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic number of shares |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
RSUs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Diluted number of shares |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Diluted |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
The following potential dilutive shares were not included in the computation of diluted earnings per share of Class A common stock, as their effects would be anti-dilutive:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Options to purchase common stock |
|
|
|
|
|
|
|
|
|
|
| 589,892 |
| |||
RSUs |
|
|
|
|
|
|
|
| 1,819,119 |
|
|
| 2,368,901 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
10. Leases
Our leases primarily consist of operating leases related to our facilities located in Orlando, Florida; Riga, Latvia; Shanghai, China; and Zhenjiang, China, and finance leases related to certain equipment located in Orlando, Florida. The operating leases for facilities are non-cancelable operating leases, expiring through
Our operating lease ROU assets and the related lease liabilities are initially measured at the present value of future lease payments over the lease term. Two of our operating leases include renewal options, which were not included in the measurement of the operating lease ROU assets and related lease liabilities. One such lease ends in November 2022 and we do not plan to renew, and the second such lease was amended in April 2021, and subsequently amended in September 2021, to extend the term to 2032 and increase the leased space from 26,000 square feet to approximately 58,500 square feet.
As most of our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. Currently, none of our leases include variable lease payments that are dependent on an index or rate. We are responsible for payment of certain real estate taxes, insurance and other expenses on certain of our leases. These amounts are generally considered to be variable and are not included in the measurement of the ROU asset and lease liability. We generally account for non-lease components, such as maintenance, separately from lease components. Our lease agreements do not contain any material residual value guarantees or material restricted covenants. Leases with a term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
| 14 |
| Table of Contents |
We received tenant improvement allowances for each of our two leases with respect to our facility located in Orlando, Florida (the “Orlando Facility”). These allowances were used to construct improvements and are included in leasehold improvements and operating lease liabilities. The balances are being amortized over the corresponding lease terms.
The components of lease expense were as follows:
|
| Three Months Ended December 31, |
|
| Six Months Ended December 31, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Operating lease cost |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of lease assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest on lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total finance lease cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total lease cost |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Supplemental balance sheet information related to leases was as follows:
|
| Classification |
| December 31, 2021 |
|
| June 30, 2021 |
| ||
Assets: |
|
|
|
|
|
|
|
| ||
Operating lease assets |
| Operating lease assets |
| $ |
|
| $ |
| ||
Finance lease assets |
| Property and equipment, net(1) |
|
|
|
|
|
| ||
Total lease assets |
|
|
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
Operating leases |
| Operating lease liabilities, current |
| $ |
|
| $ |
| ||
Finance leases |
| Finance lease liabilities, current |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
Noncurrent: |
|
|
|
|
|
|
|
|
|
|
Operating leases |
| Operating lease liabilities, less current portion |
|
|
|
|
|
| ||
Finance leases |
| Finance lease liabilities, less current portion |
|
|
|
|
|
| ||
Total lease liabilities |
|
|
| $ |
|
| $ |
| ||
| (1) | Finance lease assets were recorded net of accumulated depreciation of approximately $ |
Lease term and discount rate information related to leases was as follows:
Lease Term and Discount Rate |
| December 31, 2021 |
| |
Weighted Average Remaining Lease Term (in years) |
| |||
Operating leases |
|
|
| |
Finance leases |
|
|
| |
|
|
|
|
|
Weighted Average Discount Rate |
|
|
|
|
Operating leases |
|
| % | |
Finance leases |
|
| % | |
| 15 |
| Table of Contents |
Supplemental cash flow information:
|
| Six Months Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
| ||
Operating cash used for operating leases |
| $ |
|
| $ |
| ||
Operating cash used for finance leases |
| $ |
|
| $ |
| ||
Financing cash used for finance leases |
| $ |
|
| $ |
| ||
Future maturities of lease liabilities were as follows as of December 31, 2021:
| Fiscal year ending: |
| Finance Leases |
|
| Operating Leases |
| ||
June 30, 2022 (remaining six months) |
| $ |
|
| $ |
| ||
June 30, 2023 |
|
|
|
|
|
| ||
June 30, 2024 |
|
|
|
|
|
| ||
June 30, 2025 |
|
|
|
|
|
|
| |
June 30, 2026 |
|
|
|
|
|
|
| |
Thereafter |
|
|
|
|
|
|
| |
| Total future minimum payments |
|
|
|
|
|
| ||
| Less imputed interest |
|
| (12,481 | ) |
|
| (1,745,591 | ) |
| Present value of lease liabilities |
| $ |
|
| $ |
| ||
11. Loans Payable
As of December 31, 2021 and June 30, 2021, loans payable primarily consisted of the BankUnited Term Loan (as defined below) payable to BankUnited N.A. (“BankUnited”). On February 26, 2019, we entered into a Loan Agreement (the “Loan Agreement”) with BankUnited for (i) a revolving line of credit up to maximum amount of $2,000,000 (the “BankUnited Revolving Line”), (ii) a term loan in the amount of up to $
On May 6, 2019, we entered into that certain First Amendment to Loan Agreement, effective February 26, 2019, with BankUnited (the “First Amendment”). The First Amendment amended the definition of the fixed charge coverage ratio to more accurately reflect the parties’ understandings at the time the Loan Agreement was executed.
On September 9, 2021, we entered into a letter agreement with BankUnited (the “Letter Agreement”). The Letter Agreement: (i) reduced the fixed charge coverage ratio to 1.0 for the quarter ending September 30, 2021 and to 1.1 for the quarter ended December 31, 2021; (ii) modified the calculation for both the fixed charge coverage ratio and the total leverage ratio to provide for adjustments related to expenses incurred in connection with the employee matters that occurred during fiscal 2021 at LPOI and LPOIZ, which expenses must be approved by BankUnited; (iii) terminated the Guidance Line; and (iv) requires approval from BankUnited prior to our being able to draw upon the Revolving Line, subject to our compliance with the fixed charge coverage ratio for the quarters ending September 30, 2021 and December 31, 2021. The Letter Agreement also granted us a waiver of default arising prior to the Letter Agreement for our failure to comply with the fixed charge coverage ratio measured on June 30, 2021. Based on the waiver, we were no longer in default of the Amended Loan Agreement as of June 30, 2021. Finally, in connection with the Letter Agreement, we paid BankUnited a fee equal to $
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On November 5, 2021, we entered into a letter agreement with BankUnited (the “Second Letter Agreement”). In accordance with the Second Letter Agreement, the parties agreed to initiate discussions regarding a possible modification, forebearance, or other resolution of the Amended Loan Agreement (as defined below), which resolution would occur on or before December 31, 2021. On December 20, 2021, we entered into the Second Amendment to the Loan Agreement dated February 26, 2019 (the “Second Amendment”; and, together with the First Amendment, the Letter Agreement and the Second Letter Agreement, the “Amended Loan Agreement”), which further amended that certain Loan Agreement, dated February 26, 2019, with BankUnited. In accordance with the Second Amendment, the parties agreed to the following terms, among others: (i) a maturity date of April 15, 2023 with respect to the Term Loan (as defined in the Amended Loan Agreement); (ii) an increased monthly payment amount of $
We have commenced discussions with other lenders, with the intent of refinancing our credit facility prior to maturity with reasonable commercial terms, of which there can be no assurance. If we are unable to refinance the credit facility with other commercial lenders prior to maturity, we may need to raise additional equity financing, source financing through non-commercial lenders or further reduce certain operating expenses and capital expenditures. For additional information, see Note 14, Liquidity.
BankUnited Revolving Line
Pursuant to the Amended Loan Agreement, BankUnited will make loan advances under the BankUnited Revolving Line to us up to a maximum aggregate principal amount outstanding not to exceed $
BankUnited Term Loan
Pursuant to the Amended Loan Agreement, BankUnited advanced us $
Security and Guarantees
Our obligations under the Amended Loan Agreement are collateralized by a first priority security interest (subject to permitted liens) in all of our assets and the assets of our U.S. subsidiaries, GelTech, Inc. (“GelTech”), and ISP, pursuant to a Security Agreement granted by GelTech, ISP, and us in favor of BankUnited. Our equity interests in, and the assets of, our foreign subsidiaries are excluded from the security interest. In addition, all of our subsidiaries have guaranteed our obligations under the Amended Loan Agreement and related documents, pursuant to Guaranty Agreements executed by us and our subsidiaries in favor of BankUnited.
General Terms
The Amended Loan Agreement contains customary covenants, including, but not limited to: (i) limitations on the disposition of property; (ii) limitations on changing our business or permitting a change in control; (iii) limitations on additional indebtedness or encumbrances; (iv) restrictions on distributions; and (v) limitations on certain investments. The Amended Loan Agreement also contains certain financial covenants, including obligations to maintain a
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We may prepay any or all of the BankUnited Loans in whole or in part at any time, without penalty or premium. Late payments are subject to a late fee equal to five percent (
Financing costs incurred related to the BankUnited Loans were recorded as a discount on debt and will be amortized over the term. Amortization of approximately $14,900 and $9,300 is included in interest expense for the six-month periods ended December 31, 2021 and 2020, respectively.
In December 2020, ISP Latvia entered into an equipment loan with a third party (the “Equipment Loan”), which party is also a significant customer, and which the Equipment Loan is subordinate to the BankUnited Loans, and collateralized by certain equipment. The initial advance under the Equipment Loan was 225,000 EUR (or USD $
Future maturities of loans payable are as follows:
Fiscal year ending: |
| BankUnited Term Loan |
|
| Equipment Loan |
|
| Unamortized Debt Costs |
|
| Total |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
June 30, 2022 (remaining six months) |
| $ |
|
| $ |
|
|
| ( | ) |
| $ |
| |||
June 30, 2023 |
|
|
|
|
|
|
|
| ( | ) |
|
|
| |||
June 30, 2024 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
June 30, 2025 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
After June 30, 2025 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total payments |
| $ |
|
| $ |
|
| $ | ( | ) |
|
|
| |||
Less current portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (777,424 | ) |
Non-current portion |
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
| |
12. Foreign Operations
Assets and liabilities denominated in non-U.S. currencies 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 period. Gains or losses on the translation of the financial statements of a non-U.S. operation, where the functional currency is other than the U.S. dollar, are reflected as a separate component of equity, which was a cumulative gain of approximately $
Our cash and cash equivalents totaled approximately $
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Assets and net assets in foreign countries are as follows:
China | Latvia |
| |||||||
December 31, 2021 | June 30, 2021 | December 31, 2021 | June 30, 2021 |
| |||||
Assets | $ | $ | $ | $ |
| ||||
Net assets | $ | $ | $ | $ |
| ||||
13. Contingencies
Legal
The Company from time to time is involved in various legal actions arising in the normal course of business. Management, after reviewing with legal counsel all of these actions and proceedings, believes that the aggregate losses, if any, will not have a material adverse effect on the Company’s financial position or results of operations.
In April 2021, we terminated several employees of our China subsidiaries, LPOIZ and LPOI, including the General Manager, the Sales Manager, and the Engineering Manager, after determining that they had engaged in malfeasance and conduct adverse to our interests, including efforts to misappropriate certain of our proprietary technology, diverting sales to entities owned or controlled by these former employees and other suspected acts of fraud, theft and embezzlement. In connection with such terminations, our China subsidiaries have engaged in certain legal proceedings with the terminated employees.
We have incurred various expenses associated with its investigation into these matters prior and subsequent to the termination of the employees and the associated legal proceedings. These expenses, which included legal, consulting and other transitional management fees, totaled $
We also identified a further liability in the amount of $
Knowing that employee transitions in international subsidiaries can lead to lengthy legal proceedings that can interrupt the subsidiary’s ability to operate, compounded by the fact that our officers could not travel to China to oversee the transitions because of the travel restrictions imposed by COVID-19, we chose to enter into severance agreements with certain of the employees at the time of termination. Pursuant to the severance agreements, LPOIZ and LPOI agreed to pay such employees severance of approximately $
We have transitioned the management of LPOI and LPOIZ to a new management team without any significant detrimental effects on the ability of those subsidiaries to operate. Management does not expect any material adverse impact to the business operations of LPOI or LPOIZ as a result of the transition. We expect to incur additional legal fees and consulting expenses in future periods as all legal options and remedies are pursued; however, such future fees are expected to be at lower levels than have been incurred to date.
Although we have taken steps to minimize the business impacts from the termination of the management employees and transition to new management personnel, we have experienced some short-term adverse impacts on LPOIZ’s and LPOI’s domestic sales in China and results of operations in the three-month period ended June 30, 2021 and the six-month period ended December 31, 2021, which management anticipates may continue for the next few quarters. The Company has not experienced, nor does management anticipate, any material adverse impact on LPOIZ’s or LPOI’s production and supply of products to its other subsidiaries for their customers.
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COVID-19
Our business, results of operations financial condition, cash flows, and the stock price of our Class A common stock can be adversely affected by pandemics, epidemics, or other public health emergencies, such as the recent outbreak of COVID-19, which spread from China to countries across the world, including the United States.
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, which could impact the short-term and long-term demand from customers and, therefore, has the potential to negatively impact our results of operations, cash flows, and financial position in the future. Additionally, some areas have imposed travel restrictions, which may impact 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. Management is actively monitoring this situation and any impact on our financial condition, liquidity, and results of operations. However, given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not presently able to estimate the effects of the COVID-19 pandemic on our future results of operations, financial, or liquidity for the remainder of fiscal year 2022 or beyond.
14. Liquidity
We generally rely on cash from operations and equity and debt offerings, to the extent available, to satisfy our liquidity needs and to maintain our ability to repay the BankUnited Term Loan. As discussed in in Note 11, Loans Payable, we have commenced discussions with other lenders, and we anticipate refinancing our debt obligations with a new lender prior to the maturity date of the Term Loan, of which there can be no assurances. If we are unable to refinance the credit facility with other commercial lenders prior to maturity, we may need to raise additional equity financing, source financing through non-commercial lenders or further reduce certain operating expenses and capital expenditures. Our plans may include potentially filing a shelf registration statement to be available for equity offerings. There are a number of factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated sales growth, increased material costs, increased labor costs, planned production efficiency improvements not being realized, increases in property, casualty, benefit and liability insurance premiums, and increases in other costs. In addition, greater than
If these efforts are not successful, we may need to raise additional capital. Should capital not be available to us at reasonable terms, other actions may become necessary in addition to cost control measures and continued efforts to increase sales. These actions may include exploring strategic options for the sale of the Company, the sale of certain product lines, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, the creation of licensing arrangements with respect to our technology, or other alternatives.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations is designed to provide a reader of the financial statements with a narrative report on our financial condition, results of operations, and liquidity. This discussion and analysis should be read in conjunction with the attached unaudited Condensed Consolidated Financial Statements and notes thereto and our Annual Report on Form 10-K for the year ended June 30, 2021, including the audited Consolidated Financial Statements and notes thereto. The following discussion contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations, and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Please also see the cautionary language at the beginning of this Quarterly Report regarding forward-looking statements.
Potential Impact of COVID-19
In March 2020, the World Health Organization (“WHO”) declared the outbreak of COVID-19 as a pandemic based on the rapid increase in global exposure. Thereafter, COVID-19 spread throughout world, including the United States. Throughout the COVID-19 pandemic, our manufacturing facilities in China, Latvia, and the United States have continued to operate substantially as normal. Some of our United States- and Latvia-based non-manufacturing employees are continuing to work remotely, either on a full or partial basis. Where possible, we have staggered shifts to reduce contact within shifts and between different shifts, and have minimized interaction and physical proximity between employees working within the same building. Those measures are continuously adjusted in each of our locations, according to local conditions and guidelines. To date, we have not seen any significant direct negative impact of COVID-19 to our business. However, the COVID-19 pandemic continues to impact economic conditions, which could impact the short-term and long-term demand from our customers and, therefore, has the potential to negatively impact our results of operations, cash flows, and financial position in the future. In addition, we saw some increased demand for thermal imaging assemblies for fever detection applications in response to the pandemic. Such demand has leveled off in recent quarters. Additionally, some areas have imposed travel restrictions, which may impact 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. Management is actively monitoring this situation and any impact on our financial condition, liquidity, and results of operations. However, given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, we are not presently able to estimate the effects of the COVID-19 pandemic on our future results of operations, financial, or liquidity for the remainder of fiscal year 2022 and, possibly, beyond.
Introduction
We were incorporated in Delaware in 1992 as the successor to LightPath Technologies Limited Partnership, a New Mexico limited partnership, formed in 1989, and its predecessor, Integrated Solar Technologies Corporation, a New Mexico corporation, formed in 1985. Today, LightPath is a global company with major facilities in the United States, the People’s Republic of China, and the Republic of Latvia.
Our capabilities include precision molded optics, thermal imaging optics, custom designed optics, and the design and manufacturing of optical assemblies and subsystems. These capabilities allow us to manufacture optical components and higher-level assemblies, including precision molded glass aspheric optics, molded and diamond-turned infrared aspheric lenses and other optical materials used to produce products that manipulate light. We design, develop, manufacture and integrate optical components and assemblies utilizing advanced optical manufacturing processes. Product verticals range from consumer (e.g., cameras, cell phones, gaming, and copiers) to industrial (e.g., lasers, data storage, and infrared imaging), from products where the lenses are the central feature (e.g., telescopes, microscopes, and lens systems) to products incorporating lens components (e.g., 3D printing, machine vision, LIDAR, robotics and semiconductor production equipment) and communications. As a result, we market our products across a wide variety of customer groups, including laser systems manufacturers, laser OEMs, infrared-imaging systems vendors, industrial laser tool manufacturers, telecommunications equipment manufacturers, medical instrumentation manufacturers and industrial measurement equipment manufacturers, government defense agencies, and research institutions worldwide.
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Subsidiaries
In November 2005, we formed LPOI, a wholly-owned subsidiary, located in Jiading, People’s Republic of China. LPOI provides sales and support functions. In December 2013, we formed LPOIZ, a wholly-owned subsidiary located in the New City district, of the Jiangsu province, of the People’s Republic of China. LPOIZ’s 55,000 square foot manufacturing facility (the “Zhenjiang Facility”) serves as our primary manufacturing facility in China and provides a lower cost structure for production of larger volumes of optical components and assemblies.
In December 2016, we acquired ISP, and its wholly-owned subsidiary, ISP Latvia. ISP is a vertically integrated manufacturer offering a full range of infrared products from custom infrared optical elements to catalog and high-performance lens assemblies. Historically, ISP’s facility located in Irvington, New York functioned as its global headquarters for operations, while also providing manufacturing capabilities, optical coatings, and optical and mechanical design, assembly, and testing. In June 2019, we completed the relocation of this facility to our existing Orlando Facility and our facility located in Riga, Latvia (the “Riga Facility”). ISP Latvia is a manufacturer of high precision optics and offers a full range of infrared products, including catalog and custom infrared optics. ISP Latvia’s Riga Facility functions as its manufacturing facility.
For additional information, please refer to our Annual Report on Form 10-K for the year ended June 30, 2021.
Product Groups
Our business is organized in three product groups: PMO, infrared products and specialty products. These product groups are supported by our major product capabilities: molded optics, thermal imaging optics, and custom designed optics. Beginning in late 2019, we implemented a product management function, with a product manager for each of our major product capabilities: molded optics, thermal imaging optics and custom designed optics. Product management is principally a portfolio management process that analyzes products within the product capability areas as defined above. This function has begun to facilitate choosing investment priorities to help strategically align our competencies with strategic industry revenue opportunities. Over the longer term, this function will also help ensure successful product life cycle management.
Our PMO product group consists of visible precision molded optics with varying applications. Our infrared product group is comprised of infrared optics, both molded and diamond-turned, and thermal imaging assemblies. This product group also includes both conventional and CNC ground and polished lenses. Between these two product groups, we have the capability to manufacture lenses from very small (with diameters of sub-millimeter) to over 300 millimeters, and with focal lengths from approximately 0.4 millimeters to over 2000 millimeters. In addition, both product groups offer both catalog and custom designed optics.
Our specialty product group is comprised of value-added products, such as optical subsystems, assemblies, and collimators, and non-recurring engineering (“NRE”) products, consisting of those products we develop pursuant to product development agreements that we enter into with customers. Typically, customers approach us and request that we develop new products or applications for our existing products to fit their particular needs or specifications. The timing and extent of any such product development is outside of our control.
Growth Strategy
Historically, we operated with a focus on optical component manufacturing, and specifically on our leadership position as a precision molded lens manufacturer for visual light applications. While still positioned as a component provider, we expanded our addressable market with the acquisition of ISP, a manufacturer of infrared optical components, in December 2016. Collectively, our operations lacked synergies, maintained a high cost structure, and lacked a defined path for capitalizing on the industry’s evolution and growth opportunities.
In March 2020, our Board of Directors (our “Board”) recruited Mr. Sam Rubin to assume the role of Chief Executive Officer and to develop and implement a new strategy going forward. In the fall of 2020, Mr. Rubin led our Board and the leadership team in collaborative discussions with the purpose of defining a new comprehensive strategy for our business. The collaborative strategic planning process included leaders from across the organization, detailed dialogs with customers, vendors and partners, and an in-depth analysis of the environment we are in, changes and trends in and around the use of photonics, and an analysis of our capabilities, strengths and weaknesses. Throughout the process, we focused on developing a strategy that creates a unique and long-lasting value to our customers, and utilizes our unique capabilities and differentiators, both existing capabilities and differentiators, as well as new capabilities we acquire and develop organically.
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Understanding the shifts that are happening in the marketplace, and the changes that come when a technology like photonics moves from being a specialty, to being integrated into mainstream industries and applications, we redefined our strategic direction to provide our wide customer base with domain expertise in optics, and become their partner for the optical engine of their system. In our view, as the use of photonics evolves, so do the needs evolve. 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. We believe such a partnership starts with us, as the supplier. We have in-house domain expertise in photonics, knowledge and experience in the most advanced technologies and the necessary manufacturing techniques. We can then further develop these partnerships by working closely with the customer throughout their design process, designing an optical solution that is tailored to their needs, often times using unique technologies we own, and supplying the customer with the corresponding complete optical subsystem to be integrated into their product. Such an approach builds on our unique, value-added technologies that we both currently own, such as optical molding, fabrication, and system design along with other technologies we may acquire or develop in the future to create tailored solutions for our customers, which often are based on proprietary manufacturing technologies.
Providing the domain expertise and the extensive “know how” in optical design, fabrication, production and testing technologies will allow our customers to focus on their own development efforts, without needing to develop subject matter expertise in optics. By providing the bridge into the optical solution world, we partner with our customers on a long-term basis, create value to our customers, and capture that value through the long-term supply relationships we develop.
Further information about our strategic direction can be found in our recent Annual Report on Form 10-K for the fiscal year ended June 30, 2021.
Results of Operations
Revenue
Three months ended December 31, 2021, compared to three months ended December 31, 2020
Revenue for the second quarter of fiscal 2022 was approximately $9.2 million, a decrease of approximately $679,000, or 7%, as compared to approximately $9.9 million in the same period of the prior fiscal year. Revenue generated by infrared products was approximately $5.1 million in the second quarter of fiscal 2022, an increase of approximately $267,000, or 6%, as compared to approximately $4.8 million in the same period of the prior fiscal year. The increase in revenue generated by infrared products is primarily driven by sales to customers in the industrial and defense markets. Revenue generated by PMO products was approximately $3.8 million for the second quarter of fiscal 2022, a decrease of approximately $980,000, or 21%, as compared to approximately $4.7 million in the same period of the prior fiscal year. As discussed in recent prior quarters, the decrease in sales of PMO products was a result of both our largest telecommunications customer decreasing their orders, and a temporary decrease in our domestic sales in China due to the transition of our management team in China. While sales of products for the telecommunications market continue to be lower as we replace them with sales of products for other markets, our domestic sales in China have partially recovered, as previously demonstrated by sequential growth of 30% in our PMO sales from the fourth quarter of fiscal 2021 to the first quarter of fiscal 2022. PMO sales for the second quarter of fiscal 2022 maintained a similar level as compared to the first quarter of fiscal 2022. These decreases were partially offset by an increase in sales through our catalog and distribution channels, as well as increases in sales to customers in the industrial and medical industries. Revenue generated by our specialty products was approximately $406,000 in the second quarter of fiscal 2022, an increase of approximately $34,000, or 9%, compared to $372,000 in the same period of the prior fiscal year. This increase is primarily due to NRE projects for customers in the commercial and defense industries during the second quarter of fiscal 2022.
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Six months ended December 31, 2021, compared to six months ended December 31, 2020
Revenue for the first half of fiscal 2022 was approximately $18.3 million, a decrease of approximately $1.1 million, or 6%, as compared to approximately $19.4 million in the same period of the prior fiscal year. Revenue generated by infrared products was approximately $10.0 million in the first half of fiscal 2022, an increase of approximately $430,000, or 5%, as compared to approximately $9.5 million in the same period of the prior fiscal year. The increase in revenue is primarily driven by sales to customers in the industrial market. Revenue generated by PMO products was approximately $7.6 million for the first half of fiscal 2022, a decrease of approximately $1.5 million, or 16%, as compared to approximately $9.0 million in the same period of the prior fiscal year. As previously discussed, PMO sales for the first and second quarters of fiscal 2022 demonstrate partial recovery as compared to the fourth quarter of fiscal 2021. The decreases in telecommunications and other domestic sales in China were partially offset by an increase in sales through our catalog and distribution channels, as well as increases in sales to customers in the industrial and commercial industries. Revenue generated by our specialty products was approximately $808,000 in the first half of fiscal 2022, a decrease of approximately $54,000, or 6%, compared to $862,000 in the same period of the prior fiscal year. This decrease is primarily related to sales of custom specialty products during the first half of fiscal 2021, which orders did not repeat in the first half of fiscal 2022. This decrease was partially offset by an increase in NRE projects for customers in the commercial and defense industries, particularly in the second quarter of fiscal 2022.
Cost of Sales and Gross Margin
Three months ended December 31, 2021, compared to three months ended December 31, 2020
Gross margin in the second quarter of fiscal 2022 was approximately $2.8 million, a decrease of 23%, as compared to approximately $3.6 million in the same period of the prior fiscal year. Total cost of sales was approximately $6.4 million for the second quarter of fiscal 2022, compared to approximately $6.3 million for the same period of the prior fiscal year. Gross margin as a percentage of revenue was 30% for the second quarter of fiscal 2022, compared to 37% for the same period of the prior fiscal year. The decrease in gross margin as a percentage of revenue is primarily due to the mix of products sold in each respective period. Infrared products, which typically have lower margins than our PMO products, comprised 55% of revenue for the second quarter of fiscal 2022, as compared to 48% of revenue for the second quarter of fiscal 2021. In addition, infrared product sales for the second quarter of fiscal 2022 primarily consisted of non-molded infrared products, which typically have lower margins than molded infrared products. Infrared product margins also reflect increased costs associated with the completion of the coating department in our Riga Facility, which will improve over time as that facility works through the qualification stages and begins to produce at volume.
Six months ended December 31, 2021, compared to six months ended December 31, 2020
Gross margin in the first half of fiscal 2022 was approximately $6.0 million, a decrease of 20%, as compared to approximately $7.5 million in the same period of the prior fiscal year. Total cost of sales was approximately $12.4 million for the first half of fiscal 2022, compared to approximately $12.0 million for the same period of the prior fiscal year. Gross margin as a percentage of revenue was 33% for the first half of fiscal 2022, compared to 38% for the same period of the prior fiscal year. The decrease in gross margin as a percentage of revenue is primarily due to the mix of products sold in each respective period. Infrared products, which typically have lower margins than our PMO products, comprised 54% of revenue for the first half of fiscal 2022, as compared to 49% of revenue for the first half of fiscal 2021. Gross margins for newer infrared products have begun to improve in comparison to prior periods, as we move past some of the traditional start-up inefficiencies of new lenses moving into the volume production stage. The yield issues previously experienced in connection with BD6 coatings were resolved during the first quarter of fiscal 2022, which has begun to decrease our costs for those products. We continue to see progress toward bringing our manufacturing efficiencies on these new products to a level similar to our existing products, particularly as we begin to further utilize the new coating chambers added to the Riga Facility.
Selling, General and Administrative
Three months ended December 31, 2021, compared to three months ended December 31, 2020
Selling, general and administrative (“SGA”) costs were approximately $2.9 million for the second quarter of fiscal 2022, an increase of approximately $184,000, or 7%, as compared to approximately $2.8 million in the same period of the prior fiscal year. This increase is primarily due to approximately $153,000 of expenses incurred in the second quarter of fiscal 2022 associated with the previously described events that occurred at our Chinese subsidiaries, including legal and consulting fees. Please refer to Note 13, Contingencies, in the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information. In addition, it was determined that one of our Chinese subsidiaries is obligated to pay $248,000 in VAT and related taxes from prior years, which was accrued during the three months ended December 31, 2021. The remaining increase in SGA costs, as compared to the same period of the prior fiscal year, is due to increases in personnel-related costs and a moderate increase in travel expenses as COVID-19 restrictions are reduced. These increases were partially offset by the absence of approximately $400,000 of non-recurring additional compensation to our former Chief Executive Officer, which was included in SGA for the second quarter of fiscal 2021, and previously disclosed in the Current Report on Form 8-K filed with the SEC on November 18, 2020.
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Six months ended December 31, 2021, compared to six months ended December 31, 2020
For the first half of fiscal 2022, SGA costs were approximately $5.8 million, an increase of approximately $612,000, or 12%, as compared to approximately $5.2 million in the same period of the prior fiscal year. The increase is primarily due to approximately $481,000 of expenses incurred associated with the previously described events that occurred at our Chinese subsidiaries, including legal and consulting fees. Please refer to Note 13, Contingencies, in the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information. In addition, SGA costs for the first half of fiscal 2022 include the aforementioned $248,000 of VAT and related taxes owed by one of our Chinese subsidiaries from prior years. The remaining increase in SGA costs, as compared to the same period of the prior fiscal year, is due to increases in personnel-related costs associated with a moderate increase in headcount. These increases were partially offset by the absence of approximately $400,000 of non-recurring additional compensation to our former Chief Executive Officer which was included in SGA for the second quarter of fiscal 2021, and previously disclosed in the Current Report on Form 8-K filed with the SEC on November 18, 2020.
New Product Development
New product development costs were approximately $552,000 in the second quarter of fiscal 2022, an increase of approximately $22,000, or 4%, as compared to the same period of the prior fiscal year. This increase is primarily due to personnel-related costs. New product development costs were approximately $979,000 in the first half of fiscal 2022, nearly the same as the $980,000 expended in the same period of the prior fiscal year.
Other Income (Expense)
Interest expense, net, was approximately $50,000 for the second quarter of fiscal 2022, as compared to $55,000 for the same period of the prior fiscal year. For the first half of fiscal 2022, interest expense, net, was approximately $96,000, as compared to $114,000 for the same period of the prior fiscal year. The decrease in interest expense is due to lower interest rates and a reduction in our total debt of 18% as of the quarter ended December 31, 2021, as compared to the quarter ended December 31, 2020.
Other income, net, was approximately $11,000 for the second quarter of fiscal 2022, as compared to $93,000 for the same period of the prior fiscal year. Other income and expenses are primarily comprised of net gains losses on foreign exchange transactions. For the first half of fiscal 2022, other expense, net was approximately $40,000, as compared to other income, net, of $6,000 for the same period of the prior fiscal year. We execute all foreign sales from our U.S. facilities and inter-company transactions in U.S. dollars, partially mitigating the impact of foreign currency fluctuations. Assets and liabilities denominated in non-United States currencies, primarily the Chinese Yuan and Euro, are translated at rates of exchange prevailing on the balance sheet date, and revenues and expenses are translated at average rates of exchange for the year. During the second quarter of fiscal 2022, we incurred net foreign currency transaction losses of approximately $14,000, compared to net foreign currency transaction gains of $77,000 for the same period of the prior fiscal year. During the first half of fiscal 2022, we incurred net foreign currency transaction losses of $40,000, as compared to $21,000 for the same period of the prior fiscal year.
Income Taxes
During the second quarter of fiscal 2022, income tax expense was approximately $35,000, compared to approximately $241,000 for the same period of the prior fiscal year. During the first half of fiscal 2022, income tax expense was approximately $165,000, as compared to $676,000 in the same period of the prior fiscal year. Income tax expense is primarily related to income taxes from our operations in China, including estimated Chinese withholding taxes associated with intercompany dividends declared by LPOIZ and payable to us as its parent company. The decrease is due to lower taxable income in that jurisdiction.
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| Table of Contents |
Net Loss
Net loss for the second quarter of fiscal 2022 was approximately $1.1 million, or $0.04 basic and diluted loss per share, compared to $147,000, or $0.01 basic and diluted loss per share, for the second quarter of fiscal 2021. The decrease in net income for the second quarter of fiscal 2022, as compared to the same period of the prior fiscal year, was primarily attributable to lower gross margin and higher SGA expenses, including expenses incurred related to the previously described events that occurred in our Chinese subsidiaries. The resulting decrease in operating income was partially offset by a decrease in the provision for income taxes of approximately $206,000, as compared to the same period of the prior fiscal year.
Net loss for the first half of fiscal 2022 was approximately $1.7 million, or $0.06 basic and diluted loss per share, compared to $49,000, or $0.00 basic and diluted loss per share, for the first half of fiscal 2021. The decrease in net income for the first half of fiscal 2022, as compared to the same period of the prior fiscal year, was primarily attributable to lower gross margin and increased SGA expenses, including expenses incurred related to the previously described events that occurred in our Chinese subsidiaries. The resulting decrease in operating income was partially offset by a decrease in the provision for income taxes of approximately $510,000, as compared to the same period of the prior fiscal year.
Weighted-average common shares outstanding were 27,008,748, basic and diluted, in the second quarter of fiscal 2022, compared to 26,117,239, basic and diluted, in the second quarter of fiscal 2021. Weighted-average common shares outstanding were 27,001,360, basic and diluted, in the first half of fiscal 2022, compared to 26,049,750, basic and diluted, in the first half of fiscal 2021. The increase in the weighted-average basic common shares was due to the issuance of shares of Class A common stock (i) under the 2014 ESPP, (ii) upon the exercises of stock options, and (iii) underlying vested RSUs.
Liquidity and Capital Resources
As of December 31, 2021, we had working capital of approximately $11.0 million and total cash and cash equivalents of approximately $5.1 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. Historically, we considered unremitted earnings held by our foreign subsidiaries to be permanently reinvested. However, during fiscal 2020, we began declaring intercompany dividends to remit a portion of the earnings of our foreign subsidiaries to us, as the U.S. parent company. It is still our intent to reinvest a significant portion of earnings generated by our foreign subsidiaries, however, we also plan to repatriate a portion of their earnings. During fiscal 2020, we began to accrue for these taxes on the portion of earnings that we intend to repatriate.
In China, before any funds can be repatriated, the retained earnings of the legal entity must equal at least 50% of the registered capital. We repatriated approximately $1.8 million and $2 million from LPOIZ during the six-month periods ended December 31, 2021 and 2020, respectively. As of December 31, 2021, LPOIZ had approximately $5.2 million available for repatriation and LPOI did not have any earnings available for repatriation, based on earnings accumulated through December 31, 2021, the end of the most recent statutory tax year, that remained undistributed as of December 31, 2021.
Loans payable consists of the BankUnited Term Loan and the BankUnited Revolving Line, both pursuant to the Amended Loan Agreement, and the subordinated Equipment Loan. As of December 31, 2021, the outstanding balance on the BankUnited Term Loan was approximately $4.2 million, and there were no borrowings outstanding on the BankUnited Revolving Line. The outstanding balance on the Equipment Loan was approximately $435,000 as of December 31, 2021.
The Amended Loan Agreement and the Letter Agreement includes certain customary covenants. As of December 31, 2021, we obtained a waiver of compliance for both the fixed charge coverage ratio and total leverage ratio, and we were in compliance with all other covenants, as amended. For additional information, see Note 11, Loans Payable, to the unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
We generally rely on cash from operations and equity and debt offerings, to the extent available, to satisfy our liquidity needs and to maintain our ability to repay the BankUnited Term Loan. We anticipate refinancing our debt obligations with a new lender prior to the maturity date of the Term Loan, of which there can be no assurances. There are a number of factors that could result in the need to raise additional funds, including a decline in revenue or a lack of anticipated sales growth, increased material costs, increased labor costs, planned production efficiency improvements not being realized, increases in property, casualty, benefit and liability insurance premiums, and increases in other costs. We will also continue efforts to keep costs under control as we seek renewed sales growth. Our efforts are directed toward generating positive cash flow and profitability. If these efforts are not successful, we may need to raise additional capital. Should capital not be available to us at reasonable terms, other actions may become necessary in addition to cost control measures and continued efforts to increase sales. These actions may include exploring strategic options for the sale of the Company, the sale of certain product lines, the creation of joint ventures or strategic alliances under which we will pursue business opportunities, the creation of licensing arrangements with respect to our technology, or other alternatives.
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| Table of Contents |
Cash Flows – Operating:
Cash used in operations was approximately $157,000 for the first half of fiscal 2022, compared to cash provided by operations of approximately $1.5 million for the same period of the prior fiscal year. The decrease in cash flows from operations during the first half of fiscal 2022 is due to the decrease in net income and a decrease in accounts payable and accrued liabilities, partially offset by a reduction in inventory. The decrease in accounts payable and accrued liabilities was primarily due to the previously described events that occurred at our Chinese subsidiaries, for which certain expenses were accrued as of June 30, 2021, many of which were paid during the first half of fiscal 2022, as well as payment of certain bonuses earned by our executive officers and other employees during fiscal 2021 and the first installment payment of payroll taxes deferred in fiscal 2020 under the CARES act.
Cash Flows – Investing:
During the first half of fiscal 2021, we expended approximately $1.3 million in investments in capital equipment, compared to approximately $2.2 million in the same period of the prior fiscal year. The majority of our capital expenditures during the first half of fiscal 2022 were related to the continued expansion of our infrared coating capacity as well as increasing our lens diamond turning capacity to meet current and forecasted demand. Overall, we anticipate that the level of capital expenditures during fiscal 2022 will be less than fiscal 2021, however, the total amount expended will depend on opportunities and circumstances.
Cash Flows – Financings:
Net cash used in financing activities was approximately $243,000 for the first half of fiscal 2022, compared to approximately $116,000 in the same period of the prior fiscal year. Cash used in financing activities for the first half of fiscal 2022 reflects approximately $470,000 in principal payments on our loans and finance leases, loan costs of approximately $61,000 associated with the restructure of the BankUnited Term Loan, offset by proceeds of approximately $267,000 from the Equipment Loan, and approximately $22,000 in proceeds from the sale of Class A common stock under the 2014 ESPP. Cash used in financing activities for the first half of fiscal 2021 reflects approximately $531,000 in principal payments on our loans and capital leases, offset by proceeds of approximately $275,000 from the Equipment Loan, and approximately $140,000 in proceeds from the exercise of stock options and the sale of Class A common stock under the 2014 ESPP.
Contractual Obligations and Commitments
As of December 31, 2021, our principal commitments consisted of obligations under operating and finance leases, and debt agreements. No material changes occurred during the first six months of fiscal 2022 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, 2021.
Off Balance Sheet Arrangements
We do not engage in any activities involving variable interest entities or off-balance sheet arrangements.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and estimates during the six months ended December 31, 2021 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, 2021.
How We Operate
We have continuing sales of two basic types: sales via ad-hoc purchase orders of mostly standard product configurations (our “turns” business) and the more challenging and potentially more rewarding business of customer product development. In this latter type of business, we work with customers to help them determine optical specifications and even create certain optical designs for them, including complex multi-component designs that we call “engineered solutions.” This is followed by “sampling” small numbers of the product for the customers’ test and evaluation. Thereafter, should a customer conclude that our specification or design is the best solution to their product need; we negotiate and “win” a contract (sometimes called a “design win”) – whether of a “blanket purchase order” type or a supply agreement. The strategy is to create an annuity revenue stream that makes the best use of our production capacity, as compared to the turns business, which is unpredictable and uneven. This annuity revenue stream can also generate low-cost, high-volume type orders. A key business objective is to convert as much of our business to the design win and annuity model as is possible. We face several challenges in doing so:
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| Table of Contents |
| · | Maintaining an optical design and new product sampling capability, including a high-quality and responsive optical design engineering staff; |
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| · | The fact that as our customers take products of this nature into higher volume, commercial production (for example, in the case of molded optics, this may be volumes over one million pieces per year) they begin to focus on reducing costs – which often leads them to turn to larger or overseas producers, even if sacrificing quality; and |
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| · | Our small business mass means that we can only offer a moderate amount of total productive capacity before we reach financial constraints imposed by the need to make additional capital expenditures – in other words, because of our limited cash resources and cash flow, we may not be able to service every opportunity that presents itself in our markets without arranging for such additional capital expenditures. |
Despite these challenges to winning more “annuity” business, we nevertheless believe we can be successful in procuring this business because of our unique capabilities in optical design engineering that we make available on the merchant market, a market that we believe is underserved in this area of service offering. Additionally, we believe that we offer value to some customers as a source of supply in the U.S. should they be unwilling to commit to purchase their supply of a critical component from foreign merchant production sources. For information regarding revenue recognition related to our various revenue streams, refer to Critical Accounting Policies and Estimates in our Annual Report on Form 10-K dated June 30, 2021.
Our Key Performance Indicators:
Typically, on a weekly basis, management reviews a number of performance indicators, both qualitative and quantitative. These indicators change from time to time as the opportunities and challenges in the business change. These indicators are used to determine tactical operating actions and changes. We believe that our non-financial production indicators, such as those noted, are proprietary information.
Financial indicators that are considered key and reviewed regularly are as follows:
| · | Sales backlog; |
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| · | Revenue dollars and units by product group; and |
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| · | Other key indicators. |
These indicators are also used to determine tactical operating actions and changes and are discussed in more detail below. Management is evaluating these key indicators as we transition to our new strategic plan, and is implementing certain changes and updates as further described below.
Sales Backlog
We believe our sales growth has been and continues to be our best indicator of success. Our best view into the efficacy of our sales efforts is in our “order book.” Our order book equates to sales “backlog.” It has a quantitative and a qualitative aspect: quantitatively, our backlog’s prospective dollar value and qualitatively, what percent of the backlog is scheduled by the customer for date-certain delivery. We evaluate our total backlog, which includes all firm orders requested by a customer that are reasonably believed to remain in the backlog and be converted into revenues. This includes customer purchase orders and may include amounts under supply contracts if they meet the aforementioned criteria. Generally, a higher total backlog is better for us.
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Our total backlog at December 31, 2021 was approximately $21.9 million, a decrease of 8%, as compared to $23.8 million as of December 31, 2020. Compared to the end of fiscal 2021, our total backlog increased by 3% during the first half of fiscal 2022. Backlog change rates for the last five fiscal quarters are:
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| ||||||
| Quarter |
| Total Backlog ($ 000) |
|
| Change From Prior Year End |
|
| Change From Prior Quarter End |
| |||
| Q2 2021 |
| $ | 23,835 |
|
|
| 9 | % |
|
| 14 | % |
| Q3 2021 |
| $ | 19,498 |
|
|
| -11 | % |
|
| -18 | % |
| Q4 2021 |
| $ | 21,329 |
|
|
| -3 | % |
|
| 9 | % |
| Q1 2022 |
| $ | 19,265 |
|
|
| -10 | % |
|
| -10 | % |
| Q2 2022 |
| $ | 21,929 |
|
|
| 3 | % |
|
| 14 | % |
The increase in our backlog from the first quarter of fiscal 2022 to the second quarter of fiscal 2022 was largely due to the renewal of a large annual contract for infrared products during the second quarter, which we will begin shipping against in the third quarter of fiscal 2022, after shipments against the previous contract are completed. The timing of this renewal is similar to prior fiscal years, however the dollar value of the new annual contract is less than the prior year contract, which is the primary driver of the decrease in backlog as of December 31, 2021 as compared to December 31, 2020. The lower dollar value is the result of a strategic decision to bid on fewer, higher-value items. Backlog levels may increase substantially when annual and multi-year orders are received, and the total backlog is subsequently drawn down as shipments are made against these orders. Our annual and multi-year contracts are expected to renew in future quarters.
We continue to experience a growing demand for infrared products used in the industrial, defense and first responder sectors. Demand for infrared products continues to be fueled by interest in lenses made with our new BD6 material. We expect to maintain moderate growth in our visible PMO product group by continuing to diversify and offer new applications, with a cost competitive structure; however, we believe that the terminations of certain of our management employees in our China subsidiaries, LPOIZ and LPOI, and transition to new management personnel, has adversely impacted the domestic sales in China of these subsidiaries over the past two quarters, which could continue for a few more quarters, and which would affect potential growth in our PMO lens business for that period. Our former employees, including management personnel, maintained relationships with certain of our customers in China and we expect that until our new sales and management personnel establish relationships with these customers, of which there can be no assurance, domestic sales in China may be adversely impacted. Although the recovery is taking longer than initially expected, we have begun to recapture some customers. Our sales and management team in China was enhanced in October 2021 with two key new hires, and we are beginning to see more progress in this area.
Revenue Dollars and Units by Product Group
The following table sets forth revenue dollars and units for our three product groups for the three and six-month periods ended December 31, 2021 and 2020:
|
| (unaudited) |
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| Three Months Ended |
|
| Six Months Ended December 31, |
|
| Quarter |
|
| Year-to-date |
| ||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| % Change |
|
| % Change |
| ||||||
Revenue |
|
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|
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| ||||||
PMO |
| $ | 3,762,497 |
|
| $ | 4,742,459 |
|
| $ | 7,575,447 |
|
| $ | 9,036,062 |
|
|
| -21 | % |
|
| -16 | % |
Infrared Products |
|
| 5,075,168 |
|
|
| 4,808,102 |
|
|
| 9,963,086 |
|
|
| 9,532,606 |
|
|
| 6 | % |
|
| 5 | % |
Specialty Products |
|
| 405,509 |
|
|
| 371,610 |
|
|
| 807,984 |
|
|
| 862,475 |
|
|
| 9 | % |
|
| -6 | % |
Total revenue |
| $ | 9,243,174 |
|
| $ | 9,922,171 |
|
| $ | 18,346,517 |
|
| $ | 19,431,143 |
|
|
| -7 | % |
|
| -6 | % |
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Units |
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|
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PMO |
|
| 520,001 |
|
|
| 1,008,768 |
|
|
| 1,014,308 |
|
|
| 2,135,545 |
|
|
| -48 | % |
|
| -53 | % |
Infrared Products |
|
| 103,850 |
|
|
| 103,703 |
|
|
| 248,297 |
|
|
| 282,625 |
|
|
| 0 | % |
|
| -12 | % |
Specialty Products |
|
| 4,532 |
|
|
| 7,704 |
|
|
| 9,794 |
|
|
| 17,337 |
|
|
| -41 | % |
|
| -44 | % |
Total units |
|
| 628,383 |
|
|
| 1,120,175 |
|
|
| 1,272,399 |
|
|
| 2,435,507 |
|
|
| -44 | % |
|
| -48 | % |
Three months ended December 31, 2021
Our revenue decreased by approximately $679,000 for the second quarter of fiscal 2022, as compared to the same period of the prior fiscal year, primarily due to a decrease in PMO product sales, partially offset by an increase in infrared product sales.
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| Table of Contents |
Revenue generated by the PMO product group during the second quarter of fiscal 2022 was $3.8 million, a decrease of approximately $980,000, or 21%, as compared to the same period of the prior fiscal year. The decrease in revenue is primarily attributed to a reduction in orders from a key customer in the telecommunications market, due to a decrease in that customer’s market share. This decrease was partially offset by an increase in sales through our catalog and distribution channels, as well as increases in sales to customers in the industrial and commercial industries. Sales of PMO units decreased by 48%, as compared to the same period of the prior fiscal year, and average selling prices increased by 54%. The volume decrease was largely driven by a lower mix of telecommunications products, which typically have lower average selling prices. The unit volume for telecommunications products decreased by approximately 66% for the second quarter of fiscal 2022, as compared to the same period of the prior fiscal year.
Revenue generated by the infrared product group during the second quarter of fiscal 2022 was $5.1 million, an increase of approximately $267,000, or 6%, as compared to the same period of the prior fiscal year. The increase in revenue is primarily driven by sales to customers in the industrial and defense markets. During the second quarter of fiscal 2022, sales of infrared units were similar to the prior year period.
In the second quarter of fiscal 2022, our specialty products revenue increased by $34,000, or 9%, as compared to the same period of the prior fiscal year, primarily due to NRE projects for customers in the commercial and defense industries during the second quarter of fiscal 2022.
Six months ended December 31, 2021
Our revenue decreased by approximately $1.1 million for the first half of fiscal 2022, as compared to the same period of the prior fiscal year, primarily due to a decrease in PMO product sales, partially offset by an increase in infrared product sales.
Revenue generated by the PMO product group during the first half of fiscal 2022 was $7.6 million, a decrease of approximately $1.5 million, or 16%, as compared to the same period of the prior fiscal year. The decrease in revenue is primarily attributed to a reduction in orders from a key customer in the telecommunications market, due to a decrease in that customer’s market share. This decrease was partially offset by an increase in sales through our catalog and distribution channels, as well as increases in sales to customers in the industrial and medical industries. Sales of PMO units decreased by 53%, as compared to the same period of the prior fiscal year, and average selling prices increased by 77%. The volume decrease was largely driven by a lower mix of telecommunications products, which typically have lower average selling prices. The unit volume for telecommunications products decreased by approximately 65% for the first half of fiscal 2022, as compared to the same period of the prior fiscal year.
Revenue generated by the infrared product group during the first half of fiscal 2022 was $10.0 million, an increase of approximately $430,000, or 5%, as compared to the same period of the prior fiscal year. The increase in revenue is driven by sales of non-molded infrared products, primarily to customers in the industrial market. During the first half of fiscal 2022, sales of infrared units decreased by 12%, as compared to the prior year period. The decrease in units is due primarily due to the mix of products shipped, including more thermal imaging assemblies which are lower in volume and higher in price, as well as more larger diamond-turned lenses. Industrial applications, firefighting cameras, and other public safety applications continue to be the primary drivers of the increased demand for infrared products, including thermal imaging assemblies. During fiscal 2020 and 2021, we saw an increase in demand for medical and temperature sensing applications, such as fever detection. Demand for temperature sensing applications have been accelerated by COVID-19, and although the demand has leveled off since the initial spike, it remains elevated.
In the first half of fiscal 2022, our specialty products revenue decreased by $54,000, or 6%, as compared to the same period of the prior fiscal year, primarily related to sales of custom specialty products during the first half of fiscal 2021, which orders did not repeat in the first half of fiscal 2022. This decrease was partially offset by an increase in NRE projects for customers in the commercial and defense industries, particularly in the second quarter of fiscal 2022.
Other Key Indicators
Other key indicators include various operating metrics, some of which are qualitative and others are quantitative. These indicators change from time to time as the opportunities and challenges in the business change. They are mostly non-financial indicators, such as evaluating the pipeline of sales opportunities, on time delivery trends, units of shippable output by major product line, production yield rates by major product line, and the output and yield data from significant intermediary manufacturing processes that support the production of the finished shippable product. These indicators can be used to calculate such other related indicators as fully-yielded unit production per-shift, which varies by the particular product and our state of automation in production of that product at any given time. Higher unit production per shift means lower unit cost and, therefore, improved margins or improved ability to compete, where desirable, for price sensitive customer applications. The data from these reports is used to determine tactical operating actions and changes. Management also assesses business performance and makes business decisions regarding our operations using certain non-GAAP measures. These non-GAAP measures are described in more detail below under the heading “Non-GAAP Financial Measures.”
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| Table of Contents |
Non-GAAP Financial Measures
We report our historical results in accordance with GAAP; however, our management also assesses business performance and makes business decisions regarding our operations using certain non-GAAP financial measures. We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition and results of operations computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use.
EBITDA
EBITDA is a non-GAAP financial measure used by management, lenders, and certain investors as a supplemental measure in the evaluation of some aspects of a corporation’s financial position and core operating performance. Investors sometimes use EBITDA, as it allows for some level of comparability of profitability trends between those businesses differing as to capital structure and capital intensity by removing the impacts of depreciation and amortization. EBITDA also does not include changes in major working capital items, such as receivables, inventory and payables, which can also indicate a significant need for, or source of, cash. Since decisions regarding capital investment and financing and changes in working capital components can have a significant impact on cash flow, EBITDA is not necessarily a good indicator of a business’s cash flows. We use EBITDA for evaluating the relative underlying performance of our core operations and for planning purposes. We calculate EBITDA by adjusting net income to exclude net interest expense, income tax expense or benefit, depreciation and amortization, thus the term “Earnings Before Interest, Taxes, Depreciation and Amortization” and the acronym “EBITDA.”
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, 2021 and 2020:
|
| (unaudited) |
| |||||||||||||
|
| Quarter Ended December 31, |
|
| Six Months Ended December 31, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Net loss |
| $ | (1,055,291 | ) |
| $ | (146,545 | ) |
| $ | (1,687,388 | ) |
| $ | (49,477 | ) |
Depreciation and amortization |
|
| 928,439 |
|
|
| 864,855 |
|
|
| 1,839,401 |
|
|
| 1,691,163 |
|
Income tax provision |
|
| 35,396 |
|
|
| 241,112 |
|
|
| 165,269 |
|
|
| 675,752 |
|
Interest expense |
|
| 50,331 |
|
|
| 55,147 |
|
|
| 96,080 |
|
|
| 113,696 |
|
EBITDA |
| $ | (41,125 | ) |
| $ | 1,014,569 |
|
| $ | 413,362 |
|
| $ | 2,431,134 |
|
% of revenue |
|
| 0 | % |
|
| 10 | % |
|
| 2 | % |
|
| 13 | % |
Our EBITDA for the three months ended December 31, 2021 was a loss of approximately $41,000, compared to earnings of $1.0 million for the same period of the prior fiscal year. The decrease in EBITDA in the second quarter of fiscal 2022 was primarily attributable to lower revenue and gross margin, coupled with increased SGA expenses, largely related to the previously described events that occurred in our China subsidiaries.
Our EBITDA for the six months ended December 31, 2021 was approximately $413,000, compared to $2.4 million for the same period of the prior fiscal year. The decrease in EBITDA in the first half of fiscal 2022 was primarily attributable to lower gross margin and increased SGA expenses, including expenses incurred related to the previously described events that occurred in our Chinese subsidiaries.
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| Table of Contents |
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2021, the end of the period covered by this Quarterly Report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2021 in reporting on a timely basis information required to be disclosed by us in the reports we file or submit under the Exchange Act.
In connection with the events that occurred at our Chinese subsidiaries, we have adopted additional policies and procedures designed to improve our internal controls, including, without limitation, revising the reporting structure for our foreign-based finance directors, adopting Codes of Conduct applicable to our subsidiaries’ foreign-based employees, adopting an internal authority approval matrix, and hiring additional staff for our accounting departments at LPOI and LPOIZ to improve segregation of duties, among other items. Other than these modifications, there have not been any significant changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during and since the six months ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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| Table of Contents |
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1A. Risk Factors
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
None
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| Table of Contents |
Item 6. Exhibits
The following exhibits are filed herewith as a part of this report.
Exhibit Number |
| Description |
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101.INS | XBRL Instance Document |
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101.SCH | XBRL Taxonomy Extension Schema Document |
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101.CAL XBRL | Taxonomy Extension Calculation Linkbase Document |
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101.DEF XBRL | Taxonomy Extension Definition Linkbase Document |
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101.LAB XBRL | Taxonomy Extension Label Linkbase Document |
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101.PRE XBRL | Taxonomy Presentation Linkbase Document |
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104 | Cover Page Interactive Data File – formatted in Inline XBRL and contained in Exhibit 101 |
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*filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LIGHTPATH TECHNOLOGIES, INC. |
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Date: February 10, 2022 | By: | /s/ Shmuel Rubin |
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| Shmuel Rubin |
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| President and Chief Executive Officer |
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Date: February 10, 2022 | By: | /s/ Albert Miranda. |
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| Albert Miranda |
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| Chief Financial Officer |
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