LIGHTPATH TECHNOLOGIES, INC. 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
Potential Impact of COVID-19
In
Introduction
We were incorporated in
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
In
For additional information, please refer to our Annual Report on Form 10-K for
the year ended
Product Groups
Our business is organized in three product groups: PMO, infrared products and specialty products. These product groups are supported by our major product capabilities: molded optics, thermal imaging optics, and custom designed optics, with a product manager for each. Product management is principally a portfolio management process that analyzes products within the product capability areas as defined above. This function facilitates choosing investment priorities to help strategically align our competencies with strategic industry revenue opportunities. Over the longer term, this function will also help ensure successful product life cycle management.
Our PMO product group consists of visible precision molded optics with varying applications. Our infrared product group is comprised of infrared optics, both molded and diamond-turned, and thermal imaging assemblies. This product group also includes both conventional and CNC 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.
We design, build, and sell optical assemblies in markets for test and measurement, medical devices, military, industrial, and communications based on our proprietary technologies. Many of our optical assemblies consist of several products that we manufacture.
In connection with our new strategic direction and the expanding portfolio of products and services, we are evaluating the ways in which we may optimize the financial reporting of our product groups.
Growth Strategy
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
In March of 2020, our Board of Directors (our "Board") recruited Mr.
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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 became their partner for the optical engine of their systems. In our view, as the use of photonics evolves, so do customer needs. The industry is transforming from a fragmented industry with many component manufacturers into a solution-focused industry with the potential for partnerships for solution development and production. We believe such partnerships can start with us as the supplier. We have in-house domain expertise in photonics, knowledge and experience in advanced optical technologies, and the necessary manufacturing techniques and capabilities. We believe we can develop these partnerships by working closely with the customer throughout their design process, designing an optical solution that is tailored to their needs, often times using unique technologies that we own, and supplying the customer with a complete optical subsystem to be integrated into their product. Such an approach builds on our unique, value-added technologies that we currently own, such as optical molding, fabrication, system design, and proprietary manufacturing technologies, along with other technologies that we may acquire or develop in the future, to create tailored solutions for our customers.
Our domain expertise and the extensive "know how" in optical design, fabrication, production and testing technologies will allow our customers to focus on their own development efforts, freeing them from the need to develop subject matter expertise in optics. By providing the bridge into the optical solution world, we are able to partner with our customers on a long-term basis, create value for our customers, and capture that value through the long-term supply relationships we seek to develop.
Further information about our strategic direction can be found in our recent
Annual Report on Form 10-K for the fiscal year ended
Results of Operations Revenue
Revenue for the first quarter of fiscal 2023 was approximately
Revenue generated by infrared products was approximately
Revenue generated by PMO products was approximately
Revenue generated by our specialty products was approximately
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Cost of Sales and Gross Margin
Gross margin in the first quarter of fiscal 2023 was approximately
Selling, General and Administrative
SG&A costs were approximately
New Product Development
New product development costs were approximately
Other Income (Expense)
Interest expense, net, was approximately
Other income, net, was approximately
Income Taxes
During the first quarter of fiscal 2023, income tax expense was approximately
Net Loss
Net loss for the first quarter of fiscal 2023 was approximately
Weighted-average common shares outstanding were 27,070,949, basic and diluted, in the first quarter of fiscal 2023, compared to 26,993,971, basic and diluted, in the first quarter of fiscal 2022. The increase in the weighted-average basic common shares was due to the issuance of shares of Class A common stock under the 2014 ESPP and underlying vested RSUs.
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Potential Impact of Economic Conditions in
Due to our operations in
Liquidity and Capital Resources
As of
Cash and cash equivalents held by our foreign subsidiaries in
In
Loans payable consists of the BankUnited Term Loan, pursuant to the Amended Loan
Agreement, and the subordinated Equipment Loan. As of
The Amended Loan Agreement and the Letter Agreement includes certain customary
covenants. As of
In
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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 or rates, 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.
Cash Flows - Operating:
Cash used in operations was approximately
Cash Flows - Investing:
During the first three months of fiscal 2023, we expended approximately
Cash Flows - Financings:
Net cash used in financing activities was approximately
Contractual Obligations and Commitments
As of
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 three months ended
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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:
· Maintaining an optical design and new product sampling capability,
including a high-quality and responsive optical design engineering staff;
· The fact that as our customers take products of this nature into higher
volume, commercial production (for example, in the case of molded optics,
this may be volumes over one million pieces per year) they begin to focus
on reducing costs - which often leads them to turn to larger or overseas
producers, even if sacrificing quality; and
· Our small business mass means that we can only offer a moderate amount of
total productive capacity before we reach financial constraints imposed by
the need to make additional capital expenditures - in other words, because
of our limited cash resources and cash flow, we may not be able to service
every opportunity that presents itself in our markets without arranging
for such additional capital expenditures.
Despite these challenges to winning more "annuity" 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
Our Key Performance Indicators:
Typically, on a weekly basis, management reviews a number of performance indicators, both qualitative and quantitative. These indicators change from time to time as the opportunities and challenges in the business change. These indicators are used to determine tactical operating actions and changes. We believe that our non-financial production indicators, such as those noted, are proprietary information.
Financial indicators that are considered key and reviewed regularly are as follows:
· Sales backlog; · Revenue dollars and units by product group; and · Other key indicators.
These indicators are also used to determine tactical operating actions and changes and are discussed in more detail below. Management is evaluating these key indicators as we transition to our new strategic plan, and is implementing certain changes and updates as further described below.
Sales Backlog
We believe our sales growth has been and continues to be our best indicator of success. Our best view into the efficacy of our sales efforts is in our "order book." Our order book equates to sales "backlog." It has a quantitative and a qualitative aspect: quantitatively, our backlog's prospective dollar value and qualitatively, what percent of the backlog is scheduled by the customer for date-certain delivery. We evaluate our total backlog, which includes all firm orders requested by a customer that are reasonably believed to remain in the backlog and be converted into revenues. This includes customer purchase orders and may include amounts under supply contracts if they meet the aforementioned criteria. Generally, a higher total backlog is better for us.
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Our total backlog at September 30, 2022 was approximately $23.0 million , an
increase of 19%, as compared to $19.3 million as of September 30, 2022 . Compared
to the end of fiscal 2022, our total backlog increased by 29% during the first
three months of fiscal 2023. Backlog change rates for the last five fiscal
quarters are:
Change
From Prior
Total Backlog Change From Quarter
Quarter ($ 000 ) Prior Year End End
Q1 2022 $ 19,265 -10 % -10 %
Q2 2022 $ 21,929 3 % 14 %
Q3 2022 $ 19,678 -8 % -10 %
Q4 2022 $ 17,767 -17 % -10 %
Q1 2023 $ 22,973 29 % 29 %
The increase in backlog during the first three months of fiscal 2023 was largely
due to a
Historically, it is in the second quarter of each fiscal year that we receive the renewal of a large annual contract for infrared products, which we typically begin shipping against in the fiscal third quarter. The timing of other contract renewals may not be as consistent and, thus, 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.
Markets continue to experience growing demand for infrared products used in the
industrial, defense and first responder sectors. Demand for infrared products
continues to be fueled by interest in lenses made with our proprietary BD6
material. With the global supply of germanium currently concentrated in
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Revenue Dollars and Units by
The following table sets forth revenue dollars and units for our three product
groups for the three-month periods ended
(unaudited)
Three Months Ended
September 30, Quarter
2022 2021 % Change
Revenue
PMO $ 3,272,555 $ 3,812,950 -14 %
Infrared Products 3,639,659 4,887,918 -26 %
Specialty Products 454,687 402,475 13 %
Total revenue $ 7,366,901 $ 9,103,343 -19 %
Units
PMO 447,486 494,307 -9 %
Infrared Products 45,375 144,447 -69 %
Specialty Products 29,966 5,262 469 %
Total units 522,827 644,016 -19 %
Three months ended
Our revenue decreased by 19% in the first quarter of fiscal 2023, as compared to
the same quarter of the prior fiscal year, driven by decreases in both PMO and
Infrared products. The two main factors contributing to the sales decrease were
as follows: (1) decreased demand in the
Revenue from the PMO product group for the first quarter of fiscal 2023 was
Revenue generated by the infrared product group for the first quarter of fiscal
2023 was
Our specialty products revenue increased by 13%, as compared to the same period of the prior fiscal year, and represented 6% and 4% of total revenue for the first quarters of fiscal 2023 and 2022, respectively. The increase was primarily driven by non-recurring charges billed to a customer during the first quarter of fiscal 2023.
Other Key Indicators
Other key indicators include various operating metrics, some of which are qualitative and others are quantitative. These indicators change from time to time as the opportunities and challenges in the business change. They are mostly non-financial indicators, such as evaluating the pipeline of sales opportunities, on time delivery trends, units of shippable output by major product line, production yield rates by major product line, and the output and yield data from significant intermediary manufacturing processes that support the production of the finished shippable product. These indicators can be used to calculate such other related indicators as fully-yielded unit production per-shift, which varies by the particular product and our state of automation in production of that product at any given time. Higher unit production per shift means lower unit cost and, therefore, improved margins or improved ability to compete, where desirable, for price sensitive customer applications. The data from these reports is used to determine tactical operating actions and changes. Management also assesses business performance and makes business decisions regarding our operations using certain non-GAAP measures. These non-GAAP measures are described in more detail below under the heading "Non-GAAP Financial Measures."
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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
quarters ended
(unaudited)
Quarter Ended September 30,
2022 2021
Net loss $ (1,380,700 ) $ (632,097 )
Depreciation and amortization 816,334 910,962
Income tax provision 102,134 129,873
Interest expense 70,370 45,749
EBITDA $ (391,862 ) $ 454,487
% of revenue -5 % 5 %
Our EBITDA for the quarter ended
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