LIGHTPATH TECHNOLOGIES INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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 ("SG&A") 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 SG&A 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 SG&A 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, SG&A 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, SG&A 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 SG&A 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 SG&A 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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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 SG&A 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 SG&A 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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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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    ·   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 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;

  · 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 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:




           Total            Change           Change From
          Backlog            From               Prior
Quarter   ($ 000)       Prior Year End       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)
                Three Months Ended                Six Months Ended
                   December 31,                     December 31,               Quarter      Year-to-date
               2021            2020             2021             2020         % Change        % Change

Revenue
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 %

Units
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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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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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 SG&A 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 SG&A expenses, including
expenses incurred related to the previously described events that occurred

in
our Chinese subsidiaries.




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