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.



The duration of the COVID-19 pandemic continues to impact global economic
conditions, even as restrictions have lifted in many places throughout the
world.  Currently, China continues to experience rolling COVID-19 lockdowns in
efforts to mitigate the spread of COVID-19.  These lockdowns are resulting in
global supply chain issues.  To date, our facilities have not been directly
impacted by these lockdowns; however, many of our customers located in China
have delayed receipt of orders while the customers are closed for business.
Even though these customers have not cancelled any orders with us, the delayed
receipt of orders has impacted our revenue and we expect it to continue to
impact our revenue in future periods while China has these rolling lockdowns.
Additionally, some areas, such as China, 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.



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.




         21

  Table of Contents




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.




         22

  Table of Contents




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 March 31, 2022, compared to three months ended March 31, 2021





Revenue for the third quarter of fiscal 2022 was approximately $8.3 million, a
decrease of approximately $2.4 million, or 22%, as compared to approximately
$10.7 million in the same period of the prior fiscal year. Revenue generated by
infrared products was approximately $3.7 million in the third quarter of fiscal
2022, a decrease of approximately $2.7 million, or 42%, as compared to
approximately $6.5 million in the same period of the prior fiscal year. The
decrease in revenue from sales of infrared products is primarily due to a
decrease in sales to customers in the industrial market, for temperature sensing
applications, for which demand peaked during the third quarter of fiscal 2021.
The decrease is also partially due to lower revenue from a large annual contract
which was renewed in the second quarter of fiscal 2022. Revenue generated by PMO
products was approximately $4.0 million for the third quarter of fiscal 2022, an
increase of approximately $128,000, or 3%, as compared to approximately $3.9
million in the same period of the prior fiscal year. The increase is driven by
sales through catalog and distribution channels, as well as increases in sales
to customers in the industrial market. Sales of PMO products in China have
improved sequentially each quarter of fiscal 2022, driven in part by other
telecommunications customers, as well as increased sales to customers in the
industrial and commercial industries. This improvement partially offset
decreases in sales of PMO products to a large customer beginning in the third
quarter of fiscal 2021. Revenue generated by our specialty products was
approximately $547,000 in the third quarter of fiscal 2022, an increase of
approximately $213,000, or 64%, compared to $334,000 in the same period of the
prior fiscal year. This increase is primarily due to NRE projects for customers
in the industrial and defense industries during the third quarter of fiscal
2022.

Nine months ended March 31, 2022, compared to nine months ended March 31, 2021





Revenue for the first nine months of fiscal 2022 was approximately $26.7
million, a decrease of approximately $3.5 million, or 12%, as compared to
approximately $30.1 million in the same period of the prior fiscal year. Revenue
generated by infrared products was approximately $13.7 million in the first nine
months of fiscal 2022, a decrease of approximately $2.3 million, or 14%, as
compared to approximately $16.0 million in the same period of the prior fiscal
year. The decrease in revenue is primarily driven by a decrease in sales to
customers in the industrial market. Revenue generated by PMO products was
approximately $11.6 million for the first nine months of fiscal 2022, a decrease
of approximately $1.3 million, or 10%, as compared to approximately $12.9
million in the same period of the prior fiscal year. As previously discussed,
PMO sales for the first nine months of fiscal 2022 demonstrate sequential
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 catalog and distribution channels, as well as
increases in sales to customers in the industrial and commercial industries.
Although sales of PMO products in China have improved sequentially each quarter
of fiscal 2022, these sales are still lower as compared to the first three
quarters of fiscal 2021. Revenue generated by our specialty products was
approximately $1.4 million in the first nine months of fiscal 2022, an increase
of approximately $158,000, or 13%, compared to $1.2 million in the same period
of the prior fiscal year. This increase is primarily driven by an increase in
NRE projects for customers in the commercial and defense industries.




         23

  Table of Contents

Cost of Sales and Gross Margin

Three months ended March 31, 2022, compared to three months ended March 31, 2021





Gross margin in the third quarter of fiscal 2022 was approximately $3.0 million,
a decrease of 22%, as compared to approximately $3.9 million in the same period
of the prior fiscal year. Total cost of sales was approximately $5.3 million for
the third quarter of fiscal 2022, compared to approximately $6.8 million for the
same period of the prior fiscal year. Gross margin as a percentage of revenue
was 37% for the third quarter of fiscal 2022, compared to 36% for the same
period of the prior fiscal year. The increase in gross margin as a percentage of
revenue is primarily due to the mix of products sold in each respective period.
PMO products, which typically have higher margin than infrared products,
comprised 49% of revenue for the third quarter of fiscal 2022, as compared to
36% of revenue for the third quarter of fiscal 2021, whereas infrared products
comprised 45% of revenue for the third quarter of fiscal 2022, as compared to
60% of revenue for the third quarter of fiscal 2021. This favorable change in
mix resulted in slightly higher gross margin as a percentage of revenue, despite
the significantly lower revenue level in the third quarter of fiscal 2022, as
compared to the third quarter of fiscal 2021.

Nine months ended March 31, 2022, compared to nine months ended March 31, 2021


Gross margin in the first nine months of fiscal 2022 was approximately $9.0
million, a decrease of 21%, as compared to approximately $11.4 million in the
same period of the prior fiscal year. Total cost of sales was approximately
$17.6 million for the first nine months of fiscal 2022, compared to
approximately $18.7 million for the same period of the prior fiscal year. Gross
margin as a percentage of revenue was 34% for the first nine months of fiscal
2022, compared to 38% for the same period of the prior fiscal year. Although the
product mix is similar for PMO and infrared products for the first nine months
of fiscal 2022, as compared to the first nine months of fiscal 2021, the gross
margin as a percentage of revenue is unfavorably impacted by the 12% decrease in
revenue, which resulted in under-utilized capacity in some areas. 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.

Selling, General and Administrative

Three months ended March 31, 2022, compared to three months ended March 31, 2021


Selling, general and administrative ("SG&A") costs were approximately $2.6
million for the third quarter of fiscal 2022, a decrease of approximately
$187,000, or 7%, as compared to approximately $2.8 million in the same period of
the prior fiscal year. The decrease in SG&A costs is primarily due to a decrease
of approximately $149,000 of expenses 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. The remaining decrease in SG&A costs, as compared to the
same period of the prior fiscal year, is due to decreases in non-recurring
personnel-related costs incurred in the third quarter of the prior fiscal year.

Nine months ended March 31, 2022, compared to nine months ended March 31, 2021





For the first nine months of fiscal 2022, SG&A costs were approximately $8.4
million, an increase of approximately $426,000, or 5%, as compared to
approximately $8.0 million in the same period of the prior fiscal year. The
increase in SG&A costs is primarily due to an increase of approximately $380,000
of expenses incurred associated with the previously described events that
occurred at our Chinese subsidiaries, including legal and consulting fees, as
compared to the same period of the prior fiscal year. 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 nine months of fiscal 2022 include certain VAT and related
taxes owed by one of our Chinese subsidiaries from prior years, which was
identified and settled during the first nine months of fiscal 2022. 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.




         24

  Table of Contents




New Product Development



New product development costs were approximately $590,000 in the third quarter
of fiscal 2022, a decrease of approximately $50,000, or 8%, as compared to the
same period of the prior fiscal year. For the first nine months of fiscal 2022,
new product development costs were approximately $1.6 million, a decrease of
$51,000 as compared to the same period of the prior fiscal year. The decreases
are primarily due to timing of certain development project expenses, for which
costs were higher in the prior fiscal year periods.



Other Income (Expense)



Interest expense, net, was approximately $55,000 for the third quarter of fiscal
2022, as compared to $53,000 for the same period of the prior fiscal year. For
the first nine months of fiscal 2022, interest expense, net, was approximately
$151,000, as compared to $166,000 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 March 31, 2022, as compared to
the quarter ended March 31, 2021.



Other income, net, was approximately $180,000 for the third quarter of fiscal
2022, as compared to other expense, net, of $29,000 for the same period of the
prior fiscal year. For the first nine months of fiscal 2022, other income, net
was approximately $140,000, as compared to other expense, net, of $23,000 for
the same period of the prior fiscal year. Other expense, net, for the third
quarter and the first nine months of fiscal 2022 includes a benefit of $210,000,
which represents the reversal of a potential liability related to the actions of
the terminated employees of our subsidiaries in China, as previously discussed.
This potential liability was accrued as of June 30, 2021, pending further
investigation, and it was determined in the third quarter of fiscal 2022 that
our Chinese subsidiary would not be responsible for this amount.



The remainder of other income and expenses are primarily comprised of net gains
losses on foreign exchange transactions. 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 third quarter of fiscal 2022, we incurred net foreign currency
transaction losses of approximately $67,000, compared to $17,000 for the same
period of the prior fiscal year. During the first nine months of fiscal 2022, we
incurred net foreign currency transaction losses of $107,000, as compared to
$38,000 for the same period of the prior fiscal year.



Income Taxes



During the third quarter of fiscal 2022, income tax expense was approximately
$163,000, compared to approximately $308,000 for the same period of the prior
fiscal year. During the first nine months of fiscal 2022, income tax expense was
approximately $328,000, as compared to $984,000 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.




Net Loss



Net loss for the third quarter of fiscal 2022 was approximately $495,000, or
$0.02 basic and diluted loss per share, compared to $223,000, or $0.01 basic and
diluted loss per share, for the third quarter of fiscal 2021. The decrease in
net income for the third quarter of fiscal 2022, as compared to the same period
of the prior fiscal year, was primarily attributable to lower revenue and gross
margin, partially offset by lower operating expenses. The resulting decrease in
operating income was partially offset by the aforementioned other income item of
$210,000, and a decrease in the provision for income taxes of approximately
$145,000, as compared to the same period of the prior fiscal year.



Net loss for the first nine months of fiscal 2022 was approximately $2.2
million, or $0.08 basic and diluted loss per share, compared to $272,000, or
$0.01 basic and diluted loss per share, for the first nine months of fiscal
2021. The decrease in net income for the first nine months of fiscal 2022, as
compared to the same period of the prior fiscal year, was primarily attributable
to lower revenue and 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 the aforementioned other income item of $210,000, and a
decrease in the provision for income taxes of approximately $655,000, as
compared to the same period of the prior fiscal year.




         25

  Table of Contents




Weighted-average common shares outstanding were 27,033,578, basic and diluted,
in the third quarter of fiscal 2022, compared to 26,366,651, basic and diluted,
in the third quarter of fiscal 2021. Weighted-average common shares outstanding
were 27,011,943, basic and diluted, in the first nine months of fiscal 2022,
compared to 26,153,839, basic and diluted, in the first nine months 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 March 31, 2022, we had working capital of approximately $11.0 million and
total cash and cash equivalents of approximately $5.2 million, of which, greater
than 50% of our cash and cash equivalents was held by our foreign subsidiaries.



Cash and cash equivalents held by our foreign subsidiaries in China and Latvia
were generated in-country as a result of foreign earnings. 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 $2.2 million and $3.0 million from LPOIZ during the nine-month
periods ended March 21, 2022 and 2021, respectively. As of March 31, 2022, LPOIZ
had approximately $4.8 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 March 31, 2022.



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 March 31, 2022, the outstanding balance on the BankUnited
Term Loan was approximately $4.1 million, and there were no borrowings
outstanding on the BankUnited Revolving Line. The outstanding balance on the
Equipment Loan was approximately $400,000 as of March 31, 2022.



The Amended Loan Agreement and the Letter Agreement includes certain customary
covenants. As of March 31, 2022, 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.



In February 2022, we filed a shelf registration statement to facilitate the
issuance of our Class A common stock, warrants exercisable for shares of our
Class A common stock, and/or units up to an aggregate offering price of $75.8
million from time to time. In connection with the filing of the shelf
registration statement, we also included a prospectus supplement relating to an
at-the-market equity program under which we may issue and sell shares of our
Class A common stock up to an aggregate offering price of $25.2 million from
time to time, decreasing the aggregate offering price available under our shelf
registration statement to $50.6 million. The shelf registration statement was
declared effective by the SEC on March 1, 2022. We have not issued any shares of
our Class A common stock pursuant to the at-the-market equity program.



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.




         26

  Table of Contents




Cash Flows - Operating:

Cash provided by operations was approximately $352,000 for the first nine months
of fiscal 2022, compared to approximately $3.1 million for the same period of
the prior fiscal year. The decrease in cash flows from operations during the
first nine months 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 nine months 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 Coronavirus Aid, Relief, and Economic Security
Act.



Cash Flows - Investing:


During the first nine months of fiscal 2021, we expended approximately $1.5
million in investments in capital equipment, compared to approximately $2.7
million in the same period of the prior fiscal year. The majority of our capital
expenditures during the first nine months 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 $425,000 for the first
nine months of fiscal 2022, compared to approximately $313,000 in the same
period of the prior fiscal year. Cash used in financing activities for the first
nine months of fiscal 2022 reflects approximately $682,000 in principal payments
on our loans and finance leases and 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 $52,000 in
proceeds from the sale of Class A common stock under the 2014 ESPP. Cash used in
financing activities for the first nine months of fiscal 2021 reflects
approximately $761,000 in principal payments on our loans and capital leases,
offset by proceeds of approximately $275,000 from the Equipment Loan, and
approximately $173,000 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 March 31, 2022, our principal commitments consisted of obligations under
operating and finance leases, and debt agreements. No material changes occurred
during the first nine months of fiscal 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 nine months ended March 31, 2022 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.




         27

  Table of Contents




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 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.




         28

  Table of Contents




Our total backlog at March 31, 2022 was approximately $19.7 million, an increase
of 1%, as compared to $19.5 million as of March 31, 2021. Compared to the end of
fiscal 2021, our total backlog decreased by 8% during the first nine months of
fiscal 2022. Backlog change rates for the last five fiscal quarters are:



                                                                                  Change
                                                                                From Prior
                                         Total Backlog        Change From        Quarter
Quarter                                     ($ 000)         Prior Year End         End
Q3 2021                                 $        19,498                 -11 %          -18 %
Q4 2021                                 $        21,329                  -3 %            9 %
Q1 2022                                 $        19,265                 -10 %          -10 %
Q2 2022                                 $        21,929                   3 %           14 %
Q3 2022                                 $        19,678                  -8 %          -10 %




The decrease in backlog during the first nine months of fiscal 2022 was largely
due to timing of the renewal of a large annual contract for infrared products.
Consistent with prior years, we received the renewal of this contract in the
fiscal second quarter, and began shipping against this contract 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 new BD6 material.
With the global supply of germanium currently sourced from Russia and China,
recent global events are generating renewed interest in BD6 as an alternative to
germanium. 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 nine-month periods ended March 31, 2022 and 2021:





                                       (unaudited)
                 Three Months Ended
                     March 31,                 Nine Months Ended March 31,        Quarter         Year-to-date
               2021             2020              2021               2020         % Change         % Change

Revenue
PMO         $ 4,033,218     $  3,904,857     $    11,608,665     $ 12,940,919             3 %               -10 %
Infrared
Products      3,725,684        6,462,527          13,688,770       15,995,133           -42 %               -14 %
Specialty
Products        546,510          333,978           1,354,494        1,196,453            64 %                13 %
Total
revenue     $ 8,305,412     $ 10,701,362     $    26,651,929     $ 30,132,505           -22 %               -12 %

Units
PMO             586,528          680,825           1,600,836        2,816,370           -14 %               -43 %
Infrared
Products         89,476          174,811             337,773          457,436           -49 %               -26 %
Specialty
Products          5,075            6,742              14,869           24,079           -25 %               -38 %
Total
units           681,079          862,378           1,953,478        3,297,885           -21 %               -41 %





         29

  Table of Contents

Three months ended March 31, 2022


Our revenue decreased by approximately $2.4 million, for the third quarter of
fiscal 2022, as compared to the same period of the prior fiscal year, primarily
due to a decrease in infrared product sales, partially offset by an increase in
PMO product sales.



Revenue generated by the PMO product group during the third quarter of fiscal
2022 was $4.0 million, an increase of approximately $128,000, or 3%, as compared
to the same period of the prior fiscal year. The increase is driven by sales
through catalog and distribution channels, as well as increases in sales to
customers in the industrial market, partially offset by a reduction in orders
from a key customer in the telecommunications market, due to a decrease in that
customer's market share. Sales of PMO units decreased by 14%, as compared to the
same period of the prior fiscal year, and average selling prices increased by
20%. 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 44% for the third quarter
of fiscal 2022, as compared to the same period of the prior fiscal year.



Revenue generated by the infrared product group during the third quarter of
fiscal 2022 was $3.7 million, a decrease of approximately $2.7 million, or 42%,
as compared to the same period of the prior fiscal year. The decrease in revenue
from sales of infrared products is primarily due to a decrease in sales to
customers in the industrial market for temperature sensing applications, for
which demand peaked during the third quarter of fiscal 2021. During the third
quarter of fiscal 2022, sales of infrared units decreased by 49%, as compared to
the prior year period. The decrease in units is due primarily due to the mix of
products shipped, as the prior year period included more molded infrared lenses
which are lower in volume and higher in price than the larger diamond-turned
lenses.

In the third quarter of fiscal 2022, our specialty products revenue increased by $213,000, or 64%, as compared to the same period of the prior fiscal year, primarily due to NRE projects for customers in the industrial and defense industries during the third quarter of fiscal 2022.

Nine months ended March 31, 2022



Our revenue decreased by approximately $3.5 million for the first nine months of
fiscal 2022, as compared to the same period of the prior fiscal year, due to
decreases in both PMO and infrared product sales.



Revenue generated by the PMO product group during the first nine months of
fiscal 2022 was $11.6 million, a decrease of approximately $1.3 million, or 10%,
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 43%, as
compared to the same period of the prior fiscal year, and average selling prices
increased by 58%. 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 60%
for the first nine months of fiscal 2022, as compared to the same period of

the
prior fiscal year.



Revenue generated by the infrared product group during the first nine months of
fiscal 2022 was $13.7 million, a decrease of approximately $2.3 million, or 14%,
as compared to the same period of the prior fiscal year. The decrease in revenue
is primarily driven by sales to customers in the industrial market. During the
first nine months of fiscal 2022, sales of infrared units decreased by 26%, as
compared to the prior year period. The decrease in units is due primarily due to
the mix of products shipped, as the prior year period included more molded
infrared lenses which are lower in volume and higher in price than the larger
diamond-turned lenses. Industrial applications, firefighting cameras, and other
public safety applications continue to be the primary drivers of 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 were accelerated by COVID-19, and although the demand has leveled
off since the initial spike, it remains elevated.

In the first nine months of fiscal 2022, our specialty products revenue increased by $158,000, or 13%, as compared to the same period of the prior fiscal year, primarily driven by an increase in NRE projects for customers in the commercial and defense industries.





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."




         30

  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 nine months ended March 31, 2022 and 2021:





                                                        (unaudited)
                               Quarter Ended March 31,          Nine Months Ended March 31,
                                 2022            2021              2022               2021
Net loss                     $   (495,003 )   $  (222,564 )   $    (2,182,391 )    $  (272,041 )
Depreciation and
amortization                      924,219         917,308           2,763,620        2,608,472
Income tax provision              163,059         307,834             328,328          983,586
Interest expense                   54,984          52,795             151,064          166,491
EBITDA                       $    647,259     $ 1,055,373     $     1,060,621      $ 3,486,508
% of revenue                            8 %            10 %                 4 %             12 %




Our EBITDA for the three months ended March 31, 2022 was approximately $647,000,
compared to earnings of $1.1 million for the same period of the prior fiscal
year. The decrease in EBITDA in the third quarter of fiscal 2022 was primarily
attributable to lower revenue and gross margin, partially offset by the
aforementioned other income item of $210,000.



Our EBITDA for the nine months ended March 31, 2022 was approximately $1.1
million, compared to $3.5 million for the same period of the prior fiscal year.
The decrease in EBITDA in the first nine months of fiscal 2022 was primarily
attributable to lower revenue and gross margin and increased SG&A expenses,
including expenses incurred related to the previously described events that
occurred in our Chinese subsidiaries.




         31

  Table of Contents

© Edgar Online, source Glimpses