LIGHTPATH TECHNOLOGIES INC

Results of Operations

Revenue

Revenue for the second quarter of fiscal 2024 was approximately $7.3 million, a decrease of approximately $1.2 million, or 14%, as compared to approximately $8.5 million in the same quarter of the prior fiscal year, primarily driven by a decrease in sales of visible components.

Revenue generated by infrared components was approximately $3.6 million in the second quarter of fiscal 2024, an increase of approximately $0.3 million, or 9%, as compared to approximately $3.3 million in the same quarter of the prior fiscal year. The increase in revenue is primarily due to an increase in shipments against an annual contract for an international military program. Revenue from the visible components product group for the second quarter of fiscal 2024 was $2.7 million, a decrease of approximately $1.2 million, or 31%, as compared to the same quarter of the prior fiscal year. The decrease in revenue is primarily due to a decrease in sales to customers in the defense industry, as well as a decrease in sales through catalog and distribution channels in the U.S. and in Europe. Sales to customers in the telecommunications industry in China also decreased. Revenue from assemblies and modules decreased by 20%, as compared to the same quarter of the prior fiscal year, primarily due to timing of shipments against a multi-year contract with a defense customer. This decrease was partially offset by the addition of Visimid revenue. Revenue from engineering services was flat for the second quarter of fiscal 2024, as compared to the same quarter of the prior fiscal year.

Revenue for the first half of fiscal 2024 was approximately $15.4 million, a decrease of approximately $0.4 million, or 3%, as compared to approximately $15.8 million in the same period of the prior fiscal year, primarily driven by a decrease in sales of visible components.

Revenue generated by infrared components was approximately $7.4 million in the first half of fiscal 2024, an increase of approximately $0.9 million, or 14%, as compared to approximately $6.5 million in the same period of the prior fiscal year. The increase in revenue is primarily due to an increase in shipments against an annual contract for an international military program. Revenue from the visible components product group for the first half of fiscal 2024 was $5.4 million, a decrease of approximately $1.8 million, or 25%, as compared to the same period of the prior fiscal year. The decrease in revenue is primarily due to a decrease in sales to customers in the defense industry, as well as a decrease in sales through catalog and distribution channels in the U.S. and in Europe. Sales to customers in the telecommunications industry in China also decreased. Revenue from assemblies and modules increased by 7%, as compared to the same period of the prior fiscal year, primarily due to the addition of Visimid revenue, which increase was partially offset by a decrease in shipments against a multi-year contract with a defense customer due to timing. Revenue from engineering services increased by $253,000, as compared to the same period of the prior fiscal year, primarily due to the addition of Visimid revenue as well as revenue from one of our space-related funded research contracts.

Cost of Sales and Gross Margin

Gross margin in the second quarter of fiscal 2024 was approximately $2.2 million, a decrease of $1.1 million, or 33%, as compared to the same quarter of the prior fiscal year. Total cost of sales was approximately $5.1 million for the second quarter of fiscal 2024, compared to approximately $5.2 million for the same quarter of the prior fiscal year. Gross margin as a percentage of revenue was 30% for the second quarter of fiscal 2024, compared to 38% for the same quarter of the prior fiscal year. The decrease in gross margin as a percentage of revenue is due to the decrease in visible components sales, which typically have higher margins than our infrared components product group, which comprised a greater portion of our sales for the second quarter of fiscal 2024.

Gross margin in the first half of fiscal 2024 was approximately $4.5 million, a decrease of $1.0 million, or 18%, as compared to the same period of the prior fiscal year. Total cost of sales was approximately $10.9 million for the first half of fiscal 2024, compared to approximately $10.4 million for the same period of the prior fiscal year. Gross margin as a percentage of revenue was 29% for the first half of fiscal 2024, compared to 34% for the same period of the prior fiscal year. The decrease in gross margin as a percentage of revenue is due to the decrease in visible components sales, which typically have higher margins than our infrared components product group, which comprised a greater portion of our sales for the first half of fiscal 2024.

Selling, General and Administrative

SG&A costs were approximately $2.9 million for the second quarter of fiscal 2024, a decrease of approximately $172,000, or 6%, as compared to approximately $3.0 million in the same quarter of the prior fiscal year. The decrease in SG&A costs is primarily due to a decrease in stock-based compensation, partially offset by an increase in wages.

SG&A costs were approximately $5.5 million for the first half of fiscal 2024, a decrease of approximately $149,000, or 3%, as compared to approximately $5.7 million in the same period of the prior fiscal year. The decrease in SG&A costs is primarily due to a decrease in stock-based compensation, partially offset by an increase in wages. This decrease was also partially offset by costs of approximately $97,000 associated with the acquisition of Visimid, which closed in July 2023.

New Product Development

New product development costs were approximately $608,000 in the second quarter of fiscal 2024, an increase of approximately $142,000, or 30%, as compared to the same quarter of the prior fiscal year. For the first half of fiscal 2024, new product development costs were $1.2 million, an increase of $232,000 or 23%, as compared to the same period of the prior fiscal year. These increases are primarily due to the addition of engineering personnel as a result of the Visimid acquisition, as well as an increase in materials and outside services utilized for development projects.

Amortization of Intangibles

Amortization of intangibles increased by $204,000 for both the second quarter and first half of fiscal 2024, due to the amortization of identifiable intangible assets associated with the Visimid acquisition. See Note 3,Acquisition of Visimid, in the unaudited Condensed Consolidated Financial Statements, for further information.

Other Income (Expense)

Interest expense, net, was approximately $54,000 for the second quarter of fiscal 2024, as compared to $81,000 for the same quarter of the prior fiscal year. For the first half of fiscal 2024, interest expense was approximately $111,000, as compared to $152,000 for the same period of the prior fiscal year. The decrease in interest expense is primarily due to a decrease in amortization of loan costs, as all loan costs have been fully amortized in prior periods. Total debt has decreased 35% as of the quarter ended December 31, 2023, as compared to the quarter ended December 31, 2022, while the interest rate on our largest loan balance has increased from 5% to 8.5% for the same period.

Other income, net, was approximately $200,000 for the second quarter of fiscal 2024, as compared to other expense, net, of $1,000 for the same quarter of the prior fiscal year. For the first half of fiscal 2024, other income, net, was $205,000, as compared to $26,000 for the same period of the prior fiscal year. Other income for the second quarter and first half of fiscal 2024 includes a gain of $190,000 for the return of funds previously misappropriated by our former Chinese management team, as a result of the ongoing legal proceedings described in Note 14,Contingencies, in the unaudited Condensed Consolidated Financial Statements.

Other income and expenses also include net gains and 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.

Income Taxes

Income tax expense is primarily related to income taxes from our operations in China, including estimated Chinese withholding taxes associated with intercompany dividends declared by LPOIZ and payable to us as its parent company. Income tax expense was approximately $76,000 for the second quarter of fiscal 2024, as compared to $55,000 for the same period of the prior year. The increase is due to timing of intercompany dividends. During the first half of fiscal 2024, income tax expense was approximately $116,000, compared to $157,000 for the same period of the prior fiscal year. The decrease is due to lower taxable income in that jurisdiction.

Net Loss

Net loss for the second quarter of fiscal 2024 was approximately $1.7 million, or $0.05 basic and diluted loss per share, compared to $0.7 million, or $0.03 basic and diluted loss per share, for the same quarter of the prior fiscal year.The increase in net loss of approximately $1 million for the second quarter of fiscal 2024, as compared to the same quarter of the prior fiscal year, was primarily attributable to the decrease in revenue and gross margin, partially offset by the aforementioned other income in our Chinese subsidiary.

Net loss for the first half of fiscal 2024 was approximately $3.1 million, or $0.08 basic and diluted loss per share, compared to $2.1 million, or $0.08 basic and diluted loss per share, for the same period of the prior fiscal year. The increase in net loss of approximately $1 million for the first half of fiscal 2024, as compared to the same period of the prior fiscal year, was primarily attributable to the decrease in revenue and gross margin, partially offset by the aforementioned other income in our Chinese subsidiary.

Weighted-average common shares outstanding were 37,501,683, basic and diluted, in the second quarter of fiscal 2024, compared to 27,172,226, basic and diluted, in the same quarter of fiscal 2023. For the first half of fiscal 2024, weighted-average common shares outstanding were 37,446,714, basic and diluted, as compared to 27,121,583, basic and diluted, in the first half of fiscal 2023. The increase in the weighted-average basic common shares was due to the sale of an aggregate of 9,090,910 shares of Class A common stock pursuant to a public offering which closed January 17, 2023, as well as the issuance of shares of Class A common stock under the 2014 ESPP and underlying vested RSUs and RSAs.

Potential Impact of Economic Conditions and Policies in China

Due to our operations in China, our business, results of operations, financial condition and prospects may be influenced to a significant degree by economic, political, legal and social conditions in China. China’s economy differs from the economies of other countries in many respects, including with respect to the level of development, growth rate, amount of government involvement, control of foreign exchange and allocation of resources. While China’s economy has experienced significant growth over the past several decades, its growth rate has declined in recent years and may continue to decline. According to the National Bureau of Statistics of China, the annual economic growth rate in China was 6.9% in 2017, 6.8% in 2018, 6.1% in 2019, 2.3% in 2020, 8.1% in 2021, a3% in 2022, and 5.2% in 2023. The annual economic growth rate in 2024 is estimated to be 4.6%, although some analysts have indicated that China’s economic growth could be lower. Deteriorating economic conditions in China generally have led to lower demand for the Company’s products in China and thus lower revenues and net income for our subsidiaries in China and the Company overall. A continuation of China’s current economic conditions or a further slowdown in the economic growth, an economic downturn, a recession, or other adverse economic conditions in China is likely to have a material adverse effect on our business and results of operations in future quarters.

In addition, on July 4, 2023 China announced export limitations on Germanium and Gallium, two materials that are commonly used in infrared optical components. A certain portion of our infrared optics revenue has always been dependent on those materials. As a precaution to the disruption in the supply chain of Germanium, and in anticipation of customers ordering more optics produced from other materials, primarily our own BlackDiamond materials, we have, in agreement with one key customer, proactively canceled some of our sales orders for optics made of Germanium. This serves to both reduce our exposure to possible shortages in Germanium material supply, as well as to free up capacity for orders for optics made of materials other than Germanium. This also led to us intentionally not renew a large annual customer order for optics made of Germanium from the same customer. This annual order is typically renewed during our second fiscal quarter; the prior renewal was announced in December 2022 for over $5 million. The lack of this renewal impacts our backlog in the short term, as we would typically have received this order during the second fiscal quarter. The lack of this order booking does not mean, however, that we have lost the customer. Instead, we expect this order to renew in coming months, as the customer completes evaluating, and working toward transitioning to optics made of our BlackDiamond materials.