LIGHTPATH TECHNOLOGIES INC

Results of Operations

Revenue

Revenue for the third quarter of fiscal 2024 was approximately $7.7 million, an increase of approximately $0.3 million, or 4%, as compared to approximately $7.4 million in the same quarter of the prior fiscal year, driven by increases in sales of infrared components and engineering services.

Revenue generated by infrared components was approximately $3.6 million in the third quarter of fiscal 2024, an increase of approximately $0.5 million, or 16%, as compared to 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 third quarter of fiscal 2024 was $2.7 million, a decrease of approximately $0.4 million, or 13%, 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 and medical industries. Sales to customers in the telecommunications industry in China also decreased. Revenue from assemblies and modules decreased by 16%, 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 sales of infrared camera cores. Revenue from engineering services increased by $0.4 million, or 211%, for the third quarter of fiscal 2024, as compared to the same quarter of the prior fiscal year. This increase was primarily driven by Visimid’s contract with Lockheed Martin, where revenue is generally recognized based on the achievement of milestones.

Revenue for the first nine months of fiscal 2024 was approximately $23.1 million, a decrease of approximately $0.2 million, or 1%, as compared to approximately $23.2 million in the same period of the prior fiscal year, primarily driven by a decrease in sales of visible components, partially offset by increases in sales of infrared components and engineering services.

Revenue generated by infrared components was approximately $11.0 million in the first nine months of fiscal 2024, an increase of approximately $1.4 million, or 15%, as compared to approximately $9.6 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 nine months of fiscal 2024 was $8.1 million, a decrease of approximately $2.2 million, or 21%, 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 were flat, as compared to the same period of the prior fiscal year, due to a decrease in shipments against a multi-year contract with a defense customer, due to timing, which was offset by the addition of Visimid sales of infrared camera cores. Revenue from engineering services increased by $621,000, or 213%, as compared to the same period of the prior fiscal year. This increase was primarily driven by Visimid’s contract with Lockheed Martin, where revenue is generally recognized based on the achievement of milestones. The remaining increase is driven by revenue from one of our space-related funded research contracts.

Cost of Sales and Gross Margin

Gross margin in the third quarter of fiscal 2024 was approximately $1.6 million, a decrease of $0.9 million, or 37%, as compared to the same quarter of the prior fiscal year. Total cost of sales was approximately $6.1 million for the third quarter of fiscal 2024, compared to approximately $4.9 million for the same quarter of the prior fiscal year. Gross margin as a percentage of revenue was 21% for the third quarter of fiscal 2024, compared to 34% for the same quarter of the prior fiscal year. The decrease in gross margin as a percentage of revenue is due to two main factors. First, the decrease in visible components sales, offset by an increase in infrared components sales which typically have lower margins than visible components. Second, our quarterly revaluation of inventory resulted in a more significant adjustment for the third quarter of fiscal 2024 than in prior periods. The revaluation was a net write-down of inventory, driven by cost reduction efforts related to material, labor and outside services.

Gross margin in the first nine months of fiscal 2024 was approximately $6.1 million, a decrease of $1.9 million, or 24%, as compared to the same period of the prior fiscal year. Total cost of sales was approximately $17.0 million for the first nine months of fiscal 2024, compared to approximately $15.3 million for the same period of the prior fiscal year. Gross margin as a percentage of revenue was 26% for the first nine months 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 primarily due to the decrease in visible components sales, which typically have higher margins than our infrared components product group. Our infrared components product group comprised a greater portion of our sales for the first half of fiscal 2024. In addition, gross margin as a percentage of revenue for the first nine months of fiscal 2024 was unfavorably impacted by the aforementioned revaluation of inventory during the third quarter of fiscal 2024.

Selling, General and Administrative

SG&A costs were approximately $3.2 million for the third quarter of fiscal 2024, an increase of approximately $412,000, or 15%, as compared to approximately $2.8 million in the same quarter of the prior fiscal year. The increase in SG&A costs is primarily due to an increase in wages, including the addition of employees upon the acquisition of Visimid. We also incurred additional legal and professional fees in the third quarter of fiscal 2024 associated with our rescheduled annual stockholder meeting and previously disclosed Delaware chancery court proceedings.

SG&A costs were approximately $8.7 million for the first nine months of fiscal 2024, an increase of approximately $263,000, or 3%, as compared to approximately $8.4 million in the same period of the prior fiscal year. The increase in SG&A costs is primarily due to an increase in wages, partially offset by a decrease in stock-based compensation. We also incurred approximately $97,000 associated with the acquisition of Visimid, which closed in July 2023, as well as additional legal and professional fees in the third quarter of fiscal 2024 associated with our rescheduled annual stockholder meeting and previously disclosed Delaware chancery court proceedings.

New Product Development

New product development costs were approximately $570,000 in the third quarter of fiscal 2024, an increase of approximately $56,000, or 11%, as compared to the same quarter of the prior fiscal year. For the first nine months of fiscal 2024, new product development costs were $1.8 million, an increase of $288,000 or 19%, 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 $153,000 and $357,000 for three and nine months ended March 31, 2024, respectively, 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 $37,000 for the third quarter of fiscal 2024, as compared to $77,000 for the same quarter of the prior fiscal year. For the first nine months of fiscal 2024, interest expense was approximately $149,000, as compared to $229,000 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. In February 2024, our largest loan balance was paid in full using the restricted cash that previously secured the loan.

Other income, net, was approximately $29,000 for the third quarter of fiscal 2024, as compared to other expense, net of $61,000 for the same quarter of the prior fiscal year. For the first nine months of fiscal 2024, other income, net, was $234,000, as compared to other expense, net, of $35,000 for the same period of the prior fiscal year. Other income for the first nine months 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 $6,000 for the third quarter of fiscal 2024, as compared to $65,000 for the same period of the prior year. The decrease is due to timing of intercompany dividends. During the first nine months of fiscal 2024, income tax expense was approximately $121,000, compared to $222,000 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 third quarter of fiscal 2024 was approximately $2.6 million, or $0.07 basic and diluted loss per share, compared to $1.2 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 $1.4 million for the third quarter of fiscal 2024, as compared to the same quarter of the prior fiscal year, was primarily attributable to the decrease in gross margin, coupled with increased operating expenses, including amortization of intangibles.

Net loss for the first nine months of fiscal 2024 was approximately $5.7 million, or $0.15 basic and diluted loss per share, compared to $3.2 million, or $0.11 basic and diluted loss per share, for the same period of the prior fiscal year. The increase in net loss of approximately $2.4 million for the first nine months 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, coupled with increased operating expenses and partially offset by the aforementioned other income in our Chinese subsidiary.

Weighted-average common shares outstanding were 37,988,770, basic and diluted, in the third quarter of fiscal 2024, compared to 35,124,095, basic and diluted, in the same quarter of fiscal 2023. For the first nine months of fiscal 2024, weighted-average common shares outstanding were 37,639,464, basic and diluted, as compared to 29,750,138, basic and diluted, in the same period of the prior fiscal year. The increase in the weighted-average basic common shares was primarily due to the sale of an aggregate of 9,090,910 shares of Class A common stock pursuant to a public offering which closed on January 17, 2023. The increase is also attributable to the shares of Class A common stock issued in conjunction with the acquisition of Visimid, 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, 3% in 2022, and 5.2% in 2023. The annual economic growth rate in 2024 is projected 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.