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| LPTH > SEC Filings for LPTH > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
Quarterly Report
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the LightPath Technologies, Inc. ("LightPath", the "Company" or "We"). All statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 (the "Quarterly Report"), other than statements of historical facts, which address activities, events or developments that we expect or anticipate will or may occur in the future, including such things as future capital expenditures, growth, product development, sales, business strategy and other similar matters are forward-looking statements. These forward-looking statements are based largely on our current expectations and assumptions and are subject to a number of risks and uncertainties, many of which are beyond our control. Actual results could differ materially from the forward-looking statements set forth herein as a result of a number of factors, including, but not limited to, limited cash resources and the need for additional financing, our dependence on a few key customers, our ability to transition our business into new markets, our ability to increase sales and manage and control costs and other risks described in our reports on file with the Securities and Exchange Commission ("SEC"). In light of these risks and uncertainties, all of the forward-looking statements made herein are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized. We undertake no obligation to update or revise any of the forward-looking statements contained herein.
Overview
Historical: We are in the business of supplying users with glass lenses and
other specialty optical products, that have applications in a number of
different industries. Due to the emergence of optical technologies in
communications, networking and data storage products in the late 1990's, there
was a significant surge in demand for our products, particularly in the period
represented by our fiscal 1999-2001 years. During this period, our annual
revenues increased from less than $2 million in sales to approximately $25
million due to both acquisitions (to add glass lens production capacity and
market presence, and isolators to our existing line of collimators and
proprietary glass lenses) and organic product line growth.
During fiscal 2002, optical component markets experienced a severe downturn that resulted in a significant decline in the demand for our products. By fiscal 2003, our sales had contracted to just under $7 million. The business infrastructure was too large and diverse to support a business of this reduced size and a decision was made in late fiscal 2002 and implemented during fiscal 2003 to close our isolator production facility in California and our headquarters and collimator and lens production facility in New Mexico. Our manufacturing and production equipment from these locations was consolidated in our headquarters and manufacturing facility in Orlando, Florida and until November 2005 all of the aforementioned products were manufactured there. The consolidation was completed by June 30, 2003, resulting in a significant reduction in net cash use by the business.
In November 2005, we formed LightPath Optical Instrumentation (Shanghai) Co., Ltd, ("LPOI") a wholly owned manufacturing subsidiary, located in Jiading, People's Republic of China ("PRC"). The manufacturing operations are housed in a 17,000 square foot facility located in the Jiading Industrial Zone near Shanghai. This plant has increased overall production capacity and enabled us to compete for larger production volumes of optical components and assemblies, and strengthened our partnerships within the Asia/Pacific region. Over 95% of the Company's precision molded lenses produced in the nine months ended March 31, 2009 were manufactured in LPOI's Shanghai facility. We have increased the capacity of the Shanghai facility by increasing capital equipment. Due to improved operating efficiencies and lower revenues we reduced our Shanghai workforce by approximately 20 employees in December 2008.
We execute all foreign sales from our Orlando facility and intercompany transactions in U.S. dollars, mitigating the impact of foreign currency fluctuations. Assets and liabilities denominated in non-U.S. currencies, primarily Chinese RMB, 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 nine-month periods. During the nine months ended March 31, 2009 and 2008 we incurred a $3,443 gain and a $51,181 gain on foreign currency translation, respectively.
How we operate: We have continuing sales of two basic types: occasional sales via ad-hoc purchase orders of mostly standard product configurations (our "turns" business); and the more challenging and potentially more rewarding business of custom product development. In this latter type of business, we work with customers in the industrial, medical, defense and communications markets to help them determine optical specifications and even create certain optical designs for them,
• Maintaining an optical design and new product sampling capability, including a high-quality and responsive optical design engineering staff.
• Customers that incorporate products such as ours into higher volume commercial applications, continously work to reduce their expenses, which often leads them to larger or overseas lower-cost suppliers even at the cost of lower quality.
• Because of our limited cash resources and cash flow, we may not be able to support the supply requirements needed to service the demands in the market for high volume, low cost lenses.
Despite these challenges to obtaining more design win business, we nevertheless have been, and believe we can continue to be, successful in procuring this business because of our unique capabilities in optical design engineering. Additionally, we believe that we offer value to some customers as a secondary or backup source of supply in the United States should they be unwilling to commit all of their source of supply of a critical component to a foreign merchant production source. We also continue to have the proprietary GRADIUM lens glass technology to offer to certain laser markets.
Our key indicators:
Sales Backlog - We believe that sales growth is 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 define our "disclosure backlog" as customer orders for delivery within one year which is reasonably likely to be fulfilled, including customer purchase orders and products to be provided under supply contracts if they meet the aforementioned criteria. At June 30, 2008 our disclosure backlog was approximately $3.0 million.
At March 31, 2009, our disclosure backlog has grown to $3.4 million from $3.0 million at June 30, 2008 during these slow economic times. We believe this growth to be partially the result of our efforts to enter high volume lower cost commercial markets, like the industrial laser tool market and other imaging related product markets. We have seen increased quote activity for our Black Diamond product line. With the continuing diversification of our backlog and the smaller percentage of telecom business in our backlog we expect to show modest increases in revenue starting with the fiscal fourth quarter 2009 and into the fiscal first quarter of 2010. Bookings have increased for our industrial low cost lenses in Asia. We have seen an increase in bookings due beyond one year. Our total sales backlog at March 31, 2009 was $5.3 million with orders scheduled through 2011. This is a result of booking orders in Shanghai with two to three year delivery schedules. We anticipate beginning production over the next 3 to 6 months on these large Shanghai orders subject to customer qualifications of our samples lenses.
Inventory Levels - We manage our inventory levels to minimize investment in working capital but still have the flexibility to meet customer demand to a reasonable degree. While the mix of inventory is an important factor, including adequate safety stocks of long lead-time materials, an important aggregate measure of inventory in all phases of production is the quarter's ending inventory expressed as a number of days worth of the quarter's cost of sales, also known as "days cost of sales in inventory," or "DCSI." It is calculated by dividing the quarter's ending inventory by the quarter's cost of goods sold, multiplied by 365 and divided by 4. Generally, a lower DCSI measure equates to a lesser investment in inventory and therefore more efficient use of capital. During the nine months ended March 31, 2009 and 2008, our DCSI was 89 and 81, respectively compared to 66 for the year ended June 30, 2008. The increase in DCSI was principally caused by lower sales to customers.
Accounts Receivable Levels and Quality - Similarly, we manage our accounts receivable to minimize investment in working capital. We measure the quality of receivables by the proportions of the total that are at various increments past due
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 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.
Liquidity and Capital Resources
Going Concern and Management's Plans
The accompanying condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. Because of the current operating loss of $2.3 million for the nine months ended March 31, 2009 as well as recurring operating losses during fiscal years 2008 and 2007 of $5.5 million and $2.6 million, respectively, and cash used in operations for the nine months ended March 31, 2009 of $2.2 million as well as cash used in operations during fiscal years 2008 and 2007 of $3.6 million and $1.9 million, respectively, there is substantial doubt about our ability to continue as a going concern. Our continuation as a going concern is dependent on attaining profitable operations through achieving revenue growth targets.
We have taken certain actions to conserve our cash including extending payment terms with certain of our suppliers. We have negotiated payment plans with some key vendors and are working with other vendors to develop payment plans.
We have instituted a cost reduction program and have reduced headcount in Orlando and Shanghai and reduced costs for medical insurance for our Orlando employees. In March 2009 the Orlando staff was reduced to a four day work week. This is expected to save $663,000 per year of wages and benefits. In addition, we have redesigned certain product lines, increased sales prices on certain items, obtained more favorable material costs, and have instituted more efficient management techniques. We believe these factors will contribute towards achieving profitability assuming we meet our sales targets. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
During the third quarter of fiscal 2009 we faced financial challenges along with many in the industries we do business with, as the worldwide economic instability continued to create turbulence in the market. We engage in continuing efforts to keep costs under control as we seek renewed sales growth. Our efforts are directed toward reaching positive cash flow and profitability. If these efforts are not successful, we will 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. On May 11, 2009, the Company had a book cash balance of approximately $621,000, which included $277,000 received from the Chinese government to pay for move related expenses of the Shanghai plant.
In the second quarter of fiscal 2005, we entered into a $75,000 capital equipment lease for equipment to support our molded optics production. On January 11, 2006 we procured a secured line of credit loan in the maximum available principal amount of $500,000. We drew the maximum available principal amount of $500,000 under the loan during the first twelve
If additional capital expenditures are required, we may seek similar capital equipment lease or other debt financing, however, it is uncertain whether we would be successful in obtaining any such financing on terms acceptable to us.
In July 2007 we raised gross proceeds of approximately $3,200,000 by way of the sale of newly issued common stock and warrants to certain institutional and private investors, resulting in net proceeds to the Company of $2,978,544 through the issuance of 800,000 shares of common stock at $4.00 per share. Professional fees of $230,456 were paid to First Montauk for its role as exclusive placement agent and financial advisor and for attorney and escrow agent fees. The investors along with First Montauk and its principals, the placement agent, also received warrants which vested 100% on January 26, 2008 and can be exercised through January 26, 2013 for the future purchase of 320,000 shares of our common stock, 238,750 warrants are at $5.50 per share and 81,250 warrants are at $2.61 per share. If all of the warrants are ultimately exercised an additional $1,525,000 will be raised. Effective August 1, 2008, in conjunction with the convertible debenture agreement (see below), the exercise price of half of the warrants issued to First Montauk and all of the warrants issued to the four investors that also participated in the August transaction, were reduced from $5.50 per share to $2.61 per share, this decreased the potential proceeds to be received upon exercise of such warrants by $234,813.
On August 1, 2008, we executed a Securities Purchase Agreement with twenty-four institutional and private investors with respect to a private placement of 8% senior convertible debentures (the "Debentures"). The sale of the Debentures generated gross proceeds of approximately $2,929,000. We will use the funds to provide working capital for our operations. Among the investors were Steven Brueck, J. James Gaynor, Louis Leeburg, Robert Ripp, Gary Silverman and James Magos, all of whom were directors or officers of LightPath as of August 1, 2008. Mr. Magos resigned effective September 2, 2008.
The maturity date of the Debentures is August 1, 2011, on which date the outstanding principal amount of the Debentures will be due. Interest on the Debentures was prepaid by issuing 589,614 shares of in common stock in December 2008. Interest of $39,053 was due on October 1, 2008 and was prepaid by the Company on August 1, 2008 by issuing 27,893 shares of common stock in payment of such interest based upon the closing price of $1.40 per share. The Debentures are secured by substantially all of our previously unencumbered assets pursuant to a Security Agreement and are guaranteed by our wholly-owned subsidiaries, Geltech Inc. and LPOI pursuant to a Subsidiary Guarantee.
Upon issuance the Debentures were immediately convertible into 1,901,948 shares of common stock, based on a conversion price of $1.54 per share, which is 110% of the closing bid price of our common stock on the NASDAQ Capital Market on July 31, 2008. Investors also received warrants to purchase up to 950,974 shares of our common stock (the "Warrants"). The Warrants are exercisable for a period of five years beginning on August 1, 2008 with 65% of the Warrants, exercisable for 618,133 shares, priced at $1.68 per share and the remaining 35% of the Warrants priced at $1.89 per share. If all of the Warrants were exercised, we would receive additional proceeds in the amount of $1,645,184.
Investors who participated in our July 2007 common stock private placement equity were offered an incentive to invest in the debenture offering. Four investors from the July 2007 offering participated in the debenture offering and as a result we reduced the exercise price of the warrants they received in the July 2007 offering from $5.50 per share to $2.61 per share. This reduced warrant strike price lowered potential proceeds on the exercise of the warrants by $119,212 to $107,663. Additionally, such investors were issued an aggregate of 73,228 incentive common shares (the "Incentive Shares"), valued at $75,131.
We paid a commission to the exclusive placement agent for the offering, First Montauk Securities Corp. ("First Montauk"), in an amount equal to $216,570 plus costs and expenses. We also issued to First Montauk and its designees warrants to purchase an aggregate of 190,195 shares of our common stock at an exercise price equal to $1.68 per share, which is 120% of the closing bid price of the our common stock on the NASDAQ Capital Market on July 31, 2008. The Warrants are exercisable for a period of five years beginning on August 1, 2008. In addition, the exercise price of 50% of the warrants previously issued to the First Montauk and its designees at the closing of the July 2007 financing was reduced from $5.50 to $2.61 per share. The reduced warrant strike price resulted in lower potential proceeds on the exercise of the warrants by $115,600 to $104,400.
The Warrants and the Incentive Shares issued to the Debenture holders were valued at $790,830 and recorded as a discount on the debt. The Incentive Shares were valued using the fair market value of the Company's stock on the date of issuance. The Warrants were valued using the Black-Scholes valuation model using assumptions similar to those used to value the Company's stock options and RSU's. In addition a beneficial conversion feature associated with the Debentures was valued at $600,635 and was recorded as a discount on the debt. The total debt discount of $1,391,465 will be amortized using the effective interest method over the 36-month term of the Debentures.
On December 31, 2008 the Debentures were amended to allow debenture holders to convert 25% of their debentures into common stock, as a result, $732,250 of debentures were converted into 475,496 common shares. As an inducement to convert the debentures, we issued additional warrants (valued at $215,975 using the Black-Scholes method) and prepaid the interest of $453,995 on the unconverted portion of the Debentures through the maturity date of August 1, 2011, which resulted in the issuance of 589,614 shares of common stock. Interest payment of $58,580 for the quarter ended December 31, 2008 resulted in the issuance of 76,078 shares of common stock. As a result of the Debenture conversion, $304,382 of debt discount was written off to interest expense. During the nine months ended March 31, 2009, $558,699 of the debt discount was amortized through interest expense on the condensed consolidated statement of operations and the remaining unamortized debt discount was $832,766 at March 31, 2009. For the quarter ended March 31, 2009, $80,378 of the unamortized debt discount was amortized through interest expense and $43,935 of prepaid interest was amortized. We plan on filing a registration statement to register the prepaid interest shares and warrants issued in December 2008.
We also incurred debt issuance costs associated with the issuance of the debentures of $554,310 which will be amortized over the 36-month term using the effective interest method. The costs were for broker commissions, legal and accounting fees, filing fees and $194,057 representing the fair value of the warrants issued to the First Montauk. We used the Black-Scholes model to determine fair value of the warrants. During the nine months ended March 31, 2009, $222,566 of the debt issuance costs were amortized through interest expense on the condensed consolidated statement of operations and the remaining unamortized balance was $331,744. For the quarter ended March 31, 2009, $32,019 of the unamortized debt issuance cost was amortized through interest expense.
Total principal outstanding on the Debenture and the amount outstanding for directors and officers purchases under the Debenture agreement was $2,196,750 and $194,700, respectively at March 31, 2009, less unamortized debt discount of $832,766 and $73,809, respectively.
Further improvement in cash flow, initially meaning a reduction in cash use, is expected to be primarily a function of sales increases and, to some extent, margin improvements. Sales increases are expected to be the most important source of future reductions in operating cash outflow. Focused efforts are underway to penetrate non-laser markets. In support of these efforts, the Company is engaged in new product development and customer prospecting for these markets. Although we believe that cash flows from operations will improve in the future based upon anticipated increases in sales and further cost reductions, it is anticipated that cash flows from operations will continue to be negative through the end of the fourth quarter of fiscal 2009. The recent recession or slowdown in economic conditions has had an impact on our ability to book and ship revenues. During the second fiscal quarter we had $400,000 of orders cancelled and $100,000 of orders due to ship in the quarter which were pushed out for later deliveries. We have seen a slowdown in booking new orders in the third quarter of fiscal 2009. Our quote activity is still strong but we are seeing a higher incidence of re-quotes.
During the nine months ending March 31, 2009, we used approximately $2,179,000 of cash for operating activities. At March 31, 2009, we had a cash and cash equivalent balance of approximately $380,000.
For the nine months ended March 31, 2009, cash decreased from June 30, 2008 by approximately $2,651,000, excluding the proceeds we received from the issuance of the Debentures in August 2008, compared to a decrease of approximately $3,850,000, excluding the private placement proceeds we received in July 2007 in the same period of the prior fiscal year. The use of cash in both periods was primarily for the operating expenses, capital expenditures and financing expenses of the periods. Additionally, the use of cash for the nine month period ending March 31, 2009 included payments to vendors of which $1,149,000 were for invoices over 60 days beyond vendor terms.
NASDAQ Listing Notification
On October 3, 2008, we received a notification from The NASDAQ Listing Qualifications of The NASDAQ Stock Market, LLC that we did not comply with Marketplace Rule 4310(c)(3), which requires us to have a minimum of $2,500,000 in stockholders' equity or $35,000,000 market value of listed securities or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years.
In the notification letter from the NASDAQ Staff, the following was noted: (i) based on our Annual Report on Form 10-K for the fiscal year ended June 30, 2008, our stockholders' equity was $2,159,761; (ii) as of October 2, 2008, the market value of our listed securities was $7,357,696; and (iii) we have reported net losses from continuing operations of $(5,467,769), $(2,614,629) and $(3,368,881), in our annual filings for the fiscal years ended June 30, 2008, 2007 and 2006, respectively.
On November 14, 2008 we received a notification letter from the NASDAQ staff stating that, based on our Form 10-Q dated November 12, 2008, which demonstrated stockholders' equity of $2,802,008 as of September 30, 2008, the NASDAQ Staff . . .
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