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| LPTH > SEC Filings for LPTH > Form 10-K on 25-Sep-2009 | All Recent SEC Filings |
25-Sep-2009
Annual Report
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. All statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this 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, our products current stage of development, the need for additional financing, competition in various aspects of its business and other risks described in this report and in our other reports on file with the Securities and Exchange Commission. 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 in this report.
Liquidity and Capital Resources
History and Background:
From February 1996 (when our IPO occurred) through fiscal 2009, inclusive, we have raised a net total of approximately $99.6 million from the issuance of common and preferred stock, the sale of convertible debt and the exercise of options and warrants for our capital stock.
Our optical product markets experienced a severe downturn beginning in fiscal 2001 and resulted in a significant decline in the demand for our optical products. Despite the downturn in the optical product markets, we believe that some improvement occurred in recent fiscal years, including fiscal 2009, with respect to the demand for our products in several of our other markets, particularly the precision molded optics for laser tools and infrared optics for fire safety. Nevertheless, we did not reach a status of positive cash flow or profitability during fiscal 2009 or 2008.
We have developed our operating plan for fiscal 2010 and forecasted revenues and cash flows. We believe we currently have adequate financial resources for implementation and achievement of our fiscal 2010 operating plan and to sustain operations as currently conducted in the coming year. The cost savings generated in fiscal 2008 and 2009 due to the reduced rent obligations on the facility in Orlando and the salary reductions in Orlando is expected to continue through fiscal 2010.
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. During the fourth quarter of fiscal 2009, we delayed payments to one of our secured note holders, however as of September 2009 all payments which were past due have been paid and we are in compliance with the terms of the note.
We have instituted a cost reduction program and have reduced headcount in our Orlando and Shanghai facilities 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 cost reduction program is expected to save $663,000 per year in wages and benefits. In addition, we have redesigned certain product lines - collimators and precision molded optics, increased sales prices on GRADIUM products, obtained more favorable material costs by sourcing some purchased components in China, and have instituted more efficient management techniques which have improved our product yields. 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 engaged in continuing efforts to keep costs under control as we sought renewed sales growth. Our efforts were 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 September 21, 2009, the Company had a book cash balance of approximately $1,312,457.
Cash Flows - Recent Financings:
In fiscal 2009 we had a convertible debenture offering with twenty-four institutional and private investors. On August 1, 2008, we executed a Securities Purchase Agreement with respect to the private placement of 8% senior convertible debentures (the "Debentures"). 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 LightPath Optical Instrumentation (Shanghai) Co., Ltd pursuant to a Subsidiary Guarantee. The sale of the Debentures generated gross proceeds of approximately $2,929,000 and net proceeds of $2,568,749. We used 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 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 remaining interest on the Debentures was prepaid by issuing common stock in December 2008.
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 was 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, exercisable for 332,841 shares, of the Warrants priced at $1.89 per share. If all of the Warrants were exercised at that time, we would have received additional proceeds in the amount of $1,645,184.
Investors who participated in our July 2007 common stock private placement were offered an incentive to invest in the convertible debenture offering. Four investors from the July 2007 offering participated in the convertible 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. The reduced exercise price lowered potential proceeds on the exercise of the warrants from the July 2007 offering 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 was 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. This reduced warrant exercise price lowered potential proceeds on the exercise of the warrants issued to First Montauk from the July 2007 offering by $115,600 to $104,400.
The private placement is exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act (in that we sold the Debentures and Warrants in a transaction not involving any public offering) and pursuant to Rule 506 of Regulation D promulgated thereunder. The shares into which the Debentures are convertible, the shares issuable upon exercise of the Warrants and the Incentive Shares have been registered for resale under the Securities Act of 1933, as amended. The registration was declared effective on October 16, 2008.
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 our stock on the date of issuance. The Warrants were valued using the Black-Scholes valuation model using assumptions similar to those used to value our 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 the 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 year ended June 30, 2009, $640,695 of the debt discount was amortized through interest expense on the condensed consolidated statement of operations and the remaining unamortized debt discount was $750,770 at June 30, 2009. For the quarter ended June 30, 2009, $81,997 of the amortized debt discount was amortized through interest expense. On May 29, 2009 we filed a registration statement to register those additional interest shares and warrants which were issued in December 2008. The registration statement was declared effective on June 16, 2009.
We also incurred debt issuance costs associated with the issuance of the Debentures of $554,308 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 190,195 warrants shares issued to First Montauk. We used the Black-Scholes model to determine fair value of the Warrants. The Warrants carry a five year term, expiring on August 1, 2013, and are immediately exercisable at a per share price of $1.68 for one-third of the warrants and $1.89 for two-thirds of the warrants. As of June 30, 2009, $255,228 of the debt issuance costs were amortized through interest expense on the condensed consolidated statement of operations and the remaining unamortized balance was $299,080.
Total principal outstanding on the Debenture and the amount outstanding for directors' and officers' purchases under the Debentures was $2,196,750 and $266,250, respectively at June 30, 2009, less unamortized debt discount of $750,770 and $90,995, respectively.
Subsequent to the end of fiscal 2009, we had a private placement offering. On August 19, 2009, we executed a Securities Purchase Agreement with thirty-three institutional and private investors with respect to a private placement of an aggregate of 1,298,827 shares of our common stock at $1.26 per share and warrants to purchase 649,423 shares of our common stock at an exercise price of $1.73 per share (the "August 2009 Warrants"). The August 2009 Warrants are exercisable for a period of five years beginning on February 19, 2010. We received aggregate gross cash proceeds from the issuance of the common stock (exclusive of proceeds from any future exercise of the August 2009 Warrants) in the amount $1,636,500. We will use the funds to provide working capital for our operations.
We paid a commission to the exclusive placement agent for the offering, Garden State Securities, Inc. ("Garden State"), in an amount equal to $148,100 plus costs and expenses. We also issued to Garden State and its designees warrants to purchase an aggregate of 155,860 shares of our common stock at exercise price equal to $1.73 per share, for a five-year term beginning February 19, 2010.
The private placement is exempt from the registration requirements of the Act, pursuant to Section 4(2) of the Act (in that the shares of common stock were sold by the Company in a transaction not involving any public offering) and pursuant to Rule 506 of Regulation D promulgated thereunder. The shares of common stock and the shares of common stock underlying the August 2009 Warrants are restricted securities that have not been registered under the Act and may not be offered or sold absent registration or applicable exemption from registration requirements.
The Company and the investors also executed a Registration Rights Agreement dated August 19, 2009, pursuant to which we have undertaken the obligation to file with the Securities and Exchange Commission, and cause to be declared effective, a registration statement to register the shares of common stock issued in the private placement and the shares of common stock underlying the August 2009 Warrants.
Cash Flows - Operating and Investing:
Cash used by operations during fiscal 2009 was approximately $1.5 million, a decrease of approximately $1.9 million from fiscal 2008. We anticipate lower glass costs by replacing an internally fabricated material with purchased materials from suppliers in Asia and lower coating costs due to larger unit volumes which are expected to improve our cash flow in future years.
While progress has been made to reduce operating cash outflow since fiscal 2004, significant risk and uncertainty remains. Our cash provided by operations was approximately $644,000 for the fourth quarter of fiscal 2009. Cost cutting measures were implemented in fiscal 2008 and 2009 but revenues were not high enough to cover fixed costs. The fiscal 2010 operating plan and related financial projections which we have developed anticipate continued sales growth and continuing margin improvements based on production efficiencies and reductions in product costs, offset by marginal increases in selling, administrative and new product development expenditures.
During fiscal 2009, we expended approximately $564,000 for capital equipment in comparison to $660,000 during fiscal 2008. The majority of the capital expenditures during fiscal 2009 were related to equipment used to enhance or expand our production capacity and for tenant improvements due to the re-location of the Shanghai facility. The majority of the capital expenditures during fiscal 2008 were related to equipment used to enhance or expand our production capacity and for tenant improvements due to the reduction in space at our Orlando facility. Our operating plan for fiscal 2010 estimates expenditures at similar levels to enhance or expand our capacity, however, we may spend more or less depending on opportunities and circumstances.
Results of Operations
Operating Results for Fiscal Year Ended June 30, 2009 compared to the Fiscal Year Ended June 30, 2008:
Our consolidated revenues totaled $7.5 million for fiscal 2009, a decrease of approximately $1.3 million or 15% compared to revenues for fiscal 2008 of $8.8 million. The decrease was attributable to decreases in sales of aspheric lenses, collimators and GRADIUM product sales. In our operating plan for fiscal 2010 we expect to see revenue gains in aspheric lenses and infrared lenses while collimators, GRADIUM and isolator sales are expected to remain at current levels. We expect significant mix change in our revenue number in fiscal 2010 as we increase the volume of low cost lenses sold and continue to transform the Company into a high volume molded optical manufacturer. We anticipate our growth will come from the laser tool market in fiscal 2010.
Fiscal 2009 consolidated cost of sales of $5.4 million was approximately 73% of net revenues of $7.5 million, which is a decrease over fiscal 2008 when our cost of sales was approximately 86% of net revenues. This percentage decrease was caused by several factors. Among them, during the year we were successful in shifting a higher percentage of production of molded optics to our Shanghai facility, reducing materials cost by incorporating lower cost glass into our products and manufacturing lens holders in-house at a reduced cost, all of which we anticipate will result in continued improvements to our margins. These cost reductions have lowered our cost structure and enabled us to bid on the high volume low cost business. Lower revenues were not sufficient to absorb our fixed costs and overhead costs. Our two plants were at a combined 37% capacity for fiscal 2009. Our plant capacity and overhead structure are sufficient to handle much higher levels of production. Going forward into fiscal 2010, the emphasis will be continued unit cost reductions driven by efficient purchasing and more sourcing in China of raw materials and coating services and higher yields due to a more experienced workforce at the Shanghai facility. Over the course of fiscal 2009, as our manufacturing shifted to our Shanghai facility, we reduced our headcount in Orlando from 71 to 45. As of June 30, 2009, over 95% of our precision molded optics production had been transferred to our Shanghai facility. This line comprises 73% of our total revenue and with the majority of the manufacturing now at the Shanghai facility our gross margin will continue to improve as we have not yet seen the full year impact of this transfer. We are starting to transfer isolator and GRADIUM production to our Shanghai facility as well.
Selling, general and administrative expenses decreased by approximately $1.8 million to $3.7 million in fiscal 2009 from $5.4 million in fiscal 2008. We reduced expenses through a reduction of salaries and benefits, reduction of board compensation, decreased stock compensation expense for stock options and restricted stock issued, decreased legal costs for litigation and the elimination in fiscal 2009 of severance and search fees related to the replacement of our Chief Executive Officer that were incurred in fiscal 2008. In the fourth quarter of fiscal 2009 there were two one-time events resulting in reductions to general and administrative expenses; receipt of $183,000 from our D&O insurance carrier as a refund of legal expenses and receipt of $186,000 from the Chinese government related to the move of our manufacturing facility in Shanghai. Our operating plan for fiscal 2010 projects business levels that will require selling, general and administrative expenses to remain level. We plan to manage the Orlando workforce size to meet profit and cash flow goals.
New product development costs in fiscal 2009 decreased by approximately $327,000 to approximately $887,000. This decrease was primarily due to decreased product development materials and labor costs. Our operating plan for fiscal 2010 projects that product development spending will be level to fiscal 2009.
In fiscal 2009 our amortization of intangibles remained at approximately $33,000 and is expected to remain at this level for fiscal 2010.
Interest expense increased by approximately $1.2 million to approximately $1.3 million compared to approximately $87,000 in fiscal 2008. This is primarily due to interest on the convertible debentures payable in shares issued in August 2008 and related amortization of debt discount and debt costs and the fair value of warrants issued to induce conversion of the debentures in December 2008 recorded as interest expense.
Investment and other income decreased by approximately $57,000 to $22,000 in fiscal 2009 from approximately $79,000 in fiscal 2008, due to a decrease in interest earned on lower cash balances and lower royalty fees earned.
Net loss for fiscal 2009 was approximately $3.9 million compared with approximately $5.5 million in fiscal 2008, a decline of approximately $1.6 million. This improvement in the current year was comprised principally of:
· Gross margin improvement of $812,000 or 13% primarily due to reduced salaries and benefits of $639,000 and lower building costs, better production yields and lower material costs;
· Reduced SG&A salaries and benefits of $895,000;
· Decreased legal fees of $345,000;
· Decreased recruitment fees of $143,000;
· Decreased stock compensation expense of $259,000;
· Decreased building costs of $163,000 for SG&A;
· Decreased travel costs of $76,000 for SG&A;
· Decreased advertising costs of $43,000;
· Decreased R&D of $328,000 due to lower salaries and benefits and lower material purchases; and
· Increased interest expense of $1.2 million due to interest and amortization of debt discount and debt costs on debentures.
Key Performance Indicators
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 customer product development. In this latter type of business we work with a customer to help them determine optical specifications and even create certain optical designs for them, including complex multi-component designs that we call "engineered assemblies." This is followed by "sampling" small numbers of the product for the customer's test and evaluation. Thereafter, should the 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. A key business objective is to convert as much of our business to the design win and annuity model as is possible. We have 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 work seriously to reduce 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 United States should they be unwilling to commit their entire source of supply of a critical component to foreign merchant production sources. We also continue to have the proprietary GRADIUM lens glass technology to offer to certain laser markets.
Our key indicators
Usually on a weekly basis, management reviews a number of performance indicators. Some of these indicators 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 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. We believe that our non-financial production indicators, such as those noted, are proprietary information.
Financial indicators that are usually reviewed at the same time include the
major elements of the micro-level business cycle:
· sales backlog;
· EBITDA;
· inventory levels; and
· accounts receivable levels and quality.
These indicators are similarly used to determine tactical operating actions and changes and are discussed in more detail below.
Sales Backlog:
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 define our "Disclosure Backlog" as that which is
requested by the customer for delivery within one year and which is reasonably
likely 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, higher backlog is better for us.
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