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LPTH > SEC Filings for LPTH > Form 10-K/A on 4-Apr-2013All Recent SEC Filings

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Form 10-K/A for LIGHTPATH TECHNOLOGIES INC


4-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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:

We generally rely on cash from operations and equity and debt offerings, to the extent available, to satisfy our liquidity needs. From February 1996 (when our initial public offering occurred) through the end of our fiscal 2012, inclusive, we have raised a net total of approximately $104 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.

In 2006, the Company implemented a cash conservation strategy by reducing its operating costs, which included restructuring its manufacturing operations. As we have implemented this new business strategy, the fundamentals of the Company have been improving each year. Although we achieved positive cash flow from operations, we were not profitable during fiscal 2012 or 2011. Cash provided by operations was $406,000 for fiscal 2012. Cash provided by (used in) operations was $95,000 and ($471,000) during fiscal 2011 and 2010, respectively. The improvements in cash flows from operations are as a result of the cash conservation strategy and the additional markets we are able to address due to our lower cost structure. We have also extended payment terms with certain of our suppliers, and have delayed purchases for as long as practical using just-in-time ordering practices and reduced head count and salaries for our Orlando staff in April 2012. The headcount and salary reduction amount to $400,000 per year.

We have recurring losses from operations and, as of June 30, 2012, we have an accumulated deficit of approximately $205 million. Our accumulated deficit was approximately $204 million and $202 million for fiscal years ended June 30, 2011 and 2010, respectively.

Management has developed an operating plan for fiscal 2013 and believes we have adequate financial resources for achievement of this plan and to sustain our current operations in the coming year. The fiscal 2013 operating plan and related financial projections we have developed anticipate sales growth primarily from precision molded optics, with the emphasis on low cost, high volume applications, optical assemblies including our redesigned collimator product line and infrared products. We expect further margin improvements based on production efficiencies and yield improvements. We expect improved overhead absorption as we increase the volume of products produced and lower material costs since we will be able to purchase materials in higher volumes. We also will continue to implement new cost reductions with programs to improve tool life and lower anti-reflective coating costs by coating the lenses at our facilities. We have established milestones that will be tracked to ensure that as funds are being used that we are achieving results before additional funds are committed. Management will be monitoring the base business plan closely during the year and should the base business plan objectives not be met during the year, remedial actions will be initiated.

We continue to face financial challenges along with many in the industries we do business with, as the worldwide economic instability continues to create turbulence in the market. We engaged in continuing efforts to keep costs under control as we sought 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 September 4, 2012 we had a book cash balance of $2,291,150.


We execute all foreign sales from our Orlando facility and inter-company transactions in United States dollars, mitigating the impact of foreign currency fluctuations. Assets and liabilities denominated in non-United States currencies, primarily the Chinese Renminbi, 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 years ended June 30, 2012 and 2011, we incurred a $37,665 and a $27,127 gain on foreign currency translation, respectively.

Cash Flows - Financings:

Convertible Debentures
On August 1, 2008, we executed a Securities Purchase Agreement with twenty-four institutional and private investors with respect to the private placement of Debentures. On March 30, 2011, debenture holders holding approximately 98.71% of the outstanding principal amount of the Debentures consented to an amendment to extend the maturity date of the Debentures from August 1, 2011 to August 1, 2013, at which time the Debentures that have not been converted into shares of Class A common stock will be due and payable in full. Total principal outstanding on the Debentures and the principal amount outstanding specifically to directors, officers and stockholders owning at least 10% of the Company's securities under the Debentures was $1,087,500 and $1,012,500, respectively at both June 30, 2012 and June 30, 2011.

We can force the debenture holders to convert the Debentures into shares of our Class A common stock if our stock price exceeds $5.00 per share. A forced conversion of the Debentures would include a 10% premium on the face amount. No payment of dividends may be made while the Debentures are outstanding.

Private Placement
On June 11, 2012, we executed a Securities Purchase Agreement (the "SPA") with 19 institutional and other accredited investors with respect to a private placement of an aggregate of 1,943,852 shares of the Company's Class A common stock, at $1.02 per share, and warrants to purchase 1,457,892 shares of common stock. The warrants have an exercise price of $1.32 per share, are exercisable for a period of five years beginning December 11, 2012, and contain customary, weighted-average anti-dilution protection with respect to the exercise price (subject to a floor price of $1.15).

The Company received gross cash proceeds from the issuance of the common stock (exclusive of proceeds from any future exercise of the warrants) in the amount of approximately $1,982,727. The Company is required by the terms of the SPA to use the funds for general working capital purposes to support the continued growth of the Company's business, with the primary uses of the funds anticipated to be for expansion of our infrared molding capacity and enhancement of our glass preparation processes and test and measurement capability. The funding will also support new product development and the acquisition of new equipment, also critical to the Company's growth plans.

The Company paid a commission to the exclusive placement agent for the offering, Meyers Associates, LP, in an amount equal to $198,273, plus a non-accountable marketing and expense fee of $20,000, and reimbursement of up to $10,000 of its legal and due diligence expenses related to the private placement offering. The Company also issued the placement agent and its designees warrants to purchase an aggregate of 194,385 shares of common stock at an exercise price equal to $1.32 per share. The warrants have a five-year term and are exercisable after December 11, 2012.

The private placement was exempt from the registration requirements of the Act, pursuant to Section 4(a)(2) of the Act (in that the shares of common stock, warrants, and shares of common stock underlying the warrants were sold by the Company in a transaction not involving any public offering) and pursuant to Rule 506 of Regulation D promulgated thereunder. On June 20, 2012 we filed a registration statement to register the shares of common stock, warrants and the shares of common stock underlying the warrants. The registration statement was declared effective on July 2, 2012.

Cash Flows - Operating and Investing:

Cash flow provided by operations was approximately $406,000 for the year ended June 30, 2012, an increase of approximately $311,000 from fiscal 2011. We anticipate continued improvement in our cash flows in future years due to lower glass costs as a result of replacing internally fabricated material with purchased materials from suppliers in Asia and lower coating costs due to larger unit volumes.

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 $309,000 for the fourth quarter of fiscal 2012. Cost cutting measures were implemented in fiscal 2011 and 2012 but revenues were not high enough to cover fixed costs. The fiscal 2013 operating plan and related financial projections we 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 2012, we expended approximately $629,000 for capital equipment in comparison to $908,000 during fiscal 2011. The majority of the capital expenditures during both fiscal 2012 and fiscal 2011 were related to equipment used to enhance or expand our production capacity and for tooling for our precision molded products. Our operating plan for fiscal 2013 estimates expenditures at increased 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, 2012 compared to the Fiscal Year Ended June 30, 2011:

Revenue for fiscal 2012 totaled $11.28 million compared to $10.00 million for fiscal 2011, an increase of 13%. This increase was primarily attributable to revenue from the purchase order from Raytheon Vision Systems ("Raytheon"), precision molded lenses for the telecom and laser tool markets and custom optics. The number of units of precision molded optics sold increased by 13% due to the Company's increased production capability and the pursuit of the low-cost, high-volume lens business. We expect continued growth in sales to be derived primarily from our precision molded optics product line, particularly our low-cost lenses sold in Asia, and the Company's infrared and collimator product lines.

Gross margin percentage for fiscal 2012 was 36% compared to 39% in fiscal 2011. Total manufacturing costs of $7.25 million were approximately $1.17 million higher in fiscal 2012 compared to the prior fiscal year. This increase in manufacturing costs resulted from an increase in direct costs of $576,000 for materials, labor and outside services due to higher revenues, an increase of $171,000 in labor costs for our collimator and infrared products as we continue to ramp up the development of these products, and an increase of $293,000 in tooling costs. Direct costs, which include material, labor and services, were 25% of revenue in fiscal 2012, as compared to 27% of revenue in fiscal 2011.

Our plant capacity and overhead structure are sufficient to handle much higher levels of production. We plan to continue emphasizing unit cost reductions driven by efficiently purchasing and increasing sourcing in China of raw materials and coating services. We are continuing to see improvement in productivity due to a more experienced workforce at the Shanghai facility.

Selling, general and administrative expenses increased by approximately $109,000 to $3.88 million in fiscal 2012 from $3.77 million in fiscal 2011. This increase is due to $66,000 in higher wages and benefits, $24,000 in higher fees paid to the board of directors and $26,000 in higher commissions to our sales force due to higher revenues. Our operating plan for fiscal 2013 projects business levels that will require selling, general and administrative expenses to increase as we support a higher level of sales. We plan to manage our workforce size to meet profit and cash flow goals.

New product development costs in fiscal 2012 increased by approximately $50,000 to $1.05 million. This increase was primarily due to an increase in the cost of product development materials and higher patent costs. Our operating plan for fiscal 2013 projects that product development spending will increase due to enhanced efforts in the development of the infrared product line.

In fiscal 2012 our amortization of intangibles remained at approximately $33,000 and is expected to remain at this level for fiscal 2013. Interest expense was approximately $92,000 for fiscal 2012 as compared to approximately $606,000 for fiscal 2011. The Debentures accounted for all of the interest expense during fiscal 2012 and 2011. This represents periodic interest of 8% per annum, amortization and the write-off of the related debt issuance costs and debt discount. In fiscal 2011, we had $132,000 for loss on extinguishment of debt incurred when we extended the maturity date of the Debentures.

In fiscal 2012 we recognized a gain of approximately $103,000 related to the change in the fair value of derivative warrants issued in our June 2012 private placement. This fair value will be remeasured each reporting period throughout the five year life of the warrants, or until exercised.

Investment and other income increased by approximately $55,000 to $48,000 in fiscal 2012 from an expense of approximately $7,000 in fiscal 2011.

Net loss for fiscal 2012 was approximately $865,000 compared with approximately $1.60 million in fiscal 2011, a decline of approximately $735,000. This decrease in loss in the current year was comprised principally of:

An increase in revenues of $1.28 million, offset by an increase of $1.17 million in cost of goods sold, resulting in a $110,000 increase in gross margin; and

Lower interest expense and other cost of debt of $646,000.


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. 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 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.

The discussions of our results as presented in this Annual Report include use of the non-GAAP terms "EBITDA" and "gross margin." EBITDA is discussed below. Gross margin is determined by deducting the cost of sales from operating revenue. Cost of sales includes manufacturing direct and indirect labor, materials, services, fixed costs for rent, utilities and depreciation, and variable overhead. Gross margin should not be considered an alternative to operating income or net income, which are determined in accordance with GAAP. We believe that gross margin, although a non-GAAP financial measure, is useful and meaningful to investors as a basis for making investment decisions. It provides investors with information that demonstrates our cost structure and provides funds for our total costs and expenses. We use gross margin in measuring the performance of our business and have historically analyzed and reported gross margin information publicly. Other companies may calculate gross margin in a different manner.

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 "12-month 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 12-month backlog is better for us.

The 12-month backlog, as defined above, has been as follows in the preceding eight fiscal quarters:

                                             Approximate
                          Fiscal              12-month
                          Quarter   Ended      Backlog
                          Q4-2012 6/30/2012  $4,892,000
                          Q3-2012 3/31/2012  $4,391,000
                          Q2-2012 12/31/2011 $3,827,000
                          Q1-2012 9/30/2011  $4,203,000
                          Q4-2011 6/30/2011  $3,873,000
                          Q3-2011 3/31/2011  $3,633,000

Q4-2011 12/31/2010 $3,273,000 Q3-2011 9/30/2010 $3,186,000

Our 12-month backlog at June 30, 2012 was approximately $4.89 million. We believe this growth to be partially the result of our efforts to enter low-cost, high-volume commercial markets, like the industrial laser tool market and other imaging related product markets. Bookings and quote activity have increased for our industrial low-cost lenses in Asia. We project continued production and shipment growth for these low-cost lenses in Asia.

With the continuing diversification of our 12-month backlog we expect to show modest increases in revenue for fiscal 2013.

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 a good indicator of a business's cash flows. We use EBITDA for evaluating the relative underlying performance of the Company's core operations and for planning purposes. We calculate EBITDA by adjusting net income (loss) 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."

The following table sets forth a reconciliation of net income (loss) to EBITDA for the preceding eight quarters:

                                         Net Income      Depreciation &                           Loss on Extinguishment of
Fiscal Quarter Ended                     (Loss)          Amortization         Interest Exp.       Debt                          EBITDA

Q4 - 2012   6/30/2012                        195,864              266,317              22,659                             -        484,840
Q3 - 2012   3/31/2012                       (518,985 )            286,014              22,582                             -       (210,389 )
Q2 - 2012   12/31/2011                      (343,299 )            326,269              22,566                             -          5,536
Q1 - 2012   9/30/2011                       (198,447 )            245,438              24,220                             -         71,211

Q4 - 2011   6/30/2011                            429              257,798              23,058                             -        281,285
Q3 - 2011   3/31/2011                       (375,728 )            227,861              89,560                       131,784         73,477
Q2 - 2011   12/31/2010                      (373,714 )            215,727             113,127                             -        (44,860 )
Q1 - 2011   9/30/2010                       (852,950 )            211,543             380,510                             -       (260,897 )


Inventory levels:

We manage inventory levels to minimize investment in working capital but still have the flexibility to meet customer demand to a reasonable degree. We review our inventory for obsolete items quarterly. 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. The table below shows our DCSI for the immediately preceding eight fiscal quarters:

                         Fiscal
                         Quarter   Ended       DCSI (days)
                         Q4-2012   6/30/2012   74
                         Q3-2012   3/31/2012   75
                         Q2-2012   12/31/2011  90
                         Q1-2012   9/30/2011   100
                         Fiscal 2012 average   76
                         Q4-2011   6/30/2011   89
                         Q3-2011   3/31/2011   105
                         Q2-2011   12/31/2010  87
                         Q1-2011   9/30/2010   78

Fiscal 2011 average 90

In comparison, our average DCSI for the year ended June 30, 2011 was 90, compared to 76 for the year ended June 30, 2012. This decrease in DCSI for the year ended June 30, 2012 as compared to the year ended June 30, 2011 was due to lower inventory balances. In fiscal 2011, our manufacturing schedule was based . . .

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